SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13
or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 2004
Commission File No. 0-19893
Alpha Pro Tech, Ltd.
(exact name of registrant as specified in its charter)
|
Delaware, U.S.A. |
|
63-1009183 |
|
(State or other jurisdiction of incorporation) |
|
(I.R.S. Employer Identification No.) |
|
|
|
|
|
Suite 112, 60 Centurian Drive |
|
L3R 9R2 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code: (905) 479-0654
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 1, 2004.
23,356,849 Shares of Common stock, $.01 par value
Alpha Pro Tech, Ltd.
Table of Contents
Alpha Pro Tech, Ltd.
PART I. FINANCIAL INFORMATION
We have prepared the following unaudited interim consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations.
You should read the following unaudited interim consolidated financial statements and the accompanying notes together with our Annual Report on Form 10-K for the year ended December 31, 2003. Our 2003 Annual Report contains information that may be helpful in analyzing the financial information contained in this report and in comparing our results of operations for the three and nine months ended September 30, 2004 with the same periods in 2003.
1
Alpha Pro Tech, Ltd.
Consolidated Balance Sheets (Unaudited)
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
|
|
|
|
||
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Assets |
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
3,500,000 |
|
$ |
3,427,000 |
|
|
Accounts receivable, net of allowance for doubtful accounts of $69,000 at September 30, 2004 and December 31, 2003 |
|
3,823,000 |
|
2,707,000 |
|
||
|
Inventories, net |
|
5,162,000 |
|
6,015,000 |
|
||
|
Prepaid expenses and other current assets |
|
809,000 |
|
245,000 |
|
||
|
Deferred income taxes |
|
362,000 |
|
362,000 |
|
||
|
Total current assets |
|
13,656,000 |
|
12,756,000 |
|
||
|
|
|
|
|
|
|
||
|
Property and equipment, net |
|
3,023,000 |
|
3,166,000 |
|
||
|
Goodwill |
|
55,000 |
|
55,000 |
|
||
|
Intangible assets, net |
|
137,000 |
|
119,000 |
|
||
|
Total assets |
|
$ |
16,871,000 |
|
$ |
16,096,000 |
|
|
|
|
|
|
|
|
||
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Accounts payable |
|
572,000 |
|
956,000 |
|
||
|
Accrued liabilities |
|
920,000 |
|
1,539,000 |
|
||
|
Total current liabilities |
|
1,492,000 |
|
2,495,000 |
|
||
|
|
|
|
|
|
|
||
|
Deferred income taxes |
|
574,000 |
|
574,000 |
|
||
|
Total liabilities |
|
2,066,000 |
|
3,069,000 |
|
||
|
|
|
|
|
|
|
||
|
Shareholders’ equity |
|
|
|
|
|
||
|
Common stock, $.01 par value, 50,000,000 shares authorized, 23,356,849 and 22,727,907 issued and outstanding at September 30, 2004 and December 31, 2003, respectively |
|
234,000 |
|
227,000 |
|
||
|
Additional paid-in capital |
|
23,856,000 |
|
23,375,000 |
|
||
|
Accumulated deficit |
|
(9,285,000 |
) |
(10,575,000 |
) |
||
|
Total shareholders’ equity |
|
14,805,000 |
|
13,027,000 |
|
||
|
Total liabilities and shareholders’ equity |
|
$ |
16,871,000 |
|
$ |
16,096,000 |
|
(1) The condensed consolidated balance sheet as of December 31, 2003 has been prepared using information from the audited financial statements at that date.
The accompanying notes are an integral part of these consolidated financial statements.
2
Alpha Pro Tech, Ltd.
Consolidated Statements of Operations (Unaudited)
|
|
|
For
the Three Months Ended |
|
For
the Nine Months Ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Sales |
|
$ |
5,827,000 |
|
$ |
6,517,000 |
|
$ |
18,428,000 |
|
$ |
20,467,000 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cost of goods sold, excluding depreciation and amortization |
|
2,910,000 |
|
3,299,000 |
|
9,281,000 |
|
9,748,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross margin |
|
2,917,000 |
|
3,218,000 |
|
9,147,000 |
|
10,719,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Expenses: |
|
|
|
|
|
|
|
|
|
||||
|
Selling, general and administrative |
|
2,198,000 |
|
2,141,000 |
|
6,711,000 |
|
6,427,000 |
|
||||
|
Depreciation and amortization |
|
127,000 |
|
131,000 |
|
393,000 |
|
373,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income from operations |
|
592,000 |
|
946,000 |
|
2,043,000 |
|
3,919,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
||||
|
Gain on sale of assets |
|
— |
|
— |
|
7,000 |
|
— |
|
||||
|
Interest, net |
|
— |
|
(2,000 |
) |
(4,000 |
) |
(18,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income before provision for income taxes |
|
592,000 |
|
944,000 |
|
2,046,000 |
|
3,901,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Provision for income taxes |
|
218,000 |
|
243,000 |
|
756,000 |
|
1,372,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income |
|
$ |
374,000 |
|
$ |
701,000 |
|
$ |
1,290,000 |
|
$ |
2,529,000 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic net income per share |
|
$ |
0.02 |
|
$ |
0.03 |
|
$ |
0.06 |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted net income per share |
|
$ |
0.02 |
|
$ |
0.03 |
|
$ |
0.05 |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic weighted average shares outstanding |
|
23,270,478 |
|
22,478,537 |
|
23,155,358 |
|
22,438,723 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted weighted average shares outstanding |
|
24,467,474 |
|
24,065,723 |
|
24,642,728 |
|
23,865,847 |
|
||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Alpha Pro Tech, Ltd.
Consolidated Statement of Shareholders’ Equity (Unaudited)
|
|
|
Shares |
|
Common Stock |
|
Additional |
|
Accumulated |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Balance at December 31, 2003 |
|
22,727,907 |
|
$ |
227,000 |
|
$ |
23,375,000 |
|
$ |
(10,575,000 |
) |
$ |
13,027,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Stock options exercised |
|
724,894 |
|
7,000 |
|
644,000 |
|
— |
|
651,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Common stock repurchased |
|
(215,000 |
) |
(1,000 |
) |
(370,000 |
) |
— |
|
(371,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Warrants exercised |
|
119,048 |
|
1,000 |
|
207,000 |
|
|
|
208,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income |
|
|
|
|
|
|
|
1,290,000 |
|
1,290,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Balance at September 30, 2004 |
|
23,356,849 |
|
$ |
234,000 |
|
$ |
23,856,000 |
|
$ |
(9,285,000 |
) |
$ |
14,805,000 |
|
The accompanying notes are an integral part of these consolidated financial statements
4
Alpha Pro Tech, Ltd.
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
For
the Nine months Ended |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
Cash Flows From Operating Activities: |
|
|
|
|
|
||
|
Net income |
|
$ |
1,290,000 |
|
$ |
2,529,000 |
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
||
|
Depreciation and amortization |
|
393,000 |
|
373,000 |
|
||
|
Gain on sale of assets |
|
(7,000 |
) |
— |
|
||
|
Changes in assets and liabilities: |
|
|
|
|
|
||
|
Accounts receivable, net |
|
(1,116,000 |
) |
(668,000 |
) |
||
|
Inventories, net |
|
853,000 |
|
(2,253,000 |
) |
||
|
Prepaid expenses and other current assets |
|
(564,000 |
) |
(21,000 |
) |
||
|
Accounts payable and accrued liabilities |
|
(1,003,000 |
) |
1,023,000 |
|
||
|
|
|
|
|
|
|
||
|
Net cash provided by (used in) operating activities: |
|
(154,000 |
) |
1,025,000 |
|
||
|
|
|
|
|
|
|
||
|
Cash Flows From Investing Activities: |
|
|
|
|
|
||
|
Proceeds from related party loans |
|
— |
|
70,000 |
|
||
|
Purchase of property and equipment |
|
(238,000 |
) |
(327,000 |
) |
||
|
Proceeds from sale of assets |
|
16,000 |
|
— |
|
||
|
Purchase of intangible assets |
|
(39,000 |
) |
(18,000 |
) |
||
|
|
|
|
|
|
|
||
|
Net cash used in investing activities |
|
(261,000 |
) |
(275,000 |
) |
||
|
|
|
|
|
|
|
||
|
Cash Flows From Financing Activities: |
|
|
|
|
|
||
|
Payments on notes payable |
|
— |
|
(415,000 |
) |
||
|
Proceeds from the exercise of stock options |
|
651,000 |
|
253,000 |
|
||
|
Proceeds from the exercise of warrants |
|
208,000 |
|
— |
|
||
|
Payments for the repurchase of common stock |
|
(371,000 |
) |
(287,000 |
) |
||
|
Net cash provided by (used in) financing activities |
|
488,000 |
|
(449,000 |
) |
||
|
|
|
|
|
|
|
||
|
Increase in cash during the period |
|
73,000 |
|
301,000 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents, beginning of period |
|
3,427,000 |
|
2,879,000 |
|
||
|
Cash and cash equivalents, end of period |
|
$ |
3,500,000 |
|
$ |
3,180,000 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
1. The Company
Alpha Pro Tech, Ltd. (Alpha Pro Tech, the Company, we, our, us) manufactures and distributes a variety of disposable mask, shield, shoe cover, apparel and wound care products. Most of the Company’s disposable apparel, mask and shield products, and wound care products are distributed to medical, dental, industrial safety and clean room markets, predominantly in the United States of America.
2. Basis of Presentation
The interim financial information included herein is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2003, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (“2003 10-K”). The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet at December 31, 2003 was extracted from the audited consolidated financial statements contained in the 2003 10-K and does not include all disclosures required by accounting principles generally accepted in the United States of America for annual consolidated financial statements.
Certain amounts for prior periods have been reclassified to be consistent with the 2004 presentation. Such reclassifications had no effect on total assets, total liabilities, shareholders’ equity or net income.
3. Stock Based Compensation
Accounting for Stock-based Compensation. The Company maintains two stock option plans under which the Company may grant incentive stock options and non-qualified stock options to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value on the date of grant. Options vest and expire according to terms established at the grant date.
The Company accounts for stock options granted using Accounting Principles Board (“APB”) Opinion 25. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS No. 123,”Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-transition and disclosure”, the Company’s net income and net income per common share would have changed to the pro forma amounts indicated below:
6
|
|
|
For
the Three Months |
|
For
the Nine Months |
|
||||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||||
|
Net income, as reported |
|
$ |
374,000 |
|
$ |
701,000 |
|
$ |
1,290,000 |
|
$ |
2,529,000 |
|
||
|
Add: Total stock-based employee compensation expense included in reported net income, net of related tax effects |
|
— |
|
— |
|
— |
|
— |
|
||||||
|
Deduct: Total stock-based employee compensation expense determined using the fair value method for all rewards, net of related tax effects |
|
(60,000 |
) |
— |
|
(60,000 |
) |
— |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Pro forma net income |
|
$ |
314,000 |
|
$ |
701,000 |
|
$ |
1,230,000 |
|
$ |
2,529,000 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income per share: |
|
|
|
|
|
|
|
|
|
||||||
|
Basic - as reported |
|
$ |
0.02 |
|
$ |
0.03 |
|
$ |
0.06 |
|
$ |
0.11 |
|
||
|
Basic - pro forma |
|
0.02 |
|
0.03 |
|
0.06 |
|
0.11 |
|
||||||
|
Diluted – as reported |
|
0.02 |
|
0.03 |
|
0.05 |
|
0.11 |
|
||||||
|
Diluted - pro forma |
|
0.02 |
|
0.03 |
|
0.05 |
|
0.11 |
|
||||||
4. New Accounting Standards
Based on the Company’s review of new accounting standards released during the quarter ended September 30, 2004, the Company did not identify any standards requiring adoption that would have a significant impact on its consolidated financial statement.
5. Inventories
Inventories consist of the following:
|
|
|
September 30, |
|
December 31, |
|
||
|
Raw materials |
|
$ |
2,684,000 |
|
$ |
3,174,000 |
|
|
Work in process |
|
125,000 |
|
44,000 |
|
||
|
Finished goods |
|
2,769,000 |
|
3,183,000 |
|
||
|
|
|
5,578,000 |
|
6,401,000 |
|
||
|
Less reserve for slow-moving, obsolete or unusable inventory |
|
(416,000 |
) |
(386,000 |
) |
||
|
|
|
$ |
5,162,000 |
|
$ |
6,015,000 |
|
7
6. Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
September 30, |
|
December 31, |
|
||
|
Income taxes payable |
|
$ |
— |
|
$ |
480,000 |
|
|
Bonuses payable |
|
390,000 |
|
737,000 |
|
||
|
Accrued payroll |
|
212,000 |
|
148,000 |
|
||
|
Accrued rebates and other |
|
318,000 |
|
174,000 |
|
||
|
|
|
$ |
920,000 |
|
$ |
1,539,000 |
|
7. Basic and Diluted Net Income Per Share
The following table provides a reconciliation of both net income and the number of shares used in the computation of “basic” earnings per share (EPS), which utilizes the weighted average number of shares outstanding without regard to potential shares, and “diluted” EPS, which includes all such dilutive shares.
|
|
|
For
the Three Months Ended |
|
For
the Nine Months Ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income (Numerator) |
|
$ |
374,000 |
|
$ |
701,000 |
|
$ |
1,290,000 |
|
$ |
2,529,000 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Shares (Denominator): |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic weighted average shares outstanding |
|
23,270,478 |
|
22,478,537 |
|
23,155,358 |
|
22,438,723 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Add: Dilutive effect of stock options and warrants |
|
1,196,996 |
|
1,587,186 |
|
1,487,370 |
|
1,427,124 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted weighted average shares outstanding |
|
24,467,474 |
|
24,065,723 |
|
24,642,728 |
|
23,865,847 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income per share: |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic |
|
$ |
0.02 |
|
$ |
0.03 |
|
$ |
0.06 |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted |
|
$ |
0.02 |
|
$ |
0.03 |
|
$ |
0.05 |
|
$ |
0.11 |
|
8
8. Activity of Business Segments
The Company operates through four segments: Apparel, consisting of a complete line of disposable clothing such as coveralls, frocks, lab coats, hoods, bouffant caps and shoe covers; Mask and shields, consisting principally of medical, dental and industrial masks and eye shields; Extended care, consisting principally of fleece and other related products which include a line of pet beds and Engineered Products, consisting of a line of construction supply weatherization products as well as a line of paint with antimicrobials. The Engineered products segment began operations in June 2004 and through September 30, 2004 had not begun generating sales.
The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in the 2003 10-K . Segment data excludes charges allocated to head office and corporate sales/marketing departments and income taxes. The Company evaluates the performance of its segments and allocates resources to them based primarily on net sales.
The following table shows net sales for each segment for the three and nine months ended September 30, 2004 and 2003:
|
|
|
For
the Three Months Ended |
|
For
the Nine Months |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Apparel |
|
$ |
4,300,000 |
|
$ |
4,161,000 |
|
$ |
13,130,000 |
|
$ |
11,506,000 |
|
|
Mask and shield |
|
1,109,000 |
|
1,960,000 |
|
3,944,000 |
|
7,728,000 |
|
||||
|
Extended care |
|
418,000 |
|
396,000 |
|
1,354,000 |
|
1,233,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Consolidated total net sales |
|
$ |
5,827,000 |
|
$ |
6,517,000 |
|
$ |
18,428,000 |
|
$ |
20,467,000 |
|
The following table shows the reconciliation of total segment income to total consolidated net income for the three and nine months ended September 30, 2004 and 2003:
|
|
|
For
the Three Months Ended |
|
For
the Nine Months Ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
Apparel |
|
$ |
1,613,000 |
|
$ |
1,293,000 |
|
$ |
4,711,000 |
|
$ |
3,553,000 |
|
|
Mask and shield |
|
418,000 |
|
889,000 |
|
1,449,000 |
|
3,916,000 |
|
||||
|
Engineered products |
|
(155,000 |
) |
— |
|
(180,000 |
) |
— |
|
||||
|
Extended care |
|
52,000 |
|
72,000 |
|
189,000 |
|
207,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total segment income |
|
1,928,000 |
|
2,254,000 |
|
6,169,000 |
|
7,676,000 |
|
||||
|
Unallocated corporate overhead expenses |
|
(1,336,000 |
) |
(1,310,000 |
) |
(4,123,000 |
) |
(3,775,000 |
) |
||||
|
Provision for income taxes |
|
(218,000 |
) |
(243,000 |
) |
(756,000 |
) |
(1,372,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Consolidated net income |
|
$ |
374,000 |
|
$ |
701,000 |
|
$ |
1,290,000 |
|
$ |
2,529,000 |
|
9
You should read the following discussion and analysis together with our consolidated financial statements and the notes to our consolidated financial statements, which appear elsewhere in this report.
OVERVIEW
Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of disposable protective apparel and consumer products for the cleanroom, industrial, medical, dental and consumer markets. Our products are sold under the “Alpha Pro Tech” brand name as well as sold for use under private label.
Our current products are classified into four groups: Disposable protective apparel, consisting of a complete line of shoecovers, headcovers, gowns, coveralls and lab coats; infection control products consisting of a line of face masks and face shields; extended care products consisting of a line of mattress overlays, wheelchair covers, geriatric chair surfaces, operating room table surfaces and pediatric surfaces; and consumer products consisting of a line of pet bedding and pet toys.
Our current products are sold through three segments. The Apparel segment, consisting of disposable protective apparel; the Mask and Shield segment, consisting of infection control products; and the Extended Care segment, consisting of extended care products and consumer products.
Our target markets are pharmaceutical manufacturing, bio-pharmaceutical manufacturing and medical device manufacturing, lab animal research, high technology electronics manufacturing which includes the semi-conductor market, as well as medical and dental markets. Our products are used primarily in cleanrooms, industrial safety manufacturing environments and health care facilities such as hospitals, laboratories and dental offices. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.
A new fourth business segment, Engineered Products, was announced during the second quarter 2004 with the formation of Alpha ProTech Engineered Products, Inc., a wholly-owned subsidiary. This Engineered Products segment will consist of a line of construction supply weatherization products as well as a line of paint with antimicrobials. The construction supply weatherization products will consist of building wrap and a synthetic roof underlayment. This line of products is a natural extension of our core capabilities: creating proprietary products designed to protect people and environments. The building wrap will offer a weather resistant barrier designed to lower energy consumption costs. The proprietary synthetic roof underlayment is designed to resist the environment, as opposed to conventional roofing underlayment that is prone to rapid degradation and mold growth.
The line of paint with antimicrobials is designed to inhibit growth of bacteria, fungi and algae on the painted surfaces in hospitals, surgical rooms and cleanrooms and associated controlled environments. We have an exclusive licensing agreement for the proprietary antimicrobial formulation to be used in the paint. This product is designed to reduce operating costs in cleanrooms and hospitals while preserving environmental safety.
We expect to begin manufacturing and distributing these new Engineered Products in the fourth quarter of 2004. The Engineered Products segment is expected to contribute significantly to revenue growth in 2005.
We are also focused on appreciably improving sales in our current core business. Our key sales growth strategies for our core business are based on a strategy of developing innovative products to suit
10
individual end users true needs and on investing in additional sales personnel. As we gain market share, we will invest in additional sales personnel. In 2004, we have started to experience positive results from these growth strategies and expect sales growth to improve in the coming quarters.
Our results of operations in 2003 were significantly influenced by the outbreak of Severe Acute Respiratory Syndrome (SARS). During the third quarter and nine months ended September 30, 2003, we had approximately $0.5 million and $3.5 million, respectively of non-core SARS related N-95 Respiratory mask and eye shield sales. Excluding the non-core sales related to SARS last year, we experienced a core sales decline of 3.2% for the three months ended September 30, 2004 and core sales growth of 8.6% for the nine months ended September 30, 2004.
Net income for the quarter was $374,000 compared to $701,000 for the same quarter last year. A number of factors adversely affected net income for the 2004 quarter, namely $0.5 million in SARS related sales in the third quarter last year, a $100,000 tax credit in the third quarter last year related to our international sales and start-up costs of $155,000 in the third quarter of 2004 from the newly formed Engineered Products segment.
RESULTS OF OPERATIONS
Three months and nine months ended September 30, 2004, compared to the three and nine months ended September 30, 2003
Alpha Pro Tech, Ltd. (Alpha or the Company) reported net income for the quarter ended September 30, 2004 of $374,000 compared to $701,000 for the quarter ended September 30, 2003, representing a decrease of $327,000 or 46.6%. The decrease is attributable to a decrease in gross margin of $301,000 and an increase in selling, general and administrative expenses of $57,000, partially offset by a decrease in depreciation and amortization of $4,000, a decrease in net interest expense of $2,000 and a decrease in income taxes of $25,000.
Net income in the third quarter of 2004 was adversely affected by a number of factors. The third quarter of 2003 was positively impacted by $0.5 million of non-core SARS related sales which generated a gross margin of approximately $0.3 million and the $100,000 tax credit referred to above. The Company also had start-up costs of $155,000 in the third quarter of 2004 for the newly formed Engineered Products segment.
Sales. Consolidated sales for the quarter ended September 30, 2004 decreased to $5,827,000 from $6,517,000 for the quarter ended September 30, 2003, representing a decrease of $690,000 or 10.6%. Sales in the third quarter of last year were positively affected by the SARS outbreak. Excluding the $0.5 million non-core SARS related sales during the third quarter of 2003, our core business decreased by $190,000 or 3.2% to $5,827,000 for the quarter ended September 30, 2004 from $6,017,000 for the same period in 2003.
Sales for the Apparel segment for the quarter ended September 30, 2004 were $4,300,000 compared to $4,161,000 for the same period of 2003, an increase of $139,000 or 3.3%. The Apparel segment sales increase was due to higher sales to the industrial safety industry. Although sales to our largest distributor were down 6.3% for the quarter, end-user sales of our products by this distributor were up approximately 10%. We expect long-term growth with this distributor as we continue to gain a stronger presence into the pharmaceutical and cleanroom markets.
Mask and eye shield sales for the quarter ended September 30, 2004 decreased by $851,000 or 43.4% to $1,109,000 from $1,960,000 in the same period of 2003. The decrease is primarily the result of $0.5
11
million of N-95 Particulate Respirator mask and eye shield sales in the third quarter of last year related to the SARS outbreak and $351,000 decrease in medical and dental sales which was due to an increased awareness of infection control concerns during the third quarter of 2003.
Sales of the Company’s Extended Care Unreal Lambskin and other related products, which includes a line of pet beds, increased by $22,000 or 5.6% to $418,000 for the quarter ended September 30, 2004 from $396,000 for the quarter ended September 30, 2003. This increase in sales is primarily the result of an increase in pet bed sales.
Consolidated sales for the nine months ended September 30, 2004 decreased to $18,428,000 from $20,467,000 for the nine months ended September 30, 2003, representing a decrease of $2,039,000 or 10.0%. Excluding the $3.5 million non-core SARS related sales during the second and third quarter of 2003, our core business grew by $1,461,000 or 8.6% to $18,428,000 for the nine months ended September 30, 2004 from $16,967,000 for the same period in 2003. We attribute this core business increase primarily to sales to the pharmaceutical and cleanroom industry and to a lesser extent sales to the industrial safety industry.
Sales for the Apparel segment for the nine months ended September 30, 2004 were $13,130,000 compared to $11,506,000 for the same period of 2003, an increase of $1,624,000 or 14.1%. The Apparel segment sales increase was due to higher sales to the pharmaceutical and cleanroom industry and to a lesser extent sales to the industrial safety industry. We expect continued long-term growth in this segment.
Mask and eye shield sales for the nine months ended September 30, 2004 decreased by $3,784,000 or 49.0% to $3,944,000 from $7,728,000 in the same period of 2003. The decrease is primarily the result of $3.5 million of N-95 Particulate Respirator mask and eye shield sales in the second and third quarter of 2003 related to the SARS outbreak. Excluding the $3.5 million in SARS related sales in 2003, mask and eye shield sales in 2004 are down $284,000 or 6.7% due to decreased medical and dental sales due to and increased awareness of infection control concerns during the third quarter of 2003.
Sales of the Company’s Extended Care Unreal Lambskin and other related products, which includes a line of pet beds, increased by $121,000 or 9.8% to $1,354,000 for the nine months ended September 30, 2004 from $1,233,000 for the quarter ended September 30, 2003. This increase of $121,000 in sales is primarily the result of an increase in pet bed sales.
Cost of Goods Sold. Cost of goods sold, excluding depreciation and amortization, decreased to $2,910,000 for the quarter ended September 30, 2004 from $3,299,000 for the same period in 2003. Gross profit margin increased to 50.1% for the quarter ended September 30, 2004 from 49.4% for the same period in 2003. For the nine months ended September 30, 2004, cost of goods sold decreased to $9,281,000 from $9,748,000 for the same period in 2003. Gross profit margin decreased to 49.6% for the nine months ended September 30, 2004 from 52.4% for the same period in 2003.
The decrease in gross profit margin for nine months ended September 30, 2004 as compared to the same period of 2003 was due primarily to the higher gross profit margin on the $3.5 million SARS related sales in the second and third quarter of 2003. Gross profit margin in 2004 was also adversely affected by severance payments made due to the closing of our facility located in Benjamin Hill, Mexico during the second quarter of 2004 as well as start-up costs from our new third party contractor in Mexico, totaling $68,000.
12
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $57,000 or 2.7% to $2,198,000 for the quarter ended September 30, 2004 from $2,141,000 for the quarter ended September 30, 2003. The increase in selling, general and administrative expenses primarily consists of increased marketing and commission expenses of $30,000, increased insurance expense of $12,000, increased travel expense of $35,000, and increased professional fees and public company expense of $25,000, partially offset by decreased expense for the executive bonus program of $39,000 and decreased other expenses of $6,000. Included in the selling, general and administrative expenses for the quarter ended September 30, 2004 is $155,000 of expenses that relate to start-up costs for the newly formed Engineered Products segment. Excluding the Engineered Products expenses, selling, general and administrative expenses decreased by $98,000 or 4.6%
Selling, general and administrative expenses increased by $284,000 or 4.4% to $6,711,000 for the nine months ended September 30, 2004 from $6,427,000 for the nine months ended September 30, 2003. The increase in selling, general and administrative expenses primarily consists of increased payroll costs of $212,000, of which $52,000 is for severance payments on the closing of our Benjamin Hill, Mexico facility, increased marketing and commission expenses of $87,000, increased travel of $120,000, increased rent and utilities expense of $75,000, increased professional fees and public company expenses of $12,000 and increased miscellaneous expenses of $3,000, partially offset by a decreased expense for the executive bonus program of $207,000 and decreased credit card processing expense of $18,000. Included in selling, general and administrative expenses for the nine months ended September 30, 2004 is $180,000 of expenses that relate to start-up costs for the newly formed Engineered Products segment. Excluding the Engineered Products expenses, selling, general and administrative expenses increased by $104,000 or 1.6%
Depreciation and Amortization. Depreciation and amortization expense decreased by $4,000 to $127,000 for the quarter ended September 30, 2004 from $131,000 for the same period in 2003 and increased by $20,000 to $393,000 for the nine months ended September 30, 2004 compared to the same period in 2003. The increase for the nine months is primarily attributable to mask machine additions and the purchase of computer equipment in 2003.
Income from Operations. Income from operations decreased by $354,000 or 37.4%, to $592,000 for the quarter ended September 30, 2004 as compared to income from operations of $946,000 for the quarter ended September 30, 2003. The decrease in income from operations is primarily due to a decrease in gross profit margin of $301,000, an increase in selling, general and administrative expenses of $57,000, partially offset by a decrease in depreciation and amortization of $4,000.
Income from operations decreased by $1,876,000 or 47.9%, to $2,043,000 for the nine months ended September 30, 2004 as compared to income from operations of $3,919,000 for the nine months ended September 30, 2003. The decrease in income from operations is primarily due to a decrease in gross profit of $1,572,000 and an increase in selling, general and administrative expenses of $284,000 and an increase in depreciation and amortization of $20,000
Net Interest. Net interest expense decreased by $2,000 to $0 for the quarter ended September 30, 2004 from net interest expense of $2,000 for the quarter ended September 30, 2003. Interest expense remained flat at $2,000 for the quarter ended September 30, 2004 as compared to the same period of 2003. Interest income increased by $2,000 for the quarter ended September 30, 2004 as compared to the same period of 2003.
13
Net interest expense decreased by $14,000 to $4,000 for the nine months ended September 30, 2004 from net interest expense of $18,000 for the nine months ended September 30, 2003. Interest expense decreased by $23,000 to $8,000 for the nine months ended September 30, 2004 as compared to $31,000 the same period of 2003. The decrease in interest expense is primarily due to paying off all our notes payable during the second quarter of 2003. Interest income decreased by $9,000 to $4,000 for the nine months ended September 30, 2004 as compared to $13,000 for the same period of 2003.
Income Before Provision for Income Taxes. Income before provision for income taxes for the quarter ended September 30, 2004 was $592,000 as compared to $944,000 for the quarter ended September 30, 2003, representing a decrease of $352,000 or 37.3%. This decrease is attributable to a decrease in gross profit of $301,000, an increase in selling, general and administrative expenses of $57,000, partially offset a decrease in depreciation and amortization of $4,000 and a decrease in net interest expense of $2,000.
Income before provision for income taxes for the nine months ended September 30, 2004 was $2,046,000 as compared to $3,901,000 for the nine months ended September 30, 2003, representing a decrease of $1,855,000 or 47.6%. This decrease is attributable to a decrease in gross profit of $1,572,000, an increase in selling, general and administrative expenses of $284,000 and an increase in depreciation and amortization of $20,000, partially offset by a gain on sale of assets of $7,000 and a decrease in net interest expense of $14,000.
Provision for Income Taxes The provision for income taxes for the three months ended September 30, 2004 was $218,000 as compared to $243,000 for the three months ended September 30, 2003. The effective tax rate was approximately 37% for the three months ended September 30, 2004 as compared to approximately 26% for the same period of 2003. The lower marginal tax rate in the third quarter of last year was due primarily to extra territorial tax credits on 2003 international SARS related sales
The provision for income taxes for the nine months ended September 30, 2004 was $756,000, as compared to $1,372,000 for the nine months ended September 30, 2003. The decrease in income taxes is primarily due to lower income before provision for income taxes in 2004. The effective tax rate was approximately 37% for the nine months ended September 30, 2004 as compared to approximately 35% for the same period of 2003. The lower marginal tax rate in the nine months of last year was due primarily to extra territorial tax credits on 2003 international SARS related sales.
Net Income. Net income for the quarter ended September 30, 2004 was $374,000 compared to net income of $701,000 for the quarter ended September 30, 2003, a decrease of $327,000 or 46.6%. The net income decrease was primarily due to a decrease in income before provision for income taxes of $352,000, partially offset by a decrease in incomes taxes of $25,000.
Net income in the third quarter of 2004 was adversely affected by a number of factors. The third quarter of last year was positively impacted by $0.5 million of non-core SARS related sales which resulted in a gross profit decline of approximately $0.3 million for the third quarter 2004. The Company also had start-up costs of $155,000 in the third quarter of 2004 for the newly formed Engineered Products segment. In addition, the effective tax rate for the third quarter of last year was lower due to extra territorial tax credits.
Net income for the nine months ended September 30, 2004 was $1,290,000 compared to net income of $2,529,000 for the nine months ended September 30, 2003, a decrease of $1,239,000 or 49.1%. The net income decrease was due primarily to a decrease in income before provision for income taxes of
14
$1,855,000, partially offset by a decrease in incomes taxes of $616,000. The net income decline in 2004 is primarily due to the $3.5 million non-core SARS related sales in 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had cash and cash equivalents of $3,500,000 and working capital of $12,164,000, an increase in working capital of $1,903,000 since December 31, 2003. Cash increased by $73,000 for the nine months ended September 30, 2004. The slight increase in our cash is primarily due to cash provided by financing activities, partially offset by cash used in operating activities and the purchase of property and equipment.
We have a $3,500,000 credit facility with a bank, consisting of a line of credit with interest at prime plus 0.5%. At September 30, 2004, the prime interest rate was 4.75%. The line of credit was renewed in the second quarter of 2004 and expires May 2006. At September 30, 2004, our borrowing capacity on the line of credit was $2,996,000, which is based on a formula of accounts receivable and inventories. At September 30, 2004, we had not borrowed on this line of credit. As of September 30, 2004, we do not have any debt.
As shown below, at September 30, 2004, our contractual cash obligations totaled approximately $1,486,000.
Contractual Obligations
|
|
|
Payments Due by Period |
|
|||||||||||||
|
|
|
Total |
|
Less
than 1 |
|
2-3 Years |
|
4-5 Years |
|
After 5 years |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating leases |
|
$ |
1,486,000 |
|
$ |
147,000 |
|
$ |
848,000 |
|
$ |
346,000 |
|
$ |
145,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Line of credit |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total contractual cash obligations |
|
$ |
1,486,000 |
|
$ |
147,000 |
|
$ |
848,000 |
|
$ |
346,000 |
|
$ |
145,000 |
|
The amount for the year ending December 31, 2004 includes only payments to be made after September 30, 2004.
Net cash used in operating activities was $154,000 for the nine months ended September 30, 2004 as compared to $1,025,000 of cash provided by operating activities for the nine months ended September 30, 2003. The increase in cash used in operating activities is primarily due to a decrease in net income, an increase in accounts receivable, an increase in prepaid expenses and other current assets and a decrease in accounts payable and accrued liabilities, partially offset by an increase in depreciation and amortization and a decrease in inventories.
Net cash used in investing activities was $261,000 and $275,000 for the nine months ended September 30, 2004 and 2003, respectively. Our investing activities in 2004 consisted primarily of expenditures for property and equipment of $238,000, the purchase of intangible assets of $39,000, offset by proceeds from the sale of fixed assets of $16,000 as compared to expenditures for property and equipment of
15
$327,000, the purchase of intangibles of $18,000, offset by the proceeds from a related party loan of $70,000 for the nine months ended September 30, 2003.
The Company expects to purchase $300,000 of additional equipment in 2004. These expenditures will be primarily for equipment to be used by our new Engineered Products subsidiary.
In August 2004, we announced that our Board of Directors had approved the buy-back of up to an additional $500,000 of the Company’s outstanding common stock. This new share repurchase program is the sixth $500,000 buyback authorized by the Board of Directors. In all instances, we are retiring the shares. For the nine months ended September 30, 2004, we bought back a total of 215,000 common shares at a cost of $371,000. As of September 30, 2004, we have bought back a total of 2,323,800 common shares at a cost of $2,497,000 since the end of 1999.
During the nine months ended September 30, 2004, cash provided by financing activities was $488,000 as compared to cash used in financing activities of $449,000 for the same period of 2003. Our financing activities in 2004 consisted primarily of cash proceeds of $651,000 from the exercise of stock options and $208,000 from the exercise of warrants, partially offset by payments of $371,000 for the repurchase of common stock. Our financing activities in 2003 consisted primarily of net payments on our notes payable of $415,000 and payments of $287,000 for the repurchase of common stock, partially offset by the proceeds from the exercise of stock options of $253,000.
We believe that cash generated from operations, our current cash balance and the funds available under our credit facility, will be sufficient to satisfy our projected working capital needs and planned capital expenditures for the foreseeable future.
16
Based on the Company’s review of new accounting standards released during the quarter ended September 30, 2004, the Company did not identify any standards requiring adoption that would have a significant impact on its consolidated financial statements.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain information set forth in this report contains “forward-looking statements” within the meaning of federal securities laws. These forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. Additional forward-looking statements may be made by us from time to time. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of us, are also expressly qualified by these cautionary statements.
Our forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. However, we cannot assure you that management’s expectations; beliefs and projections will result or be achieved or accomplished. Our forward-looking statements apply only as of the date made. Except as required by law, we undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.
Where to find more information about us. We make available free of charge on our Internet website (http://www.alphaprotech.com) our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-K filed since our most recent Annual Report on Form 10-K and any amendments to such reports as soon as reasonably practicable following the electronic filing of such report with the SEC. In addition, we provide electronic or paper copies of our filings free of charge upon request.
We subcontract the manufacture of some products in China and Mexico. The Company’s results of operations could be negatively affected by factors such as changes in foreign currency exchange rates due to stronger economic conditions in those countries.
The Company doesn’t expect any significant effect on its results of operations from inflationary or interest and currency rate fluctuations. The Company does not hedge its interest rate or foreign exchange risks.
17
ITEM 4 CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of September 30, 2004. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2004.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarter ended September 30, 2004, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
18
PART II OTHER INFORMATION
ITEM 5 EXHIBITS AND REPORTS ON FORM 8-K
|
(a) Exhibits |
|
|
|
|
|
|
31.1 Certification Pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act, Signed by Chief Executive Officer (filed herewith) |
|
|
|
|
|
31.2 Certification Pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act, Signed by Chief Financial Officer (filed herewith) |
|
|
|
|
|
32.1 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, Signed by Chief Executive Officer (filed herewith) |
|
|
|
|
|
32.2 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, Signed by Chief Financial Officer (filed herewith) |
|
|
|
|
(b) Reports on Form 8-K |
|
|
|
|
|
|
No reports were filed on Form 8-K during the second quarter of 2004 |
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
Alpha Pro Tech, Ltd. |
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||||
|
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||||
|
DATE: |
November 1, 2004 |
|
|
BY: |
/S/ Sheldon Hoffman |
|
|
|
|
|
SHELDON HOFFMAN |
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CHIEF EXECUTIVE OFFICER |
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Alpha Pro Tech, Ltd. |
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DATE: |
November 1, 2004 |
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BY: |
/S/ Lloyd Hoffman |
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LLOYD HOFFMAN |
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CHIEF FINANCIAL OFFICER |
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