ALPHA PRO TECH LTD - Quarter Report: 2005 June (Form 10-Q)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2005
Commission File No. 01-15725
Alpha Pro Tech, Ltd.
(exact name of registrant as specified in its charter)
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Delaware, U.S.A. |
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63-1009183 |
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(State or other jurisdiction of incorporation) |
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(I.R.S. Employer Identification No.) |
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Suite 112, 60 Centurian Drive |
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Markham, Ontario, Canada |
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L3R 9R2 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (905) 479-0654
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2). Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 5, 2005.
23,678,953 shares of common stock, $.01 par value
Alpha Pro Tech, Ltd.
Table of Contents
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Consolidated
Balance Sheets |
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Consolidated
Statement of Shareholders’ Equity |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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EXHIBITS |
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Exhibit 31.1: Certification by CEO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act (filed herewith) |
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Exhibit 31.2: Certification by CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act (filed herewith) |
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Exhibit 32.1: Certification by CEO pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith) |
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Exhibit 32.2: Certification by CFO pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith) |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
We have prepared the following unaudited interim consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations.
You should read the following unaudited interim consolidated financial statements and the accompanying notes together with our Annual Report on Form 10-K for the year ended December 31, 2004. Our 2004 Annual Report contains information that may be helpful in analyzing the financial information contained in this report and in comparing our results of operations for the three months ended June 30, 2005 with the same period in 2004.
1
Alpha Pro Tech, Ltd.
Consolidated Balance Sheets (Unaudited)
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June 30, |
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December 31, |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,123,000 |
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$ |
4,875,000 |
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Accounts receivable, net of allowance for doubtful accounts of $83,000 at June 30, 2005 and $75,000 at December 31, 2004 |
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5,830,000 |
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4,261,000 |
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Inventories, net |
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8,354,000 |
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4,802,000 |
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Prepaid expenses and other current assets |
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767,000 |
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949,000 |
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Deferred income taxes |
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461,000 |
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461,000 |
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Total current assets |
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16,535,000 |
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15,348,000 |
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Property and equipment, net |
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3,479,000 |
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3,256,000 |
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Goodwill, net |
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55,000 |
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55,000 |
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Intangible assets, net |
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122,000 |
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130,000 |
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Other assets |
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550,000 |
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— |
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Total assets |
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$ |
20,741,000 |
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$ |
18,789,000 |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
1,616,000 |
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$ |
1,363,000 |
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Accrued liabilities |
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1,058,000 |
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1,074,000 |
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Total current liabilities |
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2,674,000 |
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2,437,000 |
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Deferred income taxes |
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652,000 |
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652,000 |
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Total liabilities |
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3,326,000 |
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3,089,000 |
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Shareholders’ equity |
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Common stock, $.01 par value, 50,000,000 shares authorized, 23,678,955 and 23,456,849 issued and outstanding at June 30, 2005 and December 31, 2004, respectively |
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237,000 |
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235,000 |
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Additional paid-in capital |
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24,459,000 |
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24,193,000 |
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Accumulated deficit |
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(7,281,000 |
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(8,728,000 |
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Total shareholders’ equity |
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17,415,000 |
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15,700,000 |
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Total liabilities and shareholders’ equity |
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$ |
20,741,000 |
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$ |
18,789,000 |
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(1) The condensed consolidated balance sheet as of December 31, 2004 has been prepared using information from the audited financial statements at that date.
The accompanying notes are an integral part of these consolidated financial statements.
2
Alpha Pro Tech, Ltd.
Consolidated Statements of Operations (Unaudited)
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For the Three Months Ended |
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For the Six Months Ended |
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2005 |
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2004 |
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2005 |
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2004 |
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Net Sales |
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$ |
9,040,000 |
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$ |
6,748,000 |
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$ |
16,022,000 |
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$ |
12,601,000 |
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Cost of goods sold, excluding depreciation and amortization |
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4,813,000 |
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3,508,000 |
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8,634,000 |
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6,371,000 |
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Gross margin |
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4,227,000 |
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3,240,000 |
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7,388,000 |
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6,230,000 |
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Expenses: |
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Selling, general and administrative |
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2,516,000 |
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2,398,000 |
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4,868,000 |
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4,513,000 |
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Depreciation and amortization |
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123,000 |
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135,000 |
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246,000 |
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267,000 |
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Income from operations |
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1,588,000 |
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707,000 |
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2,274,000 |
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1,450,000 |
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Other income (expense) |
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Gain on sale of assets |
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— |
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7,000 |
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— |
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7,000 |
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Interest, net |
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7,000 |
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(2,000 |
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23,000 |
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(3,000 |
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Income before provision for income taxes |
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1,595,000 |
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712,000 |
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2,297,000 |
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1,454,000 |
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Provision for income taxes |
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592,000 |
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262,000 |
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850,000 |
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537,000 |
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Net income |
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$ |
1,003,000 |
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$ |
450,000 |
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$ |
1,447,000 |
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$ |
917,000 |
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Basic net income per share |
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$ |
0.04 |
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$ |
0.02 |
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$ |
0.06 |
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$ |
0.04 |
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Diluted net income per share |
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$ |
0.04 |
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$ |
0.02 |
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$ |
0.06 |
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$ |
0.04 |
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Basic weighted average shares outstanding |
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23,678,955 |
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23,087,599 |
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23,662,572 |
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23,278,768 |
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Diluted weighted average shares outstanding |
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25,075,759 |
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24,567,552 |
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25,059,376 |
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24,911,324 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
Consolidated Statement of Shareholders’ Equity (Unaudited)
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Common Stock |
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Additional |
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Accumulated |
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Shares |
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Amount |
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Capital |
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Deficit |
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Total |
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Balance at December 31, 2004 |
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23,456,849 |
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$ |
235,000 |
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$ |
24,193,000 |
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($8,728,000 |
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$ |
15,700,000 |
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Options exercised |
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232,106 |
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2,000 |
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287,000 |
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— |
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289,000 |
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Common stock repurchased |
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(10,000 |
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— |
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(21,000 |
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— |
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(21,000 |
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Net income |
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— |
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— |
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— |
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1,447,000 |
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1,447,000 |
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Balance at June 30, 2005 |
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23,678,955 |
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$ |
237,000 |
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$ |
24,459,000 |
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$ |
(7,281,000 |
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$ |
17,415,000 |
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The accompanying notes are an integral part of these consolidated financial statements
4
Consolidated Statements of Cash Flows (Unaudited)
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For the Six months Ended |
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2005 |
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2004 |
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Cash Flows From Operating Activities: |
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Net income |
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$ |
1,447,000 |
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$ |
917,000 |
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Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
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246,000 |
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267,000 |
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Gain on sale of asset |
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— |
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(7,000 |
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Changes in assets and liabilities: |
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Accounts receivable, net |
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(1,569,000 |
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(603,000 |
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Inventories, net |
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(3,552,000 |
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292,000 |
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Prepaid expenses and other current assets |
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182,000 |
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(591,000 |
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Accounts payable and accrued liabilities |
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237,000 |
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(628,000 |
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Net cash used in operating activities: |
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(3,009,000 |
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(353,000 |
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Cash Flows From Investing Activities: |
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Purchase of property and equipment |
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(451,000 |
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(105,000 |
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Purchase of intangible assets |
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(10,000 |
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(34,000 |
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Proceeds from sale of assets |
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— |
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16,000 |
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Investment in Joint Venture |
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(550,000 |
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— |
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Net cash used in investing activities |
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(1,011,000 |
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(123,000 |
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Cash Flows From Financing Activities: |
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Proceeds from the exercise of stock options |
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289,000 |
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251,000 |
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Payments for the repurchase of common stock |
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(21,000 |
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(194,000 |
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Net cash provided by financing activities |
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268,000 |
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57,000 |
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Decrease in cash during the period |
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(3,752,000 |
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(419,000 |
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Cash and cash equivalents, beginning of period |
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4,875,000 |
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3,427,000 |
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Cash and cash equivalents, end of period |
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$ |
1,123,000 |
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$ |
3,008,000 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
Notes to Consolidated Financial Statements (Unaudited)
1. The Company
Alpha Pro Tech, Ltd. (Alpha ProTech, the Company, we, our, us) manufactures and distributes a line of disposable protective apparel and a line of infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets. The disposable protective apparel consists of a complete line of shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats. The infection control line of products includes a line of face masks and eye shields. The Company also manufactures and distributes a line of medical bed pads and accessories as well as a line of pet beds. The Company’s products are sold both under the “Alpha Pro Tech” brand name as well as under private label and are predominantly sold in the United States of America.
During the second quarter 2004, the Company announced the formation of a new business segment, Alpha ProTech Engineered Products, Inc., a wholly-owned subsidiary of Alpha Pro Tech. This segment consists of a line of construction supply weatherization products as well as a line of paint with antimicrobials. The construction supply weatherization products consist of building wrap and a synthetic roof underlayment. The line of paint with antimicrobials is designed to inhibit growth of bacteria, fungi and algae on the painted surfaces in hospitals, surgical rooms and cleanrooms and associated controlled environments.
2. Basis of Presentation
The interim financial information included herein is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 10-K”). The results of operations for the three months and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet at December 31, 2004 was extracted from the audited consolidated financial statements contained in the 2004 10-K and does not include all disclosures required by accounting principles generally accepted in the United States of America for annual consolidated financial statements.
3. Stock Based Compensation
Accounting for Stock-based Compensation. The Company maintains two stock option plans under which the Company may grant incentive stock options and non-qualified stock options to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value on the date of grant. Options vest and expire according to terms established at the grant date.
The Company accounts for stock options granted using Accounting Principles Board (“APB”) Opinion 25. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS No. 123,”Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, the Company’s net income and net income per common share would have changed to the pro forma amounts indicated below:
6
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For the Three Months |
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For the Six Months |
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Ended |
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Ended |
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2005 |
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2004 |
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2005 |
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2004 |
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Net income, as reported |
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$ |
1,003,000 |
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$ |
450,000 |
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$ |
1,447,000 |
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$ |
917,000 |
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Add: Total stock-based employee compensation expense included in reported net income, net of related tax effects |
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— |
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— |
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— |
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Deduct: Total stock-based employee compensation expense determined using the fair value method for all rewards, net of related tax effects |
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(93,000 |
) |
— |
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(183,000 |
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— |
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Pro forma net income |
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$ |
910,000 |
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$ |
450,000 |
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$ |
1,264,000 |
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$ |
917,000 |
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Net income per share: |
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Basic - as reported |
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$ |
0.04 |
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$ |
0.02 |
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$ |
0.06 |
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$ |
0.04 |
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Basic - pro forma |
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0.04 |
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0.02 |
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0.05 |
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0.04 |
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Diluted – as reported |
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0.04 |
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0.02 |
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0.06 |
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0.04 |
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Diluted - pro forma |
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0.04 |
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0.02 |
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0.05 |
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0.04 |
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4. New Accounting Standards
Based on the Company’s review of new accounting standards released during the quarter ended June 30, 2005 the Company did not identify any standards requiring adoption that would have a significant impact on its consolidated financial statements.
5. Inventories
Inventories consist of the following:
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June 30, |
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December 31, |
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Raw materials |
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$ |
4,964,000 |
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$ |
2,719,000 |
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Work in process |
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248,000 |
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57,000 |
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Finished goods |
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3,517,000 |
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2,452,000 |
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8,729,000 |
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5,228,000 |
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Less reserve for slow-moving, obsolete or unusable inventory |
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(375,000 |
) |
(426,000 |
) |
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$ |
8,354,000 |
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$ |
4,802,000 |
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7
6. Other Assets
On June 14, 2005, Alpha ProTech Engineered Products, Inc. entered into a 50/50 joint venture agreement with Maple Industries and Associates (Maple), a manufacturer in India, for the production of building products. The name of the joint venture is Harmony Plastics Private Limited (Harmony). As of June 30, 2005, Alpha ProTech Engineered Products has invested $550,000 in the joint venture; $350,000 for share capital and $200,000 in the form of a long term advance.
In order to fund the joint venture, the agreement calls for Alpha ProTech Engineered Products, Inc. and Maple to each contribute $350,000 for share capital, and for Alpha ProTech Engineered Products, Inc. to make a long term, non interest bearing advance of $1 million for materials. $500,000 of this advance is to be repaid monthly over a six year term and the balance is to be paid in the seventh year. The agreement also calls for Harmony to arrange a bank loan of $1.65 million, guaranteed exclusively by Maple and the assets of Harmony Plastics Private Limited. As a result, the total initial funding will be $3.35 million, of which Alpha ProTech Engineered Products, Inc. will contribute approximately $1.35 million.
The joint venture is currently not operational, and is still in the start up and funding phase. Additionally, at this time no operation agreement has been entered into. The actual design and anticipated operations could change when operations are to begin.
Harmony’s start up funding will be utilized to purchase an existing 33,000 square-foot manufacturing facility in India; this facility includes manufacturing equipment necessary to produce roof underlayment. Harmony will also build a new 60,000 square-foot facility for the additional manufacturing of roof underlayment and other building products.
7. Accrued Liabilities
Accrued liabilities consist of the following:
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June 30, |
|
December 31, |
|
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Bonuses payable |
|
$ |
359,000 |
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$ |
516,000 |
|
|
Income tax |
|
277,000 |
|
— |
|
||
|
Accrued payroll |
|
155,000 |
|
163,000 |
|
||
|
Accrued rebates and other |
|
267,000 |
|
395,000 |
|
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|
$ |
1,058,000 |
|
$ |
1,074,000 |
|
8
8. Basic and Diluted Net Income Per Share
The following table provides a reconciliation of both net income and the number of shares used in the computation of “basic” earnings per share (EPS), which utilizes the weighted average number of shares outstanding without regard to potential shares, and “diluted” EPS, which includes all such dilutive shares.
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
||||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||||
|
Net income (Numerator) |
|
$ |
1,003,000 |
|
$ |
450,000 |
|
$ |
1,447,000 |
|
$ |
917,000 |
|
||
|
Shares (Denominator): |
|
|
|
|
|
|
|
|
|
||||||
|
Basic weighted average shares outstanding |
|
23,678,955 |
|
23,087,599 |
|
23,662,572 |
|
23,278,768 |
|
||||||
|
Add: Dilutive effect of stock options and warrants |
|
1,396,804 |
|
1,479,953 |
|
1,396,804 |
|
1,632,556 |
|
||||||
|
Diluted weighted average shares outstanding |
|
25,075,759 |
|
24,567,552 |
|
25,059,376 |
|
24,911,324 |
|
||||||
|
Net income per share: |
|
|
|
|
|
|
|
|
|
||||||
|
Basic |
|
$ |
0.04 |
|
$ |
0.02 |
|
$ |
0.06 |
|
$ |
0.04 |
|
||
|
Diluted |
|
$ |
0.04 |
|
$ |
0.02 |
|
$ |
0.06 |
|
$ |
0.04 |
|
||
9. Activity of Business Segments
The Company operates through four segments:
Disposable Protective Apparel Products: consisting of a complete line of disposable protective clothing such as shoecovers (including the Aqua Track and spunbond shoecovers), bouffant caps, coveralls, frocks, lab coats and hoods, for the pharmaceutical, cleanroom, industrial and medical markets.
Infection Control Products: consisting of a line of face masks and eye shields principally for the medical, dental and industrial markets.
Extended Care Products: consisting of a line of medical bed pads using Unreal Lambskin ® (synthetic lambskin) The Unreal Lambskin ® is used to produce medical bed pads, which prevent decubitus ulcers or bedsores on long term care patients. The Unreal Lambskin ® is also used to manufacture bedrail pads, knee and elbow protectors, as well as wheelchair accessories. The Company also manufactures a line of pet beds and pet toy accessories with this material.
9
Engineered Products: this new fourth segment was announced during the second quarter 2004 with the formation of Alpha ProTech Engineered Products, Inc., a wholly-owned subsidiary. This segment consists of a line of construction supply weatherization products as well as a line of paint with antimicrobials. The construction supply weatherization products consist of building wrap and a synthetic roof underlayment. The line of paint with antimicrobials is designed to inhibit growth of bacteria, fungi and algae on the painted surfaces in hospitals, surgical rooms and cleanrooms and associated controlled environments.
The accounting policies of the segments are the same as those described previously under “Summary of Significant Accounting Policies” in the 2004 10-K. Segment data excludes charges allocated to head office and corporate sales/marketing departments and income taxes. The Company evaluates the performance of its segments and allocates resources to them based primarily on net sales
The following table shows net sales for each segment for the three and six months ended June 30, 2005 and 2004:
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Disposable protective apparel |
|
$ |
6,419,000 |
|
$ |
4,737,000 |
|
$ |
10,662,000 |
|
$ |
8,830,000 |
|
|
Infection control |
|
1,165,000 |
|
1,620,000 |
|
2,381,000 |
|
2,836,000 |
|
||||
|
Engineered products |
|
1,115,000 |
|
— |
|
2,105,000 |
|
— |
|
||||
|
Extended care |
|
341,000 |
|
391,000 |
|
874,000 |
|
935,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Consolidated total net sales |
|
$ |
9,040,000 |
|
$ |
6,748,000 |
|
$ |
16,022,000 |
|
$ |
12,601,000 |
|
The following table shows the reconciliation of total segment income to total consolidated net income for the three months and six months ended June 30, 2005 and 2004:
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
|||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|||||
|
Disposable protective apparel |
|
$ |
2,574,000 |
|
$ |
1,538,000 |
|
$ |
4,057,000 |
|
$ |
3,097,000 |
|
|
|
Infection control |
|
482,000 |
|
632,000 |
|
959,000 |
|
1,032,000 |
|
|||||
|
Engineered products |
|
34,000 |
|
— |
|
(81,000 |
) |
|
|
|||||
|
Extended care |
|
17,000 |
|
41,000 |
|
105,000 |
|
137,000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total segment income |
|
3,107,000 |
|
2,211,000 |
|
5,040,000 |
|
4,266,000 |
|
|||||
|
Unallocated corporate overhead expenses |
|
(1,512,000 |
) |
(1,499,000 |
) |
(2,743,000 |
) |
(2,812,000 |
) |
|||||
|
Provision for income taxes |
|
(592,000 |
) |
(262,000 |
) |
(850,000 |
) |
(537,000 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Consolidated net income |
|
$ |
1,003,000 |
|
$ |
450,000 |
|
$ |
1,447,000 |
|
$ |
917,000 |
|
|
10
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our consolidated financial statements and the notes to our consolidated financial statements, which appear elsewhere in this report.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This report on Form 10-Q 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 include statements concerning plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. Additional forward-looking statements may be made by us from time to time. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of us, are also expressly qualified by these cautionary statements.
Our forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. However, we cannot assure you that management’s expectations; beliefs and projections will result or be achieved or accomplished. Our forward-looking statements apply only as of the date made. Except as required by law, we undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.
Where to find more information about us. We make available free of charge on our Internet website (http://www.alphaprotech.com) our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-K filed since our most recent Annual Report on Form 10-K and any amendments to such reports as soon as reasonably practicable following the electronic filing of such report with the SEC. In addition, we provide electronic or paper copies of our filings free of charge upon request.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. We believe our critical accounting polices include the following:
Inventories: Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (computed on a standard cost basis, which approximates average cost) or market. Provision is made for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated market value based upon assumptions about future sales and supply on-hand. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Revenue Recognition: For sales transactions, we comply with the provisions of Staff Accounting Bulletin 104 “Revenue Recognition,” which states that revenue should be recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or
11
determinable; and (4) collection of the resulting receivable is reasonably assured. These criteria are satisfied upon shipment of product and revenues are recognized accordingly.
Sales are reduced for any anticipated sales returns, rebates and allowances based on historical experience. Since our return policy is only 90 days and our products are not generally susceptible to external factors such as technological obsolescence or significant changes in demand, we are able to make a reasonable estimate for returns. We offer end user product specific and sales volume rebates to select distributors. Our rebates are based on actual sales and accrued for monthly.
Stock Based Compensation: We account for stock options granted to employees and directors under the recognition and measurement principles of APB opinion No. 25 instead of the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148. Under APB opinion No. 25, no stock-based employee compensation is reflected in net income, as all options granted under the Company’s plan have an exercise price equal to the market value of the stock on the date of the grant. The effect on net income if we had applied the fair value recognition provisions of SFAS No. 123 would have been a decrease of $90,000 for the quarter ended June 30, 2005 and $180,000 for the six months ended June 30, 2005..
The fair values of stock option grants are determined using the Black-Scholes option pricing model and the following assumptions: expected stock price volatility based on historic and management’s expectations of future volatility, risk-free interest rates from published sources, weighted average expected option lives based on historical data and no dividend yield, as management currently does not intend to pay dividends in the near future. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Our stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect their fair value.
In December 2004, the FASB issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123-R, “Share-Based Payment.” SFAS No. 123-R focuses primarily on transactions in which an entity exchanges its equity instruments for employee services and generally establishes standards for the accounting for transactions in which an entity obtains goods or services in share-based payment transactions. We will adopt SFAS No. 123-R effective January 1, 2006 using the modified prospective application with no restatement of prior interim periods. The Company does not expect the adoption of this standard to have a significant impact on its financial position or results of operations.
OVERVIEW
Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets. We also manufacture and distribute a line of medical bed pads and accessories as well as a line of pet beds. Alpha ProTech Engineered Products develops and manufactures a line of construction supply weatherization products, including housewrap and roof underlayment, as well as a line of antimicrobial paint. Our products are sold both under the “Alpha Pro Tech” brand name as well as under private label.
Our products are classified into six groups: Disposable protective apparel, consisting of a complete line of shoecovers, bouffant caps, gowns, coveralls and lab coats; infection control products, consisting of a line of face masks and eye shields; extended care products, consisting of a line of medical bed pads, wheelchair covers, geriatric chair surfaces, operating room table surfaces and pediatric surfaces; a line of pet beds; construction weatherization products, consisting of house wrap and synthetic roof
12
underlayment; and a line of paint with antimicrobials designed to inhibit growth of bacteria, fungi and algae on painted surfaces.
Our products as classified above are grouped into four business segments. The Disposable Protective Apparel segment, consisting of disposable protective apparel; the Infection Control segment, consisting of face masks and eye shields; the Extended Care segment, consisting of extended care products, namely medical bed pads and pet beds; and the Engineered Products segment, consisting of construction weatherization products such as house wrap and synthetic roof underlayment as well as the line of antimicrobial paint.
Our target markets are pharmaceutical manufacturing, bio-pharmaceutical manufacturing and medical device manufacturing, lab animal research, high technology electronics manufacturing which includes the semi-conductor market, medical and dental distributors, pet stores and pet distributors and construction supply and roofing distributors.
Our products are used primarily in cleanrooms, industrial safety manufacturing environments, health care facilities such as hospitals, laboratories and dental offices, as well as construction supply sites. Our pet beds are used by pet owners and veterinarians. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.
During 2004, we announced the formation of a new business segment, Alpha ProTech Engineered Products, Inc. (Engineered Products), a wholly-owned subsidiary of Alpha Pro Tech. This new segment consists of a line of construction supply weatherization products as well as a line of paint with antimicrobials. The construction supply weatherization products consist of house wrap and a synthetic roof underlayment. The line of paint with antimicrobials is designed to inhibit growth of bacteria, fungi and algae on the painted surfaces in hospitals, surgical rooms and cleanrooms and associated controlled environments. Our paint has been tested at Nelson Laboratories, Inc., a privately owned testing lab specializing in microbiology, and confirmed by a leading university for its containment ability to inhibit micro-organisms. We have an exclusive licensing agreement for the proprietary antimicrobial formulation to be used in the paint. In addition to our paint with antimicrobials, we are currently developing a line of sealants with antimicrobials to be used for mold remediation.
During the first quarter of 2005, we announced two sales and marketing agreements for our line of construction supply weatherization products. On January 31, 2005 we announced that we signed a 3 year mutually exclusive agreement with Perma “R” Products, Inc., (Perma “R”) a Grenada, Mississippi based company. As part of the agreement, Perma “R” will be responsible for all marketing of our house wrap products, and has agreed to minimum sales of $5 million per year. On February 28, 2005 we announced the signing of a second 3 year, mutually exclusive agreement with Perma “R”. This second agreement stipulates that Perma “R” will be responsible for all sales & marketing of our synthetic roof underlayment product and has agreed to minimum sales of $3 million per year.
Engineered Products began production of house wrap and synthetic roof underlayment during the first quarter of 2005 and revenue for this segment for the quarter ended June 30, 2005 and the six months ended June 30, 2005 was $1,115,000 and $2,105,000, respectively. This segment is expected to grow in the coming quarters and contribute significantly to revenue growth in 2005.
We are also focused on appreciably improving sales in the pharmaceutical, cleanroom and industrial safety markets. We expect substantial growth in 2005 from our largest distributor as they implement their strategy, introduced in late 2004, to focus more on private label suppliers. Our key sales growth strategies for these markets are based on a strategy of communicating directly with end users and developing innovative products to suit individual end users’ specific needs. Our Disposable Protective Apparel segment that services these markets has grown by 20.7% for the six months ended June 30, 2005. We expect sales in this segment to continue to grow in 2005.
13
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of sales for the periods indicated:
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
Sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Gross profit |
|
46.7 |
|
48.0 |
|
46.1 |
|
49.4 |
|
|
Selling, general and administrative |
|
27.8 |
|
35.5 |
|
30.4 |
|
35.8 |
|
|
Income from operations |
|
17.5 |
|
10.5 |
|
14.2 |
|
11.5 |
|
|
Income before provision for income taxes |
|
17.6 |
|
10.6 |
|
14.3 |
|
11.5 |
|
|
Net income |
|
11.1 |
|
6.7 |
|
9.0 |
|
7.3 |
|
Three months ended June 30, 2005, compared to the three months ended June 30, 2004
Sales. Consolidated sales for the quarter ended June 30, 2005 increased to $9,040,000 from $6,748,000 for the quarter ended June 30, 2004, representing an increase of $2,292,000 or 34.0%. We attribute the increase primarily to increased sales of disposable protective apparel of $1,682,000, to new sales of construction supply weatherization products of $1,115,000, partially offset by decreased infection control segment sales of $455,000 relating to one international sale in the second quarter of 2004, as well as decreased sales from our Extended Care Unreal Lambskin segment of $50,000.
Sales in the second quarter of 2005 were favorably affected by a back-order situation that occurred in the first quarter. During the first quarter of 2005, due to an issue with one of our raw materials, as well as down-time with one of our sub-contractors in China, we received fewer containers from China than ordered and therefore could not fulfill these orders within the first quarter. These orders, primarily for disposable protective apparel product, which amounted to approximately $1 million, were fulfilled in the second quarter.
Sales for the Disposable Protective Apparel segment for the quarter ended June 30, 2005 were $6,419,000 compared to $4,737,000 for the same period of 2004. The Disposable Protective Apparel segment sales increase of $1,682,000 or 35.5% was primarily due to increased sales of $1,250,000 to our largest distributor, and approximately a $400,000 increase due to other distributors that concentrate on the industrial safety and cleanroom industry. As discussed above, approximately $1 million in sales were attributable to fulfilling back-orders from the first quarter of 2005. We expect growth in 2005 from our largest distributor as they continue to implement their strategy, introduced in late 2004, to focus more on private label suppliers. We also expect growth with other distributors as we continue to gain a stronger presence into the pharmaceutical, industrial safety and cleanroom markets.
Infection Control segment sales for the quarter ended June 30, 2005 decreased by $455,000 or 28.1% to $1,165,000 compared to $1,620,000 for the same period of 2004. The decrease is primarily due to a $600,000 international sale for N-95 respirator masks in the second quarter of 2004 that did not occur in the second quarter of 2005, partially offset by increased medical, dental and industry mask sales as well as increased shield sales in the second quarter of 2005. Excluding this international sale, the infection control segment was up $145,000 or 14.2% for the quarter ended June 30, 2005. From time to time, large orders could periodically occur that will influence this segments revenue on a quarterly basis.
14
The Engineered Products segment consists of a line of construction supply weatherization products (house wrap and roof underlayment) as well as a line of paint with antimicrobials. Engineered Products sales for the quarter ended June 30, 2005 was $1,115,000 as compared to $0 for the same period of 2004. The breakdown of the construction supply weatherization products is as follows for the second quarter of 2005: 77% house wrap and 23% roof underlayment. The construction supply weatherization products account for almost all of the sales for the second quarter of 2005. Due to the industry’s traditional seasonal softness in the second quarter, we remained basically flat to the first quarter of 2005, however; we continue to expect growth in the second half of 2005.
Sales from our Extended Care Unreal Lambskin and other related products, which includes a line of medical bed pads as well as pet beds, decreased by $50,000 or 12.8% to $341,000 for the quarter ended June 30, 2005 from $391,000 for the quarter ended June 30, 2004. The decrease of $50,000 in sales is primarily the result of lower medical bed pad sales.
Consolidated sales for the six months ended June 30, 2005 increased to $16,022,000 from $12,601,000 for the six months ended June 30, 2004, representing a increase of $3,421,000 or 27.1%. We attribute the increase primarily to increased sales of disposable protective apparel of $1,832,000, to new sales of construction supply weatherization products of $2,105,000, partially offset by decreased infection control segment sales of $455,000 relating to one international sale in 2004, as well as decreased sales from our Extended Care Unreal Lambskin segment of $61,000.
Sales for the Disposable Protective Apparel segment for the six months ended June 30, 2005 were $10,662,000 compared to $8,830,000 for the same period of 2004, an increase of $1,832,000 or 20.7%. The Apparel segment sales increase was due to higher sales to the pharmaceutical and cleanroom industry and to lesser extent sales to the industrial safety industry. Seventy percent of the sales increase is from our largest distributor and the balance from distributors that concentrate on the cleanroom industry and the industrial safety industry. We expect sales in this segment to continue to grow in 2005. We anticipate continued long-term growth in this segment.
Infection Control segment sales for the six months ended June 30, 2005 decreased by $455,000 or 16.0% to $2,381,000 from $2,836,000 in the same period of 2004. The decrease is primarily due to a $600,000 international sale for N-95 respirator masks in the second quarter of 2004, partially offset by increased medical, dental and industry mask sales as well as increased shield sales for the six months ended June 30, 2005. Excluding this international sale, the infection control segment was up $145,000 or 6.5% for the six months ended June 30, 2005.
The Engineered Products segment consists of a line of construction supply weatherization products (house wrap and roof underlayment) as well as a line of paint with antimicrobials. Engineered Products sales for the six months ended June 30, 2005 was $2,105,000 as compared to $0 for the same period of 2004. The breakdown of the construction supply weatherization products is as follows for the second quarter of 2005: 77% house wrap and 23% roof underlayment. The construction supply weatherization products account for almost all of the sales for the six months ended June 30, 2005. Management expects this segment to contribute significantly to revenues in 2005.
Sales of the Company’s Extended Care Unreal Lambskin and other related products, which includes a line of medical bed pads as well as pet beds, decreased by $61,000 or 6.5% to $874,000 for the six months ended June 30, 2005 from $935,000 for the six months ended June 30, 2004. This decrease of $61,000 in sales is primarily the result of a decrease in medical bed pad sales.
15
Gross Profit Gross profit increased by 30.5% to $4,227,000 for the quarter ended June 30, 2005 from $3,240,000 for the same period in 2004. Gross profit margin decreased to 46.7% for the quarter ended June 30, 2005 from 48.0% for the same period in 2004. Gross profit margin decreased to 46.1% for the six months ended June 30, 2005 from 49.4% for the same period in 2004.
Gross profit margin is primarily down due to lower margins on the Engineered Products segment.
Excluding Engineered Products, gross profit margin was 49.8% for the quarter ended June 30, 2005 and 49.6% for the six months ended June 30, 2005. This gross profit margin is in line with the gross profit margin of 49.5% for fiscal 2004.
Gross profit on the Engineered Products segment improved to 25.2% for the second quarter ended June 30, 2005 from 20.6% for the first quarter ended March 31, 2005. Gross profit on this segment for the six months ended June 30, 2005 was 23.0%. Gross profit on this product line is expected to increase to the mid 30% range by the second quarter of 2006 as our production facility in India becomes fully operational.
Although improving, our Engineered Products gross profit margin continues to be affected by start-up issues. As is common with all new equipment, it required debugging and during this process the machine did not run as efficiently resulting in low productivity and high scrap. Furthermore, the machine operators had to be trained to run this new machine, again resulting in high scrap and low productivity. In addition gross profit was affected due to the fact that we had to outsource the printing and converting of roof underlayment. We anticipated the printing and converting to be in house by the end of the second quarter but, that has been slightly delayed by a month.
Management expects some pressure on consolidated gross profit margins over the next twelve months primarily due to the lower gross margin on the Engineered Products segment.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $118,000 or 4.9% to $2,516,000 for the quarter ended June 30, 2005 from $2,398,000 for the quarter ended June 30, 2004. As a percentage of net sales, selling, general and administrative expenses decreased to 27.8% for the quarter ended June 30, 2005 from 35.5% for the same period in 2004. The increase in selling, general and administrative expenses primarily consists of increased payroll costs of $30,000, increased expense for the executive bonus program of $98,000, increased rent and utilities expense of $21,000, increased insurance expense of $76,000, increased professional fees and public company expenses of $22,000, Sarbanes-Oxley Corporate Governance costs of $45,000, increased factory indirect expenses of $23,000, partially offset by decreased travel expense of $93,000, decreased marketing and commission expenses of $77,000, decreased office expenses of $23,000 and decreased telecommunications expense of $4,000.
Selling, general and administrative expenses for the quarter ended June 30, 2005 for the Engineered Products segment was $240,000 as compared to $0 for the same period of 2004. We believe that we have built the infrastructure required to substantially grow Engineered Products and do not anticipate expenses to change substantially from current year to date levels for at least the next twelve months if sales increase as expected. Expenses are expected to decrease significantly as a percentage of sales as Engineered Products sales grow.
Excluding the Engineered Products segment expenses, selling, general and administrative expenses in the second quarter of 2005 decreased by $122,000 or 5.1% to $2,276,000 as compared to $2,398,000 for the same period of 2004.
Selling, general and administrative expenses increased by $355,000 or 7.9% to $4,868,000 for the six month ended June 30, 2005 from $4,513,000 for the six months ended June 30, 2004. As a percentage of net sales, selling, general and administrative expenses decreased to 30.4% for the six months ended June 30, 2005 from 35.8% for the same period in 2004. The increase in selling, general and administrative expenses primarily consists of increased payroll costs of $42,000, increased expense for the executive bonus program of $94,000, increased rent and utilities expense of $50,000, increased
16
insurance expense of $116,000, increased professional fees and public company expenses of $69,000, Sarbanes-Oxley Corporate Governance costs of $91,000, increased factory indirect expenses of $45,000, partially offset by decreased travel expense of $81,000, decreased marketing and commission expenses of $59,000, decreased office expenses and miscellaneous expenses of $23,000 and decreased telecommunications expense of $9,000.
Excluding the year to date Engineered Products segment expenses of $556,000, selling, general and administrative expenses for the six months ended June 30, 2005 decreased by $201,000 or 4.5% to $4,312,000 as compared to $4,513,000 for the same period of 2004.
The chief executive officer and president are each entitled to a bonus equal to 5% of the pre-tax profits of the Company. A total bonus of $255,000 was accrued for the six months ended June 30, 2005 as compared to $161,000 in the same period of 2004.
Depreciation and Amortization. Depreciation and amortization expense decreased by $12,000 to $123,000 for the quarter ended June 30, 2005 from $135,000 for the same period in 2004 and decreased by $21,000 to $246,000 for the six months ended June 30, 2005 compared to $267,000 for the same period in 2004. The decrease is primarily attributable to the closure of our facility located in Mexico.
Income from Operations. Income from operations increased by $881,000 or 124.6%, to $1,588,000 for the quarter ended June 30, 2005 as compared to income from operations of $707,000 for the quarter ended June 30, 2004. The increase in income from operations is due to an increase in gross profit of $987,000 and a decrease in depreciation and amortization of $12,000, partially offset by an increase in selling, general and administrative expenses of $118,000.
Income from operations increased by $824,000 or 56.8%, to $2,274,000 for the six months ended June 30, 2005 as compared to income from operations of $1,450,000 for the six months ended June 30, 2004. The increase in income from operations is primarily due to an increase in gross profit of $1,158,000 and a decrease in depreciation and amortization of $21,000, partially offset by an increase in selling, general and administrative expenses of $355,000
The Engineered Products segment had income from operations for the second quarter ended June 30, 2005 of $34,000 and a loss from operations of $115,000 for the first quarter ended March 31, 2005 for a $81,000 loss from operations for the six months ended June 30, 2005.
Excluding the Engineered Products segment, income from operations would be up $905,000 or 62.4% for the six months ended June 30, 2005.
Net Interest. For the quarter ended June 30, 2005, we had net interest income of $7,000 compared to net interest expense of $2,000 for the quarter ended June 30, 2004. Interest expense decreased to $2,000 for the quarter ended June 30, 2005 compared to $3,000 for the same period of 2004. Interest income increased by $8,000 to $9,000 for the quarter ended June 30, 2005 as compared to $1,000 for the same period of 2004.
For the six months ended June 30, 2005, we had net interest income of $23,000 compared to net interest expense of $3,000 for the quarter ended June 30, 2004. Interest expense decreased to $4,000 for the six months ended June 30, 2005 compared to $5,000 for the same period of 2004. Interest income increased by $25,000 to $27,000 for the six months ended June 30, 2005 as compared to $2,000 for the same period of 2004.
Income Before Provision for Income Taxes. Income before provision for income taxes for the quarter ended June 30, 2005 was $1,595,000 compared to $712,000 for the quarter ended June 30, 2004, representing a increase of $883,000 or 124.0%. This increase is attributable to an increase in gross profit of $987,000, a decrease in depreciation and amortization of $12,000 and a change in net
17
interest of $9,000, partially offset by an increase in selling, general and administrative expenses of $118,000 and a decrease in gain on sale of assets of $7,000.
Income before provision for income taxes for the six months ended June 30, 2005 was $2,297,000 compared to $1,454,000 for the six months ended June 30, 2004, representing an increase of $843,000 or 58.0%. This increase is attributable to an increase in gross profit of $1,158,000, a decrease in depreciation and amortization of $21,000 and a change in net interest of $26,000, partially offset by an increase in selling, general and administrative expenses of $355,000 and a decrease in gain on sale of assets of $7,000.
For the Engineered Products segment, income before provision for income taxes for the second quarter ended June 30, 2005 was $34,000 as compared to a loss of $115,000 for the first quarter of 2005. We expect profitability on this segment to continue to improve in the coming quarters as our sales grow.
Provision for Income Taxes The provision for income taxes for the quarter ended June 30, 2005 was $592,000 compared to $262,000 for the quarter ended June 30, 2004. The increase in income taxes is due to higher income before provision for income taxes in 2005. The effective tax rate was 37.1% for the three months ended June 30, 2005 as compared to 36.8% for the same period in 2004.
The provision for income taxes for the six months ended June 30, 2005 was $850,000, as compared to $537,000 for the six months ended June 30, 2004. The increase in income taxes is due to higher income before provision for income taxes in 2005. The effective tax rate was approximately 37.0% for the six months ended June 30, 2005 as compared to 36.9% for the same period of 2004.
Net Income. Net income for the quarter ended June 30, 2005 was $1,003,000 compared to net income of $450,000 for the quarter ended June 30, 2004, an increase of $553,000 or 122.9%. The net income increase was primarily due to an increase in income before provision for income taxes of $883,000, partially offset by an increase in income taxes of $330,000. Basic and Diluted income per share for the quarter ended June 30, 2005 and 2004 was $0.04 and $0.02, respectively.
Net income for the six months ended June 30, 2005 was $1,447,000 compared to net income of $917,000 for the same period of 2004, an increase of $530,000 or 57.8%. The net income increase was primarily due to an increase in income before provision for income taxes of $843,000, partially offset by an increase in income taxes of $313,000. Basic and Diluted income per share for the six months ended June 30, 2005 and 2004 was $0.06 and $0.04, respectively.
18
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005, we had cash and cash equivalents of $1,123,000 and working capital of $13,861,000, an increase in working capital of $950,000 since December 31, 2004. As of June 30, 2005, our current ratio was 6.18:1 as compared to 6.30:1 as of December 30, 2004. Cash decreased $3,752,000 for the quarter ended June 30, 2005. The decrease in cash is primarily due to cash used in operating activities of $3,009,000, the purchase of property and equipment of $461,000, the investment in the India joint venture of $550,000 and the repurchase of $21,000 of common stock, partially offset by cash proceeds of $289,000 from the exercise of stock options.
We have a $3,500,000 credit facility with a bank, consisting of a line of credit with interest at prime plus 0.5%. At June 30, 2005, the prime interest rate was 6.25%. The line of credit was renewed in May 2005 and expires in May 2007. The Company’s borrowing capacity on the line of credit was $3,170,000 at June 30, 2005. The available line of credit is based on a formula of eligible accounts receivable and inventories. During the quarter ended June 30, 2005, we had not borrowed on this line of credit and have not borrowed on it since 2002. As of June 30, 2005, we do not have any debt.
Net cash used in operating activities was $3,009,000 for the six months ended June 30, 2005 compared to $353,000 for the six months ended June 30, 2004. The net cash used in operating activities of $3,009,000 for the six months ended June 30, 2005 is due to an increase in accounts receivable of $1,569,000, an increase in inventory of $3,552,000, partially offset by net income of $1,447,000, an increase in accounts payable and accrued liabilities of $237,000, a decrease in prepaid expenses and other current assets of $182,000 and depreciation and amortization of $246,000. The net cash used in operating activities of $353,000 for the six months ended June 30, 2004 was due to an increase in accounts receivable of $603,000 and a decrease in accounts payable and accrued liabilities of $628,000, a increase in prepaid expenses and other current assets of $591,000 and a gain on the sale of assets of $7,000, partially offset by net income of $917,000, depreciation and amortization of $267,000 and a decrease in inventory of $292,000.
Accounts receivable increased by $1,569,000 or 36.8% to $5,830,000 for the six months ended June 30, 2005 from $4,261,000 as of December 31, 2004. The majority of this increase is due to increased sales of 34.0% for the second quarter of 2005, primarily attributable to higher sales to our largest distributor as well as the new Engineered Products segment sales. The number of days sales were outstanding as of June 30, 2005 was 59 days as compared to 62 days for the year ending December 31, 2004.
Inventory increased by $3,552,000 or 74.0% to $8,354,000 for the six months ended June 30, 2005 from $4,802,000 as of December 31, 2004. The increase is primarily attributable to a build up of $2.8 million in inventory for the Engineered Product segment. Current inventory levels for the Engineered Product segment are high, which will allow us to service anticipated sales growth. In addition, inventory for the Disposable Protective Apparel segment increased by $0.7 million or 20.5%, primarily as a result of increased sales of 35.5% for the second quarter of 2005.
Prepaid expenses and other current assets decreased by $182,000 or 19.2% to $767,000 for the six months ended June 30, 2005 from $949,000 as of December 31, 2004. The decrease of $182,000 is primarily due to a $400,000 decrease in prepaid tax installment payments and a decrease of $21,000 in prepaid trade shows, partially offset by an increase of $101,000 in prepaid insurance for Alpha Pro Tech, Inc., an increase of $100,000 in prepaid insurance for Engineered Products and an increase in annual maintenance supports contracts of $38,000.
Accounts payable and accrued liabilities in the six months ended June 30, 2005 increased by $237,000 to $2,674,000 from $2,437,000. The increase is primarily attributable to an increase in accounts payable trade due to increased sales and an increase in federal taxes payable, partially offset by payments of the 2004 chief executive officer and president bonus, payments of a 2004 corporate rebate to our largest distributor and a reduction in accrued audit.
19
Net cash used in investing activities was $1,011,000 and $123,000 for the six months June 30, 2005 and 2004, respectively. Our investing activities for the six months ended June 30, 2005 consisted primarily of expenditures for property and equipment of $451,000 and the purchase of intangible assets of $10,000 and an investment in an India joint venture of $550,000, compared to expenditures for property and equipment of $105,000, the purchases of intangible assets of $34,000 and the proceeds from the sales of assets of $16,000 for the six months ended June 30, 2004. The expenditures for property and equipment of $451,000 in 2005 were principally for the purchase of equipment for our Engineered Products segment.
Alpha ProTech Engineered Products, Inc. on June 14, 2005 entered into a joint venture with a manufacturer in India for the production of building products. As of June 30, 2005, Alpha ProTech Engineered Products has invested $550,000 in the joint venture; $350,000 for share capital and $200,000 of a $1,000,000 long term advance.
Under terms of the joint venture agreement, a private company, Harmony Plastics Private Limited (Harmony), will be owned on a 50/50 basis by Alpha ProTech Engineered Products, Inc. and Maple Industries and Associates the India shareholders. Alpha ProTech Engineered Products, Inc. and Maple Industries and Associates will each contribute $350,000 for share capital, and Alpha ProTech Engineered Products, Inc. will make a long term advance of $1 million for materials. This advance is non interest bearing and $500,000 is to be repaid in monthly installments over a six year term and the balance of $500,000 is to be paid in the seventh year. The India shareholders will arrange a bank loan of $1.65 million, guaranteed exclusively by the India shareholders and the assets of Harmony Plastics Private Limited. As a result, the total initial funding will be $3.35 million, of which Alpha ProTech Engineered Products, Inc. will contribute approximately $1.35 million.
The capital will be utilized to purchase an existing 33,000 square-foot manufacturing facility in India; this facility includes manufacturing equipment necessary to produce roof underlayment. Harmony will also build a new 60,000 square-foot facility for the additional manufacturing of roof underlayment and other building products.
This joint venture positions Alpha ProTech Engineered Products to respond to current and expected increased product demand for synthetic roofing underlayment, and future capacity for sales of specialty roofing component products and custom products for industrial applications requiring high quality extrusion coated fabrics.
We expect to purchase approximately an additional $300,000 of equipment in 2005. These expenditures will be primarily for equipment for our new Engineered Products segment.
In August 2004, we announced that our Board of Directors had approved the buy-back of up to an additional $500,000 of the Company’s outstanding common stock. This new share repurchase program is the sixth $500,000 buyback authorized by the Board of Directors. In all instances, we are retiring the shares. For the six months ended June 30, 2005, we bought back a total of 10,000 shares of common stock at a cost of $21,000. As of June 30, 2005, we have bought back a total of 2,333,800 shares of common stock at a cost of $2,518,000 since the end of 1999.
For the six months ended June 30, 2005, net cash provided by financing activities was $268,000 compared to $57,000 for the same period of 2004. Our financing activities in 2005 consisted primarily of cash proceeds of $289,000 from the exercise of 232,106 stock options, partially offset by payments of $21,000 for the repurchase of 10,000 shares of common stock. Our financing activities for the six months ended June 30, 2004 consisted primarily of cash proceeds of $251,000 from the exercise of 422,000 stock options, partially offset by payments of $194,000 for the repurchase of 105,000 shares of common stock
20
As shown below, at June 30, 2005, our contractual cash obligations totaled approximately $1,841,000.
|
|
|
Payments Due by Period |
|
|||||||||||||
|
|
|
Total |
|
1 Year |
|
2-3 Years |
|
4-5 Years |
|
After 5 |
|
|||||
|
Operating leases (1) |
|
$ |
1,041,000 |
|
$ |
267,000 |
|
$ |
499,000 |
|
$ |
247,000 |
|
$ |
28,000 |
|
|
Investment in Joint Venture (1) |
|
800,000 |
|
800,000 |
|
— |
|
— |
|
— |
|
|||||
|
Line of credit |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Total contractual cash obligations |
|
$ |
1,841,000 |
|
$ |
1,067,000 |
|
$ |
499,000 |
|
$ |
247,000 |
|
$ |
28,000 |
|
(1) The amount for the year ending December 31, 2005 includes only payments to be made after June 30, 2005.
We believe that our current cash balance and the funds available under our credit facility will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future.
Based on the Company’s review of new accounting standards released during the quarter ended June 30, 2005, the Company did not identify any standards requiring adoption that would have a significant impact on its consolidated financial statements.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We subcontract the manufacture of products in China and to a lesser extent in Thailand, India and Mexico. The Company’s results of operations could be negatively affected by factors such as changes in foreign currency exchange rates due to stronger economic conditions in those countries.
The Company doesn’t expect any significant effect on its results of operations from inflationary or interest and currency rate fluctuations. The Company does not hedge its interest rate or foreign exchange risks.
21
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of June 30, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that material information related to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period ending June 30, 2005, the period in which this report was prepared.
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures no matter how well designed and operated, can provide only reasonable, not absolute, assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible disclosure controls and procedures.
Changes in Internal Control Over Financial Reporting.
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
22
Item 5 Submission of Matters to a Vote of Security Holders
(a) Registrant held its Annual Meeting of Shareholders June 14, 2005.
(b) The following persons were elected Directors pursuant to the votes indicated:
|
Name |
|
For |
|
Withheld |
|
|
|
|
|
|
|
|
|
Sheldon Hoffman |
|
21,219,572 |
|
547,921 |
|
|
|
|
|
|
|
|
|
Alexander Millar |
|
21,218,772 |
|
548,721 |
|
|
|
|
|
|
|
|
|
Donald Bennett, Jr. |
|
21,583,596 |
|
183,897 |
|
|
|
|
|
|
|
|
|
Robert Isaly |
|
21,440,921 |
|
326,572 |
|
|
|
|
|
|
|
|
|
John Ritota |
|
21,063,198 |
|
704,295 |
|
|
|
|
|
|
|
|
|
Russell Manock |
|
21,584,896 |
|
182,597 |
|
|
|
|
|
|
|
|
|
David Anderson |
|
21,579,596 |
|
187,897 |
|
(c) The only other matter to be voted upon was the ratification of the appointment of PricewaterhouseCoopers LLP as the Registrant’s independent registered public accountants as follows:
|
For |
|
Against |
|
Abstain |
|
|
|
|
|
|
|
21,511,848 |
|
244,845 |
|
10,800 |
23
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification Pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act, Signed by Chief Executive Officer (filed herewith)
31.2 Certification Pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act, Signed by Chief Financial Officer (filed herewith)
32.1 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Signed by Chief Executive Officer (filed herewith)
32.2 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Signed by Chief Financial Officer (filed herewith)
(b) Reports on Form 8-K
16. On June 16, 2005 registrant filed a report on Form 8-K with respect to Item 2.02 reporting that on June 14, 2005 registrant issued a release announcing the formation of a Joint Venture in India.
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: |
August 9, 2005 |
|
|
BY: |
/s/ Sheldon Hoffman |
|
|
|
|
|
Sheldon Hoffman |
|||
|
|
|
|
Chief Executive Officer and Director |
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
DATE: |
August 9, 2005 |
|
|
BY: |
/s/ Lloyd Hoffman |
|
|
|
|
|
Lloyd Hoffman |
|||
|
|
|
Chief Financial Officer and Senior Vice President |
||||
24