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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, 1996
{ } 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
_________________________
ALPHA PRO TECH, LTD.
(exact name of registrant as specified in its charter)
__________
Delaware 63-1009183
- ------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.
incorporation or organization
Suite 112, 60 Centurian Drive
Markham, Ontario L3R 9R2
- ----------------------------- -----------------
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
--------------------------------------
(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 24, 1997
was 23,373,442.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 24, 1997 was $ 42,330,797 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 1997 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission on or before April 30, 1997
(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
---
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, wound care and consumer products for the
cleanroom, food services, industrial, medical, dental and consumer markets.
The Company operates through four divisions: apparel; food industry; mask
and shield; and wound care. The Company's products are primarily sold under
the "Alpha Pro Tech" brand names, but are also sold for use under private
label.
The Company's products are classified into five groups: Disposable
protective apparel consisting of a complete line of shoecovers, headcovers,
gowns, coveralls and labcoats; food industry apparel consisting of a line of
automated shoecovers, sleeve protectors, aprons, coveralls and bus boy
jackets; Infection control, products consisting of a line of facial masks and
facial shields, wound care products consisting of a line of mattress
overlays, wheelchair covers, geriatric chair surfaces, operating room table
surfaces and pediatric surfaces; consumer products consisting of a line of
pet bedding and pet toys.
During the fourth quarter of 1995, it became apparent to management that cash
flows from the mask, shield, and wound care products manufactured and
distributed through Alpha Pro Tech, Inc. had declined for each of the past
four years and would decline in the future. As a result, the Company has
modified its strategy in order to maximize sales and profit by focusing on
increased demand for its apparel cleanroom products and food service industry
products.
2
The Company's strategy is to grow its cleanroom division through its
exclusive Agreement with VWR Scientific Products ("VWR") (formerly Baxter
Scientific), by increasing its manufacturing capabilities to meet VWR's
needs. The Company entered into an exclusive distribution agreement with a
major supplier to the food industry to launch a line of innovative new
products to help solve a major problem in the food industry; accidents that
occur because of employees slipping and falling on wet slippery surfaces
found in restaurants and food processing plants, and to help decrease the
number of burns caused by frying and grilling. The Company intends to also
maintain its core business in the medical, dental, industrial and health
related markets by using its existing distributors.
The Company's products are used primarily in hospitals, clean rooms,
laboratories and dental offices and are distributed principally in the United
States through a network presently consisting of four purchasing groups, ten
major distributors, approximately 200 additional distributors, approximately
30 independent sales representatives and a Company sales force of 7 people.
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 and optical-grade
polyester film from John Russell (the inventor of certain products currently
being manufactured, marked 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. However, for the fiscal
years ended May 31, 1987, 1988, 1989 and 1991 the Company generated no
revenues.
RECENT DEVELOPMENTS
Alpha Pro Tech Acquisition
In May, 1992, the Company acquired Alpha Pro Tech, Inc. ("Alpha"), from
William C. Klintworth, Jr., the principal shareholder of Alpha acting on
behalf of himself and all other shareholders.
3
Alpha is in the business of manufacturing and selling medical and dental
surgical face masks, bed patient monitoring systems, Unreal Lambskin
decubitus products (used to prevent bedsores) and pet bedding products.
Unreal Lambskin is a material made from durable synthetic fleece fabric which
has the characteristics and attributes of real lambswool. Alpha's corporate
office and manufacturing facility is located at 903 Erst Center Street, Bldg.
E. North Salt Lake, Utah 84054. A second manufacturing facility is located
at 1145 Norwood Road, Janesville, Wisconsin.
The purchase price of $ 7,200,000 (plus closing adjustments) was paid as
follows: a $ 100,000 deposit upon the execution of the Agreement, $
3,600,000 paid at closing with the balance of $ 3,500,000 paid by a
promissory Note ("Note") payable in one year and convertible in whole or in
part at any time during the year, at the option of the holder, into Common
Shares of the Company at a deemed price per share of $ 3.50. No interest
accrued on the Note for the first 120 days after closing, by interest
thereafter accrued at the rate of 8 1/2% per annum, due and payable at the
maturity date of the Note. If a holder of the Note elected to be paid in
cash, such holder had to give the Company at least 120 days advance written
notice of such election prior to April 29, 1993. The Note was secured by all
of the issued and outstanding shares of Alpha pursuant to a pledge agreement.
As part of the transaction, Mr. Klintworth, the principal shareholder and
president of Alpha entered into a Confidentiality Agreement with the Company
in consideration of a total payment of $ 300,000 paid at closing.
Pursuant to this agreement, Mr. Klintworth provided consulting services to
the Company, and covenanted not to compete, directly or indirectly, with the
Company or Alpha during the term of the agreement and for a period of 18
months following the termination thereof. This agreement was for a term of 3
years.
Alpha also entered into an Employment Agreement with Mr. Klintworth for a
three year term at a salary of $ 115,000 per annum which could be terminated
without cause, upon 6 months notice after the above referenced Note was
satisfied. Alpha also entered into an employment agreement with Elvin Boyce
at a salary of approximately $ 3,000 per month. The employment agreement
with Mr. Boyce was generally in accordance with his existing Independent
Consulting Agreement with Alpha dated January 1, 1990, which was for a term
of 10 years. Mr. Boyce was the inventor of certain products now produced by
Alpha and continued to be involved in the manufacturing operations of Alpha.
The transaction was subject to approval of the Vancouver Stock Exchange and
required a report and commentary with respect to the purchase price to be
paid. The Company engaged Deloitte & Touche for this purpose. Their comments
concluded that the proposed purchase price was determined as a result of
arm's length negotiations and that while the price earning multiples and
price to book value ratios in inherent in the net purchase price appear
higher than Canadian "norms" for small manufacturing companies, they do not
appear out of line with such ratios inherent in initial public offerings in
the Untied States and with current trading data in the med-tech industry.
They also noted that the opportunity existed for the Company to increase the
value of Alpha in particular, due to the potential synergetic benefits
associated with selling Alpha's products through the Company's hospital
buying group agreements.
4
Finally, they commented that based upon the scope of their review, analysis
and assumptions used, the proposed cash equivalent purchase price of $ 7.2
million, at January 1, 1992, for all the issued and outstanding shares of
Alpha Pro Tech, Inc. would not be unreasonable. The Company financed this
acquisition with the proceeds of private placements.
Gross revenues of Alpha for each of the three fiscal years ending December
31, were as follows:
1991 $ 5,508,000
1990 $ 5,197,000
1989 $ 3,886,000
On January 26, 1993, the holders of the Notes notified the Company of their
election to receive payment in cash.
On May 14, 1993 the Company paid the noteholders the principal sum of $
3,500,000 together with approximately $ 199,000 of accrued interest. Of this
amount, $ 550,000 was provided by a loan from Harberton Trading, Ltd.
("Harberton") a European merchant bank, $ 1,104,000 was provided by a credit
facility secured by accounts receivable, inventory and equipment from
Allstate Financial Corporation of Arlington, Virginia, with the balance of $
2,045,000 from the Company's working capital. The Harberton loan was
initially for a nine-month terms, bearing a monthly compound interest rate of
1.13% and secured by a pledge of all of the shares of Alpha as well as a
general security interest (subordinate to that of Allstate's Financial
Corporation) on all personal property, including accounts receivable,
inventory and equipment. Harberton was also issued 40,000 shares of the
Company's Common Stock as a bonus and a finder's fee of $ 47,250 was paid to
an unaffiliated third party,. On February 18th 1994, this loan was extended
for an additional nine month period. In connection with such extension, an
additional fee of approximately $ 55,000 and an additional bonus of
approximately $ 125,000 were paid by the Company. In 1995 this loan was
converted into 487,000 shares of the Company's Common Stock.
Contemporaneously with the payment of the Note, Mr. Klintworth resigned as an
officer and director of Alpha Pro Tech and his employment contract was
terminated effective August 14, 1993.
In the fourth quarter of 1995, the Company evaluated the carrying value of
goodwill associated with the acquisition of Alpha, based on current operating
results and forecasts of future operations of this business and concluded
that a write off of the remaining intangible assets of $ 4,922,000 acquired
on the acquisition of Alpha was appropriate in accordance with generally
accepted accounting principles. 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 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. This write-off (recorded in the fourth quarter of 1995) is
reported in the income statement as a component of expenses under the caption
"Impairment Loss on Intangible Assets". See "Consolidated Financial
Statements - Consolidated Statements of Operations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
5
Acquisition of Assets of Gem Non-wovens
In October 1992, the Company acquired the assets of Gem Non-wovens, Inc.
("GEM"), an automated manufacturer of disposable surgical head and shoe
covers, located in Huntsville, Alabama in exchange of approximately $ 330,000
and the assumption of approximately $ 50,000 of GEM's liabilities
to unsecured creditors. Included in the assets acquired were cash and
accounts receivable the collection of which equalled substantially all of the
liabilities assumed. GEM manufactured its products in a leased facility of
approximately 8,500 square feet at in Huntsville, Alabama. The facility was
consolidated into Alpha's facilities in North Salt Lake, Utah effective
January 1, 1994.
Acquisition of License Agreement and Patents
In April, 1993, the Company also acquired a license agreement for an
Inflation Control for Air Supports Device and the patents for a delta Foam
Support System (Delta) from Ms. Hutchens for an aggregate of $ 200,000 ($
175,000 for the Patents and $ 25,000 for the license). The $ 200,000
originally due December 24, 1993 was paid by the issuance of an additional
50,000 shares of the Company's Common Stock and payment of $ 4,000 per month
for 24 months, commencing March 3, 1994. The license and patents relate to a
line of therapeutic mattresses and overlays used in the prevention and
treatment of pressure ulcers. The Company was obligated to pay a royalty to
Ms. Hutchens and two co-inventors of the Delta Support System on all Delta
and Inflation Control Device sales, up to a maximum royalty of $ 250,000 per
year, for the life of the patent.
As part of the Delta agreement, the Company was required to sell $ 1 million
worth of the product within two years of its first sale, and $ 1 million per
year thereafter until the patents expire. If they did not attain these
levels, all rights to the product and the patents were to revert back to Ms.
Hutchens. These sales levels were not attained. These rights have reverted
back to Ms. Hutchens and as a result, the patent was written off at December
31, 1994 and the license agreement was surrendered in 1995.
Acquisition of Assets of Disposable Medical Products, Inc.
On March 25, 1994, the Company, through its wholly owned subsidiary, Alpha,
entered into an agreement to purchase approximately $ 105,000 of inventory
and $ 228,000 of capital equipment of Disposable Medical Products, Inc.
("DMPI"), a debtor in possession pursuant to a Chapter 11 proceeding in the
United States bankruptcy court in New Orleans, Louisiana. The inventory was
purchased immediately, but the acquisition of the capital equipment was to
take place upon approval of the sale by the bankruptcy court which occurred
on July 29, 1994 and upon payment of the purchase price, which occurred on
March 3, 1995.
Between the period of March 25, 1994 and March 3, 1995, under a post-petition
financial agreement, Alpha was responsible for the operation of DMPI and had
all of the risks and rewards of the business. The post-petition financial
results of the operation of DMPI have been included in the Company's
consolidated financial statements effective April 1, 1994.
6
Under the post-petition financing agreement, Alpha Pro Tech was to supply
DMPI with a $ 450,000 line of credit until the date agreement was finalized.
As collateral for the entire amount, DMPI assigned its post-petition accounts
receivable and all other assets to be acquired, to Alpha Pro Tech, in
connection with the asset purchase agreement, employment contracts were
entered into with five employees of DMPI.
Acquisition of Ludan Corporation
Effective April 1, 1995 the Company acquired an 80% interest on Ludan Corp.,
a Georgia based materials laminating company, for $ 29,000 cash plus the
assumption of $ 23,000 net liabilities. In addition, a note payable of $
20,000 was converted to 20,000 Common Shares of the Company in March 1995.
On June 30, 1996, the Company acquired the outstanding 20% interest in Ludan
Corporation from the minority shareholder for $ 68,000. The Company paid $
49,000 of the purchase price in July 1996 and the remaining $ 19,000 is due
in March 1997.
Recent Private Placements
The Company has been dependent for the financing of its working capital
requirements on private sales of its securities to individual investors and
groups of investors and the receipt of proceeds from the exercise of
outstanding warrants and options. The Company intends to continue its
practice of funding its working capital to the extent that it is unable to
meet its working capital requirements by generating sufficient cash flow from
operations. In April 1993 the Company sold 119,048 units at a price of $ 3.70
Canadian ("CDN") for a total of $ 440,478 CDN to a private investor. Each
unit consists of one common share and one non-transferrable share purchase
warrant exercisable within twelve months at a price of $ 3.70 CDN per share.
The net proceeds from this private placement were added to the Company's
working capital. A finder's fee of 9,319 common shares was paid to an
unaffiliated third party in connection with this transaction.
In June, 1993, the Company sold 100,000 units at a per unit price of $ 2.38
CDN for a total of $ 238,000 CDN to a private investor. Each unit consists
of one common share and one non-transferrable share purchase warrant
exercisable within twelve months at a price of $ 2.38 CDN per share. The net
proceeds from this private placement were added to working capital. A
finders fee of 8,500 common shares was paid to an unaffiliated third party.
In July, 1993, the Company sold 233,697 units at a per unit price of $ 2.64
CDN for a total of $ 616,960 to a group of four private investors. Each
unit consists of one common share and one non-transferrable share purchase
warrant exercisable within twelve months at a price of $ 2.64 CDN per share.
The net proceeds from this private placement were used for working capital.
A finders fee of 12,555 common shares, valued at $ 33,145, was paid to an
unaffiliated third party.
In March, 1994 the Company commenced a private offering pursuant to which a
minimum of 500,000 units to a maximum of 3,000,000 Units were to be issued at
a price of $ 1.00 per Unit. Each Unit consisted of one share of Common
Stock, and one Class A Stock Purchase Warrant. Each Warrant entitled the
holder to immediately purchase one share of Common Stock at a price of $
2.00, subject to adjustment in certain circumstances, until their expiration
of February 28, 1996. Subsequently, the agreement with the dealer manager to
offer the Units was terminated, no Units having been sold. The Company
continued to offer Units, under revised terms, to investors. During the year
ended December 31, 1995, the Company had sold 1,802,649 Units at $ .75 per
Unit, each Unit consisting of one share of Common Stock and a two year
Warrant
7
to purchase one share of Common Stock at $ .75 per share, for which it has
received aggregate proceeds of $ 1,352,000.
Exchange of Escrow Shares
Pursuant to an escrow agreement made in June 1989 between the National Trust
Company, the Company and certain shareholders of Alpha Pro Tech, Ltd. (the
"Escrow Agreement"), 3,150,000 of the Company's shares are held in escrow by
the National Trust Company, Vancouver, B.C., and are subject to certain
performance criteria before they are released. The Escrow Agreement provides
that the shares will be released to the shareholders, pro rata, on the basis
of one share for each $ 0.30 of Net Cumulative Cash Flow (as defined in the
Escrow Agreement) in any fiscal period commencing June 1, 1989. The Escrow
Agreement was a condition of an agreement relating to the purchase of certain
assets by the Company to commence the manufacturing and marketing of its
products, and a requirement of the Vancouver Stock Exchange. The
shareholders pursuant to the Escrow Agreement included the following persons
in the following amounts: Al Millar as to 675,000 shares; Sheldon Hoffman as
to 337,500 shares; the Hoffman Family Trust as to 337,500 shares; Irving
Bronfman as to 675,000 shares; and Robert Isaly, on behalf of various
persons, as to 450,000 shares. The balance of 675,000 shares were owned by
John Russell and are deemed to be cancelled.
On December 30, 1996 the Board of Directors of the Company (including Messrs.
Millar, Hoffman and Isaly who constitute a majority of the board) authorized
the issuance of 2,475,000 shares of its Common Stock in exchange for all
rights to the 2,475,000 shares of Company Common Stock owned by Al Millar,
President, Sheldon Hoffman, CEO, the Hoffman Family Trust, Irving Bronfman
and Robert Isaly, ("Exchanging Shareholders"), and which are subject to an
existing Escrow Agreement. The Common Stock issued is identical in all
respects to the rights to the Common Stock surrendered by the Exchanging
Shareholders. Common Stock of the Exchanging Shareholders which is subject
to the Escrow Agreement of June 1989 was treated as issued and outstanding,
has full voting rights, is entitled to receive all dividends but have been
excluded in computing earnings per share because the effect of including them
would be anti-dilutive. These shares are being treated as "Cancelled" on the
books and records of the Company because the Exchanging Shareholders have by
agreement, given up all rights to the shares. Therefore, the issuance of the
shares to the Exchanging Shareholders does not change any of the rights and
privileges of the Exchanging Shareholders nor increase their beneficial
ownership nor would there by an effective change to the capitalization of the
Company. The number of shares issued and outstanding after the issuance is
the same as that outstanding prior to the transaction. The fair value is the
same as that outstanding prior to the transaction. The fair value of the
newly issued shares, $ 2,204,000 (based on the average between the closing
bid and asked price of the Common Stock in the over-the-counter market on
December 30, 1996) is, however, a charge to earnings for 1996 which resulted
in an increase to accumulated deficit. Simultaneously, there was a credit
(increase) to paid in capital resulting in shareholders equity remaining
unchanged.
The Escrow Agreement also provides that the shares now held in escrow would
be released to the shareholders pro rata if certain performance criteria
noted above, are met, and that any shares not so released before April 5,
1999 would be surrendered to the Company for cancellation at that time.
8
The Board issued the shares free of any escrow agreement because it is the
Board's belief that the current escrow terms do not give any weight to
certain achievements the Company has attained since these conditions were
imposed, notwithstanding that the Company has failed to record profits or to
increase stockholders equity in any material amount in the last several
years, and that it wrote off $ 4,922,000 of intangible assets and reported a
net loss of $ 5,971,000 for the year ended December 31, 1995. Since the time
that the escrow conditions were imposed, it is the Board's opinion that those
persons whose shares are in escrow including Irving Bronfman, a former
director, have made valuable contributions to the Company's substantial and
measurable growth including seeking out and consummating suitable
acquisitions of companies, assets and products; raising the working capital
necessary to fund the operations of the Company; increasing sales from
approximately $ 310,000 per year in 1991 to $ 14,863,000 as at December 31,
1996; and expanding the business from one manufacturing facility and 20
employees in 1989 to approximately 500 employees in six manufacturing
facilities as of December 31, 1996.
The issuance of the shares has the effect of permitting the Escrowees to
alienate their shares at such time as they were issued to the Exchanging
Shareholders. As to Messrs. Hoffman and Millar, pursuant to the above
referenced settlement with the BCSC, they cannot sell any shares of the
Company's Common Stock in British Columbia for the two (2) year period ending
November 9, 1997.
PRODUCTS
The Company's product groups and products are as follows:
Disposable Protective Apparel
* Shoecovers
* Headcovers
* Gowns
* Coveralls
* Lab Coats
Food Industry
* Automated Shoecovers
* Sleeve Protectors
* Aprons
* Coveralls
* Bus Boy Jackets
Infection Control
* Face Masks
* Face Shields
Wound Care
* Unreal Lambswool
* Medi-Pads
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Consumer Products
* Pet Bedding
* Pet Toys
Disposable Protective Apparel
The Apparel division was established April 1, 1994, for the acquisition of
the assets of DMPI. The products manufactured include many different styles
of shoecovers, headcovers, gowns, coveralls, lab coats, and other
miscellaneous products. These are manufactured in Mexico. See "Recent
Developments -Acquisition of Assets of DMPI" (TM).
Food Industry
Through the acquisition of Gem Nonwovens, Inc. a patented automated shoe
cover machine was required. This prototype machine has been replaced with an
improved new machine which in combination with a patent pending, laminated
material produced by Ludan allowed the Company to develop a shoecover that to
date is being tested by a number of restaurant chains with favorable results
and is to be marketed on an exclusive basis by Chicopee, Inc. The balance of
the food industry products are to be manufactured by the apparel division.
Masks and Face Shields
The facemasks come in a wide variety of filtration efficiencies and styles.
The Company's patented Positive Facial Lock (TM) feature that provides a
custom fit to the face to prevent blow-by for better protection. Combine
this feature with the Magic Arch (TM), that holds the mask away from the nose
and mouth and creates a breathing chamber, and you have a quality disposable
facemask.
The term "blow-by" is used to describe the potential for infectious material
entering or escaping a facemask without going through the filter as a result
of gaps or openings in the face mask.
All of the face shields are made from an optical-grade, 7 mil, polyester
film, and have a permanent anti-fog feature. This provides the wearer with
extremely light wright, distortion-free protection that can be worn for hours
and will not fog up from humidity and/or perspiration. An important feature
of all eye and face shields is that they are disposable. This eliminates a
change of cross infection between patients and saves hospitals the expense of
sterilization after every use.
Wound care
The Wound Care Division began with the Company's Unreal Lambswool pressure
sore and bed patient monitoring system product lines. The Unreal Lambswool
is used to prevent decubitus ulcers or bedsores on long term care patients.
The bed patient monitoring system offers nurses an alarm system that tell
when patients try to get out of bed. This helps nursing and other extended
and long term care facilities to comply with the Omnibus Reconciliation Act
(OBRA) of 1987 mandate to work towards using no restraints to control
residents or patients in these facilities.
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Consumer Products
The Consumer Product Division uses the Company's existing medical products
and technologies for general consumer purposes. The Unreal Lambswool is
being packaged for the retail pet bed market and pet toys.
Markets
The Company's products are sold to the following markets: Infection Control
Products, (Masks and Shields) and disposable protective apparel are sold to
the Medical and Dental market and the Industrial and Cleanroom markets;
Unreal Lambswool and Medi-Pads are sold to the Wound Care market; Pet Bedding
and Pet Toys are sold to the consumer market; and Automated Shoe Covers are
sold to the Food Industry, Medical, Industrial and Cleanroom market. The
Company intends to expand its marketing efforts for the Food Industry to
include apparel, such as sleeve protectors, aprons, coveralls and bus boy
jackets as well as shields, although no sales of such products to the food
industry have been made to date.
Distribution
The Company relies primarily on a network of independent distributors for the
sale of its products including the following:
* VWR Scientific (formerly Baxter Scientific Products)
* Allegiance Healthcare
* General Medical
* Medline Industries
* ABCO
* Texwipe
* Owens and Minor
* Stuart Drug and Surgical Supply, Inc.
* Astra Pharmaceutical
* Cottrell, Ltd.
* Henry Schein, Inc.
Of the ten major distributors in the United States to the best of the
Company's knowledge, all sell competing products.
In 1994, the Company entered into an exclusive five year agreement to supply
Scientific Products, a division of Baxter Healthcare Corporation, with eye
and face shields, masks and disposable apparel for sale to the
Industrial/Cleanroom market place. The distribution calls for Baxter to
purchase a minimum of $ 1 million during the first year to retain exclusive
distribution rights. This minimum figure has been attained for 1994 and
1995. During 1995, Baxter Scientific Products was sold to VWR Scientific
Products who has continued to honor the Agreement. In 1996, a new agreement
was entered into with VWR Scientific Products with required minimum purchases
of $ 5,000,000 annually to retain exclusive distribution rights.
In April, 1996, the Company entered into a three year distribution agreement
with Chicopee, Inc. of Dayton, New Jersey with respect to the distribution of
the Company's line of Aqua Trak black shoe covers.
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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. The products is still in the introductory stage and
sales to date have not been material.
Sales to the Scientific Products division of Baxter Healthcare ("Baxter")
represent 28.2% of total sales on 1995, and sales to VWR Scientific Products,
the successor to Baxter represented 42.9% of total sales for 1996. The loss
of this customer would have a material adverse effect on 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.
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 officers. A 19,500 square foot
facility is located at 1145 Norwood Road, Janesville, Wisconsin 53543 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 35,000 sq. ft. facility is located at 1180 West Industrial Park
Drive in Nogales, Arizona which is used for cutting, warehousing and
shipping, a 33,000 square foot facility is located at Bustamonte Drive,
Nogales, Mexico which is used for assembly of shields and sewing, and a
30,000 sq. ft. facility located at Ave. Abolardo L. Rodriguez y Novena,
Benjamin Hill, Sonora 83900, is used for sewing.
As a result of the March, 1995 acquisition of Ludan Corporation, the Company
has a material coating and automated shoe cover facility of 16,000 square
feet in Valdosta, Georgia.
The Company has multiple suppliers of the materials used to produce its
products. In that regard, the Company currently has no problems, and does not
anticipate any problems, with respect to the sources and availability of the
materials needed to produce its products. The business of the Company is not
subject to seasonal considerations. It is necessary for the Company to have
adequate finished inventory in stock, and the Company generally maintains a
one to two-month supply of product. With respect to the optical grade
polyester film used in its products, it generally must be ordered two months
in advance, and the Company generally arrives a three-month supply of film.
12
Competition
The Company faces substantial completion from numerous other companies,
including some companies with greater marketing and financial resources. The
Company's major competitor in the medical and dental markets is Technol, Inc.
of Fort Worth, Texas. Other large competitors would include Minnesota Mining
and Manufacturing Corporation (3M), Johnson & Johnson, and Isolyser, Inc.,
American Threshold and Maxium. The Company's major competitors in the
industrial and cleanroom market are Technol, Inc., 3M, Isolyser, Inc.,
Kimberly Clark, Kappler USA, and Allegiance Health Care. In the wound care
market, Texten Corp., Glenoit Mills and Hudson Industries are the principal
competitors, and in the consumer products market, principal competitors
include Flexmat Corporation, Lazy Pet Company and Dogloo, Inc. The Company
has entered the food service market with 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.
The Company is not required to obtain regulatory approval from the U.S. Food
and Drug Administration ("FDA") with respect to the sale of its products.
The Company's products are however, subject to prescribed "good manufacturing
practices" as defined by the FDA and its manufacturing facilities are
inspected by the FDA every two years to assure compliance with such "good
manufacturing practices." The Company is marketing a new Particulate
Respirator that meets the new O.S.H.A. respirator guidelines and which has
been approved by the National Institute for Safety and Health (NIOSH). This
product is designed to help prevent the breathing in of the tuberculosis
virus.
The Company does not anticipate that any federal, state and local provisions
which have been or may be enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of
the environment, will have any material effect upon the capital expenditures,
earnings and competitive position of its business.
Patents and Trademarks
Patents
The Company's policy is to protect its intellectual property rights,
products, designs and processes through the filing of patents in the Untied
States and where appropriate in Canada and other foreign countries. At
present, the Company has 13 United States patents relating to its MEDS,
Add-A-Mask, Coverall, 1/2 Coverall, Combo Cone, Combo, Positive Facial Lock
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 10 to 15 years before expiry.
13
Trademarks
Many of the Company products are sold under various trademarks and trade
names including Alpha Pro Tech and others. The Company believes that many of
its trademarks and trade names have significant recognition in its principal
markets and takes customary steps to register or otherwise protect its rights
in its trademarks and trade names.
Employees
As of February 1, 1997, the Company had 594 employees, including eight
persons at its head office in Markham, Ontario, Canada; 40 persons at its
facemask production facility in Salt Lake City, Utah and 20 persons at its
Unreal Lambskin production facility in Janesville, Wisconsin; 25 persons at
its cutting, warehouse and shipping facility in Nogales, Arizona; 200 persons
at its shield assembly and sewing operation in Nogales, Mexico; 280 at its
sewing operation in Benjamin Hill, Mexico; and 21 persons at its coating and
automated shoe cover facility in Valdosta, Georgia.
None of the Company's employees in the United States and Canada are subject
to collective bargaining agreements,. However, a collective bargaining
agreement with the Confederation of Mexican Workers, exists for its Mexican
employees. Benefits are reviewed annually by May and the 1997 agreement has
been signed with moderate benefit increases. Wages are set by the Government
of Mexico. The Company considers its relations with the union and its
employees to be good.
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, 1998. Eight (8) employees of the Company,
including the President, Alexander Millar, Chief Executive Officer, Sheldon
Hoffman and Vice President and Controller, Lloyd Hoffman work out of this
head office.
The Company manufactures irs surgical face masks at 903 West Center Street,
Building C, North Salt Lake, Utah 84054. The monthly rental is $ 6,413 for
32,000 square feet. This lease expires July 1, 1998 with successive 2-year
renewal options at rents based on the U.S. Consumer Price Index.
A second manufacturing facility is located at 1145 Norwood Road, Janesville,
Wisconsin. These premises of 19,500 square feet are leased for $ 4,853
monthly. The lease expires June 30, 1997 and there are two, 2-year renewal
options ties to the U.S. Consumer Price Index. The Company's line of Unreal
Lambskin products are manufactured in these facilities.
The Apparel division has its cutting operation, warehousing, and shipping
facility at 1180 West Industrial Park Drive, Nogales, Arizona. The monthly
rental is $ 11,812 for 35,000 square feet. This lease is on a monthly basis.
Shield assembly and sewing is done at Bustamonte Drive in Sonora, Mexico.
The monthly rental is $ 9,900 for 33,000 square feet. This lease expires
july 31, 1999. Sewing is done at Ave. Abelardo L. Rodriguez Y. Novena,
Benjamin Hill, Sonora, Mexico. The monthly rental is $ 8,500 for 30,000
square feet. This lease is on a month to month basis.
14
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.
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"). The complaint
alleges that in the latter part of December 1994, the Plaintiff, through its
agent Alfred Bowen, became aware of a private offering of securities being
made by the Company, that it contacted Al Millar, the Company's President
through Mr. Bowen, and that the Company, in a letter dated February 14, 1995,
offered to sell to investors including Plaintiff, a minimum $ 300,000
investment consisting of 400,000 shares of Common Stock together with equal
number of two year Warrants to purchase an additional 400,000 shares at $ .75
per share, and that on March 22, 1995, Bowen wrote to Mr. Millar accepting
the offer on behalf of Plaintiff, noting that they intended to request
additional materials, and that the unnamed buyers board had yet to approve
the transaction. Plaintiff alleges that it is entitled to damages equal to
the difference between the price of the Company's Stock which was $ 2.31 per
share on February 14, 1995, the day they allege they accepted an offer
allegedly made by the Company, and the $ .75 per share price, or $ 624,000.
In addition, they allege an equal amount with respect to the Warrants that
were to be included with the shares.
The Company moved to have the case transferred to the United State District
Court for the District of Arizona. The Plaintiff consented to such removal
and the Company filed an answer to the complaint, denying all material
allegations. While the matter is still in the early stages of litigation, the
Company believes that it has meritorious defenses and intends to vigorously
defend the action.
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 1996.
15
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:
Low High
--- ----
1994 First Quarter 5/8 1-7/8
Second Quarter 1-3/16 1-7/16
Third Quarter 31/32 1-3/16
Fourth Quarter 13/16 1-1/16
1995 First Quarter 3/4 3-1/8
Second Quarter 1-7/8 2-5/8
Third Quarter 1-5/8 2-1/2
Fourth Quarter 1-7/16 2-1/16
1996 First Quarter 1-1/32 1-31/32
Second Quarter 1-1/4 2-3/16
Third Quarter 1-1/32 1-11/32
Fourth Quarter 15/16 1-5/16
1997 First Quarter 7/8 2 3/16
(thru 03/24/97)
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 24, 1997 there were approximately 670 shareholders of records,
and 3,500 beneficial owners.
In the period 1993 through 1995 the Company made several efforts to list its
Common Stock on the NASDAQ SmallCap market. Each time the Company received
notification that its request for listing on the NASDAQ Stock Market had been
denied based on the Company's inability to meet NASDAQ's minimum bid price
criterion of $ 3.00 per share and/or the fact that there was a pending
proceeding with British Columbia Securities Commission.
16
As noted above, the Company's officers and directors agreed to a settlement
with BCSC in October 1995 which was actually signed as of November 10, 1995.
The Company reapplied for listing on NASDAQ in October 1995 and was again
advised by the NASDAQ staff on January 2, 1996 that its application was not
approved because of the failure to satisfy the minimum bid price requirement
of $ 3.00 and the fact that the involvement of the Company's officers in the
BCSC proceeding was sufficient to support a denial of the listing
application. The Company requested a review of the decision by the NASDAQ
Review Committee. This Committee upheld the staff's decision.
Dividend Policy
The holders of the Company's Common Shares are entitled to receive such
dividends as may be declared by the directors of the Company from time to
time to the extent that funds are legally available for payment thereof. The
Company has never declared nor paid any dividends on any of its Common
Shares. It is the current policy of the Board of Directors to retain any
earnings to provide for the development and growth of the Company.
Consequently, the Company has no intention to pay cash dividends in the
foreseeable future.
17
ITEM 6. SELECTED FINANCIAL DATA
Alpha Pro Tech, Ltd.
SELECTED FINANCIAL DATA
TWELVE MONTHS
ENDED
DECEMBER 31,
----------------------------------------------------------------------------
1996 1995(1) 1994(2) 1993 1992(3)
- ------------------------------ ------------- ------------- ------------- -------------- ------------
HISTORICAL STATEMENT OF OPERATIONS DATA
Operating revenues............ $ 14,863,000 $ 13,031,000 $ 11,966,000 $ 9,439,000 $ 8,129,000
Gross profit.................. 5,198,000 4,469,000 4,247,000 3,500,000 3,177,000
Selling, general and
administrative expenses..... 4,610,000 4,342,000 3,562,000 4,852,000 3,236,000
Interest expense.............. 279,000 563,000 898,000 450,000 99,000
Impairment loss on intangible
assets...................... -- 4,922,000 -- -- --
Exchange of escrowed shares
for new shares.............. 2,204,000 -- -- -- --
Other expenses................ 250,000 613,000 445,000 824,000 417,000
Total expenses including
provision (benefit) for
income taxes................ 7,343,000 10,440,000 4,905,000 6,126,000 3,752,000
Net loss...................... $ (2,145,000) $ (5,971,000) $ (658,000) $ (2,626,000) $ (575,000)
Loss per share................ $ (0.12) $ (0.36) $ (0.05) $ (0.22) $ (0.06)
Weighted average shares used
in loss per share........... 17,841,547 16,533,294 13,437,198 11,764,871 9,615,921
Historical Balance Sheet Data
Current assets................ $ 5,614,000 $ 4,860,000 $ 4,715,000 $ 2,749,000 $ 4,126,000
Total assets.................. $ 7,481,000 $ 6,410,000 $ 11,192,000 $ 9,578,000 $ 11,100,000
Current liabilities........... $ 3,414,000 $ 3,166,000 $ 3,879,000 $ 2,885,000 $ 4,847,000
Long-term liabilities......... $ 217,000 $ 240,000 $ 1,154,000 $ 278,000 $ 654,000
Common stockholders' equity... $ 3,850,000 $ 3,004,000 $ 6,159,000 $ 6,415,000 $ 5,599,000
(1) Includes the operations of Ludan Corporation which was acquired effective
April 1, 1995. See footnote 15 in Notes to the Consolidated Financial
Statements.
(2) Includes the operations of Disposable Medical Products, Inc. which was
acquired on March 25, 1994. See footnote 14 in Notes to the Consolidated
Financial Statements.
(3) Includes the operations of Alpha Pro Tech, Inc. which was acquired on May
14, 1992.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS FROM OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1996 compared to Fiscal 1995
Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported a net loss for the year
ended December 31, 1996 of $2,145,000 as compared to a net loss of $5,971,000
for the year ended December 31, 1995, representing an improvement of $3,826,000.
The 1996 loss was attributable to a $2,204,000 non cash charge to earnings
resulting from the issuance of 2,475,000 shares of Common Stock in exchange for
a like amount of shares of the Company's Common Stock held in escrow.
Simultaneously, there was an increase to paid in capital resulting in
shareholders equity remaining unchanged. The net income for 1996, excluding the
non-cash escrow share exchange valued at $2,204,000 was $59,000, as compared to
a net loss of $1,049,000 for 1995, excluding an impairment loss on intangible
assets of $4,922,000. This represents an improvement of $1,108,000, excluding
the above mentioned items.
Sales Consolidated net sales for the year ended December 31, 1996 increased to
$14,863,000 from $13,031,000 in 1995, representing an increase of $1,832,000 or
14.1%. Net sales for the Apparel Division for the year ended December 31, 1996
were $7,475,000 as compared to $4,953,000 for the same period of 1995. The
Apparel Division sales increase of $2,522,000 or 50.9% was primarily due to
increased sales to its largest customer which was made possible by the
completion in the first quarter of 1996 of the new manufacturing facility in
Nogales, Mexico. Mask, and eye shield sales decreased by 3.3%, to $5,035,000 in
1996 from $5,205,000 in 1995. Mask, and eye shield sales to dentists were
virtually unchanged while the decrease can be attributed to lower medical sales.
Sales from the Company's Unreal Lambskin-Registered Trademark- and other related
products which includes a line of pet beds, decreased by 18.1% to $2,353,000 in
1996 from $2,873,000 in 1995. The decrease in the Unreal Lambskin-Registered
Trademark- sales is the result of a decline in medical pad sales combined with
the loss of a major pet bed distributor and the loss of business due to
competitive pricing of rolled good products. The Company's Unreal
Lambskin-Registered Trademark- line of products is a mature line which is no
longer an area for significant growth.
19
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 facilties but there can be no assurance that these improvements
will be attained.
Selling, General and Administrative Expenses Selling, general and
administrative expenses increased by $268,000 to $4,610,000 for the year
ended December 31, 1996 from $4,342,000 for the year ended December 31, 1995.
As a percentage of net sales, selling, general and administrative expenses
decreased to 31% in 1996 from 33% in 1995. The increase in selling, general
and administrative expenses is primarily in the areas of payroll related
costs of $311,000; tradeshows expenses of $36,000 and travel expenses of
$32,000 offset by decreases in commission expenses of $46,000 and
professional fees of $45,000. Of the $311,000 increase in payroll related
costs, $296,000 is due to the Apparel Division which had an increase in sales
of 50.9%. As a percentage of net Apparel Division sales, selling, general
and administrative expenses for the Apparel division remained constant at 20%
for 1996 and 1995.
Depreciation & Amortization Depreciation and amortization expense decreased
by $364,000, to $254,000 for the year ended December 31, 1996 from $618,000
for the same period in 1995. This decrease is primarily attributable to the
write off at the end of 1995 of the remaining intangible assets acquired on
the acquisition of its wholly-owned subsidiary, Alpha Pro Tech Inc. This is
partially offset by Apparel Divison fixed asset additions in 1996 and the
amortization of goodwill recorded in connection with the Ludan acquisition.
Impairment Loss on Intangibles At the end of 1995, the Company decided to
write off the remaining intangible assets of $4,922,000 acquired on the
acquistion of its wholly-owned subsidiary, Alpha ProTech, Inc. During the
fourth quarter of 1995, it became apparent to management that cash flows from
the mask, shield, and wound care products manufactured and distributed
through Alpha ProTech, Inc. had declined for each of the past four years and
would decline in the future. Dramatic changes have taken place in the health
care market with downsizing, cost containment pressure and changing of buying
practices for medical products. A significant investment would have to be
made to change the Company's manufacturing equipment and facilities to
continue to aggressively attack these markets. As a result, the Company has
modified its strategy in order to maximize sales and profit by focusing on
increased demand for its apparel cleanroom products and food service industry
products.
20
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 cancelled effective December 30, 1996.
Net Interest Interest expense decreased by $284,000, to $279,000 for the
year ended December 31, 1996 from $563,000 for the year ended December 31,
1995. This decrease is primarily due to the following factors: a reduction
in the interest paid on notes payable of $50,000; costs related to financing
through Allstate at higher interest rates of $52,000 and the termination
costs of Allstate at $45,000 in the first quarter of 1995; costs of $63,000
in 1995 in relation to recording the fair value of options and warrants
granted to third parties; and in 1996, the Company earned an additional
$40,000 in interest revenue.
Loss from Operations Loss from operations decreased by $3,543,000 to a loss
of $1,870,000 for the year ended December 31, 1996 from a loss from
operations of $5,413,000 for the year ended December 31, 1995. The decreased
loss from operations is primarily due to the increase in gross profit of
$729,000; the decrease in depreciation and amortization of $364,000; the
increased selling, general and administrative expenses of $268,000 and the
non cash transactions of the exchange of escrow shares of $2,204,000 in 1996
offset by the impairment loss on intangible assets of $4,922,000 in 1995.
Income from operations excluding the 1996 and 1995 non cash transactions was
$334,000 in 1996 compared to a loss of $491,000 in 1995, a net increase in
income from operations of $825,000.
Net Loss Net Loss for the year ended December 31, 1996 was $2,145,000
compared to a net loss of $5,971,000 for the year ended December 31, 1995, a
decrease $3,826,000. The net loss decrease of $3,826,000 is comprised of a
decreased loss from operations of $3,543,000 as described above, and a
decrease in interest expense of $284,000. Excluding the escrow shares
exchange, net income for the year ended December 31, 1996 was $59,000 as
compared to a net loss in 1995 of $1,049,000 excluding the impairment loss on
intangible assets, an increase in net income of $1,108,000.
21
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM
OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1995 compared to Fiscal 1994
Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported a net loss for the
year ended December 31, 1995 of $5,971,000 as compared to a net loss of
$658,000 for the year ended December 31, 1994. The principal components of
the loss consist of a write-off of $4,922,000 of intangible assets associated
with masks, shields, and wound care products manufactured and distributed
through its wholly-owned subsidiary, Alpha ProTech, Inc. and an increase of
$780,000 in selling, general, and administrative expenses.
Sales Consolidated net sales for the year ended December 31, 1995 increased
to $13,031,000 from $11,966,000 in 1994, representing an increase of
$1,065,000 or 8.9%. Net sales for the Apparel Division for the year ended
December 31, 1995 were $4,953,000 as compared to $3,148,000 for the same
period of 1994. The Apparel Division sales increase of $1,805,000 or 57% was
primarily due to increased sales to its largest customer and the fact that
Alpha began including the results of the Apparel Division on April 1, 1994.
Virtually all of the 1995 overall sales increase came from the Apparel
Division and this trend is expected to continue into the future. The Company
similarily sees its newly launched food service industry product line as a
revenue source beginning in 1996. Mask, and eye shield sales decreased by
13.9%, to $5,205,000 in 1995 from $6,042,000 in 1994, due primarily to a
softening in medical sales. Sales from the Company's Unreal Lamb's Wool and
other related products increased by 3.5% to $2,873,000 in 1995 from
$2,776,000 in 1994. The Company's Unreal Lamb's Wool line of products is a
mature line which is no longer an area for significant growth.
22
Gross profit Gross profit margin decreased to 34.3% for the year ended
December 31, 1995 from 35.5% for the year ended December 31, 1994. The gross
profit margin decline was primarily due to both the initial training costs
and the initial lost efficiencies associated with re-locating shield
manufacturing to Mexico. Gross profit margin for the year ended December 31,
1995 eliminating the re-location start up costs would have been 35.1%.
Management plans to improve margins through the streamlining of its Mexican
operations and there can be no assurance that these improvements will be
attained.
Selling, General and Administrative Expenses Selling, general and
administrative expenses increased by $780,000 to $4,342,000 for the year
ended December 31, 1995 from $3,562,000 for the year ended December 31, 1994.
As a percentage of net sales, selling, general and administrative expenses
increased to 33% in 1995 from 30% in 1994. The increase in selling, general
and administrative expenses is primarily in the areas of Apparel Division
costs $386,000; payroll related costs $169,000; investor relations $79,000;
professional fees $49,000; marketing $46,000; and travel expenses $86,000.
Approximately half of the $386,000 selling, general and administrative
expense increase for the Apparel division is related to increased 1995 sales.
The other half of the increase in the Apparel Division selling, general and
administrative expenses is due to comparing twelve months of expenses in 1995
compared to 9 months in 1994 since the acquisition of the Apparel Division
took effect April 1, 1994. As a percentage of net Apparel Division sales,
selling, general and administrative expenses for the Apparel division
remained constant at 20% for both 1995 and 1994.
Depreciation & Amortization Depreciation and amortization expense decreased
by $116,000, to $618,000 for the year ended December 31, 1995 from $734,000
for the same period in 1994. This decrease is primarily attributable to the
write off in 1994 of unamortized Delta patents offset by fixed asset
additions in 1995 and the amortization of goodwill recorded in connection
with the Ludan acquisition.
23
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.
Interest Interest expense decreased by $335,000, to $563,000 for the year
ended December 31, 1995 from $898,000 for the year ended December 31, 1994.
This decrease is due to the Company obtaining asset based financing at lower
interest rates, as well as due to $830,000 of notes payable being converted
to common stock.
Loss from Operations Loss from operations increased by $5,364,000 to a loss
of $5,413,000 for the year ended December 31, 1995 from a loss from
operations of $49,000 for the year ended December 31, 1994, primarily due to
the impairment loss of $4,922,000 and the increased selling, general and
administrative expenses of $780,000 less the improved gross profit of $222,000.
Net Loss Net Loss for the year ended December 31, 1995 was $5,971,000
compared to a net loss of $658,000 for the year ended December 31, 1994, an
increase of $5,313,000. The net loss increase of $5,313,000 is comprised of
the increased loss from operations of $5,364,000, as described above, a 1994
$285,000 benefit for income taxes offset by a decrease in interest expense of
$335,000.
The Company does not have any pension, profit sharing or similar plans
established for its employees, however, the chief executive officer and
president are entitled to a combined bonus equal to 10% of the pre-tax
profits of the company. No bonus was earned in 1995 or 1994.
24
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash of $275,000 and working capital of
$2,200,000. The Company currently has a secured asset based lender's line of
credit of $3,000,000, based upon the level of eligible accounts receivable,
inventory and equipment which expires in March 1998. At December 31, 1996, the
maximum line of credit available was $1,331,000 for accounts receivable,
inventory and equipment.
Net cash used for operations was $298,000 for the year ended December 31, 1996
and $480,000 in 1995. The Company's use of cash from operations in 1996 have
been due primarily to increases in accounts receivable, and inventory partially
offset by increases in accounts payable and accrued liabilities. The Company's
use of cash for operating activities has improved for the past three years going
from $1,015,000 in 1994, $480,000 in 1995 and $298,000 in 1996, this trend is
expected to continue as the Company's sales to the food service and clean room
industries increases.
The Company's investing activities have consisted primarily of expenditures for
fixed assets and the acquisition of businesses which totalled $460,000 for the
year ended December 31, 1996 and $417,000 for 1995.
The Company has no significant capital commitments but currently anticipates
that additions to property and equipment for 1997 could be approximately
$600,000 depending on the Company's success in the food industry.
During 1996 the Company's financing activities consisting primarily of equity
infusion of $719,000, $124,000 of related party proceeds and an increase in
the asset based loan of $136,000 offset by repayment of borrowings and
capital leases totaling $290,000 which resulted in the net cash provided by
financing activities of $689,000.
25
During the period January 1, 1997 to March 31, 1997 the Company has received
net proceeds of $2,193,000 from the exercise of warrants and options.
Management believes with its trend of using less cash from operating
activities along with its available cash as discussed above, the Company has
available cash to finance all known financial committments for at least 24
months.
NEW ACCOUNTING STANDARDS
The financial accounting standards board has issued statement of financial
accounting standards ("SFAS") No. 121, "Accounting for the impairment of
long-lived assets and for long-lived assets to be disposed of". SFAS No. 121
requires that long-lived assets and certain identifiable intangible assets be
reviewed for impairment whenever events indicate that the carrying amount of an
asset may not be recoverable. The Company adopted SFAS No. 121 effective
January 1, 1996.
The Financial Accounting Standards Board issued a statement in October 1995
entitled "Accounting for Stock-Based Compensation" which the Company adopted
January 1,1996. This statement establishes an accounting method based on fair
market value of equity instruments awarded to employees as compensation,
however, companies are permitted to continue applying previous accounting
standards in the determination of net income with disclosure in the notes to the
financial statements of the differences between previous accounting measurements
and those formulated by the new accounting standard. Beginning in 1996, the
Company determines net income using previous accounting standards and makes the
appropriate disclosures in the notes to the financial statements as permitted by
the standard.
26
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Reform Act of 1995 ("Act") provides a safe harbor for
forward-looking information made on behalf of the Company. All statements,
other than statements of historical facts which address the Company's
expectations of sources of capital or which express the Company's expectation
for the future with respect to financial performance or operating strategies
can be identified as forward-looking statements. Forward-looking Statements
made by the Company are based on knowledge of the environment in which it
operates, but because of the factors previously listed, as well as other
factors beyond the control of the Company, actual results may differ
materially from the expectations expressed in the forward-looking statements.
27
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, 1997), 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 20, 1997.
28
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
(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 if Incorporation of Alpha Pro Tech, Ltd. dated June 15,
1994*
(g) Application for Certificate of Registration and Articles of
Continuance- State of Wyoming - Filed June 24 1995 *
(h) Certificate of Registration and Articles of Continuance of Secretary
of State, State of Wyoming, dated June 24, 1994
(i) Certificate of Secretary of State of Wyoming dated June 24, 1995 *
(j) Certificate of Amendment of Certificate of Incorporation of Alpha Pro
Tech, Ltd., dated June 24, 1994
(k) 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 **
(5) (a) Opinion of Counsel ***
(10)(a) Form of Director's Stock Option Agreement
(b) Form of Employee's Stock Option Agreement
(c) Employment Agreement between the Company and Al Millar dated June,
1989
(c)(i) Employment Agreement between the Company and Donald E. Bennett, Jr.
**
(c)(ii) Employment Agreement between the Company and Michael Scheerer ***
(d) Lease Agreement between White Dairy Company, Inc. and the Company for
lease of the premises situated at 2724-7th Avenue South, Birmingham,
Alabama, 35233, dated March, 1990 and amendment thereto dated April,
1990
(e) 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
29
(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 *
(24)(a) Consent of Price Waterhouse (included in Part II of Registration
Statement) ***
(b) Consent of Counsel (contained in their opinion Exhibit 5(a) included
in Part II of Registration Statement)
__________________________________________________
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, 1995 (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)
30
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: April 11, 1997 By: S/SHELDON HOFFMAN
-------------- -----------------
Sheldon Hoffman
Chief Executive Officer,
Principal Financial Officer
and Director
Date: April 11, 1997 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 April 11, 1997.
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
31
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: April 11, 1997 By:
-------------- -------------
Sheldon Hoffman
Chief Executive Officer,
Principal Financial Officer
and Director
Date: April 11, 1997 By:
-------------- -------------
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 April 11, 1997.
--------------------------
Donald E. Bennett, Jr. Director
--------------------------
Sheldon Hoffman, Director
--------------------------
Robert H. Isaly, Director
--------------------------
Alexander W. Millar, Director
--------------------------
Dr. John Ritota, Director
32
Alpha Pro Tech, Ltd.
REPORT AND CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
Alpha Pro Tech, Ltd.
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
FINANCIAL STATEMENTS: PAGE
Report of Independent Accountants...................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995.............. F-3
Consolidated Statements of Operations for the three years ended
December 31, 1996..................................................... F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1996................................... F-5
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996..................................................... F-6
Notes to Consolidated Financial Statements............................. F-8
Financial Statement Schedules for the three years ended December 31, 1996:
Schedule II--Valuation and Qualifying Accounts........................ F-24
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Alpha Pro Tech, Ltd.
In our opinion, the consolidated financial statements listed in the index on
page F-1 present fairly, in all material respects, the financial position of
Alpha Pro Tech, Ltd. and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
SALT LAKE CITY, UTAH
March 20, 1997
F-2
Alpha Pro Tech, Ltd.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1996 1995
ASSETS
Current assets:
Cash............................................................... $ 275,000 $ 344,000
Marketable securities--restricted.................................. 39,000 36,000
Accounts receivable, net of allowance for doubtful accounts
of $122,000 and $61,000.......................................... 2,170,000 2,071,000
Income taxes receivable............................................ 5,000 172,000
Inventories........................................................ 2,942,000 2,098,000
Prepaid expenses and other assets.................................. 183,000 139,000
------------ ------------
5,614,000 4,860,000
Property and equipment, net.......................................... 1,615,000 1,350,000
Intangible assets, net............................................... 219,000 167,000
Other................................................................ 33,000 33,000
------------ ------------
$ 7,481,000 $ 6,410,000
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable................................................... $ 1,600,000 $ 1,351,000
Accrued liabilities................................................ 647,000 751,000
Due to related parties............................................. 19,000 --
Notes payable, current portion including $8,000 and $33,000
due to related parties at December 31, 1996 and 1995............. 31,000 152,000
Loans payable, current portion..................................... 1,081,000 890,000
Capital leases, current portion.................................... 36,000 22,000
------------ ------------
3,414,000 3,166,000
Notes payable, less current portion.................................. -- 10,000
Loans payable, less current portion.................................. 112,000 167,000
Capital leases, less current portion................................. 105,000 49,000
Minority interest.................................................... -- 14,000
------------ ------------
3,631,000 3,406,000
------------ ------------
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
20,755,463 and 19,911,130 issued and outstanding at
December 31, 1996 and 1995.......................................... 207,000 199,000
Additional paid-in capital............................................ 21,656,000 18,673,000
Accumulated deficit................................................... (18,013,000) (15,868,000)
------------ ------------
3,850,000 3,004,000
------------ ------------
$ 7,481,000 $ 6,410,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements
F-3
Alpha Pro Tech, Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1995 1994
Sales............................................................... $ 14,863,000 $ 13,031,000 $ 11,966,000
Cost of goods sold, excluding depreciation
and amortization.................................................. 9,665,000 8,562,000 7,719,000
------------ ------------ ------------
5,198,000 4,469,000 4,247,000
Expenses:
Selling, general and administrative............................... 4,610,000 4,342,000 3,562,000
Depreciation and amortization..................................... 254,000 618,000 734,000
Impairment loss on intangible assets (Note 5)..................... -- 4,922,000 --
Exchange of escrowed shares
for new shares (Note 9)......................................... 2,204,000 -- --
------------ ------------ ------------
Loss from operations.............................................. (1,870,000) (5,413,000) (49,000)
------------ ------------ ------------
Other (income) expense
Interest, net................................................... 279,000 563,000 898,000
Other........................................................... -- (10,000) (4,000)
------------ ------------ ------------
279,000 553,000 894,000
------------ ------------ ------------
Loss before minority interest in consolidated
subsidiary and provision (benefit) for income taxes............... (2,149,000) (5,966,000) (943,000)
Minority interest in income of consolidated
subsidiary........................................................ 4,000 (5,000) --
Provision (benefit) for income taxes................................ -- -- (285,000)
------------ ------------ ------------
Net loss............................................................ $ (2,145,000) $ (5,971,000) $ (658,000)
------------ ------------ ------------
------------ ------------ ------------
Loss per share...................................................... $ (0.12) $ (0.36) $ (0.05)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of shares
outstanding....................................................... 17,841,547 16,533,294 13,437,198
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements
F-4
Alpha Pro Tech, Ltd.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION ACCUMULATED
SHARES STOCK CAPITAL ADJUSTMENT DEFICIT TOTAL
Balance at December 31, 1993....... 15,581,730 $ 15,654,000 $ -- $ 139,000 $ (9,378,000) $ 6,415,000
Stock issued for cash.............. 686,364 -- -- -- 474,000 474,000
Stock issued for services.......... 510,000 80,000 -- -- -- 80,000
Options/warrants issued for
services......................... -- 55,000 -- -- -- 55,000
Shares canceled per litigation
settlement....................... (675,000) (307,000) -- -- -- (307,000)
Conversion of note payable to
common stock..................... 100,000 100,000 -- -- -- 100,000
Change to reflect par value of
common stock..................... -- (15,893,000) 15,893,000 -- -- --
Net loss........................... -- -- -- -- (658,000) (658,000)
---------- ------------ ------------ ---------- ------------ -----------
Balance at December 31, 1994....... 16,203,094 163,000 15,893,000 139,000 (10,036,000) 6,159,000
Stock issued for cash.............. 2,564,088 25,000 1,751,000 -- -- 1,776,000
Stock issued for services.......... 16,949 -- 13,000 -- -- 13,000
Options/warrants issued for
services......................... -- -- 177,000 -- -- 177,000
Conversion of notes payable to
common stock..................... 1,126,999 11,000 839,000 -- -- 850,000
Reclassification to accumulated
deficit.......................... -- -- -- (139,000) 139,000 --
Net loss........................... -- -- -- -- (5,971,000) (5,971,000)
---------- ------------ ------------ ---------- ------------ -----------
Balance at December 31, 1995....... 19,911,130 199,000 18,673,000 -- (15,868,000) 3,004,000
Stock issued for cash.............. 844,333 8,000 711,000 -- -- 719,000
Options/warrants issued for
services......................... -- -- 68,000 -- -- 68,000
Exchange of escrowed shares........ -- -- 2,204,000 -- -- 2,204,000
Net loss........................... -- -- -- -- (2,145,000) (2,145,000)
---------- ------------ ------------ ---------- ------------ -----------
Balance at December 31, 1996....... 20,755,463 $ 207,000 $ 21,656,000 $ -- $(18,013,000) $ 3,850,000
---------- ------------ ------------ ---------- ------------ -----------
---------- ------------ ------------ ---------- ------------ -----------
The accompanying notes are an integral part of these financial statements
F-5
Alpha Pro Tech, Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1995 1994
CASH FLOWS FORM OPERATING ACTIVITIES:
Net loss........................................................... $(2,145,000) $(5,971,000) $(658,000)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization.................................... 254,000 618,000 734,000
Write-off of impaired intangibles (Note 5)....................... -- 4,922,000 --
Exchange of escrowed shares (Note 9)............................. 2,204,000 -- --
Minority interest................................................ (4,000) 5,000 --
Securities issued for services................................... 39,000 190,000 135,000
Changes in assets and liabilities:
Accounts receivable............................................ (99,000) (214,000) (869,000)
Income taxes receivable........................................ 167,000 -- (117,000)
Inventories.................................................... (844,000) (59,000) (794,000)
Prepaid and other assets....................................... (15,000) 181,000 (189,000)
Accounts payable and accrued
liabilities................................................... 145,000 (152,000) 911,000
Deferred income taxes.......................................... -- -- (168,000)
----------- ----------- ---------
Net cash used for operating activities........................... (298,000) (480,000) (1,015,000)
----------- ----------- ---------
----------- ----------- ---------
Cash flows from investing activities:
Acquisition of businesses......................................... (49,000) (35,000) (32,000)
Purchase of property and equipment................................ (388,000) (349,000) (76,000)
Cost of intangible assets......................................... (20,000) (55,000) (66,000)
Purchase of marketable security................................... (3,000) (36,000) --
Proceeds from note receivable..................................... -- 58,000 --
----------- ----------- ---------
Net cash used for investing activities.............................. (460,000) (417,000) (174,000)
Cash flows from financing activities:
Issuance of common stock.......................................... 719,000 1,776,000 474,000
Purchase and cancellation of common stock......................... -- -- (307,000)
Proceeds from related parties..................................... 124,000 -- 15,000
Payments to related parties....................................... (149,000) (323,000) --
Net proceeds from loans payable................................... 136,000 -- 309,000
Net principal repayments on loans payable......................... -- (120,000) --
Principal repayments on notes payable............................. (106,000) (420,000) --
Proceeds from notes payable....................................... -- -- 598,000
Principal repayments on capital leases............................ (35,000) (12,000) --
----------- ----------- ---------
Net cash provided by financing activities......................... 689,000 901,000 1,089,000
----------- ----------- ---------
----------- ----------- ---------
The accompanying notes are an integral part of these financial statements
F-6
Alpha Pro Tech, Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1995 1994
Increase (decrease) in cash................................................... (69,000) 4,000 (100,000)
Cash, beginning of period..................................................... 344,000 340,000 440,000
---------- ---------- ----------
Cash, end of period........................................................... $ 275,000 $ 344,000 $ 340,000
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow
information:
Cash paid for interest...................................................... $ 317,000 $ 560,000 $ 777,000
---------- ---------- ----------
Cash paid for income taxes.................................................. $ -- $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Non-cash investing and financing activity:
1996
Effective June 1996, the Company acquired the remaining 20% minority
interest in Ludan Corporation for a $68,000 note payable of which $19,000 is
unpaid at December 31, 1996.
Capital lease obligations of $105,000 were incurred when the Company entered
into leases for machinery and equipment.
1995
Effective April 1995, the Company acquired an 80% interest in Ludan
Corporation for $35,000 in cash including $6,000 of direct acquisition costs,
plus assumption of net liabilities of $23,000. In addition, a note payable
owed by LC to a third party was converted to 20,000 shares of the Company's
common stock.
Notes payable of $830,000 were converted to 1,106,999 shares of common stock
in 1995.
Capital lease obligations of $83,000 were incurred when the Company entered
into leases for office equipment and machinery and equipment.
1994
A $100,000 note payable was converted to 100,000 common shares in 1994.
The Company acquired the assets of Disposable Medical Products, Inc. and
96.8% of the common stock of its subsidiary, DPI De Mexico, in March 1994 for
$32,000 cash and $304,000 of debt, which was unpaid at December 31, 1994.
The accompanying notes are an integral part of these financial statements
F-7
Alpha Pro Tech, Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. THE COMPANY
Alpha Pro Tech, Ltd. (the Company) manufactures and distributes a variety
of disposable mask, shield, shoe cover and apparel products and woundcare
products. Through its 1992 acquisition of Alpha Pro Tech, Inc. (APT), a
wholly-owned subsidiary, the Company began manufacturing and distributing
its line of disposable mask and shield products and woundcare products.
These products accounted for the majority of the Company's revenues until
1994. In March 1994, APT acquired all of the assets of Disposable Medical
Products, Inc. (DMP) (Note 12). DMP manufactures and distributes the
Company's disposable apparel products and has become the primary division
of the Company. In April 1995, the Company, through APT, acquired an 80%
interest in Ludan Corporation (LC). In June 1996, the Company acquired the
minority shareholders 20% interest in LC (Note 13). Through this
acquisition, the Company has developed other applications for existing
products, particularly disposable apparel and automated shoe cover
products, to market to the food service and other industries. Most of the
Company's disposable apparel, mask and shield products and woundcare
products are distributed to medical, dental, industrial and clean room
markets, predominantly in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
the Company and its wholly-owned subsidiary, Alpha Pro Tech, Inc. (APT) as
well as APT's wholly-owned subsidiary (80% owned from April 1995 to June
1996), Ludan Corporation (LC), and 96.8% owned subsidiary DPI De Mexico
(DPI). No minority interest has been recorded in these financial statements
for DPI as such amounts are immaterial. All significant intercompany
accounts and transactions have been eliminated. Certain prior year balances
have been reclassified to conform with the current period presentation.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION
Revenue is generally recognized when goods are shipped to the customers. The
Company has an agreement with its largest customer whereby revenue is
recognized at cost when goods are shipped. When this customer sells and
ships the goods to third parties, the resulting profits are then recorded
by the Company. Revenues are reduced for anticipated sales returns and
allowances.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
MARKETABLE SECURITIES
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115) "Accounting for Certain Investments in Debt and
Equity Securities" which requires investment securities to be classified as
either held to maturity, trading or available for sale. The adoption of
SFAS 115 did not have a material impact on the Company's financial condition
or results of operations.
At December 31, 1996, the marketable security is a restricted certificate of
deposit held by a financial institution that serves as a compensating
balance for lines of credit relating to the Company's credit cards. The
Company has classified its short-term security as available for sale and
appropriately recorded it at its fair market value of $39,000.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
ADVERTISING
Advertising costs consist primarily of catalog preparation and printing
costs which are charged to expense as incurred. Catalog costs expensed in
1995 were $41,000. No catalog costs were incurred in 1996.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
are depreciated on a straight-line basis over their estimated useful lives
as follows:
Factory equipment................................ 9-20 years
Office furniture and equipment................... 7 years
Leasehold improvements........................... 4-6 years
Vehicles......................................... 5 years
INTANGIBLE ASSETS
The excess of purchase price over the 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.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
At each balance sheet date, the Company reviews its intangible assets and
determines whether an impairment has occurred by evaluating whether the
carrying value of intangible assets exceed their respective future
undiscounted cash flows, excluding interest. If an impairment has occurred,
the Company evaluates the expected fair value of the assets based upon
expectations of future discounted cash flows. As of December 31, 1995, the
Company concluded that an impairment of $4,922,000 existed and recorded that
amount during the fourth quarter of 1995 (Note 6).
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". This statement requires an asset and liability approach for
accounting for income taxes.
TRANSLATION OF FOREIGN CURRENCIES
During 1992, the Company replaced the Canadian dollar with the United States
dollar as the functional currency. Prior to 1995, the $139,000 in
translation for periods prior to the change in functional currency has been
recorded as the "cumulative translation adjustment" (CTA) in shareholders'
equity. At December 31, 1995, the Company reclassified the CTA account to
accumulated deficit as the balance is immaterial to overall shareholders'
equity and the account will not change in future years. Transactions in
foreign currencies during the reporting periods are translated into the
functional currency at the exchange rate prevailing at the transaction date.
Monetary assets and liabilities in foreign currencies at each period end are
translated at the exchange rate in effect at that date and are immaterial
in amount. Transactional gains or losses on foreign exchange are reflected
in net loss for the periods presented and are immaterial in amount.
LOSS PER SHARE
Prior to 1996, loss per share has been calculated based on the weighted
average number of common and common equivalent shares outstanding, if
dilutive, less shares held in escrow. The 1996 calculation remains the same
as prior years except shares held in escrow are no longer excluded due to
2,475,000 shares being issued to management on December 30, 1996 in
exchange for their shares held in escrow (Note 9). Common equivalent shares
for all years were anti-dilutive and accordingly were excluded from the
loss per share calculations.
MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK
The Company sells significant amounts of product to a large distributor on
credit terms. Net sales to this distributor were 42.9%, 28.2% and 14.5% of
total net revenue for 1996, 1995 and 1994, respectively, and trade
receivables, as a percentage of total receivables approximated the above
sales percentages for 1996 and 1995, respectively. Management believes that
adequate provision has been made for risk of loss on all credit transactions.
F-10
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments including cash, accounts receivable,
accounts payable, accrued professional fees, other accrued liabilities, due to
related parties, notes payable and loans payable approximate their respective
book values at December 31, 1996 and 1995.
STOCK FOR SERVICES
Common stock, stock options to purchase common stock and warrants to
purchase common stock that are granted to third parties in exchange for services
are valued at their estimated fair value at the date of grant and are expensed
over the period the services are rendered.
STOCK BASED COMPENSATION
The Financial Accounting Standards Board issued a statement in October 1995
entitled "Accounting for Stock-based Compensation" which the Company adopted
January 1, 1996. This statement establishes an accounting method based on the
fair value of equity instruments awarded to employees as compensation. However,
companies are permitted to continue applying the intrinsic value based method
prescribed by APB opinion No. 25, "Accounting for Stock Issued to Employees"
with disclosure in the notes to the financial statements of the differences
between previous accounting measurements and those formulated by the new
accounting standard. The Company has elected to continue valuing stock-based
compensation under the intrinsic value based method but has included proforma
disclosure in Note 9 showing the impact on net loss and loss per share had the
fair value based method prescribed by SFAS 123 been utilized for financial
reporting.
3. INVENTORIES
Inventories consist of the following:
1996 1995
------------ ------------
Raw materials..................................................... $ 1,511,000 $ 1,308,000
Work in process................................................... 76,000 140,000
Finished goods.................................................... 1,355,000 650,000
------------ ------------
$ 2,942,000 $ 2,098,000
------------ ------------
------------ ------------
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1996 1995
------------ ------------
Machinery and equipment........................................... $ 2,042,000 $ 1,590,000
Office furniture and equipment.................................... 334,000 302,000
Leasehold improvements............................................ 75,000 67,000
------------ ------------
F-11
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2,451,000 1,959,000
Less accumulated depreciation and amortization....... (836,000) (609,000)
--------- ---------
$1,615,000 $1,350,000
--------- ---------
--------- ---------
Included in the above amounts are the following assets under capital lease
obligations:
1996 1995
---------- ---------
Machinery and equipment................................................ $ 162,000 $ 57,000
Office furniture and equipment......................................... 26,000 26,000
---------- ---------
188,000 83,000
Less accumulated amortization.......................................... (42,000) (9,000)
---------- ---------
$ 146,000 $ 74,000
---------- ---------
---------- ---------
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
1996 1995
-------- ----------
Goodwill................................ $ 136,000 $ 78,000
Patents................................. 57,000 40,000
Other................................... 81,000 77,000
--------- ----------
274,000 195,000
Less accumulated amortization........... (55,000) (28,000)
--------- ----------
$ 219,000 $ 167,000
--------- ----------
--------- ----------
Impairment Loss
The Company acquired all of the common stock of Alpha Pro Tech, Inc. in
May 1992 for $7,307,000 including direct acquisition costs of
$107,000.
The acquisition was accounted for as a purchase and the purchase price
was ultimately allocated as follows:
Net identifiable assets......................................... $ 690,000
Goodwill........................................................ 5,148,000
Patents......................................................... 1,012,000
Trademarks...................................................... 127,000
Non compete agreement........................................... 300,000
Other........................................................... 30,000
---------
$7,307,000
---------
---------
F-12
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
As noted in Note 1, the Company manufactures and distributes its line of
disposable mask and shield products and woundcare products through its
wholly-owned subsidiary, APT. Due to declining sales of these product lines
since the 1992 APT acquisition and due to recent changes in the health care
market, the Company has modified its strategy to focus on increased demand for
its disposable apparel and automated shoe cover products. The above changes
resulted in the Company revising the estimated useful lives of intangible assets
recorded from the APT acquisition (Note 2). Additionally, the Company conducted
an impairment analysis that determined the fair value of the assets based on
discounted cash flows. From the analysis, the Company determined that the
carrying value of the APT goodwill and patents related to the Company's line of
disposable mask and shield products and woundcare products should be
reduced by $4,922,000 at December 31, 1995. At December 31, 1995, the impairment
loss has been recorded in the 1995 statement of operations and relates to the
carrying value of the following assets:
DECEMBER 31,
1995
------------
Goodwill........................................................................ $4,215,000
Patents......................................................................... 586,000
Trademarks...................................................................... 61,000
Other........................................................................... 60,000
----------
$4,922,000
----------
----------
DELTA FOAM PATENT
In 1993, the Company purchased patent rights for the Delta Foam Support
System. Under the terms of the purchase agreement, the Company was required to
generate cumulative revenues for the product line of $1,000,000 by June 30, 1995
and $1,000,000 per year thereafter until the patent was to expire in the year
2008. If these revenues were not achieved, the patent rights reverted back to
the seller. Management believed the Company would not generate sufficient
revenues to retain the patent rights and, accordingly, the unamortized balance
of the patent rights, $175,000, was expensed in 1994.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1996 1995
---------- ----------
Professional fees..................................................... $ 286,000 $ 439,000
Payroll and payroll taxes............................................. 203,000 185,000
Other................................................................. 158,000 127,000
---------- ----------
$ 647,000 $ 751,000
---------- ----------
---------- ----------
F-13
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. NOTES PAYABLE
Notes payable consist of the following:
1996 1995
--------- ---------
Note payable due in monthly installments of $4,900, interest at 7.5%,
maturing July 31, 1996................................................. $ -- $ 41,000
Note payable due in monthly installments of $1,500, interest at 8.0%,
maturing July 31, 1997................................................. 9,000 26,000
Note payable due in monthly installments of $4,000, interest at 6%, with
the remaining balance due March 31, 1997............................... 14,000 62,000
Notes payable to related parties, interest at 20% payable quarterly, due
on demand.............................................................. 8,000 33,000
--------- ---------
31,000 162,000
Less: Current portion.................................................... 31,000 152,000
--------- ---------
Notes payable, less current portion...................................... $ -- $ 10,000
--------- ---------
--------- ---------
8. LOANS PAYABLE
During 1995, the Company, through its wholly owned subsidiary APT, entered
into a three- year credit facility with an asset-based lender. Loans payable at
December 31, 1996 and 1995 represent outstanding amounts against the facility.
Pursuant to the terms of the credit agreement, the Company has a $3,000,000 line
of credit secured by accounts receivable, inventory, trademarks, patents,
property and equipment, and all issued and outstanding shares of DPI. Borrowings
collateralized by machinery and equipment are limited to $275,000 and borrowings
for inventory are limited to the lesser of $500,000 or 25% of the outstanding
balance under the facility. At December 31, 1996, the maximum line of credit
available to the Company was $1,331,000. The credit facility bears interest at
prime plus 5% which was 13.5% at December 31, 1996 and 1995. Interest is payable
on the greater of $1,750,000 or the actual amount of borrowings outstanding. At
December 31, 1996 and 1995, $167,000 and $222,000,
F-14
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
respectively, of the outstanding balance is collateralized by the Company's
machinery and equipment which is payable over five years.
The Company paid $30,000 in loan origination fees to obtain the credit
facility. Under the terms of the agreement, the Company pays a 1% loan fee
annually and is subject to certain other minimum loan fees, unused line fees and
prepayment penalties if the line of credit is repaid early. Total commitment
fees paid on the unused lines of credit were approximately $84,000 and $76,000
for 1996 and 1995, respectively.
Future maturities for loans payable are as follows:
1997 $1,081,000
1998 55,000
1999 55,000
2000 2,000
----------
$1,193,000
----------
----------
9. SHAREHOLDERS' EQUITY
LITIGATION SETTLEMENT
In 1990, the Company was named as a co-defendant in a legal action. The
plaintiff, John P. Russell, the Company and other co-defendants have settled and
compromised all claims involved in the litigation pursuant to a Settlement
Agreement dated August 19, 1994. The terms of the Agreement provided for the
payment of $260,000 to Mr. Russell and the cancellation of 675,000 escrowed
shares (see below) of the Company's common stock owned by Mr. Russell. Legal
fees directly associated with the settlement totaled $47,000, resulting in a
total charge to shareholders' equity of $307,000.
ESCROWED SHARES
Pursuant to an agreement dated April 5, 1989, the Company purchased all of
the assets and business of BFD Inc. from certain individuals. The purchase price
of $625,000 Canadian was settled by the issuance of 3,500,000 common shares and
the assumption of liabilities of $520,000 Canadian. Of the shares issued,
3,150,000 were subject to an escrow agreement. On December 30, 1996, all of the
escrowed shares, except for the shares canceled in connection with the
settlement with John P. Russell, were exchanged for new shares. The 2,475,000
new shares were valued at the fair market value of the shares on the date of the
exchange which resulted in a $2,204,000 charge to earnings that was recorded
during the fourth quarter of 1996. Additionally, the paid in capital increase
$2,204,000 resulted in no net change to stockholders equity. The 2,475,000
shares held in escorw were cancelled effective December 30, 1996.
SHARES ISSUED FOR SERVICES
During 1995, the Company issued 16,949 shares valued at $13,000 for services
performed relating to the Company's private placement. During 1994, the Company
issued 510,000 shares valued at $80,000 relating to consulting and advisory
services. No shares were issued for services in 1996.
F-15
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
PRIVATE PLACEMENT ACTIVITY
During 1995 and 1994, 1,802,649 and 432,964 common shares were subscribed
for under private placements for $1,352,000, and $324,000, respectively. Costs
relating to the private placements were $426,000 and $76,000 for 1995 and 1994,
respectively.
WARRANT ACTIVITY
Warrant activity for the three years ended December 31, 1996 is as
follows:
EXERCISE PRICE
SHARES PER WARRANT
---------- ----------------
Warrants outstanding, December 31, 1993........................ 452,745 $1.75
Granted in connection with private placement................... 432,964 0.75
Granted to lenders............................................. 1,064,999 0.75
---------- ----------------
Warrants outstanding, December 31, 1994........................ 1,950,708 0.75 to 1.75
Granted in connection with private placement................... 1,819,598 0.75
Granted to lenders............................................. 257,000 0.75
Exercised...................................................... (451,439) 0.75 to 1.75
Expired........................................................ (80,000) 1.75
---------- ----------------
Warrants outstanding, December 31, 1995........................ 3,495,867 0.75 to 1.75
Granted to employees........................................... 95,384 1.03
Exercised...................................................... (188,333) 0.75 to 1.25
Expired........................................................ (90,000) 1.25
---------- ----------------
Warrants outstanding, December 31, 1996........................ 3,312,918 $0.75 to $1.75
---------- ----------------
---------- ----------------
The warrants outstanding at December 31, 1996 entitle the holders to
purchase one common share for the stated price and expire between January 1997
and February 1998.
OPTION ACTIVITY
During 1993, the Company adopted stock option plans for employees and
directors of the Company. As of December 31, 1996, 2,700,000 shares were
reserved for issuance under these plans, of which 2,336,000 have been granted at
December 31, 1996. The exercise price of the options is determined based on the
fair market value of the stock on the date of grant and the options generally
vest immediately.
F-16
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Option activity for the three years ended December 31, 1996 is as follows:
AVERAGE
EXERCISE PRICE
SHARES PER OPTION
---------- ---------------
Options outstanding, December 31, 1993............................ 1,732,000 .80
Granted to employees/directors.................................... 100,000 1.00
Granted to lenders................................................ 747,500 .90
Granted to consultants............................................ 555,000 1.00
Exercised......................................................... (253,400) .88
Expired........................................................... (108,600) 1.00
Canceled.......................................................... (85,000) 0.75
---------- -----
Options outstanding, December 31, 1994............................ 2,687,500 0.82
Granted to employees/directors.................................... 784,000 1.36
Granted to consultants............................................ 540,000 1.45
Exercised......................................................... (310,000) 0.85
Canceled.......................................................... (160,000) 1.92
---------- -----
Options outstanding, December 31, 1995............................ 3,541,500 0.98
Granted to employees.............................................. 87,000 1.12
Granted to consultants............................................ 10,000 1.47
Exercised......................................................... (656,000) 0.85
Canceled.......................................................... (393,500) 1.06
---------- -----
Options outstanding, December 31, 1996............................ 2,589,000 $ 1.01
---------- -----
---------- -----
The following summarizes information about stock options outstanding at
December 31, 1996:
OPTIONS OUTSTANDING
------------------------------------
EXERCISE AVERAGE AVERAGE
PRICE SHARES PRICE TERM
- ---------------- ---------- ----------- -----------
$ 0.75 to $1.00 1,678,000 $ 0.79 1.61
$ 1.01 to $1.50 739,000 1.32 3.88
$ 1.51 to $2.00 50,000 2.00 1.25
$ 2.01 to $2.50 122,000 2.03 2.09
All but 60,000 of the above options are exercisable at December 31, 1996.
F-17
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Had compensation cost for the Company's employee/director options been
determined based on the fair value at the grant date consistent with the
requirements of Statements of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net loss and net loss per share would
have been as follows:
FOR THE YEAR ENDED
----------------------------
1996 1995
------------- -------------
Net loss........................................................ $ (2,208,000) $ (6,598,000)
------------- -------------
Loss Per Share.................................................. $ (0.12) $ (0.40)
------------- -------------
------------- -------------
The fair value of each employee/director stock option grant has been
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions:
1996 1995
--------- ---------
Risk-free interest rate 7.50% 7.50%
Expected life 5 years 5 years
Expected volatility 70% 60%
Expected dividend yield 0% 0%
The weighted-average grant date fair values of employee/director options
granted during 1996 and 1995 were $0.72 and $0.80, respectively.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----- ----- -----------
Current................................................................................ $ -- $ -- $ (117,000)
Deferred............................................................................... -- -- (168,000)
--------- --------- -----------
$ -- $ -- $ (285,000)
--------- --------- -----------
--------- --------- -----------
No current benefit for income taxes has been recorded in the 1996 statement
of operations since the Company's history of recurring losses precludes
anticipation of the benefit of the 1996 loss.
F-18
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The current income tax benefit in 1994 is a result of the carryback of net
operating losses, generated by the Company's wholly owned United States
subsidiary, APT. This benefit resulted in tax refunds for taxes paid in prior
years.
The deferred income tax benefit of $168,000 in 1994 is the result of a
reduction in the prior year deferred tax liability. The reduction results from
the ability of the Company to utilize excess 1994 operating losses generated by
the U.S. operations to offset deferred tax liabilities.
Deferred tax assets (liabilities) are comprised of the following at December
31.
1996 1995
------------ ------------
Loss carry forwards
U.S............................................................... $ 2,064,000 $ 2,035,000
Canada............................................................ 1,428,000 2,082,000
Other............................................................. 82,000 76,000
------------ ------------
Gross deferred tax assets......................................... 3,574,000 4,193,000
Depreciation and amortization..................................... (119,000) (55,000)
------------ ------------
Net............................................................... 3,455,000 4,138,000
Valuation allowance............................................... (3,455,000) (4,138,000)
------------ ------------
$ - $ --
------------ ------------
------------ ------------
The provision for income taxes differs from the amount that would be
obtained by applying the United States statutory rate to the loss before income
taxes as a result of the following:
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ------------- -----------
Recovery of income taxes based on United States statutory rates (34%).... $ (729,000) $ (2,030,000) $ (325,000)
Non-deductible goodwill amortization..................................... -- 1,590,000 40,000
Compensation expense for exchange of escrowed shares for new shares...... 749,000 -- --
Increase (decrease) in valuation allowance............................... (29,000) 430,000 --
Other.................................................................... 9,000 10,000 --
----------- ------------- -----------
Provision (benefit) for income taxes..................................... $ -- $ -- $ (285,000)
----------- ------------- -----------
----------- ------------- -----------
F-19
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
At December 31, 1996, the Company has net operating losses for United States
and Canadian tax purposes available to reduce future United States and Canadian
taxable income amounting to approximately $5.5 million and $3.2 million,
respectively. For United States tax purposes, these losses will expire as
follows:
2005 $1,400,000
2006 37,000
2007 857,000
2008 184,000
2009 1,632,000
2010 323,000
2011 1,023,000
2012 78,000
----------
$5,534,000
----------
----------
For Canadian income tax purposes, these losses will expire as follows:
1997 $ 109,000
1998 1,010,000
1999 357,000
2000 1,729,000
----------
$3,205,000
----------
----------
11. LEASE COMMITMENTS AND OBLIGATIONS
The Company leases two manufacturing facilities under month to month
operating leases and certain other office and warehouse facilities under
non-cancelable operating leases expiring between April 1997 and July 2000. The
Company also leases certain manufacturing and office equipment under capital
leases expiring between July 1997 and June 2001.
F-20
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following summarizes future minimum lease payments required under
capital and non-cancelable operating leases:
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ---------------------------------------------------------------------------------------- ---------- ------------
1997 $ 62,000 $ 513,000
1998 50,000 409,000
1999 37,000 87,000
2000 34,000 1,000
2001 10,000 --
- ---- ---------- ------------
Future minimum lease payments $ 193,000 $ 1,010,000
Less amounts representing interest (52,000)
Present value of future minimum lease payments ---------- ------------
Less amounts due within one year $ 141,000
Amounts due after one year (36,000)
-----------
$ 105,000
-----------
-----------
Total rent expense incurred by the Company under operating leases for the
year ended December 31, 1996, 1995 and 1994 was $599,000, $447,000 and $342,000,
respectively.
12. Acquisition of Disposable Medical Products, Inc.
On March 25, 1994, the Company, through its wholly owned subsidiary Alpha
Pro Tech, Inc., acquired the assets of Disposable Medical Products, Inc. (DMP)
and 96.8% of the shares of DMP's wholly owned subsidiary DPI for $336,000,
including $32,000 of direct acquisition costs. The Company recorded a liability
of $304,000 at December 31, 1994 for the unpaid purchase price which was
subsequently paid in 1995. This amount was payable to the previous owners who
are now employees of the Company. Prior to the acquisition, DMP had been
operating as a debtor in possession under Chapter 11 of the Bankruptcy Code.
F-21
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Under the purchase agreement, the Company operated DMP under a post petition
financing agreement through March 1995. In March 1995, the acquisition was
finalized and all related payments were made. Under the terms of the agreement,
the Company was entitled to the risks and rewards of operating DMP in exchange
for providing DMP with sufficient working capital for continuing operations and,
accordingly, DMP's operations have been consolidated into those of the Company's
since April 1, 1994. The purchase price was allocated as follows:
Inventories....................................................... $ 105,000
Prepaid expenses.................................................. 30,000
Machinery and equipment........................................... 228,000
Accounts payable and accrued liabilities.......................... (27,000)
---------
$ 336,000
---------
---------
Pro forma financial information (unaudited)
The unaudited pro forma results of operations of the Company, as if the
acquisition of DMP had occurred on January 1, 1994, are as follows:
DECEMBER 31,
1994
-------------
Revenue........................................................................ $ 12,574,000
-------------
Loss for the year.............................................................. $ (671,000)
-------------
Loss per common share.......................................................... $ (0.05)
-------------
-------------
The unaudited pro forma information does not purport to be indicative of the
results from operations that actually would have been obtained if the purchase
had been consummated January 1, 1994 or of the results of operations that may be
obtained in the future.
13. ACQUISITION OF LUDAN CORPORATION
Effective April 1995, the Company acquired an 80% interest in Ludan
Corporation, a Georgia based materials laminating company, for $35,000 in cash
including $6,000 of direct acquisition costs, plus assumption of net liabilities
of $23,000. In addition, a note payable owed by LC to a third party of $20,000
was converted to 20,000 shares of the Company's common stock. The Company
recorded $78,000 of goodwill in connection with the acquisition which is being
amortized over 8 years.
In June 1996, the Company acquired the remaining 20% interest in LC for a
$68,000 note payable of which $49,000 was paid in 1996 and the remaining $19,000
is due at March 31, 1997. The Company recorded $58,000 of goodwill which is
being amortized over 8 years.
F-22
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. Quarterly Financial Information (Unaudited)
Fourth quarter adjustment affecting prior quarter During the fourth quarter
of 1995, the Company recorded a $412,000 reduction to fourth quarter cost of
sales to correct the September 30, 1995 inventory balance which was overstated.
Had this adjustment been recorded in the quarter ended September 30, 1995,
net income (loss) and net income (loss) per share for this quarter would have
been reported as follows:
Net income as reported........................................... $ 12,000
---------
---------
Net income per share as reported................................. $ 0.00
---------
---------
Net loss as adjusted............................................. $(400,000)
---------
---------
Net loss per share as adjusted................................... $ (0.02)
---------
---------
F-23
ALPHA PRO TECH, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged Charged Balance at
Beginning to Costs and to Other End of
Description of Period Expenses Accounts(1) Deductions(2) Period
December 31, 1996 Deducted
from related asset
account:
Allowance for doubtful
accounts.................. $ 61,000 $ 80,000 $ -- $ 19,000 $ 122,000
---------- --------- ---------- --------- ----------
Provision for inventory..... $ 32,000 $ 10,000 $ -- $ -- $ 42,000
---------- --------- ---------- --------- ----------
Valuation allowance for
income taxes.............. $4,138,000 $ -- $ -- $683,000 $3,455,000
---------- --------- ---------- --------- ----------
December 31, 1995 Deducted
from related asset
account:
Allowance for doubtful
accounts.................. $ 66,000 $ 18,000 $ -- $ 23,000 $ 61,000
---------- --------- ---------- --------- ----------
Provision for inventory..... $ 22,000 $ 140,000 $ -- $130,000 $ 32,000
---------- --------- ---------- --------- ----------
Valuation allowance for
income taxes.............. $3,487,000 $ $ 651,000 $ $4,138,000
---------- --------- ---------- --------- ----------
December 31, 1994 Deducted
from related asset
account:
Allowance for doubtful
accounts.................. $ 75,000 $ 140,000 $ -- $(149,000) $ 66,000
---------- --------- ---------- --------- ----------
Provision for inventory..... $ 22,000 $ -- $ -- $ -- $ 22,000
---------- --------- ---------- --------- ----------
Valuation allowance for
income taxes.............. $3,423,000 $ $ 64,000 $ $3,487,000
---------- --------- ---------- --------- ----------
- ------------------------
(1) Represents increase to net deferred tax assets and a corresponding increase
to the valuation allowance.
(2) Represents uncollectible accounts and inventory written off.
F-24
CONSENT OF INDEPENDENT ACCOUNTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 33-72332) of
Alpha Pro Tech, Ltd. of our report dated March 20, 1997 appearing on page F-2
of this Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
April 10, 1997