<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
------------------
Quarterly Report pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1998 Commission File No. 0-19893
---------------------------
Alpha Pro Tech, Ltd.
--------------------
(exact name of registrant as specified in its charter)
Delaware, U.S.A. 63-1009183
- ---------------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
Suite 112, 60 Centurian Drive
Markham, Ontario, Canada L3R 9R2
- ------------------------ -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (905) 479-0654
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 3 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock , as of August 6, 1998
--------------
Common stock, $.01 par value..... 24,112,449
<PAGE>
Alpha Pro Tech, Ltd.
Table of Contents
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 Consolidated Financial Statements (Unaudited) Page No.
<S> <C>
a) Consolidated Balance Sheet -
June 30, 1998 (unaudited) and December 31, 1997 1
b) Consolidated Statement of Operations
for the three months and six months ended
June 30, 1998 and June 30, 1997 (unaudited) 2
c) Consolidated Statement of Shareholder's Equity
for the six months ended June 30, 1998
(unaudited) 3
d) Consolidated Statement of Cash Flows
for the six months ended June 30, 1998
and June 30, 1997 (unaudited) 4
e) Notes to Consolidated Financial Statements 5-6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
Part II. OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote Security Holders 13
SIGNATURES 14
</TABLE>
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Balance Sheet
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
Assets (Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 111,000 $ 490,000
Marketable Securities-restricted 17,000 21,000
Accounts receivable, net of allowance for
doubtful accounts of $67,000 and $91,000 2,751,000 2,805,000
Income taxes receivable 5,000 5,000
Inventories 3,378,000 3,697,000
Prepaid expenses and other assets 363,000 393,000
----------- ----------
6,625,000 7,411,000
Property and equipment, net of accumulated
depreciation and amortization of $1,264,000
and $1,088,000 2,119,000 2,084,000
Intangible assets, net of accumulated
amortization of $113,000 and $92,000 314,000 305,000
Other 196,000 185,000
----------- ----------
$ 9,254,000 $9,985,000
----------- ----------
----------- ----------
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,222,000 $ 2,142,000
Accrued liabilities 662,000 494,000
Loans payable, current portion 944,000 1,051,000
Capital leases, current portion 115,000 112,000
----------- ----------
2,943,000 3,799,000
Loans payable, less current portion 287,000 320,000
Capital leases, less current portion 213,000 229,000
----------- ----------
3,443,000 4,348,000
--------- ---------
Shareholders' Equity
Common stock, $.01 par value, 50,000,000
shares authorized, and 24,112,449
issued and outstanding at June 30, 1998
and December 31, 1997 241,000 241,000
Additional paid-in capital 24,338,000 24,338,000
Accumulated deficit (18,768,000) (18,942,000)
----------- ----------
5,811,000 5,637,000
--------- ---------
$ 9,254,000 $9,985,000
----------- ----------
----------- ----------
</TABLE>
1
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales $4,701,000 $4,491,000 $9,443,000 $8,476,000
Cost of goods sold, excluding
depreciation 2,884,000 2,772,000 5,730,000 5,217,000
---------- ---------- ---------- ----------
1,817,000 1,719,000 3,713,000 3,259,000
Expenses
Selling, general and administrative 1,575,000 1,561,000 3,236,000 2,883,000
Depreciation and amortization 100,000 78,000 198,000 148,000
---------- ---------- ---------- ----------
Income from operations 142,000 80,000 279,000 228,000
---------- ---------- ---------- ----------
Interest 51,000 66,000 105,000 147,000 0
---------- ---------- ---------- ----------
51,000 66,000 105,000 147,000
---------- ---------- ---------- ----------
Income before provision for income
taxes 91,000 14,000 174,000 81,000
Provision for income taxes 0 0 0 0
---------- ---------- ---------- ----------
Net Income $91,000 $14,000 $174,000 $81,000
---------- ---------- ---------- ----------
Net Income per common share:
Basic $ 0.00 $ 0.00 $ 0.01 $ 0.00
Diluted $ 0.00 $ 0.00 $ 0.01 $ 0.00
Weighted average shares outstanding:
Basic 24,112,449 23,968,116 24,112,449 23,047,417
Diluted 24,249,657 25,060,847 24,303,654 25,100,321
</TABLE>
2
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statement of Shareholders' Equity (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Additional Accumulated Total
Stock Paid-in Capital Deficit
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 24,112,449 $241,000 $24,338,000 ($18,942,000) $5,637,000
---------- -------- ----------- ------------- -----------
Net Income 174,000 174,000
Balance at
June 30, 1998 24,112,449 $241,000 $24,338,000 ($18,768,000) $5,811,000
---------- -------- ----------- ------------- -----------
---------- -------- ----------- ------------- -----------
</TABLE>
3
<PAGE>
Alpha Pro Tech, Ltd.
Consolidated Statement of Cash Flows (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months ended
June 30,
1998 1997
<S> <C> <C>
Operating Activities:
Net Income/(loss) $174,000 $81,000
Adjustments to reconcile net income to cash
used for operating activities:
Depreciation and amortization 198,000 148,000
Changes in assets and liabilities:
Accounts receivable 54,000 (594,000)
Inventories 319,000 (173,000)
Prepaid expenses and other assets 30,000 49,000
Accounts payable and accrued liabilities (753,000) (977,000)
--------- ---------
Net cash provided by (used for) operating
activities: 22,000 (1,466,000)
------ -----------
Investing Activities:
Purchase of property and equipment (211,000) (271,000)
Purchase of intangible assets (30,000) (92,000)
Purchase of other assets (11,000) 2,000
Sale of marketable securities 4,000 17,000
----- ------
Net cash used for investing activities (248,000) (344,000)
--------- ---------
Financing Activities:
Issuance of common stock ----- 2,412,000
Net proceeds (payments) on loans payable (140,000) 427,000
Net proceeds (payments)on notes payable ----- (31,000)
Net proceeds ( payments) on capital leases (13,000) 71,000
-------- ------
Net Cash provided by financing activities (153,000) 2,879,000
--------- ---------
Increase (decrease) in cash during the period (379,000) 1,069,000
Cash, beginning of period $490,000 $275,000
--------
Cash, end of period $111,000 $1,344,000
-------- ----------
</TABLE>
4
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. The Company
Alpha Pro Tech, Ltd. (the Company) manufactures and distributes a variety
of disposable mask, shield, shoe cover, and apparel products, and woundcare
products. Most of the Company's disposable apparel, mask and shield
products, and woundcare products are distributed to medical, dental,
industrial, and clean room markets, predominantly in the United States.
2. Basis of Presentation
The unaudited interim financial statements reflect all adjustments which
are in the opinion of management necessary for a fair presentation of the
results for the interim period presented. All such adjustments made are of
a normal recurring nature.
There have been no significant changes since December 31, 1997 in
accounting principles and practices utilized in the presentation of these
financial statements.
<TABLE>
<CAPTION>
3. Inventories June 30, December 31,
1998 1997
<S> <C> <C>
Raw Materials $1,542,000 $1,741,000
Work in process 317,000 370,000
Finished goods 1,519,000 1,586,000
--------- ---------
$3,378,000 $3,697,000
---------- ----------
4. Accrued liabilities June 30, December 31,
1998 1997
Professional fees $164,000 $145,000
Payroll and payroll taxes 330,000 267,000
Other 168,000 82,000
------- ------
$662,000 $494,000
---------- ----------
---------- ----------
</TABLE>
5
<PAGE>
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
5. Basic and Diluted Net Income per share
The Company has adopted SFAS No. 128, "Earnings per Share". SFAS No. 128 is
effective for fiscal periods ending after December 15, 1997 and requires
restatement of all prior-period earnings per share (EPS) data presented.
Under this statement, both "basic" EPS and "diluted" EPS are presented on
the face of the income statement.
6. Provision for Income Tax
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". This statement requires an asset and liability approach for the
financial accounting and reporting of income taxes. At June 30, 1998 the
Company had net operating loss (NOL) carryforwards of approximately
$8,600,000. NOL's can be carried forward up to 15 years and are available to
offset future taxable income. The Company's NOL's expire in the years 2005
through 2015.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months and six months ended June 30, 1998, compared to the three months
and six months ended June 30, 1997
Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported net income for the
three months ended June 30, 1998 of $91,000 as compared to net income of $14,000
for the three months ended June 30, 1997 representing an improvement of $77,000
or 550.0%. For the six months ended June 30, 1998 net income rose to $174,000
from $81,000 for the same period in 1997, representing an increase of 114.8%.
Sales Consolidated net sales for the three months ended June 30, 1998 increased
to $4,701,000 from $4,491,000 in 1997, representing an increase of $210,000 or
4.7%. Net sales for the Apparel Division for the second quarter ended June 30,
1998 were $3,192,000 as compared to $2,584,000 for the same period of 1997. The
Apparel Division sales increase of $608,000 or 23.5% was primarily due to
increased sales to the Company's largest distributor. Mask and eye shield sales
decreased by $194,000 or 15.4%, to $1,066,000 for the second quarter of 1998
from $1,260,000 in the second quarter of 1997. Sales of these products should
strengthen in the second half of 1998 with the introduction of a new line of
masks and shields. Sales from the Company's Extended Care Unreal Lambskin(R) and
other related products which includes a line of pet beds decreased by $204,000
or 31.5%, to $443,000 in the second quarter of 1998 compared to $647,000 in the
same period in 1997. The decrease in sales is primarily a result of the
discontinuation of a low margin rolled goods line.
Consolidated sales were $9,443,000 and $8,476,000 for the six months ended June
30, 1998 and 1997 respectively, representing an increase of $967,000 or 11.4%.
The increase is attributable to an increase in apparel sales of 30.6% offset by
a decrease in mask and shield products of 12.0% and a decrease in Unreal
Lambskin of 19.2%.
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 the goods are shipped.
7
<PAGE>
Cost of Goods Sold Cost of goods sold increased to $2,884,000 for the three
months ended June 30,1998 from $2,772,000 for the same period in 1997. As a
percentage of net sales, cost of goods sold decreased to 61.3% in 1998 from
61.7% in 1997. Gross profit margin increased to 38.7% for the three months ended
June 30, 1998 from 38.3% for the three months ended June 30, 1997.
For the six months ended June 30, 1998 as compared to 1997, cost of goods sold
increased to $5,730,000 from $5,217,000. As a percentage of net sales for the
six months, cost of goods sold decreased to 60.7% from 61.6%. Gross profit
margin increased to 39.3% from 38.4% for the six months ended June 30, 1998 and
1997, respectively.
The improvement in gross profit is a result of the Company's new strategic
emphasis of developing innovative high gross profit products, especially for its
largest customer, and also on improved manufacturing efficiency as a result of
recent capital expenditures. Management expects gross profit margin to continue
to remain strong through its strategic emphasis of developing innovative
products and processes but there can be no assurance that these margin
improvements will be sustained.
Selling, General and Administrative Expenses Selling, general and administrative
expenses increased by a modest $14,000 to $1,575,000 for the three months ended
June 30, 1998 from $1,561,000 for the three months ended June 30, 1997. As a
percentage of net sales, selling, general and administrative expenses decreased
to 33.5% in the three months ended June 30,1998 from 34.8% in the same period of
1997. The increase in selling, general and administrative expenses primarily
consists of increased payroll related costs of $36,000; increased marketing,
commissions and travel expenses of $14,000; decreased public company expenses of
$68,000 including investor relations, options/warrants issued for services;
stock transfer costs, and costs associated with SEC reporting requirements; and
increased general office, telecommunication and factory expenses of $23,000.
Management expects selling, general and administrative expenses as a percentage
of net sales to continue to decrease as sales increase.
Selling, general and administrative expenses increased by $353,000 to $3,236,000
for the six months ended June 30, 1998 from $2,883,000 for the six months ended
June 30, 1997. As a percentage of net sales, selling, general and administrative
expenses increased slightly to 34.3% in the six months ended June 30,1998 from
34.0% in the same period of 1997. The increase in selling, general and
administrative expenses for the six months ended June 30, 1998 is due to
increased payroll related costs of $149,000; increased marketing, commissions
and travel expenses of $118,000; decreased public company expenses of $26,000
including investor relations, options/warrants issued for services; stock
transfer costs, and costs associated with SEC reporting requirements; and
increased general office, telecommunication and factory expenses of $66,000.
8
<PAGE>
The $149,000 increase in payroll related costs, is primarily comprised of a
$24,000 decrease in administrative salaries and a $179,000 increase in factory
indirect expenses of which $159,000 is attributable to the Apparel Division
which had an increase in sales of 30.6%. As a percentage of Apparel Division
sales, payroll costs for the Apparel Division increased to 12.5% for the first
six months of 1998 as compared to 12.8% for the first six months of 1997.
Marketing, commissions and travel expenses, which increased $118,000 in the six
months ended June 30, 1998 as compared to the same period in 1997, increased as
a percentage of net sales to 6.5% from 5.8%. These expenses are as a result of
additional focus being placed on customers other than the Company's largest
customer.
Depreciation & Amortization Depreciation and amortization expense increased by
$22,000 to $100,000 for the three months June 30, 1998 from $78,000 for the same
period in 1997 and increased by $50,000 for the six months ended June 30, 1998
compared to 1997. This increase is primarily attributable to an increase in the
purchase of equipment.
Net Interest Interest expense decreased by $15,000 or 22.7%, to $51,000 for the
three months ended June 30, 1998 from $66,000 for the three months ended June
30, 1997. Interest expense decreased by $42,000, or 28.6% for the six months
ended June 30, 1998 compared to 1997. The decrease in net interest expense is
due to a decrease in the cost of capital partially offset by increases in
interest on additional capital leases acquired. In December 1997, the Company
entered into a new three-year $2,900,000 credit facility with an asset-based
lender at prime plus 2%. Alpha's previous credit facility was at prime plus 5%.
Income from Operations Income from operations increased by $62,000 to $142,000
for the three months ended June 30, 1998 from $80,000 for the three months ended
June 30, 1997. The increase in income from operations is primarily due to an
increase of gross profit of $98,000 offset by a small increase in selling,
general and administrative expenses of $14,000 and an increase in depreciation
and amortization of $22,000.
Income from operations increased by $51,000 to $279,000 for the six months ended
June 30, 1998 compared to $228,000 for the same period in 1997. The increased
income from operations for the six months is due to an increase in gross profit
of $454,000 offset by an increase in selling, general and administrative
expenses of $353,000 and an increase in depreciation and amortization of
$50,000.
9
<PAGE>
Net Income Net income for the three months ended June 30, 1998 was $91,000
compared to a net income of $14,000 for the three months ended June 30, 1997, an
improvement of $77,000 or 550.0%. The net income increase of $77,000 is
comprised of an increase in income from operations of $62,000 and a decrease in
interest expense of $15,000.
Net income for the six months ended June 30, 1998 was $174,000 compared to a net
income of $81,000 for the six months ended June 30, 1997, an improvement of
$93,000 or 114.8%. The net income increase for the six months of $93,000 is
comprised of an increase in income from operations of $51,000 and a decrease in
interest expense of $42,000.
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.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash of $111,000 and working capital of
$3,682,000. For the six months ended June 30, 1998, cash decreased by $379,000
and accounts payable and accrued liabilities decreased by $753,000. The Company
currently has a secured 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 June 30, 1998, the maximum line of credit was
$2,336,000 for accounts receivable, inventory and equipment of which $1,105,000
remained available.
Net cash provided for operations was $22,000 for the six months ended June 30,
1998 compared to net cash used for operations of $1,466,000 for the same period
of 1997. The Company's generation of cash from operations for the six months
ended June 30, 1998 is due primarily to net income before depreciation and
amortization and a decrease in accounts receivable, inventory and prepaid and
other assets offset by a decrease in accounts payable and accrued liabilities.
The Company's investing activities have consisted primarily of expenditures for
fixed assets and intangible assets of $252,000 offset by $4,000 for the sale of
marketable securities for a total of $248,000 for the six months ended June 30,
1998.
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 six months ended June 30,1998, the Company's financing activities
consisted primarily of decreases in the asset based loan of $140,000 and capital
leases of $13,000 resulting in the net cash used by financing activities of
$153,000.
Management believes that it has available cash and borrowings to finance all
known financial commitments for at least 12 months.
11
<PAGE>
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which became effective for
fiscal years beginning after December 15, 1997 and established standards for the
way that public business enterprises report information about operating segments
in annual and quarterly financial statements. SFAS No. 131 also established
standards for related disclosures about products and services, geographic areas
and major customers. The company is currently assessing the impact of SFAS No.
131 on its financial statements.
The American Institute of Certified Public Accountants issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal use", which became effective for fiscal years beginning after December
15, 1997 and established standards for the way that public business enterprises
account for the costs of internal use computer software. The Company is
currently assessing the impact of SOP 98-1 on its financial statements.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 ("Act) provides a safe
harbor for forward-looking information made on behalf of the Company. All
statements, other than statements of historical facts which address the
Company's expectations of sources of capital or which express the Company's
expectation for the future with respect to financial performance or operating
strategies can be identified as forward-looking statements. 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.
12
<PAGE>
Alpha Pro Tech, Ltd.
PART II - OTHER INFORMATION
- -----------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote Security Holders
(a) Registrant held its Annual Meeting of Shareholders June 19, 1998.
(b) The following persons were elected Directors pursuant to the votes
indicated:
<TABLE>
<CAPTION>
Name For Against
<S> <C> <C>
Sheldon Hoffman 19,083,390 126,204
Al Millar 19,056,869 153,434
Robert Isaly 19,083,390 126,204
John Ritota 19,083,390 126,204
Donald E. Bennett, Jr. 19,083,390 126,204
</TABLE>
(c) The only other matter to be voted upon was the ratification of
the appointment of Price Waterhouse LLP as the Registrant's
independent accountants as follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
19,131,228 56,000 23,066
</TABLE>
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has dult caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Alpha Pro Tech, Ltd.
DATE: August 6, 1998 BY: Sheldon Hoffman
---------------------- ------------------------
SHELDON HOFFMAN
CHIEF EXECUTIVE OFFICER
CHIEF FINANCIAL OFFICER
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Consolidated Balance Sheet as of June 30, 1998 and December 31, 1997 and the
Statement of Operations for the three and six months ended June 30, 1998.
</LEGEND>
<CIK> 0000884269
<NAME> ALPHA PRO TECH, LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 111,000
<SECURITIES> 17,000
<RECEIVABLES> 2,818,000
<ALLOWANCES> 67,000
<INVENTORY> 3,378,000
<CURRENT-ASSETS> 6,625,000
<PP&E> 3,383,000
<DEPRECIATION> 1,264,000
<TOTAL-ASSETS> 9,254,000
<CURRENT-LIABILITIES> 2,943,000
<BONDS> 0
0
0
<COMMON> 241,000
<OTHER-SE> 24,338,000
<TOTAL-LIABILITY-AND-EQUITY> 9,254,000
<SALES> 4,701,000
<TOTAL-REVENUES> 4,701,000
<CGS> 2,884,000
<TOTAL-COSTS> 1,675,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,000
<INCOME-PRETAX> 91,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 91,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,000
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
