-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ERCiHXALC/sgJUsdrEwtPXi1nZdXnEkiIemXMRs4CYo517fHYoUlM0qo77iiK4o/ v4R5b8bZOLromL0YuCoE+Q== 0001047469-03-009185.txt : 20030319 0001047469-03-009185.hdr.sgml : 20030319 20030319111744 ACCESSION NUMBER: 0001047469-03-009185 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALPHA PRO TECH LTD CENTRAL INDEX KEY: 0000884269 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 631030494 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15725 FILM NUMBER: 03608655 BUSINESS ADDRESS: STREET 1: 60 CENTURIAN DR STREET 2: SUITE 112 CITY: MARKHAM ONTARIO CANA STATE: A6 BUSINESS PHONE: 9054790654 MAIL ADDRESS: STREET 1: 60 CENTURION DR STREET 2: STE 112 CITY: MARKHAM ON STATE: A6 FORMER COMPANY: FORMER CONFORMED NAME: BFD INDUSTRIES INC DATE OF NAME CHANGE: 19930328 10-K 1 a2105426z10-k.txt 10-K 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, 2002 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 / / The number of registrant's Common Shares outstanding as of March 5, 2003 was 22,477,807 The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 5, 2003 was $20,904,361 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 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or before April 30, 2003 (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. Yes /X/ No / / PART I CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements, annual reports and other periodic reports and filings of the Company filed with the Securities and Exchange Commission. 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. As a result, there can be no assurance that the Company's future results will not be materially different from those described herein as "believed," "anticipated," "estimated" or "expected," which reflect the current views of the Company with respect to future events. We caution readers that these forward-looking statements speak only as of the date hereof. The Company hereby expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which such statement is based. The SEC maintains an Internet site (http://www.sec.gov) which contains reports, proxy and information statements, and other information regarding the Company. The Company's Form 10-K filed with the SEC includes all exhibits required to be filed with the SEC. Copies of this Form 10-K, not including any of the exhibits listed under Item 16 of this Form 10-K, are available without charge upon request. Please contact the Company to request copies of this Form 10-K and for information as to the number of pages contained in each of the exhibits and to request copies of such exhibits (905-479-0654). We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ITEM 1. BUSINESS GENERAL ALPHA PRO TECH, LTD. (the "Company") was incorporated in the State of Delaware on July 1,1994 as a successor to a business that was organized in 1983. The Company's executive offices are located at 60 Centurian Drive, Suite 112, Markham Ontario, Canada L3R 9R2, and its telephone number is (905) 479-0654. The Company's web site is located at www.alphaprotech.com. Information contained on our web site is not part of this report. BUSINESS The Company develops, manufactures and markets disposable protective apparel and consumer products for the cleanroom, industrial, medical, dental, and consumer markets. The Company operates through three major segments : apparel; mask and shield; and extended care. The Company's products are primarily sold under the "Alpha Pro Tech" brand name, but are also sold for use under private label. 2 The Company's products are classified into four groups: Disposable protective apparel, consisting of a complete line of shoecovers, headcovers, gowns, coveralls and labcoats; 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. The Company's products as classified above are grouped into three segments. The Apparel segment, consisting of disposable protective apparel; the Mask/Shield segment, consisting of infection control products; and the Extended Care segment, consisting of extended care products and consumer products. The Company's current strategy is to not only grow its cleanroom business through its exclusive agreement with VWR Scientific Products, but to also focus on its other core businesses which include medical, dental, industrial safety and pet. As part of its current strategy, emphasis is being placed on developing innovative products and processes and sourcing raw materials and finished goods globally which are expected to increase capacity and gross margins. The Company's products are used primarily in hospitals, clean rooms, laboratories, industrial and dental offices and are distributed principally in the United States through a network presently consisting of 2 purchasing groups, 11 major distributors, approximately 935 additional distributors, approximately 21 independent sales representatives and a Company sales and marketing force of 15 people. PRODUCTS The Company's principal product groups and products include the following: Disposable Protective Apparel - Shoecovers - Headcovers - Gowns - Coveralls - Lab Coats Infection Control - Face Masks - Face Shields Extended Care - Unreal Lambskin - Medi-Pads - Hospital Pads - Wheelchair accessories - Bedrail Pads - Knee and Elbow protectors Consumer Products - Pet Bedding - Pet Toys 3 DISPOSABLE PROTECTIVE APPAREL The Apparel division was established April 1, 1994. The products manufactured include many different styles of shoecovers, headcovers, gowns, coveralls, lab coats, and other miscellaneous products. These are manufactured in Mexico and China. MASK AND EYE SHIELDS The facemasks come in a wide variety of filtration efficiencies and styles. The Company's patented Positive Facial Lock(R) feature provides a custom fit to the face to prevent blow-by for better protection. The Company's Magic Arch (R) feature holds the mask away from the nose and mouth, creating a comfortable breathing chamber. 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 eye shields are made from an optical-grade polyester film, and have a permanent anti-fog feature. This provides the wearer with extremely lightweight, distortion-free protection that can be worn for hours and will not fog up from humidity and/or perspiration. An important feature of all eye and face shields is that they are disposable. This eliminates a chance of cross infection between patients and saves hospitals the expense of sterilization after every use. EXTENDED CARE The Extended Care Division began with the Company's Unreal Lambskin(R) pressure sore and bed patient monitoring system product lines. The Unreal Lambskin (R) is used to prevent decubitus ulcers or bedsores on long term care patients. The bed patient monitoring system offers nurses an alarm system that can tell when patients try to get out of bed. This helps nursing and other extended and long term care facilities to comply with the Omnibus Reconciliation Act (OBRA) of 1987 mandate to work towards using no restraints to control residents or patients in these facilities. CONSUMER PRODUCTS The Consumer Product Division uses the Company's existing medical products and technologies for general consumer purposes. The Unreal Lambskin (R) 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 markets and the Industrial and Cleanroom markets; Unreal Lambskin and Medi-Pads are sold to the Extended Care market; Pet Bedding and Pet Toys are sold to the Consumer market; and automated shoecovers are sold to the Medical, Industrial and Cleanroom markets. 4 DISTRIBUTION The Company relies for the sale of its products primarily on a network of independent distributors which include the following: - - VWR Scientific - - Cardinal Healthcare - - McKesson HBOC - - Medline Industries - - Blain Supply - - Owens and Minor - - Cameron & Barkley - - Berkeley Medical Resources - - Henry Schein, Inc. - - Stauffer Glove & Safety - - Patterson Dental These eleven major United States distributors, to the best of the Company's knowledge, all sell competing products. Sales to our largest customer, VWR Scientific, represented 64.5% of total sales for 2002, 65.2% for 2001, and 62.5 % for 2000. The Company's agreements with its largest distributor provide for exclusive distribution rights with respect to eye and face shields, masks and disposable apparel for sale to the Industrial/Cleanroom market place. In order to retain such exclusivity, the distributor has agreed to purchase at least 95% of its prior year's distributor sales in the current year. Since the beginning of its relationship with such supplier, the minimum requirement has been met each year. 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 shipment and shipped within 30 days. The Company anticipates no problem in fulfilling orders as they are placed. MANUFACTURING The Company's mask production facility is located in a 24,500 square foot building at 903 West Center Street, Bldg. E, North Salt Lake, Utah. A 25,000 square foot facility located at 615 North Parker Drive, Janesville, Wisconsin is used to manufacture the Company's Extended Care products and consumer products including a line of pet beds and pet toys. The Company's disposable protective apparel production is located in two facilities, a 60,000 sq. ft. facility located at 1287 Fairway Drive in Nogales, Arizona which is used for cutting, warehousing and shipping and a 30,000 sq. ft. facility located at Ave. Abolardo L. Rodriguez y Novena, Benjamin Hill, Sonora Mexico, which is used for sewing. The lease on a third facility, a 19,500 square foot facility at Kennedy Drive #6 in Sonora, Mexico, expired on June 30, 2002 and was not renewed due to an emphasis on goods manufactured in China. 5 In 2001, the Company began subcontracting the manufacturing of some of its goods previously manufactured in Mexico to subcontractors in China. These goods are manufactured pursuant to the Company's specifications and quality assurance guidelines. Certain proprietary products are being made in China using material supplied by the Company. The Company has a material coating and automated shoecover facility of 36,000 square feet located at 2224 Cypress Street, 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 two-to-three month supply of product. COMPETITION The Company faces substantial competition from numerous other companies, including some companies with greater marketing and financial resources. The Company's major competitor in the medical and dental markets is Kimberly Clark of Fort Worth, Texas. Other large competitors include Minnesota Mining and Manufacturing Corporation (3M), Johnson & Johnson, White Knight/Precept, Allegiance Health Care Corp., and Medline Industries Inc. The Company's major competitors in the industrial and cleanroom market are Kimberly Clark, 3M, Kappler USA, Dupont and Allegiance Health Care. In the extended care market, Skil-care, Glenoit Mills and JT Posey Co. are the principal competitors, and in the consumer products market, principal competitors include Flexmat Corporation and Lazy Pet Company. Allegiance Health Care Corp. and Medline Industries Inc. are distributors of the Company's products. The Company is not required to obtain regulatory approval from the U.S. Food and Drug Administration ("FDA") with respect to the sale of its products. The Company's products are, however, subject to prescribed "good manufacturing practices" as defined by the FDA and its manufacturing facilities are inspected by the FDA every two years to assure compliance with such "good manufacturing practices." The Company is marketing a Particulate Respirator that meets the new O.S.H.A. respirator guidelines and which has been approved by the National Institute for Safety and Health (NIOSH). This product is designed to help prevent the breathing in of the tuberculosis virus. The Company does not anticipate that any federal, state and local provisions which have been or may be enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have any material effect on the capital expenditures, earnings or competitive position of its business. PATENTS AND TRADEMARKS PATENTS The Company's policy is to protect its intellectual property rights, products, designs and processes through the filing of patents in the United States and where appropriate in Canada and other foreign countries. At present, the Company has 14 United States patents relating to its MEDS, Add-A-Mask, Coverall, 1/2 Coverall, Combo Cone, Combo, Positive Facial Lock and Shieldmate products, a U.S. patent on the automated shoecover and the shoecover process and a fluid impervious and non-slip fabric for the Company's Aqua Trak shoecover. In addition, the Company has a U.S. patent on a method to fold and put 6 on sterile garments. 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 5 to 15 years before expiration. TRADEMARKS Many of the Company products are sold under various trademarks and trade names, including Alpha Pro Tech. 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 6, 2003, the Company had 230 employees, including 17 persons at its head office in Markham, Ontario, Canada; 20 persons at its facemask production facility in Salt Lake City, Utah, 22 persons at its Extended Care production facility in Janesville, Wisconsin; 32 persons at its cutting, warehouse and shipping facility in Nogales, Arizona; 106 at its sewing and shield assembly operation in Benjamin Hill, Mexico; 17 persons at its coating and automated shoecover facility in Valdosta, Georgia; a sales and marketing staff of 15 and 1 person in China. 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 2002 agreement was signed with moderate benefit increases. Wages are set by the Government of Mexico. The Company considers its relations with the union and its employees to be good. ITEM 2. PROPERTIES The Companies' Head Office is located at 60 Centurian Drive, Suite 112, Markham, Ontario L3R 9R2. The approximate monthly costs are $4,100 under a lease expiring February 28, 2006. Seventeen (17) employees of the Company, including the President, Alexander Millar, Chief Executive Officer, Sheldon Hoffman and Chief Financial Officer and Senior Vice President-Finance and Administration, Lloyd Hoffman work out of the head office. The Company manufactures its surgical face masks at 903 West Center Street, Building C, North Salt Lake, Utah. The monthly rental is $6,500 for 24,500 square feet. This lease expires June 30, 2004 with successive 2-year renewal options with rental rate increases based on the U.S. Consumer Price Index. A second manufacturing facility is located at 615 North Parker Drive, Janesville, Wisconsin. These premises of 35,000 square feet are leased for $7,600 monthly. The lease expires August 15, 2005. The Company's line of Extended Care and consumer products is manufactured at this facility. 7 The Apparel division has its cutting operation, warehousing, and shipping facility at 1287 Fairway Drive, Nogales, Arizona. The monthly rental is $16,500 for 60,000 square feet. This lease expires December 31, 2005. Sewing and shield assembly is done at Ave. Abelardo L. Rodriguez Y. Novena, Benjamin Hill, Sonora, Mexico. The monthly rental is $5,000 for 30,000 square feet. This lease expires June 23, 2004. The lease on a third facility, a 19,500 square foot plant at Kennedy Drive #6 in Sonora, Mexico expired on June 30, 2002 and was not renewed due to an emphasis on China manufactured goods. The Coating and Automated Shoecover Division has its facility at 2224 Cypress Street, Valdosta, Georgia. The monthly rental is $4,500 for 36,000 square feet. This lease expires June 1, 2005. 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 There are no pending legal proceedings against the Company. 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 2002. 8 PART II ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF SECURITIES The Common Shares of the Company trade on the American Stock Exchange (Amex) under the symbol "APT." The high and low range of bid prices for the Common Shares of the Company for the quarters indicated as reported by the Amex were as follows: 2001 First Quarter $ 1.063 $ 3.75 Second Quarter 1.01 1.40 Third Quarter 0.65 1.20 Fourth Quarter 0.84 1.05 2002 First Quarter $ 0.80 $ 1.23 Second Quarter 0.71 1.20 Third Quarter 0.75 1.04 Fourth Quarter 0.76 0.90 2003 First Quarter 0.84 1.05 (through March 5, 2003)
As of March 5, 2003 there were 493 shareholders of record, and approximately 2,800 beneficial owners. DIVIDEND POLICY The holders of the Company's Common Shares are entitled to receive such dividends as may be declared by the board of 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. 9 ITEM 6. SELECTED FINANCIAL DATA ALPHA PRO TECH, LTD. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 HISTORICAL STATEMENT OF OPERATIONS DATA Sales $ 21,354,000 $ 21,333,000 $ 21,130,000 $ 20,235,000 $ 17,985,000 Gross profit 10,523,000 9,086,000 8,892,000 7,985,000 7,252,000 Selling, general and administrative expenses 7,435,000 7,481,000 6,834,000 6,352,000 6,341,000 Depreciation and amortization 447,000 476,000 405,000 362,000 402,000 Gain on sale of assets (3,000) (98,000) - - - Interest expense (income) 24,000 21,000 (6,000) 124,000 193,000 ------------- ------------- ------------- ------------- ------------- Income before provision for income taxes 2,620,000 1,206,000 1,659,000 1,147,000 316,000 Provision for income taxes 955,000 420,000 199,000 18,000 - ------------- ------------- ------------- ------------- ------------- Net income $ 1,665,000 $ 786,000 $ 1,460,000 $ 1,129,000 $ 316,000 ============= ============= ============= ============= ============= Basic and diluted net income (loss) per share $ 0.07 $ 0.03 $ 0.06 $ 0.05 $ 0.01 ============= ============= ============= ============= ============= Basic weighted average shares outstanding 23,263,451 23,812,587 24,049,774 24,110,722 24,112,449 Diluted weighted average shares outstanding 23,770,248 24,452,699 25,580,880 24,450,382 24,238,866 HISTORICAL BALANCE SHEET DATA Current assets $ 9,222,000 $ 8,124,000 $ 7,386,000 $ 7,161,000 $ 6,230,000 Total assets 12,775,000 11,904,000 10,504,000 10,048,000 8,938,000 Current liabilities 2,172,000 1,679,000 1,571,000 2,783,000 2,579,000 Long-term liabilities 829,000 1,321,000 703,000 203,000 406,000 Shareholders' equity 9,774,000 8,904,000 8,230,000 7,062,000 5,953,000
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis together with our selected five-year financial data, our consolidated financial statements and the notes to our consolidated financial statements, which appear elsewhere in this report. CRITICAL ACCOUNTING POLICIES A summary of our significant accounting policies is included in Footnote 2 of our financial statements. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented in the financial statements. Critical accounting policies are those that may have a material impact on our financial statements and require management to exercise significant judgment due to a degree of uncertainty. Management believes our critical accounting polices include those addressing the recoverability and useful lives of assets and income taxes. RESULTS OF OPERATIONS FISCAL 2002 COMPARED TO FISCAL 2001 Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported net income for the year ended December 31, 2002 of $1,665,000 as compared to $786,000 for the year ended December 31, 2001, representing an increase of $879,000 or 111.8%. The increase is attributable to an increase in income before provision for income taxes of $1,414,000, partially offset by an increase in income taxes of $535,000. Fiscal 2002 was the fifth consecutive year of profitability and management expects to remain profitable in 2003. SALES Consolidated sales for the year ended December 31, 2002 increased slightly to $21,354,000 from $21,333,000 for the year ended December 31, 2001, representing an increase of $21,000 or 0.1%. The Company attributes the limited sales growth primarily to improved sales to the pharmaceutical market, offset by weakness in the medical market and the semiconductor clean room market. Apparel sales for the year ended December 31, 2002 were $14,613,000 as compared to $14,091,000 for the same period of 2001. The Apparel sales increase of $522,000 or 3.7% was due primarily to increased sales to new Industrial Safety distributors, partially offset by slightly lower sales to the Company's largest Industrial Safety/Clean Room distributor. Sales to this distributor continue to be negatively affected by a weak semiconductor clean room market. The Company expects a slow recovery over the next several months in the Semiconductor clean room market. Sales to the Company's largest distributor for the pharmaceutical market have been increasing, and as a result, management expects continued growth in this market segment. Mask and eye shield sales for the year ended December 31, 2002 decreased by $431,000 or 8.3% to $4,778,000 as compared to $5,209,000 for the same period in 2001. This is primarily the result of a decline in mask sales, partially offset by an increase in shield sales. Sales from the Company's Extended Care Unreal Lambskin(R) and other related products, which includes a line of pet beds, decreased by $70,000 or 3.4% to $1,963,000 for the year ended December 31, 2002 from 11 $2,033,000 for the year ended December 31, 2001. The decrease in sales is primarily the result of a decrease in medical fleece products, partially offset by an increase in pet bed sales. COST OF GOODS SOLD Cost of goods sold, excluding depreciation and amortization, decreased to $10,831,000 for the year ended December 31, 2002 from $ 12,247,000 for the same period in 2001 Gross profit margin increased to 49.3% for the year ended December 31, 2002 from 42.6% for the same period in 2001, due to an increase in the amount of products being manufactured in China at a lower cost. Management expects gross profit margin to continue to be strong over the next twelve months. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased slightly by $46,000 or 0.6% to $7,435,000 for the year ended December 31, 2002 from $7,481,000 for the year ended December 31, 2001. As a percentage of net sales, selling, general and administrative expenses decreased to 34.8% for the year ended December 31, 2002 from 35.1% for the same period in 2001. The decrease in selling, general and administrative expenses primarily consists of decreased travel, marketing and commission expenses of $164,000 and decreased general office, telecommunication, and insurance of $73,000; partially offset by increased professional fees and public company expenses of $190,000 and executive compensation of $157,000. The chief executive officer and president are entitled to a combined bonus equal to 10% of the pre-tax profits of the company. A bonus of $291,000 has been accrued in 2002 as compared to $134,000 in 2001. Management expects selling, general and administrative expenses to decrease as a percentage of net sales in 2003. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense decreased by $29,000 or 6.1% to $447,000 for the year ended December 31, 2002 from $476,000 for the same period in 2001. The decrease is primarily attributable to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which eliminated amortization of goodwill effective January 1, 2002. INCOME FROM OPERATIONS Income from operations increased by $1,512,000 or 133.9%, to $2,641,000 for the year ended December 31, 2002 as compared to income from operations of $1,129,000 for the year ended December 31, 2001. The increase in income from operations is due to an increase in gross profit of $1,437,000, a decrease in selling, general and administrative expenses of $46,000 and a decrease in depreciation and amortization of $29,000. NET INTEREST Net interest expense increased by $3,000 to $24,000 for the year ended December 31, 2002 from net interest expense of $21,000 for the year ended December 31, 2001 primarily due to decreased interest income, partially offset by lower interest rates and lower borrowings. Interest income decreased by $18,000 to $18,000 for the year ended December 31, 2002 from $36,000 in the same period of 2001 due to an overall decrease in interest rates. 12 INCOME BEFORE PROVISION FOR INCOME TAXES Income before provision for income taxes for the year ended December 31, 2002 was $2,620,000 as compared to $1,206,000 for the year ended December 31, 2001, representing an increase of $1,414,000 or 117.3%. This increase is attributable primarily to an increase in gross profit of $1,437,000, a decrease in selling, general and administrative expenses of $46,000, and a decrease in depreciation and amortization of $29,000, partially offset by an increase in other expense of $98,000. PROVISION FOR INCOME TAXES The provision for income taxes for the year ended December 31, 2002 was $955,000, as compared to $420,000 for the year ended December 31, 2001. The increase in income taxes is due to higher income in 2002. The estimated federal tax rate is approximately 34%. NET INCOME Net income for the year ended December 31, 2002 was $1,665,000 compared to net income of $786,000 for the year ended December 31, 2001, an increase of $879,000 or 111.8%. The net income increase of $879,000 is comprised of an increase in income from operations of $1,512,000, partially offset by an increase in other expense of $98,000 and an increase in the provision for income taxes of $535,000. FISCAL 2001 COMPARED TO FISCAL 2000 Alpha reported net income for the year ended December 31, 2001 of $786,000 as compared to $1,460,000 for the year ended December 31, 2000, representing a decrease of $674,000 or 46.2%. The decrease is attributable to a decrease in income before provision for income taxes of $453,000 discussed above and an increase in income taxes of $221,000. Fiscal 2001 was the fourth consecutive year of profitability and management expects to remain profitable in 2002. SALES Consolidated sales for the year ended December 31, 2001 increased to $21,333,000 from $21,130,000 for the year ended December 31, 2000, representing an increase of $203,000 or 1.0%. Consolidated sales for the eight months ended August 31, 2001 were 10.8% ahead of the same period in 2000. The Company attributes the lower than normal sales for the last four months of 2001 to the events of September 11th, which disrupted normal business and caused an economic downturn in most industries. Sales for the Apparel Division for the year ended December 31, 2001 were $14,091,000 as compared to $13,507,000 for the same period of 2000. The Apparel Division sales increase of $584,000 or 4.3% was due primarily to increased sales to the Company's largest distributor. This distributor reported record annual sales for the sixth consecutive year to its customers of the Company's products. Mask and eye shield sales decreased by $152,000 or 2.8% to $5,209,000 in 2001 from $5,361,000 in 2000. The decrease is primarily the result of a decline in industrial mask sales, partially offset by growth in medical mask and shield sales and dental mask sales. Sales from the Company's Extended Care and other related products, which includes a line of pet beds, decreased by $229,000 or 10.1% to $2,033,000 for the year ended December 31, 2001 from $2,262,000 for the year ended December 31, 2000. The decrease in sales of $229,000 is primarily the result of a decrease in sales of consumer fleece products including pet beds and a decrease in medical fleece product sales. 13 COST OF GOODS SOLD Cost of goods sold, excluding depreciation and amortization, increased to $12,247,000 for the year ended December 31, 2001 from $12,238,000 for the same period in 2000. As a percentage of net sales, cost of goods sold decreased to 57.4% in 2001 from 57.9% in 2000. Gross profit margin increased to 42.6% for the year ended December 31, 2001 from 42.1% for the same period in 2000. Gross profit margin in 2001 was negatively affected by severance payouts of approximately $80,000 to 86 employees on the closing of one facility in Mexico and a reduction of employees in a second facility in Mexico. The Company decided in the first half of 2001 to downsize its operations in Mexico in order to shift some of its manufacturing to China. Excluding the severance payouts, gross margin would have increased to 43.0% for the year ended December 31, 2001 from 42.1% for the same period in 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased by $647,000 or 9.5% to $7,481,000 for the year ended December 31, 2001 from $6,834,000 for the year ended December 31, 2000. As a percentage of net sales, selling, general and administrative expenses increased to 35.1% in the year ended December 31, 2001 from 32.3% for the same period in 2000. The increase in selling, general and administrative expenses primarily consists of increased payroll related costs of $350,000; increased travel and commission expenses of $73,000; increased rent and utilities of $78,000, and increased insurance and general office expenses of $72,000, offset by a reduction in executive compensation of $49,000. The chief executive officer and president are entitled to a combined bonus equal to 10% of the pre-tax profits of the company. A bonus of $134,000 has been accrued in 2001 as compared to $183,000 in 2000. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense increased by $71,000 to $476,000 for the year ended December 31, 2001 from $405,000 for the same period in 2000. The increase is primarily attributable to the acquisition of a new extrusion coating machine and new mask machines. INCOME FROM OPERATIONS Income from operations decreased by $524,000 or 31.7%, to $1,129,000 for the year ended December 31, 2001 as compared to income from operations of $1,653,000 for the year ended December 31, 2000. The decrease in income from operations is due to an increase in selling, general and administrative expenses of $647,000, an increase in depreciation and amortization of $71,000, partially offset by an increase in gross profit of $194,000. Income from operations for 2001 was adversely affected by two events. The first being total severance payouts and other costs of approximately $134,000 on the closing of one facility in Mexico and a reduction of employees in a second Mexican facility for a total reduction of 144 employees. The Company decided in the first half of 2001 to downsize its Mexican operations in order to shift some of its manufacturing to China. The second event was September 11th, which significantly affected sales for the last four months of the year. Consolidated sales for the eight months ended August 31, 2001 were 10.8% ahead of the same period in 2000. The Company attributes the lower than normal sales for the last four months of 2001 to the events of September 11th, which disrupted normal business and caused an economic downturn in most all industries. NET INTEREST Net interest expense increased by $27,000 to $21,000 for the year ended December 31, 2001 from net interest income of $6,000 for the year ended December 31, 2000. Interest expense increased by $3,000 to $14,000 for the year ended December 31, 2001 from $11,000 for the year ended December 31, 2000. The increase in net interest expense is due to higher borrowings, decreased interest income, partially 14 offset by lower interest rates, and a decreased number of outstanding capital leases. Interest income decreased by $25,000 to $36,000 for the year ended December 31, 2001 from $61,000 in the same period of 2000 due to an overall decrease in interest rates. INCOME BEFORE PROVISION FOR INCOME TAXES Income before provision for income taxes for the year ended December 31, 2001 was $1,206,000 as compared to $1,659,000 for the year ended December 31, 2000, representing a decrease of $453,000 or 27.3%. The net decrease of $453,000 for the year ended December 31, 2001, compared to the same period in 2000, is attributable primarily to an increase in selling, general and administrative expenses of $647,000 and an increase in depreciation and amortization of $71,000, partially offset by an increase in gross profit of $194,000 and a decrease in other expenses of $71,000. PROVISION FOR INCOME TAXES The provision for income taxes for the year ended December 31, 2001 was $420,000, as compared to $199,000 for the year ended December 31, 2000. The increase in income taxes is due to net operating losses (NOL's) from prior years being utilized during three quarters of 2000. The estimated tax rate is 34% in 2001. NET INCOME Net income for the year ended December 31, 2001 was $786,000 compared to net income of $1,460,000 for the year ended December 31, 2000, a decrease of $674,000 or 46.2%. The net income decrease of $674,000 is comprised of a decrease in income from operations of $524,000, of which $134,000 ($80,000 in cost of goods sold and $54,000 in SG&A) relates to severance payouts on downscaling Mexican facilities and moving manufacturing to China, an increase in net interest expense of $27,000 and an increase in income taxes of $221,000, partially offset by a decrease in other expenses of $98,000. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2002, the Company had cash of $2,879,000 and working capital of $7,050,000. During the year ended December 31, 2002, cash increased by $1,507,000 and accounts payable and accrued liabilities increased by $560,000. The increase in the Company's cash is due primarily to an increase in net income, a decrease in inventories, a decrease in prepaid expenses and other assets, and an increase in accounts payable and accrued liabilities, partially offset by an increase in accounts receivable, the purchase of property and equipment, net payments on notes payable and the repurchase of common stock. The Company has a $4,301,000 credit facility with a bank, consisting of a line of credit of up to $3,500,000, a term note of $225,000 and equipment loans of $576,000, with interest at prime plus 0.5% on the credit line, prime plus 1.0% on the term loan and an 8.5% fixed rate on the equipment loans. At December 31, 2002, the prime interest rate was 4.25%. The line of credit expires in May 2004, the term note was repaid in February 2003 and the equipment loans expire between November 2005 and June 2006. At December 31, 2002, the Company's unused portion of the line of credit was $2,438,000. Net cash provided by operating activities was $3,028,000 for the year ended December 31, 2002 compared to $1,360,000 for the same period of 2001. The increase in Company's generation of cash by operating activities for the year ended December 31, 2002 is primarily due to an increase in net income, a decrease in inventories, a decrease in prepaid expenses and other assets, an increase in accounts payable and accrued liabilities, and an increase in the net deferred tax liability, partially offset by an increase in accounts receivable. 15 Net cash provided by operating activities was $1,360,000 for the year ended December 31, 2001 compared to $2,091,000 for the same period of 2000. The Company's generation of cash from operating activities of $1,360,000 for the year ended December 31, 2001 is down primarily due to a decrease in net income, an increase in inventory, an increase in prepaid expenses and other assets partially offset by a decrease in accounts receivable. The Company's investing activities consisted primarily of expenditures for property and equipment and intangible assets, for a total of $182,000 for the year ended December 31, 2002 compared to $1,045,000 for the year ended December 31, 2001. The Company expects to purchase $200,000 of equipment in 2003. The Company's investing activities have consisted primarily of expenditures for property and equipment of $1,143,000 increases in intangible assets of $15,000 partially offset by proceeds of $113,000 on the sale of fixed assets, for a total of $1,045,000 for the year ended December 31, 2001 compared to $896,000 for the year ended December 31, 2000. During the year ended December 31, 2002, the Company's cash used in financing activities resulted primarily from payments on the Company's notes payable of $1,013,000, offset by proceeds from notes payable of $473,000 and from payments of $802,000 for the repurchase of common stock. During the year ended December 31, 2001, the Company's cash used in financing activities resulted primarily from the buy-back of 471,700 of Company's common shares at a cost of $506,000 and payments on capital leases of $32,000, partially offset by a net increase in the Company's loans payable of $461,000 and the exercise of options to purchase 76,000 shares of the Company's common stock for which the Company received $58,000. The Company announced in December 1999 that the Board of Directors approved the buy-back of up to $500,000 of its outstanding common stock. In January 2001, the Company announced that its Board of Directors had approved the buy-back of an additional $500,000 of the Company's outstanding common stock. As of December 31, 2001, the Company has bought back 877,900 common shares at a cost of $1,036,000. In October 2002, the Company announced that its 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 follows the completion of three previous $500,000 buyback programs authorized by the Board of Directors. In all instances, the Company is retiring the shares. In 2002, the Company bought back a total of 930,900 common shares at a cost of $802,000. As of December 31, 2002, the Company has bought back a total of 1,808,800 common shares at a cost of $1,838,000, which includes 399,800 common shares at a cost of $338,000 on the most recently approved buy back. 16 As of December 31, 2002, our line of credit of up to $3,500,000 was unused and we did not have any capital leases. As shown below, at December 31, 2002, the Company's contractual obligations totaled $1,513,000. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
BALANCE AT PAYMENTS DUE DECEMBER 31, --------------------------------------------------------- 2002 2003 2004 2005 2006 ------------ ------------ ------------ ------------ ------------ Term note $ 12,000 $ 12,000 $ - $ - $ - Equipment Loans 403,000 115,000 125,000 136,000 27,000 Operating Leases 1,098,000 429,000 383,000 276,000 10,000 ------------ ------------ ------------ ------------ ------------ Total Contractual Cash Obligations $ 1,513,000 $ 556,000 $ 508,000 $ 412,000 $ 37,000 ============ ============ ============ ============ ============
The Company believes that cash generated from operations, its current cash balance, and the funds available under its credit facility, will be sufficient to satisfy the Company's projected working capital and planned capital expenditures for the foreseeable future. NEW ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 143 ("SFAS 143"), Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. SFAS 143 requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset. Upon recognition of the liability, a corresponding asset is recorded and depreciated over the remaining life of the long-lived asset. The Company will adopt SFAS 143 effective January 1, 2003. The Company does not believe that the adoption of SFAS 143 will have a significant effect on its financial statements. In August 2001, the FASB issued SFAS No. 144 ("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. SFAS 144 requires that one accounting model be used for the long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions and resolves implementation issues. The adoption of SFAS 144 did not have a significant effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145 ("SFAS 145"), Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.13, and Technical Corrections. Among other things, SFAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be classified as extraordinary items. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early adoption permitted. The Company does not expect the adoption of this standard to have a significant impact on its financial statements. In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), Accounting for Costs Associated with Exit or Disposal Activities. Under SFAS 146, exit costs are recorded when the liability is incurred and not as a result of an entity's commitment to an exit plan. The statement addresses significant issues related to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.) SFAS 146 is effective for exit or disposal activities initiated 17 after December 31, 2002, with early adoption encouraged. The Company does not expect the adoption of this standard to have a significant impact on its financial statements. In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"), Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 148, which is effective for years ending after December 15, 2002, provides alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosure about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will continue to account for its stock based compensation according to the provisions of APB Opinion No. 25. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which elaborates on existing disclosure of most guarantees, and clarifies when a company must recognize an initial liability for the fair value of obligations it assumes under guarantee agreements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for the Company's fiscal year 2002. The Company does not expect the adoption of FIN 45 to have a material impact on the Company's financial statements. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an interpretation of ARB 51. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The Company is currently evaluating the impact of FIN 46 on its financial statements, but does not expect that there will be any material impact. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We manufacture some products in Mexico and subcontract the manufacture of some products in China. The Company's results of operations could be negatively effected 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. 18 CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION Certain information set forth in this Annual Report on Form 10-K contains "forward-looking statements" within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, exploration efforts, project development schedules, financing needs, plans or intentions relating to potential acquisitions 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. We may make additional forward-looking statements from time to time. All subsequent forward-looking statements, whether written or oral and whether made by us or on our behalf, are also expressly qualified by these cautionary statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements and the Report of Independent Accountants thereon are set forth under Item 15 (a) (1) of this Form 10-K. QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended December 31, 2002 and 2001 is presented below: 2002 QUARTERS
1ST 2ND 3RD 4TH Revenue $ 5,203,000 $ 5,805,000 $ 5,013,000 $ 5,333,000 Gross Profit 2,425,000 3,071,000 2,533,000 2,494,000 Net Income 421,000 668,000 362,000 214,000 Basic and Diluted Income per Share 0.02 0.03 0.02 0.01
2001 QUARTERS
1ST 2ND 3RD 4TH Revenue $ 5,435,000 $ 6,003,000 $ 5,069,000 $ 4,826,000 Gross Profit 2,381,000 2,530,000 2,145,000 2,030,000 Net Income 300,000 265,000 101,000 120,000 Basic and Diluted Income per Share 0.01 0.01 0.00 0.01
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 19 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, 2003), a definitive proxy statement pursuant to Regulation 14A, which involves the election of directors at the annual shareholders' meeting of the Company which is expected to be held in May of 2003. ITEM 14. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. This information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our principal executive officer and principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures within 90 days of the filing date of this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be disclosed in our periodic filings. CHANGES IN INTERNAL CONTROLS There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the foregoing paragraph. 20 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 and 2 Financial Statements 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 EXHIBIT 99.1: CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER (ANNEXED HERETO) EXHIBIT 99.2 CERTIFICATION BY THE CHIEF FINANCIAL OFFICER (ANNEXED HERETO) 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 of Incorporation of Alpha Pro Tech, Ltd. dated June 15, 1994* (g) Application for Certificate of Registration and Articles of Continuance- State of Wyoming - Filed June 24, 1994 * (h) Certificate of Registration and Articles of Continuance of Secretary of State, State of Wyoming, dated June 24, 1994 * (i) Certificate of Secretary of State of Wyoming dated June 24, 1995 * (j) Certificate of Amendment of Certificate of Incorporation of Alpha Pro Tech, Ltd., dated June 24, 1994 * (k) Article of Merger of BFD Industries, Inc., a Wyoming Corporation and Alpha Pro Tech, Ltd., a Delaware Corporation, effective July 1, 1994 * (l) Certificate of Ownership and Merger which merges BFD Industries with and into Alpha Pro Tech, Ltd., a Delaware Corporation effective July 1, 1994 * (4) (a) Form of Common Stock Certificate ** (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) BFD Industries Limited Partnership Agreement between 881216 Ontario Inc. and Bernard Charles Sherman dated May 17, 1990 21 (f) Asset Purchase Agreement between the Company and the BFD Industries Limited Partnership dated May 17, 1990 (g) Purchase Agreement between the Company, Bernard Charles Sherman and Apotex, Inc. dated June 21, 1991 and amendment thereto made August 30, 1991 (h) Professional Services Agreement between the Company and Quanta Corporation dated September, 1991 (i) Sales and Marketing Agreement between the Company and MDC Corp., dated October 4, 1991 (j) National Account Marketing Agreement between the Company and National Contracts, Inc. dated October 7, 1991 (k) Group Purchasing Agreement between the Company and Premier Hospitals Alliance, Inc. dated November 1, 1991 (l) Letter of Intent between the Company and the shareholders of Alpha Pro Tech, Inc. dated December 11, 1991 and amendment thereto dated February 19, 1992 (m) Group Purchasing Agreement between the Company and AmeriNet Incorporated dated January, 1992 (n) Group Purchasing Agreement between the Company and Magnet, Inc. (o) Share Purchase Agreement re Acquisition of Alpha Pro Tech, Inc. (p) VWR Scientific Products Corporation Distribution Agreement dated January 1, 2000**** (q) Business Relationship/Confidentially Agreement between the Company and McDonald's Corporation dated February 1, 2000 and First Amendment thereto ***** - ---------- Unless otherwise noted, all of the foregoing exhibits are incorporated by reference to Form 10 Registration Statement (File No. 0-1983) filed on February 25, 1992. * Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 019893) ** Incorporated by reference to Registration Statement on Form S-1, (File No. 33-93894) which became effective August 10, 1995 *** Incorporated by reference to Post-Effective Amendment No. 1 filed January 30, 1997 to Registration Statement on Form S-1 (File No,. 33-93894) **** Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 01-9893) ***** Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 01-9893) 22 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has fully caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALPHA PRO TECH, LTD. DATE: March 5, 2003 BY: /s/ Sheldon Hoffman ------------------------------ Sheldon Hoffman Chief Executive Officer and Director DATE: March 5, 2003 BY: /s/ Lloyd Hoffman ------------------------------ Lloyd Hoffman Chief Financial Officer and Senior Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registration and in the capacities indicated on March 5, 2003. /s/ Donald E. Bennett Hr. ------------------------- 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 /s/ Russ Manock --------------- Russ Manock, Director 23 CERTIFICATIONS I, Sheldon Hoffman, Chief Executive Officer and Director, certify that: 1. I have reviewed this annual report on Form 10-K of Alpha Pro Tech, LTD; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: March 5, 2003 BY: /s/ Sheldon Hoffman ------------------------------ Sheldon Hoffman Chief Executive Officer and Director 24 CERTIFICATIONS I, Lloyd Hoffman, Chief Financial Officer and Senior Vice President, certify that: 1. I have reviewed this annual report on Form 10-K of Alpha Pro Tech, LTD; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; e) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and f) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: March 5, 2003 BY: /s/ Lloyd Hoffman ------------------------------ Lloyd Hoffman Chief Financial Officer and Senior Vice President 25 ALPHA PRO TECH, LTD. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Consolidated Financial Statements: Report of Independent Accountants................................................F-2 Consolidated Balance Sheets at December 31, 2002 and 2001........................F-3 Consolidated Statements of Operations for the three years in the period ended December 31, 2002..........................................F-4 Consolidated Statement of Shareholders' Equity for the three years in the period ended December 31, 2002..............................F-5 Consolidated Statements of Cash Flows for the three years in the period ended December 31, 2002.................................................F-6 Notes to Consolidated Financial Statements.......................................F-7 Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for the three years in the period ended December 31, 2002................................................F-21
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 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 accompanying index present fairly, in all material respects, the financial position of Alpha Pro Tech, Ltd. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah February 27, 2003 F - 2 ALPHA PRO TECH, LTD. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 2001 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 2,879,000 $ 1,372,000 Accounts receivable, net of allowance for doubtful accounts of $37,000 and $34,000 at December 31, 2002 and 2001, respectively 2,286,000 2,188,000 Inventories, net 3,358,000 3,581,000 Prepaid expenses and other current assets 334,000 516,000 Deferred income taxes 365,000 467,000 ------------- ------------- Total current assets 9,222,000 8,124,000 Property and equipment, net 3,283,000 3,535,000 Intangible assets, net 179,000 189,000 Notes receivable and other assets 91,000 56,000 ------------- ------------- Total assets $ 12,775,000 $ 11,904,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 453,000 $ 882,000 Accrued liabilities 1,592,000 603,000 Notes payable, current portion 127,000 185,000 Capital leases, current portion - 9,000 ------------- ------------- Total current liabilities 2,172,000 1,679,000 Notes payable, less current portion 288,000 770,000 Deferred income taxes 541,000 551,000 ------------- ------------- Total liabilities 3,001,000 3,000,000 ------------- ------------- Commitments and contingencies (Notes 7 and 10) Shareholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized, 22,625,907 and 23,546,809 issued and outstanding at December 31, 2002 and 2001, respectively 226,000 235,000 Additional paid-in capital 23,134,000 23,920,000 Accumulated deficit (13,586,000) (15,251,000) ------------- ------------- Total shareholders' equity 9,774,000 8,904,000 ------------- ------------- Total liabilities and shareholders' equity $ 12,775,000 $ 11,904,000 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F - 3 ALPHA PRO TECH, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 2001 2000 ------------- ------------- ------------- Sales $ 21,354,000 $ 21,333,000 $ 21,130,000 Cost of goods sold, excluding depreciation and amortization shown below 10,831,000 12,247,000 12,238,000 ------------- ------------- ------------- Gross profit 10,523,000 9,086,000 8,892,000 Expenses: Selling, general and administrative 7,435,000 7,481,000 6,834,000 Depreciation and amortization 447,000 476,000 405,000 ------------- ------------- ------------- Income from operations 2,641,000 1,129,000 1,653,000 Other income (expense) Gain on sale of assets 3,000 98,000 - Interest, net (24,000) (21,000) 6,000 ------------- ------------- ------------- Income before provision for income taxes 2,620,000 1,206,000 1,659,000 Provision for income taxes 955,000 420,000 199,000 ------------- ------------- ------------- Net income $ 1,665,000 $ 786,000 $ 1,460,000 ============= ============= ============= Basic income per share $ 0.07 $ 0.03 $ 0.06 ============= ============= ============= Diluted income per share $ 0.07 $ 0.03 $ 0.06 ============= ============= ============= Basic weighted average shares outstanding 23,263,451 23,812,587 24,049,774 ============= ============= ============= Diluted weighted average shares outstanding 23,770,248 24,452,699 25,580,880 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F - 4 ALPHA PRO TECH, LTD. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN ACCUMULATED SHARES STOCK CAPITAL DEFICIT TOTAL ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1999 24,079,949 $ 241,000 $ 24,318,000 $ (17,497,000) $ 7,062,000 Options exercised 236,667 2,000 212,000 - 214,000 Shares repurchased (374,100) (4,000) (502,000) - (506,000) Net income - - - 1,460,000 1,460,000 ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2000 23,942,516 239,000 24,028,000 (16,037,000) 8,230,000 Options exercised 76,000 1,000 57,000 - 58,000 Shares repurchased (471,707) (5,000) (501,000) - (506,000) Income tax benefit from stock options exercised - - 336,000 - 336,000 Net income - - - 786,000 786,000 ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2001 23,546,809 235,000 23,920,000 (15,251,000) 8,904,000 Options exercised 10,000 - 7,000 - 7,000 Shares repurchased (930,902) (9,000) (793,000) - (802,000) Net income - - - 1,665,000 1,665,000 ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2002 22,625,907 $ 226,000 $ 23,134,000 $ (13,586,000) $ 9,774,000 ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F - 5 ALPHA PRO TECH, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002 2001 2000 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 1,665,000 $ 786,000 $ 1,460,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 447,000 476,000 405,000 Gain on sale of assets (3,000) (98,000) - Write off of intangible assets - - 9,000 Deferred taxes 92,000 (6,000) 93,000 Changes in assets and liabilities: Restricted cash - - 18,000 Accounts receivable (98,000) 1,171,000 (107,000) Inventories 223,000 (1,182,000) 558,000 Prepaid expenses and other assets 142,000 127,000 150,000 Accounts payable and accrued liabilities 560,000 86,000 (495,000) ------------- ------------- ------------- Net cash provided by operating activities 3,028,000 1,360,000 2,091,000 ------------- ------------- ------------- Cash flows from investing activities: Purchase of property and equipment (174,000) (1,143,000) (872,000) Proceeds from sale of assets 3,000 113,000 - Cost of intangible assets (11,000) (15,000) (24,000) ------------- ------------- ------------- Net cash used in investing activities (182,000) (1,045,000) (896,000) ------------- ------------- ------------- Cash flows from financing activities: Proceeds from the exercise of stock options 7,000 58,000 214,000 Payments for the repurchase of common stock (802,000) (506,000) (506,000) Proceeds from notes payable 473,000 820,000 3,311,000 Repayments on notes payable (1,013,000) (359,000) (3,738,000) Payments for/proceeds from related party loans 5,000 (55,000) - Principal repayments on capital leases (9,000) (32,000) (130,000) ------------- ------------- ------------- Net cash used in financing activities (1,339,000) (74,000) (849,000) ------------- ------------- ------------- Increase in cash and cash equivalents 1,507,000 241,000 346,000 Cash and cash equivalents, beginning of period 1,372,000 1,131,000 785,000 ------------- ------------- ------------- Cash and cash equivalents, end of period $ 2,879,000 $ 1,372,000 $ 1,131,000 ============= ============= ============= Supplemental disclosure of cash flow information: Cash paid for interest $ 42,000 $ 52,000 $ 57,000 ============= ============= ============= Cash paid for income taxes $ 65,000 $ 163,000 $ 275,000 ============= ============= =============
NON-CASH INVESTING AND FINANCING ACTIVITY: 2002 None 2001 Reduction of income tax payable and increase in additional paid-in capital due to tax benefit from stock options exercised of $336,000. 2000 None The accompanying notes are an integral part of these consolidated financial statements. F - 6 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, shoecover and apparel products and woundcare (fleece) products. Most of the Company's disposable apparel, mask and shield products and woundcare products are distributed to medical, dental, industrial and clean room markets, predominantly in the United States of America. 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, DPI De Mexico (DPI). All significant intercompany accounts and transactions have been eliminated. INVENTORIES Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (computed on a standard cost basis, which approximates average cost) or market. Provision is made for slow-moving, obsolete or unusable inventory. PROPERTY AND EQUIPMENT Property and equipment is stated at cost less accumulated depreciation and amortization and is depreciated and amortized using the straight-line method over the shorter of the respective useful lives of the assets or the related lease terms as follows: Property and equipment 9-25 years Office furniture and equipment 2-7 years Leasehold improvements 4-6 years Vehicles 5 years
Expenditures for renewals and betterments are capitalized whereas costs of maintenance and repairs are charged to operations in the period incurred. INTANGIBLE ASSETS The excess of purchase price over the fair value of assets acquired and liabilities assumed in acquisition transactions is classified as goodwill. Effective January 1, 2002, the Company adopted SFAS No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. As prescribed by SFAS 142, goodwill is not amortized but rather is tested for impairment (Note 5). Patent rights and trademarks are recorded at cost and are amortized using the straight-line method over their estimated useful lives of 8-17 years. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The Company believes the future cash flows to be received from its long-lived assets exceed the asset's carrying value, and accordingly, the Company has not recognized any impairment losses for the years ended December 31, 2002, 2001 and 2000. F - 7 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCK OPTIONS AND WARRANTS ISSUED FOR SERVICES Options and warrants to purchase common stock that are granted to non-employees in exchange for services are valued at their estimated fair value at the measurement date and are expensed over the period the services are rendered. Effective January 1, 2000, the Company's policy is to no longer grant stock options and warrants to non-employees. REVENUE RECOGNITION Sales are recognized when goods are shipped to customers, at which time title and risk of loss passes. Sales are reduced for anticipated sales returns and allowances. STOCK BASED COMPENSATION The Company accounts for stock options granted under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The Company's stock option plans are described more fully in Note 8. No stock-based employee compensation is reflected in net income, as all options granted under the Company's plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, to stock-based employee compensation.
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 Net income, as reported $ 1,665,000 $ 786,000 $ 1,460,000 Deduct: Total stock-based employee compensation expense determined using the fair value method for all awards, net of related tax effects (336,000) (281,000) (238,000) --------------- --------------- --------------- Pro forma net income $ 1,329,000 $ 505,000 $ 1,222,000 =============== =============== =============== Net income per share: Basic - as reported $ 0.07 $ 0.03 $ 0.06 Basic - pro forma 0.06 0.02 0.05 Diluted - as reported 0.07 0.03 0.06 Diluted - pro forma 0.06 0.02 0.05
INCOME TAXES The Company accounts for income taxes in accordance with SFAS No.109 ("SFAS 109"), Accounting for income taxes. This statement requires an asset and liability approach for accounting for income taxes. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not such assets will be realized. F - 8 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NET INCOME PER SHARE The following table provides a reconciliation of both the net income and the number of shares used in the computations 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 YEAR ENDED DECEMBER 31, 2002 2001 2000 Net income (Numerator) $ 1,665,000 $ 786,000 $ 1,460,000 Shares (Denominator): Basic weighted average shares outstanding 23,263,451 23,812,587 24,049,774 Add: Dilutive effect of stock options and warrants 506,797 640,112 1,531,106 --------------- --------------- --------------- Diluted weighted average shares outstanding $ 23,770,248 $ 24,452,699 $ 25,580,880 =============== =============== =============== Net income per share: Basic $ 0.07 $ 0.03 $ 0.06 Diluted $ 0.07 $ 0.03 $ 0.06
TRANSLATION OF FOREIGN CURRENCIES Transactions in foreign currencies during the reporting periods are translated into U.S. dollars 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. Transaction gains or losses on foreign currencies are reflected in net income for the periods presented and are not significant in amount. RECLASSIFICATIONS Certain 2001 and 2000 balances have been reclassified to conform to the current year's presentation. CASH EQUIVALENTS The Company considers all highly liquid instruments with an original maturity date of three months or less to be cash equivalents. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. Such costs are not material. ADVERTISING The Company expensed advertising costs as incurred. These costs were included in selling, general and administrative expenses. USE OF ESTIMATES The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires 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. F - 9 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments including cash, accounts receivable, notes receivable, accounts payable and notes payable approximate their respective book values at December 31, 2002 and 2001. NEW ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 143 ("SFAS 143"), Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. SFAS 143 requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset. Upon recognition of the liability, a corresponding asset is recorded and depreciated over the remaining life of the long-lived asset. The Company will adopt SFAS 143 effective January 1, 2003. The Company does not believe that the adoption of SFAS 143 will have a significant effect on its financial statements. In August 2001, the FASB issued SFAS No. 144 ("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. SFAS 144 requires that one accounting model be used for the long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions and resolves implementation issues. The adoption of SFAS 144 did not have a significant effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145 ("SFAS 145"), Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.13, and Technical Corrections. Among other things, SFAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be classified as extraordinary items. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early adoption permitted. The Company does not expect the adoption of this standard to have a significant impact on its financial statements. In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), Accounting for Costs Associated with Exit or Disposal Activities. Under SFAS 146, exit costs are recorded when the liability is incurred and not as a result of an entity's commitment to an exit plan. The statement addresses significant issues related to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.) SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002, with early adoption encouraged. The Company does not expect the adoption of this standard to have a significant impact on its financial statements. In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"), Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148, which is effective for years ending after December 15, 2002, provides alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosure about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will continue to account for its stock based compensation according to the provisions of APB Opinion No. 25. F - 10 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which elaborates on existing disclosure of most guarantees, and clarifies when a company must recognize an initial liability for the fair value of obligations it assumes under guarantee agreements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of the FIN 45 are effective for the Company's fiscal year 2002. The Company does not expect the adoption of FIN 45 to have a material impact on the Company's financial statements. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an interpretation of ARB 51. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The Company is currently evaluating the impact of FIN 46 on its financial statements, but does not expect that there will be any material impact. 3. INVENTORIES Inventories consist of the following:
DECEMBER 31, 2002 2001 Raw materials $ 1,751,000 $ 2,165,000 Work in process 85,000 100,000 Finished goods 1,854,000 1,628,000 ============= ============= 3,690,000 3,893,000 Less reserve for obsolescence (332,000) (312,000) ------------- ------------- $ 3,358,000 $ 3,581,000 ============= =============
F - 11 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, 2002 2001 Buildings $ 355,000 $ 355,000 Machinery and equipment 4,650,000 4,557,000 Office furniture and equipment 727,000 661,000 Leasehold improvements 137,000 131,000 ------------- ------------- 5,869,000 5,704,000 Less accumulated depreciation and amortization (2,586,000) (2,169,000) ------------- ------------- $ 3,283,000 $ 3,535,000 ============= =============
The following assets (included in the above amounts) are under capital lease obligations:
DECEMBER 31, 2002 2001 Machinery and equipment $ - $ 146,000 Office furniture and equipment 22,000 ------------- ------------- - 168,000 Less accumulated amortization - (119,000) ------------- ------------- $ - $ 49,000 ============= =============
Depreciation and amortization expense of property and equipment was $426,000, $396,000 and $357,000 for the years ended December 31, 2002, 2001 and 2000, respectively. F - 12 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, 2002 2001 Goodwill $ 206,000 $ 206,000 Patents and trademarks 203,000 192,000 ------------- ------------- 409,000 398,000 Less accumulated amortization (230,000) (209,000) ------------- ------------- $ 179,000 $ 189,000 ============= =============
Amortization expense of intangible assets was $21,000, $80,000 and $48,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The following table presents what reported net income and earnings per share would have been for the years ended December 31, 2001 and 2000 under SFAS 142:
FOR THE YEARS ENDED DECEMBER 31, 2001 2000 ------------ ------------ Reported net income $ 786,000 $ 1,460,000 Add back: Goodwill amortization, net of tax of $9,000 and $9,000 respectively, for the years ended December 31, 2001 and 2000 17,000 17,000 ------------ ------------ Adjusted net income $ 803,000 $ 1,463,000 ------------ ------------ BASIC EARNINGS PER SHARE: Reported net income $ 0.03 $ 0.06 Add back: Goodwill amortization, net of tax of $9,000 and $9,000 respectively, for the years ended December 31, 2001 and 2000 - - ------------ ------------ Adjusted net income $ 0.03 $ 0.06 ------------ ------------ DILUTED EARNINGS PER SHARE: Reported net income $ 0.03 $ 0.06 Add back: Goodwill amortization, net of tax of $9,000 and $9,000 respectively, for the years ended December 31, 2001 and 2000 - - ------------ ------------ Adjusted net income $ 0.03 $ 0.06 ------------ ------------
Future estimated amortization expense is as follows: 2003 $ 22,000 2004 22,000 2005 22,000 2006 22,000 2007 22,000 ------------ $ 110,000 ============
F - 13 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. ACCRUED LIABILITIES Accrued liabilities consist of the following:
DECEMBER 31, 2002 2001 Payroll expenses $ 135,000 $ 119,000 Commissions payable 444,000 289,000 Accrued rebates and other 268,000 160,000 Income taxes payable 745,000 35,000 ------------- ------------- $ 1,592,000 $ 603,000 ============= =============
7. NOTES PAYABLE In December 1997, the Company, through its wholly owned subsidiary APT, entered into a three-year credit facility with an asset-based lender. The facility has been subsequently extended until May 15, 2003. The Company intends to renew this facility. Pursuant to the terms of the credit facility, the Company has a line of credit for up to $3,500,000 based on eligible accounts receivable and inventory, of which $0 and $355,000 was outstanding and $2,438,000 and $1,911,000 was available at December 31, 2002 and 2001, respectively. The credit facility bears interest at prime plus .5%, which totaled 4.75% and 5.25% at December 31, 2002 and 2001, respectively and is collateralized by accounts receivable, inventory, trademarks, patents, property and equipment, and 66.67% of the issued and outstanding shares of DPI. Under the terms of the facility, the Company pays a 0.5% loan fee annually. The Company also has a $225,000 term note collateralized by equipment, which matures in January 2003. The Company's outstanding balance on this term note was $12,000 and $92,000 at December 31, 2002 and 2001, respectively. The term note is due in monthly installments of $7,000 with interest at prime plus 1.00%, which totaled 5.25% and 5.75% at December 31, 2002 and 2001, respectively. The Company has a $304,000 equipment loan. The outstanding balance on this loan was $206,000 and $263,000 at December 31, 2002 and 2001, respectively. This note is due in monthly installments of $7,000 with a fixed interest rate of 8.5%, maturing November 2005. The Company obtained a $156,000 equipment loan in April 2001 and the outstanding balance at December 31, 2002 and 2001 was $111,000 and $139,000, respectively. Payments are due in monthly installments of $3,000 with a fixed interest rate of 8.5%, maturing April 2006. The Company obtained a $116,000 equipment loan in June 2001 and the outstanding balance at December 31, 2002 and 2001 was $86,000 and $106,000 respectively. Payments are due in monthly installments of $2,000 with a fixed interest rate of 8.5%, maturing June 2006. F - 14 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future maturities of notes payable are as follows: 2003 $ 127,000 2004 125,000 2005 136,000 2006 27,000 2007 - ------------ $ 415,000 ============
8. SHAREHOLDERS' EQUITY WARRANT ACTIVITY For each of the three years ended December 31, 2002, the Company had outstanding warrants to purchase 119,048 shares of common stock at an exercise price of $1.75 per share. No warrants have been exercised during the three years ended December 31, 2002. All warrants expire on July 1, 2004. OPTION ACTIVITY During 1993, the Company adopted stock option plans for employees and directors of the Company. In aggregate, as of December 31, 2002, 4.8 million options were reserved for issuance under these plans and approximately 4.3 million options have been granted. Option plan grants vest immediately and expire no later than the fifth anniversary of the date of grant. The exercise price of the options is determined based on the fair value of the stock on the date of grant. The following table summarizes the option activity for the three years ended December 31, 2002:
WEIGHTED AVERAGE EXERCISE PRICE SHARES PER OPTION Options outstanding, December 31, 1999 3,423,000 $ 0.88 Granted to employees 640,000 $ 1.28 Exercised (237,000) $ 0.91 Canceled/Expired/Forfeited (564,000) $ 1.34 ------------ ------------ Options outstanding, December 31, 2000 3,262,000 $ 0.87 Granted to employees 1,008,000 $ 1.01 Exercised (76,000) $ 0.76 Canceled/Expired/Forfeited (688,000) $ 0.97 ------------ ------------ Options outstanding, December 31, 2001 3,506,000 $ 0.89 Granted to employees 1,510,000 $ 0.83 Exercised (10,000) $ 0.67 Canceled/Expired/Forfeited (1,141,000) $ 0.79 ------------ ------------ Options outstanding, December 31, 2002 3,865,000 $ 0.90 ============ ============
All options are fully exercisable. F - 15 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following summarizes information about stock options outstanding and exercisable at December 31, 2002:
OPTIONS OUTSTANDING AVERAGE EXERCISE AVERAGE TERM PRICE SHARES PRICE REMAINING $0.49 to $0.75 657,000 $ 0.52 0.95 $0.76 to $0.99 2,117,000 $ 0.86 4.41 $1.00 to $1.48 1,091,000 $ 1.22 2.59 ------------- ------------- ------------- 3,865,000 $ 0.90 3.31 ------------- ------------- -------------
The fair value of stock-based awards to employees/directors is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
YEAR ENDED DECEMBER 31, 2002 2001 2000 Risk-free interest rate 2.72%-4.69% 3.87-4.64% 6.63% Expected life 5 years 5 years 5 years Expected volatility 80% 87% 93% Expected dividend yield 0% 0% 0%
The weighted-average grant date fair values of employee/director options granted during the years ended December 31, 2002, 2001 and 2000 were $0.34, $0.46 and $0.62, respectively. 9. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, 2002 2001 2000 Current $ 863,000 $ 426,000 $ 106,000 Deferred 92,000 (6,000) 93,000 ------------ ------------ ------------ $ 955,000 $ 420,000 $ 199,000 ============ ============ ============
F - 16 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31, 2002 2001 Inventory reserve for obsolescence $ 113,000 $ 106,000 Intangible assets 71,000 68,000 Alternative minimum tax credits 16,000 88,000 State income taxes - 28,000 Other 165,000 177,000 ------------ ------------ Gross deferred tax assets 365,000 467,000 ------------ ------------ Property and Equipment (476,000) (531,000) State income taxes (21,000) - Other (44,000) (20,000) ------------ ------------ Gross deferred tax liabilities (541,000) (551,000) ------------ ------------ Net deferred tax liability $ (176,000) $ (84,000) ============ ============
The net deferred tax liability is reflected in the balance sheets as follows:
DECEMBER 31, 2002 2001 Current deferred tax asset $ 365,000 $ 467,000 Long-term deferred tax liability (541,000) (551,000) ------------ ------------ $ (176,000) $ (84,000) ============ ============
The provision for income taxes differs from the amount that would be obtained by applying the United States statutory rate to income before income taxes as a result of the following:
YEAR ENDED DECEMBER 31, 2002 2001 2000 Income taxes based on US statutory rate (34%) $ 891,000 $ 410,000 $ 564,000 Non-deductible meals and entertainment 11,000 13,000 12,000 Decrease in valuation allowance - - (539,000) Foreign tax credits (29,000) - - State taxes 93,000 28,000 19,000 Other (11,000) (31,000) 143,000 ------------ ------------ ------------ $ 955,000 $ 420,000 $ 199,000 ============ ============ ============
F - 17 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. LEASE COMMITMENTS AND OBLIGATIONS The Company leases manufacturing facilities under non-cancelable operating leases expiring through December 31, 2005. The following summarizes future minimum lease payments required under non-cancelable operating leases:
OPERATING YEAR ENDING DECEMBER 31, LEASES 2003 $ 429,000 2004 383,000 2005 276,000 2006 7,000 2007 3,000 ------------ Future minimum lease payments $ 1,098,000 ============
Total rent expense incurred by the Company under operating leases for the years ended December 31, 2002, 2001 and 2000 was $593,000, $637,000 and $584,000, respectively. 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. Bonuses of $291,000, $134,000 and $183,000 were accrued for the years ended December 31, 2002, 2001 and 2000, respectively. 11. ACTIVITY OF BUSINESS SEGMENTS The Company operates through three major segments: Apparel, consisting of a complete line of disposable clothing such as overalls, frocks, lab coats, hoods, bouffant caps, and shoecovers (including the Aqua Track and spunbond shoecovers); Mask and shields, consisting principally of medical, dental and industrial masks and eye shields; and extended care, consisting principally of fleece and other related products which includes a line of pet beds. The accounting policies of the segments are the same as those described previously under "Summary of Significant Accounting Policies." 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:
YEAR ENDED DECEMBER 31, 2002 2001 2000 Apparel $ 14,613,000 $ 14,091,000 $ 13,507,000 Mask and shield 4,778,000 5,209,000 5,361,000 Extended care 1,963,000 2,033,000 2,262,000 ------------ ------------ ------------ Consolidated total net sales $ 21,354,000 $ 21,333,000 $ 21,130,000 ============ ============ ============
F - 18 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of total segment income to total consolidated net income.
YEAR ENDED DECEMBER 31, 2002 2001 2000 Apparel $ 4,638,000 $ 2,948,000 $ 2,849,000 Mask and shield 1,698,000 1,302,000 1,515,000 Extended care 399,000 424,000 486,000 ------------ ------------ ------------ Total segment income 6,735,000 4,674,000 4,850,000 Unallocated corporate overhead expenses (4,115,000) (3,468,000) (3,191,000) Provision for income taxes (955,000) (420,000) (199,000) ------------ ------------ ------------ Consolidated net income $ 1,665,000 $ 786,000 $ 1,460,000 ============ ============ ============
The following reflects sales and long-lived asset information by geographic area:
YEAR ENDED DECEMBER 31, 2002 2001 2000 Sales by region United States $ 20,121,000 $ 20,312,000 $ 19,802,000 International 1,233,000 1,021,000 1,328,000 ------------ ------------ ------------ Consolidated total sales $ 21,354,000 $ 21,333,000 $ 21,130,000 ============ ============ ============ Long-lived assets United States $ 3,078,000 $ 3,270,000 $ 2,578,000 International 205,000 265,000 225,000 ------------ ------------ ------------ Consolidated total long-lived assets $ 3,283,000 $ 3,535,000 $ 2,803,000 ============ ============ ============
Sales by region are based on the countries in which the customers are located. The Company did not generate sales from any single foreign country that were significant to the Company's consolidated sales. 12. CONCENTRATION OF CREDIT RISK The Company maintains it cash and cash equivalents in accounts in several banks, the balances which at times may exceed federally insured limits. The Company sells significant amounts of product to a large distributor on credit terms. Net sales to this distributor were 64.5%, 65.2% and 62.5% of total sales for the years ended December 31, 2002, 2001 and 2000, respectively. Accounts receivable from this distributor were 65.4% and 54.5% of total accounts receivable at December 31, 2002 and 2001, respectively. The loss of this customer would have a material adverse effect on the Company's business. Management believes that adequate provision has been made for risk of loss on all credit transactions. F - 19 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. RELATED PARTY TRANSACTIONS Included in the notes receivable and other assets balance at December 31, 2002 and 2001 are notes receivable of $0 and $55,000, respectively from officers of the Company. F - 20 ALPHA PRO TECH, LTD. AND SUBSIDIARIES 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 DEDUCTIONS PERIOD Year Ended December 31, 2002 Allowance for doubtful accounts $ 34,000 $ 12,000 $ - $ (9,000) $ 37,000 ============ ============ ============ ============ ============ Reserve for inventory obsolescence $ 312,000 $ 20,000 $ - $ - $ 332,000 ============ ============ ============ ============ ============ Valuation allowance for deferred income taxes $ - $ - $ - $ - $ - ============ ============ ============ ============ ============ Year Ended December 31, 2001 Allowance for doubtful accounts $ 32,000 $ 27,000 $ - $ (25,000) $ 34,000 ============ ============ ============ ============ ============ Reserve for inventory obsolescence $ 305,000 $ 7,000 $ - $ - $ 312,000 ============ ============ ============ ============ ============ Valuation allowance for deferred income taxes $ - $ - $ - $ - $ - ============ ============ ============ ============ ============ Year Ended December 31, 2000 Allowance for doubtful accounts $ 40,000 $ 22,000 $ - $ (30,000) $ 32,000 ============ ============ ============ ============ ============ Reserve for inventory obsolescence $ 262,000 $ 43,000 $ - $ - $ 305,000 ============ ============ ============ ============ ============ Valuation allowance for deferred income taxes $ 539,000 $ - $ - $ (539,000) $ - ============ ============ ============ ============ ============
F - 21 EX-99.1 3 a2105426zex-99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 Alpha Pro Tech, Ltd CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACTS OF 2002 In connection with the Annual Report of Alpha Pro Tech, Ltd on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Sheldon Hoffman Chief Executive Officer of the company, certify, pursuant to 10 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934: and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. DATE: March 19, 2003 BY: /s/ Sheldon Hoffman -------------------------------------- Sheldon Hoffman Chief Executive Officer and Director EX-99.2 4 a2105426zex-99_2.txt EXHIBIT 99.2 EXHIBIT 99.2 Alpha Pro Tech, Ltd CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACTS OF 2002 In connection with the Annual Report of Alpha Pro Tech, Ltd on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lloyd Hoffman Chief Financial Officer of the company, certify, pursuant to 10 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934: and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. DATE: March 19, 2003 BY: /s/ Lloyd Hoffman ------------------------------ Lloyd Hoffman Chief Financial Officer and Senior Vice President -----END PRIVACY-ENHANCED MESSAGE-----