-----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, E5Fxt0SlwQua8I1uOCOa77v3qpuZ4fW8T+JNk80X2t86LNGutVFrSImK4VCZ32rb A/+Gbg9I9q7BF5QxrnNLHA== 0000912057-02-011904.txt : 20020415 0000912057-02-011904.hdr.sgml : 20020415 ACCESSION NUMBER: 0000912057-02-011904 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 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: 02588532 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 a2073783z10-k.txt FORM 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, 2001 / / 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 February 28, 2002 was 23,546,809 The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 2002 was $21,192,128 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 2001 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or before April 30, 2002 (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. --- 1 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. 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, food service and consumer markets. The Company operates through three divisions: 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. The Company's products are classified into five 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; food industry apparel consisting of a line of automated shoecovers, sleeve protectors, aprons, and face shields; 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 and food industry 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, pet and food service. 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. 2 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, 9 major distributors, approximately 900 additional distributors, approximately 24 independent sales representatives and a Company sales and marketing force of 12 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 Food Industry * Automated Shoecovers * Sleeve Protectors * Aprons * Face Shields 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. MASKS AND FACE 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. Combine this feature with the Magic Arch (R), that holds the mask away from the nose and mouth and creates a breathing chamber, and you have a quality disposable facemask. The term "blow-by" is used to describe the potential for infectious material entering or escaping a facemask without going through the filter as a result of gaps or openings in the face mask. All of the face shields are made from an optical-grade polyester film, and have a permanent anti-fog feature. This provides the wearer with extremely 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. FOOD INDUSTRY A patented automated shoecover machine in combination with a patented laminated material has allowed the Company to develop a shoecover that is being used by McDonald's Corporation through a Supply Agreement and is being tested by a number of other restaurant chains. The balance of the food industry products are manufactured by the apparel division. 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 market 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 Food Industry, Medical, Industrial and Cleanroom market. The Company has expanded its marketing efforts for the Food Industry to include apparel, such as sleeve protectors and aprons as well as shields. 4 DISTRIBUTION The Company relies for the sale of its products primarily on a network of independent distributors which include the following: * VWR Scientific * Allegiance Healthcare * McKesson HBOC * Medline Industries * Blain Supply * Owens and Minor * Cameron & Barkley * Berkeley Medical Resources * Henry Schein, Inc. These nine major United States distributors to the best of the Company's knowledge, all sell competing products. Sales to our largest customer represented 65.2% of total sales for 2001, 62.5% for 2000, and 57.85% for 1999. The Company's agreements with its largest distributor provides 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 the prior years distributor sales at cost. 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 three facilities, a 50,000 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, expires on June 30, 2002.This facility recently became vacant and is not being renewed due to an emphasis on China manufactured goods. In 2001 the Company began subcontracting the manufacturing of some of its goods previously manufactured in Mexico to contractors 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. 5 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 would 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. The Company has entered the food service market with a new type of product, and expects competition from companies who provide floor treatment and manufacturers of safety boots such as Shoes For Crews and Traction Plus. However, the Company believes that the quality of its products, along with the price and service provided, will allow it to remain competitive in the disposable apparel market. 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 upon 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 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. 6 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 28, 2002, the Company had 342 employees, including 17 persons at its head office in Markham, Ontario, Canada; 32 persons at its facemask production facility in Salt Lake City, Utah, 22 persons at its Extended Care production facility in Janesville, Wisconsin; 37 persons at its cutting, warehouse and shipping facility in Nogales, Arizona; 196 at its sewing and shield assembly operation in Benjamin Hill, Mexico; 25 persons at its coating and automated shoecover facility in Valdosta, Georgia; a sales and marketing staff of 12 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 2001 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 $4,200 under a lease expiring February 28, 2003. Seventeen (17) employees of the Company, including the President, Alexander Millar, Chief Executive Officer, Sheldon Hoffman 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 $6,200 for 24,500 square feet. This lease expires July 1, 2002 with successive 2-year renewal options with rental rate increases based on the U.S. Consumer Price Index. The Company expects to renew this lease. A second manufacturing facility is located at 615 North Parker Drive, Janesville, Wisconsin. These premises of 25,000 square feet are leased for $7,400 monthly. The lease expires August 15, 2002. The Company's line of Extended Care and consumer products is manufactured at this facility. The Company expects to renew this lease. The Apparel division has its cutting operation, warehousing, and shipping facility at 1287 Fairway Drive, Nogales, Arizona. The monthly rental is $14,200 for 50,000 square feet. This lease expires November 30, 2002. Sewing and shield assembly is done at Ave. Abelardo L. Rodriguez Y. Novena, Benjamin Hill, Sonora, Mexico. The monthly rental is $8,500 for 30,000 square feet. This lease expires June 23, 2004. A third facility, a 19,500 square foot plant at Kennedy Drive #6 in Sonora, Mexico is vacant due to an emphasis on China manufactured goods. The monthly rental is $6,700 for 19,500 square feet. This lease expires June 30, 2002 and will not be renewed. 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. 7 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 2001 PART II ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF SECURITIES Through April 3, 2001, the Common Shares of the Company were cleared for quotation on the National Association of Securities Dealers (NASD) Over the Counter (OTC) Bulletin Board under the symbol "APTD." The high and low range of bid prices for the Common Shares of the Company for the quarters indicated as reported by the NASD were as follows:
LOW HIGH ------ ------- 2000 First Quarter $ 0.72 $ 4.937 Second Quarter 1.00 3.75 Third Quarter 1.063 1.813 Fourth Quarter 1.00 1.438 2001 First Quarter 1.063 3.75 Second Quarter 1.20 1.35 (Thru April 3, 2001)
Beginning April 4, 2001 the Common Shares of the Company were cleared for trading 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 Second Quarter $ 1.01 $ 1.40 Third Quarter 0.65 1.20 Fourth Quarter 0.84 1.05 2002 First Quarter 0.84 1.05 (Thru February 28, 2002)
As of February 28, 2002 there were 479 shareholders of record, and approximately 2,800 beneficial owners. 8 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. ITEM 6. SELECTED FINANCIAL DATA ALPHA PRO TECH, LTD. SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 2001 2000 1999 1998 1997 HISTORICAL STATEMENT OF OPERATIONS DATA Sales $ 21,333,000 $ 21,130,000 $ 20,235,000 $ 17,985,000 $ 17,823,000 Gross profit 9,086,000 8,892,000 7,985,000 7,252,000 6,229,000 Selling, general and administrative expenses 7,481,000 6,834,000 6,352,000 6,341,000 6,531,000 Interest expense (income) 21,000 (6,000) 124,000 193,000 308,000 Depreciation and amortization 476,000 405,000 362,000 402,000 319,000 Gain on sale of fixed assets (98,000) - - - - Provision for income taxes 420,000 199,000 18,000 - - -------------- ------------- -------------- -------------- -------------- Total expenses including provision for income taxes 8,300,000 7,432,000 6,856,000 6,936,000 7,158,000 -------------- ------------- -------------- -------------- -------------- Net income (loss) $ 786,000 $ 1,460,000 $ 1,129,000 $ 316,000 $ (929,000) ============== ============= ============== ============== ============== Basic and diluted net income (loss) per share $ 0.03 $ 0.06 $ 0.05 $ 0.01 $ (0.04) ============== ============= ============== ============== ============== Basic weighted average shares outstanding 23,812,587 24,049,774 24,110,722 24,112,449 23,388,369 Diluted weighted average shares outstanding 24,452,699 25,580,880 24,450,382 24,238,866 23,388,369 HISTORICAL BALANCE SHEET DATA Current assets $ 8,124,000 $ 7,386,000 $ 7,161,000 $ 6,230,000 $ 7,411,000 Total assets 11,904,000 10,504,000 10,048,000 8,938,000 9,985,000 Current liabilities 1,679,000 1,571,000 2,783,000 2,579,000 3,799,000 Long-term liabilities 1,321,000 703,000 203,000 406,000 549,000 Shareholders' equity 8,904,000 8,230,000 7,062,000 5,953,000 5,617,000
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FISCAL 2001 COMPARED TO FISCAL 2000 Alpha Pro Tech, Ltd. ("Alpha" or the "Company") reported income before provision for income taxes for the year ended December 31, 2001 of $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 decrease 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, due to higher sales and gross profit margin and a decrease in other expenses of $71,000. 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. Orders booked in 2002 have returned to normal levels and management expects increased sales in 2002, which would be the seventh consecutive year. 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 has reported record annual sales for the sixth consecutive year to its customers of the Company's products. Management expects the Company's sales to this distributor should remain strong and continue to grow. 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 medical 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. 10 The Medical market, which includes a line of face masks, eye shield and fleece bed pads, increased by $154,000, or 4.8% year to date, to $3,333,000 for the year ended December 31, 2001 as compared to $3,179,000 for the year ended December 31, 2000. Medical face masks and eye shield sales increased during 2001, but fleece bed pads sales decreased. Medical mask and eye shield sales should improve over the next twelve months. Dental market sales increased by approximately $57,000 or 3.7%, to $1,593,000 for the year ended December 31, 2001 as compared to $1,536,000 for the same period in 2000. In 2001 the Company hired a Dental sales specialist and the results of his efforts are expected to improve the Company's dental market revenue in 2002. Sales in the Pet Supply market, in which the Company markets a line of pet beds decreased $34,000 or 3.5%, to $941,000 for the year ended December 31, 2001, compared to $975,000 for same period in 2000. In the Food Service market, sales for the year ended December 31, 2001 were $231,000 compared to $175,000 in the same period of 2000, an increase of $56,000 or 32.0%. The Company continues to work with its existing customers, and in January 2002, announced a new distribution agreement with a food service distributor to sell and distribute Alpha Pro Tech's line of personal safety products starting February 2002. The Company has also introduced new products to its major customer that continue to generate positive feedback. Management is confident that increased exposure and new product launches to the Food Service sector will result in added revenues over the next twelve months. Management believes that the Company is positioned to grow revenue in its markets of Industrial Safety, Clean Room, Medical, Dental and Food Service in fiscal 2002. 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. Management expects gross profit margin to continue to improve over the next twelve months due to an increased emphasis on products being manufactured in China. 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 11 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. Management expects selling, general and administrative expenses as a percentage of net sales to decrease as sales increase in 2002. 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 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. 12 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 and 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. 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. FISCAL 2000 COMPARED TO FISCAL 1999 Alpha Pro Tech, Ltd. reported income before provision for income taxes for the year ended December 31, 2000 of $1,659,000 as compared to $1,147,000 for the year ended December 31, 1999, representing an increase of $512,000 or 44.63%. The increase is attributable primarily to higher sales and gross profit margin of $907,000 and a decrease in net interest expense of $130,000, partially offset by an increase in selling, general and administrative expenses of $482,000 and an increase in depreciation and amortization of $43,000. Alpha reported net income for the year ended December 31, 2000 of $1,460,000 as compared to net income of $1,129,000 for the year ended December 31, 1999, representing an improvement of $331,000 or 29.3%. The increase is attributable to an increase in income before provision for income taxes of $512,000 and offset by an increase in income taxes of $181,000. SALES Consolidated sales for the year ended December 31, 2000 increased to $21,130,000 from $20,235,000 for the year ended December 31, 1999, representing an increase of $895,000 or 4.4%. Sales for the Apparel Division for the year ended December 31, 2000 were $13,507,000 as compared to $12,883,000 for the same period of 1999. The Apparel Division sales increase of $624,000 or 4.9% was due to increased sales to the Company's largest distributor. This distributor has reported record annual sales for the fifth consecutive year to its customers of the Company's products. Mask and eye shield sales increased by $288,000 or 5.7% to $5,361,000 in 2000 from $5,073,000 in 1999. This increase is primarily the result of growth in dental mask of 10.2%, growth in medical mask sales of 8.6%, partially offset by a decline in industrial mask sales of 3.4%. The industrial mask sales decrease is the result of a soft second quarter. 13 Sales from the Company's Extended Care Unreal Lambskin(R) (and other related products, which includes a line of pet beds), decreased by $17,000 or 0.8% to $2,262,000 for the year ended December 31, 2000 from $2,279,000 for the year ended December 31, 1999. The slight decrease in sales of $17,000 is primarily the result of a decrease in medical fleece product sales partially offset by an increase in pet bed sales. The Medical market, which includes a line of face masks and fleece bed pads, were down by $462,000 or 12.7% for the year ended December 31, 2000, compared to the same period in 1999. Fleece bed pads sales decreased and medical face masks sales increased during the year ended December 31, 2000. Dental market sales increased by approximately $143,000 or 10.2% for the year ended December 31, 2000 as compared to the same period in 1999. The Company is working with national dental distributors to increase the Company's share of the Dental market. Sales in the Pet supply market, in which the Company markets a line of pet beds, were up $130,000 or 13.3% for the year ended December 31, 2000 as compared to the same period in 1999. In the Food Service market, sales for the year ended December 31, 2000 were $175,000 compared to $56,000 in the same period of 1999, an increase of $119,000 or 212.5%. COST OF GOODS SOLD Cost of goods sold increased to $12,238,000 for the year ended December 31, 2000 from $12,250,000 for the same period in 1999. As a percentage of net sales, cost of goods sold decreased to 57.9% in 2000 from 60.5% in 1999. Gross profit margin increased to 42.1% for the year ended December 31, 2000 from 39.5% for the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased by $482,000 or 7.6%, to $6,834,000 for the year ended December 31, 2000, from $6,352,000 for the year ended December 31, 1999. As a percentage of net sales, selling, general and administrative expenses increased to 32.3% in the year ended December 31, 2000 from 31.4% in the same period of 1999. The increase in selling, general and administrative expenses primarily consists of increased payroll related costs of $392,000; increased public company expenses of $50,000, including investor relations, stock exchange listing fees, options/warrants issued for services, annual report and annual meeting costs, stock transfer costs and costs associated with SEC reporting requirements; and increased marketing, commissions and travel expenses of $256,000. This was partially offset by decreased office, telephone, factory, insurance and general expenses of $154,000, decreased professional fees of $40,000 and decreased rent of $22,000. DEPRECIATION & AMORTIZATION Depreciation and amortization expense increased by $43,000 to $405,000 for the year ended December 31, 2000 from $362,000 for the same period in 1999. The increase is primarily attributable to increased depreciation on the automated shoecover machines and the introduction of new mask machines. 14 INCOME FROM OPERATIONS Income from operations increased by $382,000 or 30.1%, to $1,653,000 for the year ended December 31, 2000 as compared to income from operations of $1,271,000 for the year ended December 31, 2000. The increase in income from operations is due to an increase in gross profit of $907,000, partially offset by an increase in selling, general and administrative expenses of $482,000 and an increase in depreciation and amortization of $43,000. NET INTEREST Net interest expense decreased by $130,000 or 104.8% to net interest income of $6,000 for the year ended December 31, 2000 from net interest expenses of $124,000 for the year ended December 31, 1999. The decrease in net interest expense is due to lower borrowings, lower interest rate, decreased interest on capital leases and increased interest income. Interest income increased by $22,000, to $61,000 for the year ended December 31, 2000 from $39,000 in the same period of 1999. In 2000, the Company re-negotiated its credit facility from an asset-based loan to a traditionally based line of credit. The Company has a $4,041,000 credit facility with the bank, consisting of a line of credit of up to $3,500,000, a term note of $225,000 and a equipment loan of $316,000, with interest at prime plus 1.0% on the credit line, prime plus 1.0% on the term loan and a 10.25% fixed rate on the equipment loan. The line of credit expires in May 2003, the term note expires in April 2003 and the equipment loan expires in November 2005. PROVISION FOR INCOME TAXES Provision for income taxes increased by $181,000 or 1,005.6% to $199,000 for the year ended December 31, 2000 from $18,000 for the year ended December 31, 1999. The increase in income tax is due to net operating losses (NOL's) from prior years being utilized during all of 1999 and only through three quarter in 2000. NET INCOME Net income for the year ended December 31, 2000 was $1,460,000 compared to net income of $1,129,000 for the year ended December 31, 1999, an improvement of $331,000 or 29.3%. The net income increase of $331,000 is comprised of an increase in income from operations of $382,000, a decrease in interest expense of $130,000, partially offset by an increase in income taxes of $181,000. 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 $183,000 has been accrued in 2000 as compared to $125,000 in 1999. 15 LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2001, the Company had cash of $1,372,000 and working capital of $6,445,000. During the year ended December 31, 2001, cash increased by $241,000 and accounts payable and accrued liabilities increased by $136,000. The increase in the Company's cash is primarily due to a decrease in accounts receivable, income from operations, and net proceeds from notes payable, partially offset by to a significant increase in inventories, the purchase of property and equipment 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, 2001, the prime interest rate was 4.75%. The line of credit expires in May 2003, the term note expires in April 2003 and the equipment loans expire between December 2005, and September 2006. At December 31, 2001, the Company's unused line of credit is $2,266,000. Net cash provided from operations was $1,305,000 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 operations of $1,305,000 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 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. The Company expects to purchase $200,000 in 2002 for additional equipment. The Company intends to lease equipment whenever possible. 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. 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. 16 NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", which is effective for all business combinations for which the date of acquisition is after June 30, 2001. SFAS No. 141 also establishes specific criteria for the recognition of intangible assets. The Company will adopt SFAS No. 141 for acquisitions completed after June 30, 2001 in preparing its financial statements. The Company did not make any acquisitions in 2001. In June 2001, the FASB issued No. 142, "Goodwill and Other Intangible Assets", which is effective for financial statements issued for fiscal years beginning after December 15, 2002 and interim periods within those fiscal years. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The Company does not believe that the adoption of SFAS No. 142 will have significant effect on the earnings and financial position of the Company. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for financial statements issued for fiscal years beginning after June 15, 2002 and interim periods within those fiscal years. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The Company has evaluated this new pronouncement and has determined that it will not have any effect on its financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets", which is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. SFAS No. 144 addresses financial accounting and reporting for the disposal of long-lived assets. The Company is currently evaluating the potential impact, if any, the adoption of SFAS No. 144 will have on its financial position and results of operations. 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. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements and the Report of Independent Accountants thereon are set forth under Item 14 (a) (1) of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III The information pursuant to Items 10, 11, 12 and 13 is omitted from this report (in accordance with Federal Instruction G for Form 10-K), since the Company is filing with the Commission (by no later than April 30, 2002), 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 June of 2002. 18 PART IV ITEM 14. 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 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 (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 19 (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) ***** Filed herewith 20 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 14, 2002 By: S/SHELDON HOFFMAN ---------------- ----------------- Sheldon Hoffman Chief Executive Officer, Principal Financial Officer and Director Date: March 14, 2002 By: :S/LLOYD HOFFMAN ---------------- ----------------- Lloyd Hoffman Senior Vice President, Controller and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registration and in the capacities indicated on March 14, 2002. S/DONALD E. BENNETT, JR. ------------------------ Donald E. Bennett, Jr. Director S/SHELDON HOFFMAN ----------------- Sheldon Hoffman, Director S/ROBERT H. ISALY ----------------- Robert H. Isaly, Director S/ALEXANDER W. MILLAR --------------------- Alexander W. Millar, Director S/ DR. JOHN RITOTA ------------------ Dr. John Ritota, Director S/ RUSS MANOCK -------------- Russ Manock, Director 21 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, 2001 and 2000........F-3 Consolidated Statements of Operations for the three years in the period ended December 31, 2001.............................F-4 Consolidated Statement of Shareholders' Equity for the three years in the period ended December 31, 2001....................F-5 Consolidated Statements of Cash Flows for the three years in the period ended December 31, 2001.............................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, 2001...................F-18
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. F - 1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Alpha Pro Tech, Ltd. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Alpha Pro Tech, Ltd. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, 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 March 14, 2002 F - 2 ALPHA PRO TECH, LTD. CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
DECEMBER 31, 2001 2000 --------------- --------------- ASSETS Current assets: Cash $ 1,372,000 $ 1,131,000 Accounts receivable, net of allowance for doubtful accounts of $34,000 and $32,000 at December 31, 2001 and 2000, respectively 2,455,000 3,359,000 Inventories, net 3,581,000 2,399,000 Prepaid expenses and other current assets 249,000 247,000 Deferred income taxes 467,000 250,000 --------------- --------------- Total current assets 8,124,000 7,386,000 Property and equipment, net 3,535,000 2,803,000 Intangible assets, net 189,000 254,000 Notes receivable and other assets 56,000 61,000 --------------- --------------- Total assets $ 11,904,000 $ 10,504,000 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 882,000 $ 932,000 Accrued liabilities 603,000 467,000 Notes payable, current portion 185,000 131,000 Capital leases, current portion 9,000 41,000 --------------- --------------- Total current liabilities 1,679,000 1,571,000 Notes payable, less current portion 770,000 363,000 Deferred income taxes 551,000 340,000 --------------- --------------- Total liabilities 3,000,000 2,274,000 --------------- --------------- Commitments and contingencies (Notes 7 and 10) Shareholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized, 23,546,809 and 23,942,516 issued and outstanding at December 31, 2001 and 2000, respectively 235,000 239,000 Additional paid-in capital 23,920,000 24,028,000 Accumulated deficit (15,251,000) (16,037,000) --------------- --------------- Total shareholders' equity 8,904,000 8,230,000 --------------- --------------- $ 11,904,000 $ 10,504,000 =============== ===============
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, 2001 2000 1999 ------------- -------------- -------------- Sales $ 21,333,000 $ 21,130,000 $ 20,235,000 Cost of goods sold, excluding depreciation and amortization 12,247,000 12,238,000 12,250,000 ------------- -------------- -------------- Gross profit 9,086,000 8,892,000 7,985,000 Expenses: Selling, general and administrative 7,481,000 6,834,000 6,352,000 Depreciation and amortization 476,000 405,000 362,000 ------------- -------------- -------------- Income from operations 1,129,000 1,653,000 1,271,000 Other income (expense) Gain on sale of assets 98,000 - - Interest, net (21,000) 6,000 (124,000) ------------- -------------- -------------- Income before provision for income taxes 1,206,000 1,659,000 1,147,000 Provision for income taxes 420,000 199,000 18,000 ------------- -------------- -------------- Net income $ 786,000 $ 1,460,000 $ 1,129,000 ============= ============== ============== Basic income per share $ 0.03 $ 0.06 $ 0.05 ============= ============== ============== Diluted income per share $ 0.03 $ 0.06 $ 0.05 ============= ============== ============== Basic weighted average shares outstanding 23,812,587 24,049,774 24,110,722 ============= ============== ============== Diluted weighted average shares outstanding 24,452,699 25,580,880 24,450,382 ============= ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F - 4 ALPHA PRO TECH, LTD. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
ADDITIONAL COMMON PAID-IN ACCUMULATED SHARES STOCK CAPITAL DEFICIT TOTAL ---------- --------- ------------ ------------- ----------- Balance at December 31, 1998 24,112,449 $ 241,000 $ 24,338,000 $ (18,626,000) $ 5,953,000 Warrants issued for services - - 4,000 - 4,000 Shares repurchased/cancelled (32,500) - (24,000) - (24,000) Net income - - - 1,129,000 1,129,000 ---------- --------- ------------ ------------- ------------ 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 impact 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 ========== ========= ============ ============= ============
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, 2001 2000 1999 ----------- ----------- --------------- Cash flows from operating activities: Net income $ 786,000 $ 1,460,000 $ 1,129,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 476,000 405,000 362,000 Gain on sale of assets (98,000) - - Amortization of securities issued for services - - 25,000 Write off of intangible assets - 9,000 - Deferred taxes (6,000) 93,000 (3,000) Changes in assets and liabilities: Restricted cash - 18,000 (2,000) Accounts receivable 904,000 (107,000) (214,000) Inventories (1,182,000) 558,000 42,000 Prepaid expenses and other assets 339,000 150,000 (99,000) Accounts payable and accrued liabilities 86,000 (495,000) 437,000 ----------- ----------- ------------- Net cash provided by operating activities 1,305,000 2,091,000 1,677,000 ----------- ----------- ------------- Cash flows from investing activities: Purchase of property and equipment (1,143,000) (872,000) (453,000) Proceeds from sale of fixed assets 113,000 - - Cost of intangible assets (15,000) (24,000) (26,000) ----------- ----------- ------------- Net cash used in investing activities (1,045,000) (896,000) (479,000) ----------- ----------- ------------- Cash flows from financing activities: Proceeds from the exercise of stock options 58,000 214,000 - Payments for the repurchase of common stock (506,000) (506,000) (20,000) Proceeds from loans payable 820,000 3,311,000 20,232,000 Repayments on loans payable (359,000) (3,738,000) (20,567,000) Principal repayments on capital leases (32,000) (130,000) (101,000) ----------- ----------- ------------- Net cash used in financing activities (19,000) (849,000) (456,000) ----------- ----------- ------------- Increase in cash 241,000 346,000 742,000 Cash, beginning of period 1,131,000 785,000 43,000 ----------- ----------- ------------- Cash, end of period $ 1,372,000 $ 1,131,000 $ 785,000 =========== =========== ============= Supplemental disclosure of cash flow information: Cash paid for interest $ 52,000 $ 57,000 $ 163,000 =========== =========== ============= Cash paid for income taxes $ 34,000 $ 275,000 $ - =========== =========== =============
NON-CASH INVESTING AND FINANCING ACTIVITY: 2001 Reduction of income tax payable and increase in additional paid-in capital due to tax effect of stock options exercised of $336,000. 2000 None. 1999 The company incurred capital lease obligations for machinery and equipment of $56,000. 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 are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. 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: Factory equipment 9-20 years Office furniture and equipment 5-7 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 estimated fair value of assets acquired and liabilities assumed has been recorded as goodwill and is being amortized using the straight-line method over 8 years. Patent rights and trademarks are recorded at cost and are amortized using the straight-line method over their estimated useful lives of 8-17 years. LONG-LIVED ASSETS Impairment of long-lived assets is determined in accordance with Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and of Long- Lived Assets to be Disposed Of." SFAS 121 requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. STOCK OPTIONS ISSUED FOR SERVICES Options to purchase common stock and warrants to purchase common stock that are granted to nonemployees 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 nonemployees. F - 7 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- REVENUE RECOGNITION Sales are recognized when goods are shipped to customers, upon which time title and risk of loss passes. Sales are reduced for anticipated sales returns and allowances. STOCK BASED COMPENSATION As allowed by Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based Compensation," which recommends, but does not require, a method based on the fair value of equity instruments awarded to employees to account for stock-based compensation, the Company applies the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" to account for its stock-based compensation. The Company also provides pro forma disclosure in the notes to the financial statements of the differences between the fair value method and the intrinsic value method as required by SFAS 123 (Note 8). INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." This statement requires an asset and liability approach for accounting for income taxes. 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 (Note 9). 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 shares.
FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999 Net income (Numerator) $ 786,000 $ 1,460,000 $ 1,129,000 Shares (Denominator): Basic weighted average shares outstanding 23,812,587 24,049,774 24,110,722 Add: Dilutive effect of stock options and warrants 640,112 1,531,106 339,660 ------------- ------------- ------------ Diluted weighted average shares outstanding 24,452,699 25,580,880 24,450,382 ============= ============= ============ Net income per share: Basic $ 0.03 $ 0.06 $ 0.05 Diluted $ 0.03 $ 0.06 $ 0.05
TRANSLATION OF FOREIGN CURRENCIES The Company has adopted the United States dollar as its functional currency. Transactions in foreign currencies during the reporting periods are translated into the functional currency at the exchange rate prevailing at the transaction date. Monetary assets and liabilities in foreign currencies at each period end are translated at the exchange rate in effect at that date and are immaterial in amount. Transaction gains or losses on foreign exchange are reflected in net income for the periods presented and are not significant in amount. F - 8 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- RECLASSIFICATIONS Certain 2000 and 1999 balances have been reclassified to conform to the current year's presentation. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 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, 2001 and 2000. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. ("SFAS") 141, BUSINESS COMBINATIONS. SFAS 141 requires that the purchase method of accounting be used for all business combinations for which the date of acquisition is after June 30, 2001. SFAS 141 also establishes specific criteria for the recognition of intangible assets. The Company will adopt SFAS 141 for acquisitions completed after June 30, 2001 in preparing its financial statements. In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS 142 as of January 1, 2002 and has determined that the adoption of SFAS No. 142 will not have a significant effect on the earnings and financial position of the Company. As of December 31, 2001, the Company had unamortized goodwill of $55,000. In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company has evaluated this new pronouncement and has determined that it will not have any effect on its financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OF DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and reporting for the disposal of long-lived assets. The Company is currently evaluating the potential impact, if any, the adoption of SFAS No. 144 will have on its financial position and results of operations. F - 9 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 3. INVENTORIES Inventories consist of the following:
2001 2000 Raw materials $ 2,165,000 $ 1,375,000 Work in process 100,000 174,000 Finished goods 1,628,000 1,155,000 -------------- ------------- 3,893,000 2,704,000 Less reserve for obsolescence (312,000) (305,000) -------------- ------------- $ 3,581,000 $ 2,399,000 ============== =============
4. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
2001 2000 Buildings $ 355,000 $ 48,000 Machinery and equipment 4,557,000 3,952,000 Office furniture and equipment 661,000 511,000 Leasehold improvements 131,000 93,000 ------------ ------------ 5,704,000 4,604,000 Less accumulated depreciation and amortization (2,169,000) (1,801,000) ------------ ------------ $ 3,535,000 $ 2,803,000 ============ ============
Included in the above amounts are the following assets under capital lease obligations:
2001 2000 Machinery and equipment $ 146,000 $ 146,000 Office furniture and equipment 22,000 22,000 ------------- ------------ 168,000 168,000 Less accumulated amortization (119,000) (114,000) ------------- ------------ $ 49,000 $ 54,000 ============= ============
F - 10 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 5. INTANGIBLE ASSETS Intangible assets consist of the following:
2001 2000 Goodwill $ 206,000 $ 206,000 Patents and trademarks 192,000 180,000 Other - 95,000 ------------- ------------- 398,000 481,000 Less accumulated amortization (209,000) (227,000) ------------- ------------- $ 189,000 $ 254,000 ============= =============
6. ACCRUED LIABILITIES Accrued liabilities consist of the following:
2001 2000 Payroll expenses $ 119,000 $ 137,000 Commissions payable 289,000 318,000 Accrued taxes, rebates and other 195,000 12,000 ------------- ------------- $ 603,000 $ 467,000 ============= =============
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. Notes payable at December 31, 2001 represent outstanding amounts against the facility. Pursuant to the terms of the credit agreement, the Company has a line of credit for up to $3,500,000 based on eligible accounts receivable and inventory, of which $355,000 and $0 was outstanding and $1,911,000 and $1,867,060 was available at December 31, 2001 and 2000, respectively. The credit facility bears interest at prime plus .5%, which totaled 5.25% and 10.0% at December 31, 2001 and 2000, respectively and is collateralized by accounts receivable, inventory, trademarks, patents, property, and 66.67% of the issued and outstanding shares of DPI. The Company also has a $400,000 term note collateralized by equipment. The Company's outstanding balance on this term note was $92,000 and $178,000 at December 31, 2001 and 2000, respectively. The term note is due in monthly installments of $7,000 with interest at prime plus 1.00%, which totaled 5.75% and 10.5% at December 31, 2001 and 2000, respectively, maturing July 1, 2003. The Company paid $29,000 in loan origination fees to obtain the above credit facilities. Under the terms of the agreement, the Company pays a 0.5% loan fee annually. F - 11 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Company has a $316,000 equipment loan. The outstanding balance on this loan was $263,000 and $316,000 at December 31, 2001 and 2000, 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 an equipment loan in April 2001 and the outstanding balance at December 31, 2001 and 2000 was $139,000 and $316,000, respectively. Payments are due in monthly installments of $3,000 with a fixed interest rate of 8.5% maturing April 2006. The Company obtained an equipment loan in June 2001 and the outstanding balance at December 31, 2001 was $106,000. Payments are due in monthly installments of $2,000 with a fixed interest rate of 8.5%, maturing June 2006. Future maturities of notes payable are as follows: 2002 $ 185,000 2003 482,000 2004 125,000 2005 136,000 2006 27,000 ----------- $ 955,000 -----------
8. SHAREHOLDERS' EQUITY WARRANT ACTIVITY For each of the three years ended December 31, 2001 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, 2001. All warrants expire on July 1, 2004. OPTION ACTIVITY During 1993, the Company adopted stock option plans for employees and directors of the Company. As of December 31, 2001, 4.5 million shares were reserved for issuance under these plans and 4.0 million options have been granted. The exercise price of the options is determined based on the fair market value of the stock on the date of grant, and the options generally vest immediately. F - 12 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Option activity for the three years ended December 31, 2001 is as follows:
WEIGHTED AVERAGE EXERCISE PRICE SHARES PER OPTION Options outstanding, December 31, 1998 2,994,000 $1.00 Granted to employees 695,000 $0.57 Exercised - - Canceled/Expired/Forfeited (266,000) $1.43 --------- ----- 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 ========= =====
All options are fully exercisable. The following summarizes information about stock options outstanding at December 31, 2001:
OPTIONS OUTSTANDING AVERAGE EXERCISE AVERAGE TERM PRICE SHARES PRICE REMAINING $0.50 to $0.75 1,550,000 $ 0.65 1.58 $0.76 to $0.99 869,000 $ 0.93 4.15 $1.00 to $1.50 1,087,000 $ 1.22 3.29
Had compensation expense for the Company's employee/director options been determined based on the fair value of the options at the grant date, the Company's pro forma net income and pro forma net income per share would have been as follows:
FOR THE YEAR ENDED 2001 2000 Pro forma net income $505,000 $1,222,000 ========= ========== Pro forma basic income per share $ 0.02 $ 0.05 ========= ========== Pro forma diluted income per share $ 0.02 $ 0.05 ========= ==========
F - 13 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- For the purpose of the above pro forma disclosures, the fair value of each employee/director stock option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
2001 2000 1999 Risk-free interest rate 4.64% 6.63% 6.00% Expected life 5 years 5 years 5 years Expected volatility 87% 93% 70% Expected dividend yield 0% 0% 0%
The weighted-average grant date fair values of employee/director options granted during 2001, 2000 and 1999 were $0.46, $0.62 and $0.22 respectively. 9. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, 2001 2000 1999 Current $ 163,000 $ 106,000 $ 21,000 Deferred 257,000 93,000 (3,000) ----------- ----------- --------- $ 420,000 $ 199,000 $ 18,000 =========== =========== =========
Deferred tax assets (liabilities) are comprised of the following at December 31.
2001 2000 Inventory obsolescence $ 106,000 $ 104,000 Alternative minimum tax credits 88,000 34,000 State income taxes 28,000 28,000 Other 205,000 146,000 ----------- ----------- Gross deferred tax assets 427,000 312,000 Depreciation and amortization (463,000) (359,000) Other (48,000) (43,000) ----------- ----------- (84,000) (90,000) ----------- ----------- $ (84,000) $ (90,000) =========== ===========
F - 14 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The net deferred tax liability as of December 31, 2001 and 2000 is reflected in the balance sheets as follows:
2001 2000 Current deferred tax asset $ 467,000 $ 250,000 Long-term deferred tax liability (551,000) (340,000) ------------- ---------- $ (84,000) $ (90,000) ============= ==========
The provision for income taxes differs from the amount that would be obtained byapplying the United States statutory rate to the income before income taxes as a result of the following:
YEAR ENDED DECEMBER 31, 2001 2000 1999 Income taxes based on US statutory rates (34%) $ 410,000 $ 564,000 $ 384,000 Non-deductible meals and entertainment 13,000 12,000 11,000 Decrease in valuation allowance - (539,000) (360,000) Other (3,000) 162,000 (17,000) ------------ ---------- ------------ $ 420,000 $ 199,000 $ 18,000 ============ ========== ============
10. LEASE COMMITMENTS AND OBLIGATIONS The Company leases manufacturing facilities under non-cancelable operating leases expiring through November 2004. The following summarizes future minimum lease payments required under non-cancelable operating leases:
OPERATING LEASES 2002 $ 232,000 2003 9,000 2004 3,000 ----------- Future minimum lease payments $ 244,000 ===========
Total rent expense incurred by the Company under operating leases for the years ended December 31, 2001, 2000 and 1999 was $716,000, $636,000 and $619,000, respectively. The Company also leases certain manufacturing and office equipment under capital leases expiring between April 2001 and December 2002. Total remaining obligations under capital leases at December 31, 2001 are $9,000. The Company does not have any pension, profit sharing or similar plans established for its employees; however, the chief executive officer and president are entitled to a combined bonus equal to 10% of the pre-tax profits of the company. A bonus of $134,000 was accrued for 2001 and $183,000 was accrued in 2000. F - 15 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 11. ACTIVITY OF BUSINESS SEGMENTS The Company classifies its businesses into three fundamental 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 eye shields, consisting principally of medical, dental and industrial masks and eye shields; and Extended Care Unreal Lambskin(R), 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. The Company evaluates the performance of its segments and allocates resources to them based primarily on net sales. The following table shows net sales for each segment for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 Apparel $ 14,091,000 $ 13,507,000 $ 12,883,000 Mask and shield 5,209,000 5,361,000 5,073,000 Fleece 2,033,000 2,262,000 2,279,000 ------------- ------------- ------------ Consolidated total net sales $ 21,333,000 $ 21,130,000 $ 20,235,000 ============= ============= ============
A reconciliation of total segment net income to total consolidated net income for the years ended December 31, 2001, 2000 and 1999 is presented below:
2001 2000 1999 Apparel $ 2,948,000 $ 2,849,000 $ 2,393,000 Mask and Shield 1,302,000 1,515,000 1,208,000 Fleece 424,000 486,000 499,000 ------------- ------------ ----------- Total segment net income 4,674,000 4,850,000 4,100,000 Unallocated corporate overhead expenses (3,888,000) (3,390,000) (2,971,000) ------------- ------------ ----------- Consolidated net income $ 786,000 $ 1,460,000 $ 1,129,000 ============= ============ ===========
F - 16 ALPHA PRO TECH, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following reflects sales and long-lived asset information by geographic area as of and for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 Sales by region United States $ 20,312,000 $ 19,802,000 $ 19,563,000 International 1,021,000 1,328,000 672,000 ------------- ------------- ------------- Consolidated total sales $ 21,333,000 $ 21,130,000 $ 20,235,000 ============= ============= ============= Long-lived assets United States $ 3,270,000 $ 2,578,000 $ 2,097,000 International 265,000 225,000 192,000 ------------- ------------- ------------- Consolidated total long-lived assets $ 3,535,000 $ 2,803,000 $ 2,289,000 ============= ============= =============
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 was significant to the Company's consolidated sales. 12. MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK The Company sells significant amounts of product to a large distributor on credit terms. Net sales to this distributor were 65.2%, 62.5% and 57.8% of total net revenue for 2001, 2000 and 1999, respectively. Trade receivables from this distributor were 54.5% and 67.9% of total trade receivables for 2001 and 2000, respectively. Management believes that adequate provision has been made for risk of loss on all credit transactions. 13. RELATED PARTY TRANSACTIONS Included in the notes receivable and other assets balance at December 31, 2001 and 2000 are notes receivable of $55,000 and $36,000, respectively from officers of the Company. F - 17 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 December 31, 2001 Deducted from related asset account: Allowance for doubtful accounts $ 32,000 $ 27,000 $ - $ (25,000) $ 34,000 =========== =========== =========== =========== =========== Provision for inventory $ 305,000 $ 7,000 $ - $ - $ 312,000 =========== =========== =========== =========== =========== Valuation allowance for income taxes $ - $ - $ - $ - $ - =========== =========== =========== =========== =========== December 31, 2000 Deducted from related asset account: Allowance for doubtful accounts $ 40,000 $ 22,000 $ - $ (30,000) $ 32,000 =========== =========== =========== =========== =========== Provision for inventory $ 262,000 $ 43,000 $ - $ - $ 305,000 =========== =========== =========== =========== =========== Valuation allowance for income taxes $ 1,278,000 $ - $ - $(1,278,000) $ - =========== =========== =========== =========== =========== December 31, 1999 Deducted from related asset account: Allowance for doubtful accounts $ 48,000 $ 6,000 $ - $ (14,000) $ 40,000 =========== =========== =========== =========== =========== Provision for inventory $ 146,000 $ 116,000 $ - $ - $ 262,000 =========== =========== =========== =========== =========== Valuation allowance for income taxes $ 1,638,000 $ - $ - $ (360,000) $ 1,278,000 =========== =========== =========== =========== ===========
F - 18 EX-10.(Q) 3 a2073783zex-10_q.txt EXHIBIT 10(Q) EXHIBIT 10(q) McDonald's Corporation McDonald's Plaza Oak Brook, Illinois 60523-1900 February 1, 2000 Mr.A. W. Millar President AlphaProTech, Ltd. 60 Centurian Dr., Suite 112 Markham, Ontario, Canada L3R 9R2 Re: BUSINESS RELATIONSHIP/CONFIDENTIALITY AGREEMENT Dear Mr. Millar: AlphaProTech, Ltd. (the "Company") has expressed a desire to sell to McDonald's Corporation ("McD") certain proprietary products manufactured by the Company and identified on Exhibit B ("Company Products") and to work with McD in the future on one or more projects (each a "Project") to develop new products or services (each a "Product") that may be used in the McDonald's System. As you know, the "McDonald's System" is a comprehensive system for the ongoing development, operation and maintenance of McDonald's restaurants and includes among others, McD, its subsidiaries and affiliates, franchisees and suppliers. 1. CONTROLLING EFFECT OF AGREEMENT/AFFILIATES DEFINED. (a) The rights and obligations of the Company and McD contained in this letter will apply to all Projects and Products and will exclusively control unless otherwise modified, supplemented or amended on an applicable "Project Supplement" in the form of Exhibit A attached to this letter. Each signed Project Supplement, if any, modifying, supplementing or amending the parties' rights and obligations with respect to a particular Project or Product creates a supplement to and forms a part of this agreement so that this letter and all Project Supplements constitute a single agreement between McD and the Company (collectively the "Agreement"). Notwithstanding anything to the contrary contained herein, section 2, section 4 and section 5(b) of this Agreement shall have no application to any Company Product unless McD first proposes a technical improvement or Development which would be governed by a Project Supplement executed by the parties at the time of any such proposal. (b) As used herein, the term "Company Affiliates" includes all direct or indirect subsidiaries and affiliates and all officers, directors, employees, agents, consultants, independent contractors, representatives or others acting on behalf of the Company and such direct or indirect subsidiaries and affiliates. The term "McD Affiliates" includes all direct or indirect subsidiaries and affiliates, all franchisees in and suppliers to the McDonald's System, and all officers, directors, employees, agents, consultants, independent contractors, representatives or others acting on behalf of McD and such direct or indirect subsidiaries, affiliates, franchisees and suppliers. 1 2. DEVELOPMENTS, PRIOR DEVELOPMENTS, IMPROVEMENTS. (a) The Company agrees and will cause Company Affiliates to agree that (1) McD will be the exclusive owner and will have all proprietary and intellectual property rights to all Developments and Improvements; (2) McD or others designated by McD will have a non-exclusive, irrevocable, perpetual, royalty-free, worldwide license, with right of sublicense, to make, have made, use, or sell all Prior Developments; and (3) McD will pay no separate compensation for the Developments, Prior Developments or Improvements except as set forth in Section 4 below. As used herein, the following terms have the following meanings: "Developments" means all Work Product, other than Prior Developments, submitted by the Company and/or Company Affiliates to McD and/or McD Affiliates in response to any request for proposals by McD and/or McD Affiliates, or Work Product developed, created, discovered, conceived or reduced to practice, individually by the Company and/or Company Affiliates or jointly with McD and/or McD Affiliates, in connection with any Project or Product. "Work Product" includes, but is not limited to, all products, equipment, compositions, processes, formulas, recipes, techniques, innovations, discoveries, ideas, names, concepts, developments, writings, inventions, technology improvements, trade secrets, trade names, trade marks, service marks, designs and know-how related thereto and all intellectual property and other proprietary rights, whether or not patentable, copyrightable or otherwise subject to intellectual property protection. "Prior Developments" means all Work Product of the Company or Company Affiliates relating to a Project or any Product in the possession of or owned by the Company or Company Affiliates prior to any contact, discussion or other communication with McD or McD Affiliates relating to such Project or Product provided that the Company establishes such prior possession or ownership by contemporary documentation reasonably acceptable to McD. "Improvements" means modifications, alterations, changes, improvements, enhancements, adaptations or derivative works of or to any Developments or Prior Developments. (b) The Company hereby grants and assigns and will cause Company Affiliates to grant and assign to McD or any third party designated by McD, all right, title and interest that the Company or Company Affiliates may have in the Developments and the Improvements, including all proprietary and intellectual property rights, including, but not limited to patent, copyright, trademark, servicemark or trade secret rights, and all goodwill associated therewith. In addition, the Company agrees and will cause Company Affiliates to agree to promptly notify McD of all Developments, Prior Developments and Improvements described in Section 2(a) above and sign, and cause Company Affiliates to sign, at no charge, such documents, at any time reasonably required by McD, including patent, copyright, trademark applications and assignments, to achieve such intellectual property status as McD deems appropriate to protect, perfect, register, record and maintain McD's rights in the Developments, Prior Developments and Improvements. (c) The Company agrees, represents and warrants and will cause Company Affiliates to agree, represent and warrant that it or they, as applicable, are the sole owners of all rights to the Prior Developments and Work Product (of the Company and Company Affiliates) relating to each Project and Product, or have the authorization of the owners of such rights so as to be able to convey the rights to McD or to a third party designated by McD as set forth in this Section 2. The Company further agrees, represents and warrants and will cause Company Affiliates to agree, represent and warrant that the use of 2 any Prior Developments, Developments or Improvements will not violate or infringe the proprietary or intellectual property rights of any person or entity. (d) Except as provided in Section 5 below, the Company and Company Affiliates will have no rights to disclose, make, have made, use, sell or otherwise exploit the Developments or any Improvements. 3. CONFIDENTIALITY. (a) The Company agrees and will cause Company Affiliates to agree that all McD Confidential Information (defined below) will be held in strict confidence, pursuant to the specific provisions set forth in this Section 3. (b) "McD Confidential Information" includes, but is not limited to, any and all ideas, information, material, data, documents or other Work Product of McD or McD Affiliates that have been furnished to the Company or Company Affiliates by McD or McD Affiliates either orally, in writing, by inspection or by means of computer, tape or other electronic, magnetic, mechanical or visual media and that relate (1) to any proposed or actual Project or Product; (2) to the business, assets, financial condition, operations, trade secrets, know-how or prospects of McD or McD Affiliates; (3) to the McDonald's System; or (4) any and all Developments and Improvements. "McD Confidential Information" also includes any analyses, compilations, studies, summaries, extracts or other documents or records (regardless of the format in which maintained) prepared by Company or Company Affiliates which contain or otherwise reflect or are generated from the foregoing information. (c) The nature and contents of McD Confidential Information will not be disclosed by the Company to others (except Company Affiliates, subject to the conditions described below) or used in any manner except pursuant to the terms of this Agreement without the prior written permission of McD. The Company agrees to take all reasonable precautions necessary to keep McD Confidential Information secret and confidential with no less than the degree of care it uses in safeguarding its own confidential information and other proprietary information. With respect to any McD Confidential Information provided to the Company, the Company further agrees that each Company Affiliate given access to such McD Confidential Information must have a legitimate need to know and must agree to be bound by this Section 3. (d) McD Confidential Information does not include any information or data that (1) is already known by the Company or Company Affiliates (through no improper action) prior to receipt, provided that the Company or Company Affiliates, as the case may be, within 30 days of receipt of McD Confidential Information advises McD in writing if any part or all of the McD Confidential Information is already known to it or them and supplies McD with all relevant documents to support its or their position; (2) becomes (through no improper action) generally available to the public; (3) is independently developed by the Company or Company Affiliates without the use of any McD Confidential Information for a party other than McD or McD Affiliates provided, however, that the Company or Company Affiliates, as the case may be, will have the burden of establishing that whomever allegedly worked on the independent development did not have direct or indirect access to any McD Confidential Information; or (4) is approved for release by written authorization from McD. (e) If the Company or any Company Affiliate is required by applicable law or regulation or as a result of any judicial, administrative or governmental proceeding to disclose any McD Confidential Information, the Company agrees and will cause Company Affiliates to agree to provide McD with written notice of such requirement promptly after learning of the same and to object to the production on the grounds that the information requested is confidential. Subject to the foregoing, the Company or Company Affiliates may furnish that portion of the McD Confidential Information that, in the written opinion of its 3 counsel reasonably acceptable to McD, the Company or Company Affiliates are legally required to disclose. In addition, the Company agrees and will cause Company Affiliates to agree to exercise their best efforts to obtain confidential treatment or a protective order with respect to such McD Confidential Information and allow McD, in its sole discretion, to participate in such action or proceeding. (f) The Company agrees and will advise Company Affiliates and cause them to agree that (1) McD or McD Affiliates may engage other parties to work with McD or McD Affiliates on a Project or Projects in order to develop products or services that are similar or identical to any Product or Products; and (2) any information, ideas, material, documentation, Work Product or other matter, including Developments, Prior Developments and Improvements, may be shared by McD or McD Affiliates with such other parties. McD will cause such other parties to be bound by confidentiality provisions similar to those contained herein. (g) Upon termination of any Project or this Agreement as provided in Section 6 below, the Company and Company Affiliates will immediately return to McD all McD Confidential Information. 4. COSTS OF DEVELOPMENT. All costs and expenses of development, research and testing that the Company or Company Affiliates incur in connection with any Project or Product (collectively "Development Costs") will be borne by the Company or Company Affiliates and are not subject to any reimbursement by McD or McD Affiliates. In addition, the Company understands and agrees and will cause Company Affiliates to agree that no Development Costs will be incurred in reliance on securing an Approved Supplier status (as described in Section 5) or any other business relationship with McD or McD Affiliates. In the event, however, that McD determines, in its sole discretion, that any of the Developments, Prior Developments or Improvements are to be used in an Approved Product (as defined in Section 5 below) and neither the Company nor any Company Affiliate is designated as an Approved Supplier, McD agrees that upon the Company providing adequate written supporting documentation, McD will pay the Company or a Company Affiliate designated by the Company an amount not to exceed the lesser of 50% of the Development Costs or $1,000.00 as reimbursement for such Development Costs. 5. APPROVED PRODUCTS/APPROVED SUPPLIERS. (a) McD strives to maintain quality and uniformity throughout the McDonald's System by identifying standards, procedures, specifications and requirements (collectively "Standards") for the manufacture, distribution and purchasing, preparation and service of goods, services, supplies, fixtures, equipment and inventory. McD considers these Standards to be of critical importance to the continued success of the McDonald's System and therefore requires each McDonald's restaurant to deal only with suppliers that have been approved by McD (each an "Approved Supplier"). The Company is hereby designated as an Approved Supplier of any Company Product. (b) If, in McD's sole business judgment, a Project is successful, one or more Products developed under that Project may be designated by McD as an approved product (each an "Approved Product") for use in the McDonald's System. If this occurs, McD will designate in writing, one or more Approved Suppliers to manufacture, distribute, sell or provide the Approved Product within the McDonald's System on an ongoing basis. Unless this Agreement is terminated pursuant to Section 6 below, McD will consider in good faith the Company or a Company Affiliate (designated by the Company) as a possible Approved Supplier for the Approved Product. In determining whether the Company or any Company Affiliate will be designated as such Approved Supplier, McD will consider, among other things, the Company's or such Company Affiliate's (1) ability to consistently manufacture the Approved Product to McD Standards; (2) production and delivery capabilities for the Approved Product on a local or national 4 basis; (3) ability to comply with any of the other requirements described below in this Section 5; and (4) financial condition. (c) As indicated above, the Company understands and agrees and will advise Company Affiliates and cause them to agree that the selection of an Approved Supplier by McD depends on a number of factors as determined by McD in its sole discretion. There is no guarantee or assurance that the Company or any Company Affiliates will ultimately be selected as an Approved Supplier, be the sole Approved Supplier or that such Approved Supplier status, if granted, will continue for any specific time period. (d) If the Company or any Company Affiliate is designated as an Approved Supplier for any Approved Product or any Company Product, the Company understands and agrees and will advise Company Affiliates, as applicable, and cause them to agree that (1) orders for the Approved Product or Company Product come only from approved independent distribution centers, McDonald's restaurants owned by independent franchisees or McD subsidiaries or affiliates, or other approved parties (each a "Purchaser"); (2) a commitment to purchase any Approved Product or Company Product will arise only at such time that a Purchaser issues a written or electronic order for such Approved Product or Company Product setting forth price, quantities and delivery, payment and other terms (a "Purchase Order"); (3) McD does not operate any McDonald's restaurants and, as such, does not directly order or purchase any goods or services for any McDonald's restaurant; (4) McD does not make any promises, commitments or guarantees of sales or profit or that Approved Supplier status will continue for any specific time period; and (5) McD is not responsible for and does not guarantee payment of any past due invoices or delinquent accounts of any Purchaser. (e) If the Company or any Company Affiliate is designated as an Approved Supplier for any Approved Product or Company Product, without disclaiming implied remedies or limiting remedies for breach thereof, the Company represents and warrants and will cause such Company Affiliate to represent and warrant that such Approved Product or Company Product will (1) conform to McD's then current Standards; (2) be merchantable; (3) be free from defects in design, construction, workmanship, materials and packaging; (4) be fit and sufficient for the purpose for which it is intended and/or which is stated on any packaging, labeling or advertising; and (5) be equivalent in materials, quality, fit, finish, workmanship, performance and design to samples, if any, submitted to and approved by McD. (f) If the Company or any Company Affiliates is designated as an Approved Supplier for any Approved Product or Company Product, the Company agrees, represents and warrants and will cause such Company Affiliate to agree, represent and warrant that (1) the manufacture, use, distribution or sale of the Approved Product or Company Product will not violate or infringe any proprietary or intellectual property rights of any person or entity; (2) the Approved Product or Company Product will be produced, packaged, tagged, labeled, packed, shipped and invoiced in compliance with the applicable requirements of federal, state and local laws, regulations, ordinances and administrative orders and rules of the United States, its territories and all other countries in which the Approved Product or Company Product is produced or delivered; (3) they will strictly adhere to all applicable federal, state and local laws, regulations, ordinances and administrative orders and rules of the United States, its territories and all other countries in which the Approved Product or Company Product is produced or delivered with respect to the operation of their production facilities and their other business and labor practices, including laws, regulations and prohibitions governing the working conditions, wages, hours and minimum age of work force; (4) they will not discriminate based upon gender, race, sexual orientation, national origin or any other basis prohibited by law in their employment practices and that such Approved Product or Company Product will not be produced or manufactured, in whole or in part, by child labor or by convict or forced labor; (5) upon request from McD, they will provide McD with specific information, in such detail as McD may reasonably request, as to the location(s) and methods(s) of the manufacture of such Approved Product; (6) 5 upon reasonable notice and during regular business hours, McD, its designated representatives and any independent inspectors approved by McD may inspect any production facility at which such Approved Product or any components of such Approved Product are being produced; (7) if McD determines that such Approved Product or Company Product must be inspected prior to its shipment to the United States or other country, such inspection will be performed at the sole expense of the Company or such Company Affiliate by an independent inspector approved by McD and any inspection or documentation thereof, and corrective actions, if any, taken by the Company or such Company Affiliate with respect to such Approved Product or Company Product will not be deemed an acceptance of any Approved Product or Company Product, or a waiver or any nonconformities or defects in any such Approved Product or Company Product and will not excuse any failure by the Company or such Company Affiliate to deliver such Approved Product or Company Product in accordance with this Agreement or the terms of any Purchase Order; (8) they will strictly adhere to McD's current Employment Standards for Suppliers, a copy of which will be provided by McD; (9) they will not use any trade name, trademark, service mark or other intellectual property of McD, or any other trade name, trademark or service mark incorporating the "Mc" or "Mac" formative, in any manner whatsoever, including, without limitation, on or in connection with any Approved Product or Company Product or other products or services, without first obtaining the written consent of McD; and (10) they will at all times remain in compliance with the Foreign Corrupt Practices Act, as it may be amended from time to time. (g) If the Company or a Company Affiliate is designated as an Approved Supplier for any Approved Product or Company Product, the Company agrees and will cause such Company Affiliate to agree to obtain and maintain, at its expense, a policy or policies of commercial general liability insurance covering liabilities relating to the Approved Products or Company Products, including but not limited to products and completed operations coverage, with a broad form vendor's endorsement naming McD or such other party designated by McD, in such amounts and with such companies and containing such other provisions satisfactory to McD. All such policies will provide that the coverage thereunder will not be terminated or any material changes made without at least 30 days prior written notice to McD. Certificates of insurance evidencing such coverage will be promptly submitted to McD. Approval of any of these insurance policies by McD will not relieve the Company of any obligation contained herein, including the Company's defense and indemnity requirements set forth below, even for claims in excess of the policy limits. Notwithstanding the foregoing, upon receipt of written approval from McD, the Company may elect to self-insure for all or part of its insurance requirements under this Section 5. (h) If the Company or any Company Affiliate is designated as an Approved Supplier for any Approved Product or Company Product, the Company agrees, and will cause such Company Affiliate to agree that in addition all other remedies available to any Purchaser, such Approved Product or Company Product may be rejected by such Purchaser and abandoned, returned or held at the Company's or such Company Affiliate's expense and risk, when such Approved Product or Company Product (1) is not produced, sold, shipped and/or delivered in compliance with the terms of this Agreement or the applicable Purchase Order; (2) violates or allegedly violates federal, state and local laws, regulations, ordinances and administrative orders and rules of the United States, its territories and all other countries in which the Approved Product or Company Product is produced or delivered; or (3) infringes or allegedly infringes any patent, trademark, service mark, trade name, copyright, trade secret or other intellectual or proprietary right. 6. TERMINATION. (a) Each Project or this entire Agreement (including any Approved Supplier designation under Section 5 herein) may be terminated at any time by either party with or without cause; such termination to be effective immediately upon receipt of written notice by the other party. 6 (b) Notwithstanding any termination pursuant to this Section 6, the representations, warranties, obligations, undertakings, agreements and covenants of the Company and Company Affiliates contained in Sections 2, 3, 5, and 7 of this Agreement will survive. 7. INDEMNIFICATION. (a) The Company agrees and will cause Company Affiliates to agree, to protect, defend, indemnify and hold harmless McD, McD Affiliates and any Purchaser (each an "Indemnified Person") from and against any and all losses, claims, actions, suits or proceedings and any related judgments, damages, amounts paid in settlement, and any other expenses, costs or fees (including reasonable counsel fees, disbursements costs of investigation) (each a "Loss"), arising from or in any way relating to a Project or Product or Company Product, including but not limited to (1) any actual or alleged infringement or misappropriation of any patent, trademark, tradename, service mark, copyright, trade secret or other intellectual or proprietary right or any actual or alleged unfair competition relating to any Developments, Prior Developments, Improvements or Approved Products or Company Products; (2) the death of or injury to any person, damage to any property, or any other damage or loss, by whomsoever suffered, resulting or claimed to result, in whole or in part, from any actual or alleged defect in an Approved Product or Company Product, whether latent or patent, including actual or alleged improper construction and/or design, or actual or alleged failure of such Approved Product or Company Product to comply with any Standards or with any express or implied warranties of the Company or any Company Affiliates, or any claim of strict liability (or like theory of law) tort relating to any an Approved Product or Company Product; (3) violation of any federal, state or local laws, regulations, ordinances or administrative orders or rules of the United States or any other country, or political subdivisions thereof, in which any Approved Product or Company Product is produced, shipped or delivered; (4) defects or alleged defects involving the packaging, tagging, labeling, packing, shipping and/or invoicing of any Approved Product or Company Product; (5) failure to warn or inadequate warnings and/or instructions relating to an Approved Product or Company Product; (6) improper or defective displays, assembly or installation of an Approved Product or Company Product; and (7) the actual or alleged breach by the Company or any Company Affiliates of any of its or their representations, warranties, obligations, undertakings, agreements and covenants given under or pursuant to this Agreement (collectively "Obligations") or any Purchase Order. (b) Promptly after receipt by an Indemnified Person of notice of any claim or the commencement of any action, suit or proceeding (collectively "Proceeding") or within a reasonable period of time after the discovery of facts that an Indemnified Person believes will likely give rise to a claim for indemnification from the Company or a Company Affiliate (the "Indemnitor") hereunder, the Indemnified Person will notify the Indemnitor in writing, giving reasonable detail of the claim or the commencement of the Proceeding. Failure to give, or any deficiency in, any such notice will not relieve the Indemnitor of its indemnification obligations hereunder, except and only to the extent that such failure or deficiency materially prejudiced the ability of the Indemnitor to minimize the Loss. In each case, the Indemnified Person will be entitled to retain counsel and control the defense of the indemnified claim or Proceeding. In its defense of any such claim or Proceeding, the Indemnified Person will act reasonably and in accordance with its good faith business judgment with respect thereto, and will not settle or compromise any third party claim or Proceeding without the consent of the Indemnitor, which consent will not unreasonably be withheld. Alternatively, in the case of a third party demand, claim or Proceeding, the Indemnitor, at the request of the Indemnified Person, will assume the defense of any such demand, claim or Proceeding, employing counsel reasonably satisfactory to the Indemnified Person. In such a circumstance, the Indemnitor will not settle or compromise any such demand, claim or Proceeding without the consent of the Indemnified Person, which consent will not be unreasonably withheld. In any circumstance involving a third party demand, claim or Proceeding in which an indemnity requirement as set forth in this Section 7 is determined not to be enforceable under applicable law, the Indemnitor and Indemnified Person will contribute to the payment of any Loss for which indemnification is not available, in proportion to the comparative degree of culpability of the Indemnitor and the Indemnified Person. 7 8. ENTIRE AGREEMENT/WAIVER/ASSIGNMENT. This Agreement contains the entire agreement of the parties regarding the subject matter hereof and supersedes all prior oral or written agreements, understandings and negotiations regarding the same including but not limited to any confidentiality and development agreements or business relationship letters. This Agreement may not be changed, modified, amended, supplemented (each an "Alteration") or waived except by a written instrument to be signed by an authorized representative of each party hereto, in the case of an Alteration, or by an authorized representative of the party waiving compliance herewith, in the case of a waiver. In addition, the Company agrees and will cause Company Affiliates to agree that no Purchase Order may eliminate or otherwise limit any of the Obligations of the Company under this Agreement. No failure or delay by McD in exercising any right, power or privilege hereunder will operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other further exercise thereof or the exercise of any other right, power or privilege hereunder. The Company may not assign or delegate any of its rights or obligations hereunder without the prior written consent of McD and any attempted assignment or delegation without consent will be null and void. If any portion or portions of this Agreement are for any reason invalid or unenforceable, the remaining portion or portions are nevertheless valid and enforceable. 9. CHOICE OF LAW/INJUNCTIVE RELIEF. (a) THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS. THE COMPANY HEREBY SUBMITS AND WILL CAUSE ALL COMPANY AFFILIATES TO SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE FEDERAL AND/OR STATE COURTS OF ILLINOIS IN CONNECTION WITH ALL SUITS, ACTIONS, PROCEEDINGS OR OTHER DISPUTES RELATING TO THIS AGREEMENT, THE PARTIES' BUSINESS RELATIONSHIP, OR ANY OTHER AGREEMENT BETWEEN THE PARTIES OR THE COMPANY AFFILIATES OR McD AFFILIATES RELATING TO THE SUBJECT MATTER HEREIN (COLLECTIVELY "ACTIONS"). THE COMPANY AGREES (AND WILL CAUSE COMPANY AFFILIATES TO AGREE) TO (1) SUBMIT TO THE PERSONAL JURISDICTION AND VENUE OF THE ILLINOIS COURTS; (2) WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTIONS TO THE JURISDICTION AND/OR VENUE OF THE ILLINOIS COURTS; AND (3) WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION. THE COMPANY FURTHER AGREES (AND WILL CAUSE COMPANY AFFILIATES TO AGREE) THAT PROCESS MAY BE SERVED ON THEM BY MAILING THE SAME TO THEM BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, WITH THE SAME EFFECT AS THOUGH SERVED UPON THEM PERSONALLY. (b) The Company recognizes and acknowledges that its failure or the failure of Company Affiliates to comply with any of the representations, warranties, obligations, undertakings, agreements and covenants under this Agreement will cause McD and McD Affiliates material and adverse harm for which there is no adequate remedy at law. Accordingly, the Company agrees and will cause Company Affiliates to agree that, in addition to any other remedies that may be available, McD and McD Affiliates will be entitled to immediate injunctive relief against the breach or threatened breach of any representation, warranty, obligation, undertaking, agreement or covenant by the Company or any Company Affiliates, without proof of actual damages and without posting any bond or other security. Please indicate the Company's acceptance of this Agreement by signing two copies of this letter and returning one copy to McD. 8 ALPHA PRO TECH, LTD. MCDONALD'S CORPORATION By :___________________________ By :____________________________ A. W. Millar Larry Long President Vice President Insurance 9 EXHIBIT A PROJECT SUPPLEMENT This document constitutes a Project Supplement as referred to the in the Agreement dated February 1, 2000 between Alpha ProTech, Ltd. (the "Company") and McDonald's Corporation ("McD"). Capitalized terms used herein but not defined will have the meanings given to them in the Development Agreement, as supplemented. 1. DESCRIPTION OF THE PROJECT[S] AND/OR PRODUCT[S]. 2. OTHER PROVISIONS. [ALL SPECIFIC PROVISIONS RELATING TO A PARTICULAR PROJECT OR PRODUCT THAT DIFFER FROM THE LANGUAGE IN THE MASTER LETTER OR OTHER PROJECT SUPPLEMENTS WILL BE LISTED HERE I.E. OWNERSHIP, COSTS OF DEVELOPMENTS ETC.] Except as provided herein, all of the rights and obligations of the Company and McD as set forth in the Agreement are hereby ratified and confirmed. MCDONALD'S CORPORATION COMPANY By: _____________________________ By: _______________________________ Its: ____________________________ Its: ______________________________ Date: ___________________________ Date: _____________________________ 10 EXHIBIT B COMPANY PRODUCTS The Company currently manufactures and sells the following proprietary products using patented materials, designs and processes: AquaTrak (Registered) and AquaTrak Black (Registered) shoe covers; (b) aprons; (c) sleeve protectors; and, (d) eye shields These proprietary products manufactured by the Company in any color, using any material and containing any McD trademark, tradename or logo shall be referred to herein as a "Company Product.". 11 FIRST AMENDMENT TO BUSINESS RELATIONSHIP/CONFIDENTIALITY AGREEMENT This First Amendment to Business Relationship/Confidentiality Agreement ("First Amendment") by and between Alpha Pro Tech, Ltd. ("Company") and McDonald's Corporation ("McDonald's") is dated as of June 12, 2001. WHEREAS, Company and McDonald's have entered into a Business Relationship/Confidentiality Agreement dated as of February 1, 2000 (the "Agreement"). WHEREAS, the Company and McDonald's desire to amend the Agreement; NOW THEREFORE, in consideration of the premises, mutual promises and covenants herein set forth and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and McDonald's agree that the Agreement is hereby amended as follows: 1. Exhibit B to the Agreement shall be deleted in its entirety and replaced with the revised attached Exhibit B: All other terms and provisions of the Agreement are hereby reaffirmed and remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have duly caused this Second Amendment to be executed as of the date indicated above. ALPHA PRO TECH, LTD. MCDONALD'S CORPORATION By: /s/ A.W. Miller By: /s/ Larry Long -------------------------------- ---------------------------- A.W. Miller Larry Long President Vice President Insurance EXHIBIT B The Company currently manufactures and sells the following proprietary products using patented materials, designs and processes: (a) AquaTrak (registered) and AquaTrak Black (registered) shoe covers; (b) aprons; (c) sleeve protectors; (d) eye shields; and (e) safety mitts/gloves. The above-described products, in any color and using any material, shall be deemed Company Products and shall be owned by the Company. -----END PRIVACY-ENHANCED MESSAGE-----