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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________to____________
Commission file number--019893
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ALPHA PRO TECH, LTD.
(exact name of registrant as specified in its charter)
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Delaware 63-1009183
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(State or other jurisdiction of (I.R.S. Employer Identification No.
incorporation or organization
Suite 112, 60 Centurian Drive
Markham, Ontario L3R 9R2
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Address of principal offices Zip Code
Registrant's telephone number including area code: 905-479-0654
Securities registered pursuant to Section 12(g) of the Act:
Common Shares Par Value $.01 Per Share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The number of registrants's Common Shares outstanding as of March 25, 1998
was 24,112,449.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1998 was $ 22,225,642 based on the average bid and
asked price on that date.
Documents incorporated by reference and the Part of the Form 10-K into which
the document is incorporated are as follows: Registrant's definitive proxy
statement for its 1998 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission on or before April 30, 1998 (incorporated
by reference under Part III).
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K (Sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
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PART I
ITEM 1. BUSINESS
GENERAL
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 its corporate domicile
from Canada to the State of Delaware in the United States and changed its name
to Alpha Pro Tech, Ltd. At that time, all of the Company's operating assets were
transferred to its wholly owned subsidiary Alpha Pro Tech, Inc. The Company's
executive offices are located at 60 Drive, Suite 112, Markham Ontario, Canada
L3R 9R2, and its telephone number is (905) 479-0654.
BUSINESS
The Company develops, manufactures and markets disposable protective
apparel, food industry, infection control, extended 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 extended 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, extended 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 current strategy is to not only grow its cleanroom business
through its exclusive agreement with VWR Scientific Products, but to refocus on
its other core businesses which include medical, dental and pet markets. As part
of its current strategy emphasis is being placed on developing innovative
products and processes which are expected to increase gross margins. The Company
will continue to pursue the food service industry with its proprietary
shoecover, which helps prevent employees from slipping and falling on slippery
surfaces, found in restaurants, supermarkets and food processing facilities.
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The Company's products are used primarily in hospitals, clean rooms,
laboratories industrial and dental offices and are distributed principally in
the United States through a network presently consisting of three purchasing
groups, ten major distributors, approximately 200 additional distributors,
approximately 10 independent sales representatives and a Company sales force of
8 people.
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 optical-grade
polyester film from John Russell (the inventor of certain products currently
being manufactured, marketed and distributed by the Company), Al Millar
(currently president and a director of the Company), Sheldon Hoffman
(currently chief executive officer and a director of the Company), Robert
Isaly, (currently a director of the Company), and Irving Bronfman, (a former
director of the Company), BFD Inc. (an Alabama corporation), 779177 Ontario
Inc. (a corporation owned by Messrs. Hoffman and Bronfman), Milmed
International Distributors Limited (a company owned by Al Millar). None of the
persons of 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, the
Company was involved in mining and exploration.
PRODUCTS
The Company's product groups and products include the following:
DISPOSABLE PROTECTIVE APPAREL
* Shoecovers
* Headcovers
* Gowns
* Coveralls
* Lab Coats
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FOOD INDUSTRY
* Automated Shoecovers
* Sleeve Protectors
* Aprons
* Coveralls
* Bus Boy Jackets
INFECTION CONTROL
* Face Masks
* Face Shields
EXTENDED CARE
* Unreal Lambswool
* Medi-Pads
* Hospital Pads
* Wheelchair accessories
* Bedrail Pads
* Knee and Elbow protectors
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.
FOOD INDUSTRY
Through the acquisition of Gem Nonwovens, Inc. a patented automated shoe
cover machine was acquired. 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.
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MASKS AND FACE SHIELDS
The facemasks come in a wide variety of filtration efficiencies and
styles. The Company's patented Positive Facial Lock-Registration Mark-
feature that provides a custom fit to the face to prevent blow-by for better
protection. Combine this feature with the Magic Arch-Registration Mark-, 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, polyester
film, and have a permanent anti-fog feature. This provides the wearer with
extremely light weight, 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.
EXTENDED CARE
The Extended Care Division began with the Company's Unreal Lambswool
pressure sore and bed patient monitoring system product lines. The Unreal
Lambswool is used to prevent decubitus ulcers or bedsores on long term care
patients. The bed patient monitoring system offers nurses an alarm system that
tell when patients try to get out of bed. This helps nursing and other extended
and long term care facilities to comply with the Omnibus Reconciliation Act
(OBRA) of 1987 mandate to work towards using no restraints to control residents
or patients in these facilities.
CONSUMER PRODUCTS
The Consumer Product Division uses the Company's existing medical products
and technologies for general consumer purposes. The Unreal Lambswool is being
packaged for the retail pet bed market and pet toys.
MARKETS
The Company's products are sold to the following markets: Infection Control
Products, (Masks and Shields) and disposable protective apparel are sold to the
Medical and Dental market and the Industrial and Cleanroom markets; Unreal
Lambswool and Medi-Pads are sold to the Extended 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.
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DISTRIBUTION
The Company relies primarily on a network of independent distributors for
the sale of its products including the following:
* VWR Scientific
* Allegiance Healthcare
* General Medical
* Medline Industries
* ABCO
* Texwipe
* Owens and Minor
* 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 Baxter 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 which was
attained for 1996 and 1997.
In April, 1996, the Company entered into a three year distribution agreement
with Chicopee, Inc. of Dayton, New Jersey with respect to the distribution of
the Company's line of Aqua Trak black shoe covers.
Chicopee was granted exclusive distribution rights for the restaurant, food
service, food processing and related businesses in the United State, 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. Although minimum purchase requirements were not met for
1996 and 1997, Chicopee retained exclusivity.
Sales to VWR Scientific Products, the successor to Baxter Scientific
Products represented 42.9% of total sales for 1996, and 50.7% for 1997. The loss
of this customer would have a material adverse effect on the Company's business.
The Company does not generally have backlog orders, as orders are usually
placed for immediate shipment and contract for shipment over a period time. The
Company anticipates no problems in fulfilling orders as they are placed.
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MANUFACTURING
The Company's mask production, shield production and automated shoecover
facility is located in a leased 26,800 square foot building at 903 West Center
Street, Bldg. E, North Salt Lake, Utah. Approximately 3,000 square feet of this
building is used for corporate offices. A 25,000 square foot facility is located
at 615 North Parker Drive, Janesville, Wisconsin 53595 is used for the
manufacture of the Company's real lambskin products.
The Company's disposable protective apparels production is located in three
facilities, a 45,000 sq. ft. facility is located at 1180 West Industrial Park
Drive in Nogales, Arizona which is used for cutting, warehousing and shipping, a
33,000 square foot facility is located at Bustamonte Drive, Nogales, Mexico
which is used for assembly of shields and sewing, and a 30,000 sq. ft. facility
located at Ave. Abolardo L. Rodriguez y Novena, Benjamin Hill, Sonora 83900, is
used for sewing.
As a result of the March, 1995 acquisition of Ludan Corporation, the Company
has a material coating and automated shoe cover facility of 16,000 square feet
located at 2224 Cypress Street, Valdosta, Georgia 31602.
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
Fort Worth, Texas. Other large competitors would include Minnesota Mining and
Manufacturing Corporation (3M), Johnson & Johnson, and Isolyser, Inc., American
Threshold and Maxium. The Company's major competitors in the industrial and
cleanroom market are Technol, Inc., 3M, Isolyser, Inc., Kimberly Clark, Kappler
USA, and Allegiance Health Care. In the extended 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 a new type of 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.
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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 Particulate
Respirator that meets the new O.S.H.A. respirator guidelines and which has
been approved by the National Institute for Safety and Health (NIOSH). This
product is designed to help prevent the breathing in of the tuberculosis
virus.
The Company does not anticipate that any federal, state and local provisions
which have been or may be enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, will have any material effect upon the capital expenditures,
earnings and competitive position of its business.
PATENTS AND TRADEMARKS
PATENTS
The Company's policy is to protect its intellectual property rights,
products, designs and processes through the filing of patents in the United
States and where appropriate in Canada and other foreign countries. At present,
the Company has 13 United States patents relating to its MEDS, Add-A-Mask,
Coverall, 1/2 Coverall, Combo Cone, Combo, Positive Facial Lock and Shieldmate
products and a U.S. patent on the automated shoecover and the shoecover process.
The Company also has a U.S. 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 doe 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 9 to 14 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.
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EMPLOYEES
As of February 1, 1998, the Company had 594 employees, including eight
persons at its head office in Markham, Ontario, Canada; 40 persons at its
facemask production facility in Salt Lake City, Utah and 20 persons at its
Extended Care production facility in Janesville, Wisconsin; 25 persons at its
cutting, warehouse and shipping facility in Nogales, Arizona; 200 persons at its
shield assembly and sewing operation in Nogales, Mexico; 280 at its sewing
operation in Benjamin Hill, Mexico; and 21 persons at its coating and automated
shoe cover facility in Valdosta, Georgia.
None of the Company's employees in the United States and Canada are subject
to collective bargaining agreements. However, a collective bargaining agreement
with the Confederation of Mexican Workers, exists for its Mexican employees.
Benefits are reviewed annually by May and the 1998 agreement was 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.
ITEM 2. PROPERTIES
The Companies' Head Office is located at 60 Centurian Drive, Suite 112,
Markham, Ontario L3R 9R2. The approximate monthly costs are $2,500 under a
lease expiring January 31, 1999. 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 615 North Parker Drive,
Janesville, Wisconsin. These premises of 25,000 square feet are leased for
$5,600.00 monthly. The lease expires August 15, 2002. The Company's
line of Extended Care products are manufactured in these facilities.
The Apparel division has its cutting operation, warehousing, and shipping
facility at 1140 West Industrial Park Drive, Nogales, Arizona. The monthly
rental is $15,476.00 for 45,000 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 expires January 31, 1999.
The Coating Division has its facility at 2224 Cypress Street, Valdosta,
Georgia. The monthly rental is $3,600 for 16,000 square feet.
The Company believes that these arrangements are adequate for its present
needs and that other premises, if required, are readily available.
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ITEM 3. LEGAL PROCEEDINGS
In June, 1996, an action was commenced against the Company in the Superior
Court of the State of Arizona, in and for the County of Maricopa by New-Invest,
Inc., an Arizona Corporation (the "Plaintiff"). This action involved a claim by
the Plaintiff for the breach of an alleged contract to sell stock units
consisting of Common Stock and Warrants in the Company to the Plaintiff through
an alleged private offering. The lawsuit was originally filed in the Maricopa
County (Arizona) Superior Court. Thereafter, the action was removed to the
United States District Court for the District of Arizona. In November 1997, the
lawyers for the Plaintiff withdrew as counsel of record. The District Court
ordered that the Plaintiff secure replacement counsel for the reason that a
corporation cannot appear in court on its own behalf. Upon failure to comply
with this order, the District Court entered its Amended Judgment on December 4,
1997 dismissing the lawsuit with prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF SECURITIES
From January 1, 1991 through July 16, 1993 the Common Shares were traded on
the Vancouver Stock Exchange under the symbol BFI, at which time the Common
Shares were de-listed from the Vancouver Stock Exchange at the Company's
request.
On March 8, 1993 the Common Shares of the Company were cleared for
quotation on the National Association of Securities Dealers (NASD) Over the
Counter (OTC) Bulletin Board under the symbol "BFDIF." When the Company
changed its name to Alpha Pro Tech Ltd. on July 1, 1994, its symbol was
changed to APTD.
The high and low range of bids prices for the Common Shares of the Company
for the quarters indicated as reported by the NASD were as follows:
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LOW HIGH
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<S> <C> <C>
1995 First Quarter................................... 3/4 3-1/8
Second Quarter.................................. 1-7/8 2-5/8
Third Quarter................................... 1-5/8 2-1/2
Fourth Quarter.................................. 1-7/16 2-1/16
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<TABLE>
<CAPTION>
<S> <C> <C>
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.................................. 1-15/32 1-1/2
Third Quarter................................... 1-13/32 1-3/4
Fourth Quarter.................................. 1-1/2 1-17/32
1998 First Quarter................................... 27/32 1-1/4
(thru 03/25/98)
</TABLE>
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 25, 1998 there were approximately 613 shareholders of record,
and 3,500 beneficial owners.
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.
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ITEM 6. SELECTED FINANCIAL DATA
ALPHA PRO TECH, LTD.
SELECTED FINANCIAL DATA
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YEAR ENDED DECEMBER 31,
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1997 1996 1995(1) 1994(2) 1993
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA
Sales $ 17,823,000 $ 14,863,000 $ 13,031,000 $ 11,966,000 $ 9,439,000
Gross profit 6,229,000 5,198,000 4,469,000 4,247,000 3,500,000
Selling, general andadministrative expenses 6,531,000 4,610,000 4,342,000 3,562,000 4,852,000
Interest expense 308,000 279,000 563,000 898,000 450,000
Impairment loss on intangible assets -- -- 4,922,000 -- --
Exchange of escrowed shares for new shares -- 2,204,000 -- -- --
Other expenses 319,000 250,000 613,000 455,000 824,000
----------- ----------- ----------- ----------- ------------
Total expenses including provision
(benefit) for income taxes 7,158,000 7,343,000 10,440,000 4,905,000 6,126,000
------------ ------------ ------------ ------------- -------------
Net income (loss) $ (929,000) $ (2,145,000) $ (5,971,000) $ (658,000) $ (2,626,000)
------------ ------------ ------------ ------------- -------------
Basic and diluted loss per share $ (0.04) $ (0.12) $ (0.36) $ (0.05) $ (0.22)
------------ ------------ ------------ ------------- -------------
Weighted average shares used
in basic and diluted loss per share 23,388,369 17,841,547 16,533,294 13,437,198 11,764,871
HISTORICAL BALANCE SHEET DATA
Current assets $ 7,411,000 $ 5,614,000 $ 4,860,000 $ 4,715,000 $ 2,749,000
Total assets $ 9,985,000 $ 7,481,000 $ 6,410,000 $ 11,192,000 $ 9,578,000
Current liabilities $ 3,799,000 $ 3,414,000 $ 3,166,000 $ 3,879,000 $ 2,885,000
Long-term liabilities $ 549,000 $ 217,000 $ 240,000 $ 1,154,000 $ 278,000
Common stockholders' equity $ 5,637,000 $ 3,850,000 $ 3,004,000 $ 6,159,000 $ 6,415,000
</TABLE>
(1) Includes the operations of Ludan Corporation which was acquired April 1,
1995. See footnote 12 in Notes to the Consolidated Financial Statements.
(2) Includes the operations of Disposable Medical Products, Inc. which was
acquired on March 25, 1994. See footnote 12 in Notes to Consolidated
Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1997 compared to fiscal 1996
Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported a net loss for the
year ended December 31, 1997 of $929,000 as compared to a net loss of $2,145,000
for the year ended December 31, 1996 representing an improvement of $1,216,000.
The net loss is attributable primarily to costs associated with Alpha's efforts
to restructure into a more customer-driven, innovative operation and entering
into an unprofitable venture into contract manufacturing of reusable apparel
products that was discontinued in August 1997.
SALES Consolidated net sales for the year ended December 31, 1997 increased
to $17,823,000 from $14,863,000 in 1996, representing an increase of $2,960,000
or 19.9%. Net sales for the Apparel Division for the year ended December 31,
1997 were $10,969,000 as compared to $7,475,000 for the same period of 1996. The
Apparel Division sales increase of $3,494,000 or 46.7% was primarily due to
increased sales to the Company's largest distributor which is expected to
continue growing as a result of the Company's strategy toward developing
innovative solutions to meet this and other customers needs. Net sales to this
distributor were 50.7% and 42.9% of total net revenue for 1997 and 1996
respectively. Mask and eye shield sales decreased by 13.5%, to $4,354,000 in
1997 from $5,035,000 in 1996. This decrease is primarily the result of a drop in
shield/mask combination product sales. Sales of mask and eye shield should
strengthen in 1998 with the introduction of a new line of masks and shields.
Sales from the Company's Extended Care Unreal Lambskin and other related
products which includes a line of pet beds increased by 6.2% to $2,500,000 in
1997 compared to $2,353,000 in the same period in 1996. An increase in sales of
Alpha's line of pet beds & related products is primarily responsible for the
increase. The Company's line of pet products is expected to improve in the
future. Alpha has recently restructured its business around a new strategy of
innovation that will enable it to develop custom products to meet its customers
needs in a very timely manner. This new approach is to satisfy customer
requirements in a way that the Company's larger competitors are unable to match.
The Company has a profit sharing agreement with its largest distributor. Goods
shipped at cost to this distributor are to fill orders already received from the
distributor's end users. Revenue for goods shipped to this distributor which
includes goods shipped at cost as well as the Company's share of the profits,
are recognized at the time of shipping.
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COST OF GOODS SOLD Cost of goods sold increased to $11,594,000 for the year
ended December 31,1997 from $9,665,000 for the same period in 1996. As a
percentage of net sales, cost of goods sold remained flat at 65.0% for both 1997
and 1996. Gross profit margin also remained constant at 35.0% for the year ended
December 31, 1997 and 1996 respectively. Management expects the gross profit
margin to improve through its new strategic emphasis of developing innovative
products and processes but there can be no assurance that these margin
improvements will be attained.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses increased by $1,921,000 to $6,531,000 for the year
ended December 31, 1997 from $4,610,000 for the year ended December 31, 1996.
As a percentage of net sales, selling, general and administrative expenses
increased to 36.6% in 1997 from 31.0% in 1996. The increase in selling,
general and administrative expenses primarily consists of increased payroll
related costs of $886,000; increased marketing, commissions and travel
expenses of $560,000; increased expense related to options/warrants issued
for services of $98,000; increased public company expenses of $96,000
including investor relations, annual report and annual meeting costs, stock
transfer costs, and costs associated with SEC reporting requirements;
increased professional fee expenses of $104,000; increased rent of $47,000;
increased telecommunications expense of $41,000 and increased general office
and factory expenses of $79,000. Of the increases in payroll related costs,
$637,000 is due to increases in factory indirect expenses of which the
majority is attributable to the Apparel Division which had an increase in
sales of 46.7%. As a percentage of Apparel Division sales, selling, general
and administrative expenses for the Apparel division decreased slightly to
20.6% in 1997 as compared to 20.9% in 1996. The 1997 increase in selling,
general and administrative expenses are primarily as a result of Alpha's new
innovative and customer-driven strategy.
DEPRECIATION & AMORTIZATION Depreciation and amortization expense increased
by $65,000 to $319,000 for the year ended December 31, 1997 from $254,000 for
the same period in 1996. This increase is primarily attributable to an increase
in the purchase of equipment through capital leases and amortization of goodwill
on the acquisition of Ludan Corporation.
NET INTEREST Interest expense increased by $29,000, to $308,000 for the year
ended December 31, 1997 from $279,000 for the year ended December 31, 1996. The
14
<PAGE>
increase in interest expense is due to interest on the additional capital leases
acquired. In December 1997, the Company entered into a new three-year $2,900,000
credit facility with an asset-based lendor at prime plus 2%. Alpha's previous
credit facility was at prime plus 5%.
LOSS FROM OPERATIONS Loss from operations decreased by $1,249,000 to a loss
of $621,000 for the year ended December 31, 1997 as compared to a loss from
operations of $1,870,000 for the year ended December 31, 1996. The decreased
loss from operations of $1,249,000 is due to an increase in gross profit of
$1,031,000 ; a decrease of $2,204,000 on the 1996 non cash transaction of the
exchange of escrow shares offset by an increase in selling, general and
administrative expenses of $1,921,000; and an increase in depreciation and
amortization of $65,000.
NET LOSS The net loss for the year ended December 31, 1997 was $929,000
compared to a net loss of $2,145,000 for the year ended December 31, 1996, an
improvement of $1,216,000 . The net loss decrease of $1,216,000 is comprised
primarily of a decrease in loss from operations of $1,249,000 offset by an
increase in interest expense of $29,000.
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 1997 or 1996.
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.
15
<PAGE>
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 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 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 line of products is a mature line which is no longer an area
for significant growth.
COST OF GOODS SOLD Cost of goods sold increased to $9,665,000 for the year
ended December 31, 1996 from $8,562,000 for the same period in 1995. As a
percentage of net sales, cost of goods sold decreased to 65% from 65.7%. Gross
profit margin increased slightly to 35.0% for the year ended December 31, 1996
from 34.3% for the year ended December 31, 1995. Management expects the gross
profit margin to continue to improve through the streamlining of its
manufacturing facilities but there can be no assurance that these improvements
will be attained.
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
16
<PAGE>
same period in 1995. This decrease is primarily attributable to the write
off at the end of 1995 of the remaining intangible assets acquired on the
acquisition of its wholly-owned subsidiary, Alpha Pro Tech Inc. This is
partially offset by Apparel Division fixed asset additions in 1996 and the
amortization 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
acquisition of its wholly-owned subsidiary, Alpha ProTech, Inc. During the
fourth quarter of 1995, it became apparent to management that cash flows from
the mask, shield, and wound care products manufactured and distributed through
Alpha ProTech, Inc. had declined for each of the past four years and would
decline in the future. Dramatic changes have taken place in the health care
market with downsizing, cost containment pressure and changing of buying
practices for medical products. A significant investment would have to be made
to change the Company's manufacturing equipment and facilities to continue to
aggressively attack these markets. As a result, the Company has modified its
strategy in order to maximize sales and profit by focusing on increased demand
for its apparel cleanroom products and food service industry products.
EXCHANGE OF ESCROW SHARES
Pursuant to an agreement dated April 5, 1989, the Company purchased all of
the assets of BFD Inc. from certain individuals. The purchase price of
$625,000 Canadian was settled by the issuance of 3,500,000 common shares and
the assumption of liabilities of $520,000 Canadian. Of the shares issued,
3,150,000 were subject to an escrow agreement. On December 30, 1996, all of
the escrowed shares, except for the shares canceled in connection with the
settlement with John P. Russell, were exchanged for new shares. The 2,475,000
new shares were valued at the fair market value of the shares on the date of
the exchange which resulted in a $2,204,000 charge to earnings that was
recorded during the fourth quarter of 1996. Additionally, the paid in capital
increase $2,204,000 resulted in no net change to stockholders equity. The
2,475,000 shares held in escrow were canceled effective December 30, 1996.
Net Interest Interest expense decreased by $284,000, to $279,000 for the
year ended
17
<PAGE>
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.
The Company does not have any pension, profit sharing or similar plans
established for its employees, however, the chief executive officer and
president are entitled to a combined bonus equal to 10% of the pre-tax profits
of the company. No bonus was earned in 1996 or 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash of $490,000 and working
capital of
18
<PAGE>
$3,612,000. During the year ended December 31, 1997, cash increased by
$215,000 and accounts payable and accrued liabilities increased by $389,000.
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
$2,463,000. The Company currently has secured a new asset based lender's line
of credit of $2,900,000, based upon the level of eligible accounts
receivable, inventory and equipment which expires in December 2000. At
December 31, 1997, the maximum line of credit available was $2,144,000 for
accounts receivable, inventory and equipment of which $773,000 remained
available at December 31, 1997.
Net cash used for operations was $1,973,000 for the year ended December 31,
1997 and $298,000 for the same period of 1996. The Company's use of cash from
operations for the year ended December 31, 1997 is due primarily to increases in
accounts receivable, inventories, prepaids and other assets offset by an
increase in accounts payable and accrued liabilities.
The Company's investing activities have consisted primarily of expenditures
for fixed assets and intangible assets of $534,000, $70,000 for business
acquisition offset by $18,000 for the sale of marketable securities for a total
of $586,000 for the year ended December 31, 1997.
The Company anticipates that its mask manufacturing capabilities are to be
improved based on customer demands at an estimated cost of $225,000. Depending
on the success of the automated shoe cover approximately $350,000 of additional
equipment could be required. The Company intends to lease equipment whenever
possible.
During the year ended December 31, 1997, the Company's financing activities
consisted primarily of the exercise of warrants and options for $2,463,000,
increases in the asset based loan of $179,000, offset by principle payment on
capital leases of $71,000 and repayments of borrowings totaling $50,000 which
resulted in the net cash provided by financing activities of $2,521,000.
Management believes that it has available cash and borrowings to finance all
known financial commitments for at least 12 months and also expects to show
positive cash flow for 1998.
NEW ACCOUNTING STANDARDS
The financial accounting standards board has issued statement of financial
accounting
19
<PAGE>
standards (SFAS) No. 128, "Earnings Per Share," which became
effective after December 15, 1997. SFAS 128 requires the computation of "basic"
earnings per share, which utilizes the weighted average number of common shares
outstanding without regard to potential common shares, and "diluted" earnings
per share, which includes all such shares if dilutive. Potential common shares
for all years were anti-dilutive and accordingly were excluded from the loss per
share calculations.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 ("Act) provides a safe
harbor for forward-looking information made on behalf of the Company. All
statements, other than statements of historical facts which address the
Company's expectations of sources of capital or which express the Company's
expectation for the future with respect to financial performance or operating
strategies can be identified as forward-looking statements. Such statements made
by the Company are based on knowledge of the environment in which it operates,
but because of the factors previously listed, as well as other factors beyond
the control of the Company, actual results may differ materially from the
expectations expressed in the forward-looking statements.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements and the Report of Independent Auditors
thereon are set forth under Item 134 (a) (1) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
The information pursuant to Items 10, 11, 12 and 13 is omitted from this
report (in accordance with Federal Instruction G for Form 10-K), since the
Company is filing with the Commission (by no later than April 30, 1998), a
definitive proxy statement pursuant to Regulation 14A, which involves the
election of directors at the annual shareholders' meeting of the Company is
expected to be held on June 19, 1998.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2 Financial Statement and Financial Statement Schedules
SEE INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
APPEARING ON PAGE F-1 OF THIS FORM 10-K
(b) Exhibit Index
ITEM 16. EXHIBITS
<TABLE>
<S> <C> <C>
(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 1994 *
(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) Article of Merger of BAD 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 BAD Industries
with and into Alpha Pro Tech, Ltd., a Delaware Corporation
effective July 1, 1994 *
(4) (a) Form of Common Stock Certificate **
(10) (a) Form of Director's Stock Option Agreement
(b) Form of Employee's Stock Option Agreement
(c) Employment Agreement between the Company and Al Millar dated
June, 1989
(c)(i) Employment Agreement between the Company and
Donald E. Bennett, Jr. **
(c)(ii)Employment Agreement between the Company and Michael Scheerer ***
(d) Lease Agreement between White Dairy Company, Inc. and the
Company for lease of the premises situated at 2724-7th Avenue
South, Birmingham, Alabama, 35233, dated March, 1990 and
amendment thereto dated April, 1990
(e) BAD 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 BAD
Industries Limited Partnership dated May 17, 1990
</TABLE>
22
<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.
(16) (a) Letter, re: Changes in certifying accountant *
(27) Financial Data Schedule (filed herewith)
</TABLE>
- ------------------------
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.
* 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 filed January
30, 1997 to Registration Statement on Form S-1 (File No. 33-93894)
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has fully caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ALPHA PRO TECH, LTD.
Date: March 27, 1998 By: S/SHELDON HOFFMAN
-------------- -------------------------------
Sheldon Hoffman
Chief Executive Officer,
Principal Financial Officer
and Director
Date: March 27, 1998 By: S/LLOYD HOFFMAN
-------------- -------------------------------
Lloyd Hoffman
Vice President, Controller and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registration and in the capacities indicated on March 27, 1998.
S/DONALD E. BENNETT, JR.
----------------------------------
Donald E. Bennett, Jr. Director
S/SHELDON HOFFMAN
----------------------------------
Sheldon Hoffman, Director
S/ROBERT H. ISALY
----------------------------------
Robert H. Isaly, Director
S/ALEXANDER W. MILLAR
----------------------------------
Alexander W. Millar, Director
S/ DR. JOHN RITOTA
----------------------------------
Dr. John Ritota, Director
24
<PAGE>
Alpha Pro Tech, Ltd.
Report and Consolidated Financial Statements
December 31, 1997, 1996 and 1995
<PAGE>
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
Financial Statements:
Report of Independent Accountants.......................................F-2
Consolidated Balance Sheets at December 31, 1997 and 1996...............F-3
Consolidated Statements of Operations for each of the three years
ended December 31, 1997...............................................F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1997...................................F-5
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997.....................................................F-6
Notes to Consolidated Financial Statements..............................F-8
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for the three years
ended December 31, 1997..............................................F-22
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Alpha Pro Tech, Ltd.
In our opinion, the consolidated financial statements listed in the index on
page F-1 present fairly, in all material respects, the financial position of
Alpha Pro Tech, Ltd. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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
February 24, 1998
F-2
<PAGE>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash $ 490,000 $ 275,000
Marketable securities - restricted 21,000 39,000
Accounts receivable, net of allowance for doubtful accounts
of $91,000 and $122,000 2,805,000 2,170,000
Income taxes receivable 5,000 5,000
Inventories 3,697,000 2,942,000
Prepaid expenses and other assets 393,000 183,000
------------ ------------
7,411,000 5,614,000
Property and equipment, net 2,084,000 1,615,000
Intangible assets, net 305,000 219,000
Other 185,000 33,000
------------ ------------
$ 9,985,000 $ 7,481,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,142,000 $ 1,600,000
Accrued liabilities 494,000 647,000
Due to related parties -- 19,000
Notes payable, including $0 and $8,000 due to related
parties at December 31, 1997 and 1996, respectively -- 31,000
Loans payable, current portion 1,051,000 1,081,000
Capital leases, current portion 112,000 36,000
------------ ------------
3,799,000 3,414,000
Loans payable, less current portion 320,000 112,000
Capital leases, less current portion 229,000 105,000
------------ ------------
4,348,000 3,631,000
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
24,112,449 and 20,755,463 issued and outstanding at
December 31, 1997 and 1996, respectively 241,000 207,000
Additional paid-in capital 24,338,000 21,656,000
Accumulated deficit (18,942,000) (18,013,000)
------------ ------------
5,637,000 3,850,000
------------ ------------
$ 9,985,000 $ 7,481,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Sales $ 17,823,000 $ 14,863,000 $ 13,031,000
Cost of goods sold, excluding depreciation
and amortization 11,594,000 9,665,000 8,562,000
------------ ------------ ------------
6,229,000 5,198,000 4,469,000
Expenses:
Selling, general and administrative 6,531,000 4,610,000 4,342,000
Depreciation and amortization 319,000 254,000 618,000
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 (621,000) (1,870,000) (5,413,000)
------------ ------------ ------------
Other (income) expense
Interest, net 308,000 279,000 563,000
Other -- -- (10,000)
------------ ------------ ------------
308,000 279,000 553,000
------------ ------------ ------------
Loss before minority interest in consolidated
subsidiary and provision (benefit) for
income taxes (929,000) (2,149,000) (5,966,000)
Minority interest in loss (income) of
consolidated subsidiary -- 4,000 (5,000)
Provision (benefit) for income taxes -- -- --
------------ ------------ ------------
Net loss $ (929,000) $ (2,145,000) $ (5,971,000)
============ ============ ============
Basic loss per share $ (0.04) $ (0.12) $ (0.36)
============ ============ ============
Diluted loss per share $ (0.04) $ (0.12) $ (0.36)
============ ============ ============
Basic weighted average number of
shares outstanding 23,388,369 17,841,547 16,533,294
============ ============ ============
Diluted weighted average number of
shares outstanding 23,388,369 17,841,547 16,533,294
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Cumulative
Common Paid-in Translation Accumulated
Shares Stock Capital Adjustments Deficit Total
<S> <C> <C> <C> <C> <C> <C>
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 upon exercise
of options/warrants 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
Stock issued upon exercise
of options/warrants 3,356,986 34,000 2,429,000 -- -- 2,463,000
Options/warrants issued
for services -- -- 253,000 -- -- 253,000
Net loss -- -- -- -- (929,000) (929,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1997 24,112,449 $ 241,000 $ 24,338,000 $ -- $(18,942,000) $ 5,637,000
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (929,000) $(2,145,000) $(5,971,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 319,000 254,000 618,000
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 120,000 39,000 190,000
Changes in assets and liabilities:
Accounts receivable (635,000) (99,000) (214,000)
Income taxes receivable -- 167,000 --
Inventories (755,000) (844,000) (59,000)
Prepaid and other assets (229,000) (15,000) 181,000
Accounts payable and accrued liabilities 389,000 145,000 (152,000)
----------- ----------- -----------
Net cash used in operating activities (1,720,000) (298,000) (480,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of businesses (70,000) (49,000) (35,000)
Purchase of property and equipment (481,000) (388,000) (349,000)
Cost of intangible assets (53,000) (20,000) (55,000)
Sale (purchase) of marketable security 18,000 (3,000) (36,000)
Proceeds from note receivable -- -- 58,000
----------- ----------- -----------
Net cash used for investing activities (586,000) (460,000) (417,000)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock 2,463,000 719,000 1,776,000
Proceeds from related parties -- 124,000 --
Payments to related parties (19,000) (149,000) (323,000)
Net proceeds from loans payable 1,936,000 136,000 --
Net principal repayments on loans payable (1,757,000) -- (120,000)
Principal repayments on notes payable (31,000) (106,000) (420,000)
Principal repayments on capital leases (71,000) (35,000) (12,000)
----------- ----------- -----------
Net cash provided by financing activities 2,521,000 689,000 901,000
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ALPHA PRO TECH, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Increase (decrease) in cash...... $215,000 $(69,000) $ 4,000
Cash, beginning of period........ 275,000 344,000 340,000
-------- -------- --------
Cash, end of period.............. $490,000 $275,000 $344,000
-------- -------- --------
Supplemental disclosure of cash
flow information:
Cash paid for interest....... $375,000 $317,000 $560,000
-------- -------- --------
Cash paid for income taxes... $ -- $ -- $ --
-------- -------- --------
</TABLE>
Non-cash investing and financing activity:
1997
The Company incurred capital lease obligations for machinery and equipment
of $270,000.
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
was unpaid at December 31, 1996.
The Company incurred capital lease obligations for machinery and
equipment of $105,000.
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 in the amount of $20,000 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.
The Company incurred capital lease obligations for office equipment and
machinery and equipment of $83,000.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ALPHA PRO TECH
NOTES TO 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.
In 1994, APT acquired all of the assets of Disposable Medical Products,
Inc. (DMP). 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 12). 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). 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 goods
to third parties, the resulting profits are then recorded by the Company.
Revenues are reduced for anticipated sales returns and allowances.
MARKETABLE SECURITIES
The Company complies with 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.
At December 31, 1997, 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 $21,000.
F-8
<PAGE>
ALPHA PRO TECH
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
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 when shipped. Catalog costs expensed
in 1997, 1996 and 1995 were $16,000, $0 and $41,000, respectively.
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 estimated 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 that future sales from masks, shields and woundcare
products will 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.
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 5).
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
F-9
<PAGE>
ALPHA PRO TECH, LTD.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
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.
Transaction gains or losses on foreign exchange are reflected in net loss
for the periods presented and are immaterial in amount.
LOSS PER SHARE
Earnings per share "EPS" have been computed pursuant to the provisions of
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings Per Share" which became effective after December 15, 1997. All
periods prior to December 15, 1997 have been restated to conform with the
provisions SFAS 128.
The following table provides a reconciliation of both the net loss and
the number of common shares used in the computations of "basic" EPS,
which utilizes the weighted average number of common shares outstanding
without regard to potential common shares, and "diluted" EPS, which
includes all such shares.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net loss (Numerator)...................... $ (929,000) $(2,145,000) $(5,971,000)
Shares (Denominator):
Basic average common shares............. 23,388,369 17,841,547 16,533,294
Add: Dilutive effect of stock options
and warrants.......................... -- -- --
----------- ----------- -----------
Diluted shares.......................... $23,388,369 $17,841,547 $16,533,294
----------- ----------- -----------
Per Share Amount-Net Loss:
Basic................................... $ (0.04) $ (0.12) $ (0.36)
Diluted................................. $ (0.04) $ (0.12) $ (0.36)
</TABLE>
For 1995, the basic and diluted common share calculations (denominator)
exclude 2,475,000 shares held in escrow. Such shares were issued to
management on December 30, 1996 (Note 9) and have been included in basic
and diluted common shares thereafter. Potential common 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 DMP in 1994, the
Company sells significant amounts of product to a large distributor on
credit terms. Net sales to this distributor were 50.7%, 42.9% and 28.2%
of total net revenue for 1997, 1996 and 1995, respectively. Trade
receivables from this distributor were 42.3% and 33.7% of total trade
receivables for 1997 and 1996, respectively. Management believes that
adequate provision has been made for risk of loss on all credit
transactions.
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, 1997 and 1996.
F-10
<PAGE>
ALPHA PRO TECH, LTD.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
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
In accordance with Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-based Compensation," which establishes
an accounting method based on the fair value of equity instruments
awarded to employees to account for its stock-based compensation, the
Company applies the intrinsic value method prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees" to account for its
stock-based compensation. The company also provides pro forma disclosure
in the notes to the financial statements of the differences between the
fair value method and the intrinsic value method (Note 9).
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials................................... $1,741,000 $1,511,000
Work in process................................. 370,000 76,000
Finished goods.................................. 1,586,000 1,355,000
---------- ----------
$3,697,000 $2,942,000
---------- ----------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Machinery and equipment.......................... $2,557,000 $2,042,000
Officer furniture and equipment.................. 525,000 334,000
Leasehold improvements........................... 90,000 75,000
---------- ----------
3,172,000 2,451,000
Less accumulated depreciation and amortization... (1,088,000) (836,000)
---------- ----------
$2,084,000 $1,615,000
</TABLE>
F-11
<PAGE>
ALPHA PRO TECH, LTD.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Included in the above amounts are the following assets under capital lease
obligations:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
Machinery and equipment $ 396,000 $ 162,000
Office furniture and equipment 62,000 26,000
--------- ---------
458,000 188,000
Less accumulated amortization (102,000) (42,000)
--------- ---------
$ 356,000 $ 146,000
--------- ---------
--------- ---------
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Goodwill $ 206,000 $ 136,000
Patents 107,000 57,000
Other 84,000 81,000
--------- ---------
397,000 274,000
Less accumulated amortization (92,000) (55,000)
--------- ---------
$ 305,000 $ 219,000
--------- ---------
--------- ---------
</TABLE>
IMPAIRMENT LOSS
The Company acquired all of the common stock of APT 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>
<CAPTION>
<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-12
<PAGE>
ALPHA PRO TECH
NOTES TO 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:
<TABLE>
<CAPTION>
December 31,
1995
<S> <C>
Goodwill $ 4,215,000
Patents 586,000
Trademrks 61,000
Other 60,000
----------
$ 4,922,000
----------
----------
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Professional fees $ 145,000 $ 286,000
Payroll and payroll taxes 267,000 203,000
Other 82,000 158,000
--------- ---------
$ 494,000 $ 647,000
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
ALPHA PRO TECH
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Note payable due in monthly installments of
$1,500, interest at 8.0%, maturing July 31,
1997 $ -- $ 9,000
Note payable due in monthly installments of
$4,000, interest at 6%, with the remaining
balance due March 31, 1997 -- 14,000
Note payable to related parties, interest at
20% payable quarterly, due on demand -- 8,000
--------- ---------
-- 31,000
Less: Current portion 31,000
--------- --------
Notes payable, less current portion $ -- $ --
--------- ---------
--------- ---------
</TABLE>
8. LOANS PAYABLE
In December 1997, 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, 1997 represent outstanding amounts against the
facility. Pursuant to the terms of the credit agreement, the Company has a
$2,500,000 line of credit and a $400,000 term loan secured by accounts
receivable, inventory, trademarks, patents, property and equipment, and
66.67% of the issued and outstanding shares of DPI. The credit facility bears
interest at prime plus 2% which was 10.5% at December 31, 1997.
The Company paid $29,000 in loan origination fees to obtain the credit
facility. Under the terms of the agreement, the Company pays a 0.5% 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.
The Company used certain of the proceeds of its new facility to repay its
previous asset-based loan. Loans payable at December 31, 1996 represent
outstanding amounts against this previous facility. Additionally, under the
terms of the previous facility, the Company paid $63,000, $84,000 and $76,000
in loan and unused line of credit fees for the years ended December 31, 1997,
1996 and 1995, respectively.
F-14
<PAGE>
ALPHA PRO TECH
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Future maturities for loans payable are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $1,051,000
1999 80,000
2000 80,000
2001 80,000
2002 80,000
----------
$1,371,000
----------
----------
</TABLE>
9. SHAREHOLDERS' EQUITY
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 shares of
common stock 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 675,000 shares which were
canceled in connection with a legal settlement with a former stockholder,
were exchanged for new shares. The 2,475,000 new shares were valued at fair
market value 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. As a
result of the related paid-in capital increase of $2,204,000, the transaction
resulted in no net change to stockholders equity. The 2,475,000 shares held
in escrow were canceled 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. No shares
were issued for services in 1997 or 1996.
PRIVATE PLACEMENT ACTIVITY
During 1995, the Company received subscriptions for 1,802,649 common
shares under private placements for $1,352,000. Costs relating to the private
placements were $426,000 for 1995.
F-15
<PAGE>
ALPHA PRO TECH
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
WARRANT ACTIVITY
Warrant activity for the three years ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER WARRANT
---------- -----------------
<S> <C> <C>
Warrants outstanding, December 31, 1994 1,950,708 $0.75 to 1.75
Granted in connection with private placement 1,819,598 0.75
Granted to lenders 257,000 0.75
Exercised (451,439) 0.75 to 1.75
Expired (80,000) 1.75
---------- ---------------
Warrants outstanding, December 31, 1995 3,495,867 0.75 to 1.75
Granted to employees 95,384 1.03
Exercised (188,333) 0.75 to 1.25
Expired (90,000) 1.25
---------- ------------
Warrants outstanding, December 31, 1996 3,312,918 0.75 to 1.75
Exercised (3,096,986) 0.75
Expired (96,884) 0.75 to 1.03
---------- ------------
Warrants outstanding, December 31, 1997 119,048 1.75
---------- ------------
---------- ------------
</TABLE>
The warrants outstanding at December 31, 1997 are currently exerciseable
and entitle the holders to purchase one common share for the stated price and
expire July 1, 1999.
OPTION ACTIVITY
During 1993, the Company adopted stock option plans for employees and
directors of the Company. As of December 31, 1997, 3.6 million shares were
reserved for issuance under these plans, of which 3.0 million have been
granted. The exercise price of the options is determined based on the fair
market value of the stock on the date of grant, and the options generally
vest immediately.
F-16
<PAGE>
Alpha Pro Tech
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Option activity for the three years ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Average
Exercise Price
Shares Per Option
--------- ---------------
<S> <C> <C>
Options outstanding, December 31, 1994 2,687,000 $ 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
Ganted to consultants 10,000 1.47
Exercised (656,000) 0.85
Cancelled (393,500) 1.06
--------- ----------------
Options outstanding, December 31, 1996 2,589,000 1.01
Granted to employees 675,000 0.99
Granted to consultants 610,000 1.82
Exercised (260,000) 0.79
Canceled (216,000) 1.80
--------- ----------------
Options outstanding, December 31, 1997 3,398,000 1.13
--------- ----------------
--------- ----------------
</TABLE>
All options are fully exerciseable.
The following summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------
<S> <C> <C> <C>
EXERCISE AVERAGE AVERAGE
PRICE SHARES PRICE TERM
- ---------------- ---------- ----------- -----------
$ 0.75 to $0.95 1,343,000 $ 0.77 0.58
$ 0.96 to $0.99 578,000 0.97 3.45
$ 1.00 to $1.50 952,000 1.27 2.29
$ 1.51 to $2.75 525,000 1.95 1.70
</TABLE>
F-17
<PAGE>
ALPHA PRO TECH
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Had compensation cost for the Company's employee/director options been
determined based on the fair value at the grant date the Company's pro forma net
loss, pro forma basic loss, and pro forma diluted loss per share would have been
as follows:
<TABLE>
<CAPTION>
For the Year Ended
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Pro forma net loss.................................................................. $ (1,183,000) $ (2,208,000)
------------- -------------
------------- -------------
Pro forma basic loss per share...................................................... $ (0.05) $ (0.12)
------------- -------------
------------- -------------
Pro forma diluted loss per share.................................................... $ (0.05) $ (0.12)
------------- -------------
------------- -------------
</TABLE>
For the purpose of the above pro forma disclosures, the fair value of each
employee/director stock option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................................................ 6.15% 7.50% 7.50%
Expected life...................................................................... 5 years 5 years 5 years
Expected volatility................................................................ 70% 70% 60%
Expected dividend yield............................................................ 0% 0% 0%
</TABLE>
The weighted-average grant date fair values of employee/director options
granted during 1997 and 1996 were $0.38 and $0.72, respectively.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current............................................................. $ -- $ -- $ --
Deferred............................................................ -- -- --
------------- ------------- -------------
-- -- --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
No current benefit for income taxes has been recorded in the 1997 statement
of operations since the Company's history of recurring losses precludes
anticipation of the benefit of the 1997 loss.
F-18
<PAGE>
ALPHA PRO TECH
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Deferred tax assets (liabilities) are comprised of the following at December
31.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Loss carryforwards
U.S............................................................................... $ 2,428,000 $ 2,064,000
Canada............................................................................ 1,379,000 1,428,000
Other............................................................................. 96,000 82,000
------------- -------------
Gross deferred tax assets........................................................... 3,903,000 3,574,000
Depreciation and amortization....................................................... (166,000) (119,000)
------------- -------------
Net................................................................................. 3,737,000 3,455,000
Valuation allowance................................................................. (3,737,000) (3,455,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
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,
---------------------------------------
1997 1996 1995
----------- ----------- -------------
<S> <C> <C> <C>
Recovery of income taxes based on United States statutory rates (34%).... $ (316,000) $ (729,000) $ (2,030,000)
Non-deductible goodwill amortization..................................... -- -- 1,590,000
Compensation expense for exchange of escrowed shares for new shares...... -- 749,000 --
Increase (decrease) in valuation allowance............................... 301,000 (29,000) 430,000
Other.................................................................... 15,000 9,000 10,000
----------- ----------- -------------
$ -- $ -- $ --
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
At December 31, 1997, 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 $6.5 million and $3.1 million,
respectively.
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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
2013........ 974,000
---------
$6,508,000
</TABLE>
For Canadian income tax purposes, these losses will expire as follows:
<TABLE>
<S> <C>
1998........ $1,010,000
1999........ $ 357,000
2000........ $1,729,000
----------
$3,096,000
----------
----------
</TABLE>
In the event of changes in ownership, IRS regulations may limit net
operating losses available to the Company.
11. LEASE COMMITMENTS AND OBLIGATIONS
The Company leases manufacturing facilities under non-cancelable operating
leases expiring between June 1998 and January 2001. The Company also leases
certain manufacturing and office equipment under capital leases expiring between
June 1998 and June 2000.
F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The following summarizes future minimum lease payments required under
capital and non-cancelable operating leases:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
1998................................................. $ 159,000 $ 522,000
1999................................................. 147,000 179,000
2000................................................. 138,000 69,000
2001................................................. 15,000 67,000
2002................................................. -- 45,000
---------- ----------
Future minimum lease payments........................ $ 459,000 $ 882,000
----------
----------
Less amounts representing interest................... 118,000
----------
Present value of future minimum lease payments....... $ 341,000
----------
Less amounts due within one year..................... 112,000
----------
Amounts due after one year........................... $ 229,000
----------
</TABLE>
Total rent expense incurred by the Company under operating leases for the
year ended December 31, 1997, 1996 and 1995 was $588,000, $599,000 and $447,000,
respectively.
12. 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 $19,000 remaining
at December 31, 1996 was paid in 1997. The Company recorded an additional
$58,000 of goodwill which is being amortized over 8 years.
During 1997 the Company through its wholly-owned subsidiary Disposable
Medical Products, Inc. acquired the remaining 3.2% of the shares in DPI, for
$70,000. The Company recorded $70,000 of goodwill in connection with the
acquisition which is being amortized over 8 years.
F-21
<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 Deductions Period
- ---------------------------------------------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1997
Deducted from related asset account:
Allowance for doubtful accounts............... $ 122,000 $ 11,000 $ -- $ 42,000 $ 91,000
------------ ------------ ---------- ----------- ------------
------------ ------------ ---------- ----------- ------------
Provision for inventory....................... $ 42,000 $ 37,000 $ -- $ -- $ 79,000
------------ ------------ ---------- ----------- ------------
------------ ------------ ---------- ----------- ------------
Valuation allowance for income taxes.......... $ 3,455,000 $ -- $ 282,000 $ -- $ 3,737,000
------------ ------------ ---------- ----------- ------------
------------ ------------ ---------- ----------- ------------
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
------------ ------------ ---------- ----------- ------------
------------ ------------ ---------- ----------- ------------
</TABLE>
F-22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 490,000
<SECURITIES> 21,000
<RECEIVABLES> 2,896,000
<ALLOWANCES> 91,000
<INVENTORY> 3,697,000
<CURRENT-ASSETS> 7,411,000
<PP&E> 2,893,000
<DEPRECIATION> 319,000
<TOTAL-ASSETS> 9,985,000
<CURRENT-LIABILITIES> 3,799,000
<BONDS> 0
0
0
<COMMON> 241,000
<OTHER-SE> 5,396,000
<TOTAL-LIABILITY-AND-EQUITY> 9,985,000
<SALES> 17,823,000
<TOTAL-REVENUES> 17,823,000
<CGS> 11,594,000
<TOTAL-COSTS> 11,594,000
<OTHER-EXPENSES> 6,850,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 308,000
<INCOME-PRETAX> (929,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (929,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (929,000)
<EPS-DILUTED> (0.04)
</TABLE>
