**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

----

 

**FORM 10-Q**

 

----

 

**Quarterly Report pursuant to section 13 or15(d)**

**of the Securities Exchange Act of 1934**

 

**For theQuarter Ended March 31, 2003**

**CommissionFile No. 0-19893**

 

**Alpha Pro Tech, Ltd.**

(exact name of registrantas specified in its charter)

 

| **Delaware,  U.S.A.**                     |   | **63-1009183**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction             |   | (I.R.S. Employer  Identification No.) |
| of incorporation)                         |   |                                  |
|                                      |   |                                  |
| **Suite  112, 60 Centurian Drive**        |   |                                  |
| **Markham,  Ontario, Canada**             |   | **L3R  9R2**                          |
| (Address of principal  executive offices) |   | (Zip Code)                            |

 

Registrant’s telephone number, including area code:  **(905)479-0654**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of April 21, 2003 

 

| Common stock, $.01 par value |   | **22,615,007** |
|------------------------------|--------|----------------|

 

----

 

**Alpha Pro Tech, Ltd**.

 

 

Table of Contents

 
|                                 |                                                                                         |                                                                                                                          |   |
|--------------------------------------|----------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|                                 |                                                                                         |                                                                                                                          |   |
| PART I.   FINANCIAL INFORMATION |                                                                                         |
|                                 |                                                                                         |                                                                                                                          |   |
| ITEM 1                               | Consolidated Financial Statements (Unaudited)                                                |                                                                                                                          |
|                                 |                                                                                         |                                                                                                                          |   |
|                                 | a)                                                                                           | Consolidated Balance Sheets  -  March 31, 2003 (unaudited) and December 31, 2002                                              |   |
|                                 |                                                                                         |                                                                                                                          |   |
|                                 | b)                                                                                           | Consolidated  Statements of Operations  for the three months ended March 31, 2003 (unaudited)  and March 31, 2002 (unaudited) |   |
|                                 |                                                                                         |                                                                                                                          |   |
|                                 | c)                                                                                           | Consolidated  Statement of Shareholder’s Equity  for the three months ended March 31, 2003 (unaudited)                   |   |
|                                 |                                                                                         |                                                                                                                          |   |
|                                 | d)                                                                                           | Consolidated  Statements of Cash Flows  for the three months ended March 31, 2003 (unaudited)  and March 31, 2002 (unaudited) |   |
|                                 |                                                                                         |                                                                                                                          |   |
|                                 | e)                                                                                           | Notes to  Consolidated Financial Statements                                                                                   |   |
|                                 |                                                                                         |                                                                                                                          |   |
| ITEM  2                              | Management’s Discussion and Analysis of  Financial  Condition and Results of Operations |                                                                                                                          |
|                                 |                                                                                         |                                                                                                                          |   |
| ITEM  3                              | Quantitative  and Qualitative disclosures About Market Risk                                  |                                                                                                                          |
|                                 |                                                                                         |                                                                                                                          |   |
| ITEM  4                              | Controls  and Procedures                                                                     |                                                                                                                          |
|                                 |                                                                                         |                                                                                                                          |   |
| SIGNATURES                           |                                                                                         |
|                                 |                                                                                         |                                                                                                                          |   |
| CERTIFICATIONS                       |                                                                                         |
|                                 |                                                                                         |                                                                                                                          |   |
| EXHIBITS                             |                                                                                         |
|                                 |                                                                                         | Exhibit 99.1: Certification by CEO (annexed hereto)                                                                           |   |
|                                 |                                                                                         |                                                                                                                          |   |
|                                 |                                                                                         | Exhibit 99.2: Certification by CFO (annexed hereto)                                                                           |   |

 

----

 

 

**AlphaPro Tech, Ltd.**

 

**Consolidated Balance Sheets**

** **
|                                                                                                                                                   |   | **March 31,**   |       | **December  31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|-------------------|--------|
|                                                                                                                                                   |   | **2003**        |       | **2002**          |   |
|                                                                                                                                                   |   | **(Unaudited)** |       |              |   |
| **Assets**                                                                                                                                             |   |            |       |              |   |
| Current assets:                                                                                                                                        |   |            |       |              |   |
| Cash                                                                                                                                                   |   | $               | 2,449,000  |              | $      | 2,879,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $37,000 at March 31,  2003 and December 31, 2002                                       |   | 2,544,000       |       | 2,286,000         |   |
| Inventories, net                                                                                                                                       |   | 3,980,000       |       | 3,358,000         |   |
| Prepaid expenses  and other current assets                                                                                                             |   | 306,000         |       | 334,000           |   |
| Deferred income  taxes                                                                                                                                 |   | 365,000         |       | 365,000           |   |
| Total current assets                                                                                                                                   |   | 9,644,000       |       | 9,222,000         |   |
|                                                                                                                                                   |   |            |       |              |   |
| Property and  equipment, net                                                                                                                           |   | 3,217,000       |       | 3,283,000         |   |
| Intangible assets, net                                                                                                                                 |   | 174,000         |       | 179,000           |   |
| Notes receivable  and other assets                                                                                                                     |   | 81,000          |       | 91,000            |   |
|                                                                                                                                                   |   | $               | 13,116,000 |              | $      | 12,775,000 |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                         |   |            |       |              |   |
| Current liabilities:                                                                                                                                   |   |            |       |              |   |
| Accounts payable                                                                                                                                       |   | $               | 944,000    |              | $      | 453,000 |   |
| Accrued liabilities                                                                                                                                    |   | 1,296,000       |       | 1,592,000         |   |
| Notes payable, current portion                                                                                                                         |   | 112,000         |       | 127,000           |   |
| Total current  liabilities                                                                                                                             |   | 2,352,000       |       | 2,172,000         |   |
|                                                                                                                                                   |   |            |       |              |   |
| Notes payable,  less current portion                                                                                                                   |   | 258,000         |       | 288,000           |   |
| Deferred income  taxes                                                                                                                                 |   | 541,000         |       | 541,000           |   |
| Total  liabilities                                                                                                                                     |   | 3,151,000       |       | 3,001,000         |   |
|                                                                                                                                                   |   |            |       |              |   |
| Shareholders’  Equity:                                                                                                                            |   |            |       |              |   |
| Common stock,  $.01 par value, 50,000,000 shares authorized, 22,335,907 and 22,625,907  issued and outstanding at March 31, 2003 and December 31, 2002 |   | 223,000         |       | 226,000           |   |
| Additional  paid-in capital                                                                                                                            |   | 22,863,000      |       | 23,134,000        |   |
| Accumulated  deficit                                                                                                                                   |   | (13,121,000     | )          | (13,586,000       | )      |
| Total  shareholders’ equity                                                                                                                       |   | 9,965,000       |       | 9,774,000         |   |
|                                                                                                                                                   |   | $               | 13,116,000 |              | $      | 12,775,000 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

1

----

 

**AlphaPro Tech, Ltd.**

 

**Consolidated Statements of Operations****(Unaudited)**

** **
|                                                         |   | **For the  Three Months Ended  March 31,** |      |
|--------------------------------------------------------------|--------|--------------------------------------------|-----------|
|                                                         |   | **2003**                                   |      | **2002** |   |
|                                                         |   |                                       |      |   |   |
| Sales                                                        |   | $                                          | 5,244,000 |   | $ | 5,203,000 |   |
|                                                         |   |                                       |      |   |   |
| Cost of goods  sold, excluding depreciation and amortization |   | 2,518,000                                  |      | 2,778,000 |   |
|                                                         |   |                                       |      |   |   |
| Gross margin                                                 |   | 2,726,000                                  |      | 2,425,000 |   |
|                                                         |   |                                       |      |   |   |
| Expenses:                                                    |   |                                       |      |   |   |
| Selling, general  and administrative                         |   | 1,867,000                                  |      | 1,658,000 |   |
| Depreciation and  amortization                               |   | 120,000                                    |      | 108,000 |   |
|                                                         |   |                                       |      |   |   |
| Income from  operations                                      |   | 739,000                                    |      | 659,000 |   |
|                                                         |   |                                       |      |   |   |
| Interest, net                                                |   | (1,000                                     | )         | 10,000 |   |
|                                                         |   |                                       |      |   |   |
| Income before  provision for income taxes                    |   | 740,000                                    |      | 649,000 |   |
|                                                         |   |                                       |      |   |   |
| Provision for  income taxes                                  |   | 275,000                                    |      | 228,000 |   |
|                                                         |   |                                       |      |   |   |
| Net income                                                   |   | $                                          | 465,000   |   | $ | 421,000 |   |
|                                                         |   |                                       |      |   |   |
| Basic net income  per share                                  |   | $                                          | 0.02      |   | $ | 0.02 |   |
|                                                         |   |                                       |      |   |   |
| Diluted net  income per share                                |   | $                                          | 0.02      |   | $ | 0.02 |   |
|                                                         |   |                                       |      |   |   |
| Basic weighted  average shares outstanding                   |   | 22,500,134                                 |      | 23,547,216 |   |
|                                                         |   |                                       |      |   |   |
| Diluted weighted  average shares outstanding                 |   | 23,012,139                                 |      | 24,179,918 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

 

2

----

 

 

**AlphaPro Tech, Ltd.**

 

**ConsolidatedStatement of Shareholders’ Equity****(Unaudited)**

 
|                          |   | **Shares** |   | **Common  Stock** |    | **Additional  Paid-in Capital** |   | **Accumulated  Deficit** |   | **Total** |        |
|-------------------------------|--------|------------|--------|-------------------|---------|---------------------------------|--------|--------------------------|--------|-----------|-------------|
| Balance at  December 31, 2002 |   | 22,625,907 |   | $                 | 226,000 |                            | $      | 23,134,000               |   | $         | (13,586,000 | ) | $ | 9,774,000 |   |
|                          |   |       |   |              |    |                            |   |                     |   |      |        |
| Repurchase of  common stock   |   | (290,000   | )      | (3,000            | )       | (271,000                        | )      |                     |   | (274,000  | )           |
| Net income                    |   |       |   |              |    |                            |   | 465,000                  |   | 465,000   |        |
|                          |   |       |   |              |    |                            |   |                     |   |      |        |
| Balance at March  31, 2003    |   | 22,335,907 |   | $                 | 223,000 |                            | $      | 22,863,000               |   | $         | (13,121,000 | ) | $ | 9,965,000 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

 

3

----

 

 

**AlphaPro Tech, Ltd.**

 

**ConsolidatedStatements of Cash Flows****(Unaudited)**

 
|                                                                                         |   | **For the  three months ended** |       |
|----------------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                                         |   | **March 31,**                   |       |
|                                                                                         |   | **2003**                        |       | **2002** |   |
| **Cash  Flows From Operating Activities:**                                                   |   |                            |       |   |   |
| Net income                                                                                   |   | $                               | 465,000    |   | $ | 421,000 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |   |                            |       |   |   |
| Depreciation and  amortization                                                               |   | 120,000                         |       | 108,000 |   |
|                                                                                         |   |                            |       |   |   |
| Changes in  assets and liabilities:                                                          |   |                            |       |   |   |
| Accounts  receivable, net                                                                    |   | (258,000                        | )          | (230,000 | ) |
| Inventories, net                                                                             |   | (622,000                        | )          | (18,000 | ) |
| Prepaid expenses  and other assets                                                           |   | 38,000                          |       | (48,000 | ) |
| Accounts payable  and accrued liabilities                                                    |   | 195,000                         |       | 572,000 |   |
|                                                                                         |   |                            |       |   |   |
| Net cash  provided by (used in) operating                                                    |   |                            |       |   |   |
| activities:                                                                                  |   | (62,000                         | )          | 805,000 |   |
|                                                                                         |   |                            |       |   |   |
| **Cash  Flows From Investing Activities:**                                                   |   |                            |       |   |   |
| Purchase of  property and equipment                                                          |   | (49,000                         | )          | (72,000 | ) |
| Purchase of  intangible assets                                                               |   | —                          |       | (2,000 | ) |
|                                                                                         |   |                            |       |   |   |
| Net cash used in  investing activities                                                       |   | (49,000                         | )          | (74,000 | ) |
|                                                                                         |   |                            |       |   |   |
| **Cash  Flows From Financing Activities:**                                                   |   |                            | ** ** |   | ** ** |
| Payments on  notes payable                                                                   |   | (45,000                         | )          | (394,000 | ) |
| Principal  payments on capital leases                                                        |   |                            |       | (4,000 | ) |
| Repurchase of  common stock                                                                  |   | (274,000                        | )          | — |   |
| Net cash used in  financing activities                                                       |   | (319,000                        | )          | (398,000 | ) |
|                                                                                         |   |                            |       |   |   |
| Increase(decrease)  in cash during the period                                                |   | (430,000                        | )          | 333,000 |   |
|                                                                                         |   |                            |       |   |   |
| Cash, beginning  of period                                                                   |   | 2,879,000                       |       | 1,372,000 |   |
| Cash, end of  period                                                                         |   | $                               | 2,449,000  |   | $ | 1,705,000 |   |

** **

The accompanying notesare an integral part of these consolidated financial statements

** **

 

4

----

 

** **

**Alpha Pro Tech, Ltd.**

 

**Notesto Consolidated Financial Statements****(Unaudited)**

 

**1.    TheCompany**

 

Alpha Pro Tech, Ltd. (theCompany) manufactures and distributes a variety of disposable mask, shield,shoe cover, apparel and wound care products. Most of the Company’s disposable apparel, mask and shield products, andwound care products are distributed to medical, dental, industrial safety andclean room markets, predominantly in the United States of America.

 

 

**2.    Stock BasedCompensation**

 

Accounting forStock-based Compensation The Company maintains a stock option plan under whichthe Company may grant incentive stock options and non-qualified stock optionsto employees and non-employee directors. Stock options have been granted withexercise prices at or above the fair market value on the date of grant. Optionsvest and expire according to terms established at the grant date.

 

SFAS No. 123,  Accounting for Stock-BasedCompensation,  encourages, but does notrequire, companies to record compensation cost for stock-based employeecompensation plans based on the fair market value of options granted. TheCompany has chosen to account for stock based compensation using the intrinsicvalue method prescribed in Accounting Principles Board ( APB ) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. Accordingly, because the grant price equalsthe market price on the date of grant for options issued by the Company, nocompensation expense is recognized for stock options issued to employees.

 

On December 31, 2002, theFinancial Accounting Standards Board ( FASB ) issued SFAS No. 148,  Accounting for Stock Based Compensation   Transition and Disclosure,  which amends SFAS No. 123. SFAS No. 148requires more prominent and frequent disclosures about the effects ofstock-based compensation. which the Company has elected to adopt. The Companywill continue to account for its stock based compensation according to theprovisions of APB Opinion No. 25.

 

 

5

----

 

 

Had compensationcost for the Company s stock options been recognized based upon the estimatedfair value on the grant date under the fair value methodology prescribed bySFAS No. 123, as amended by SFAS No. 148, the Company s net earnings andearnings per share would have been as follows :

 
|                                                                                         |   | **For the  Three Months Ended  March 31,** |    |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                         |   | **2003**                                   |    | **2002** |   |
|                                                                                         |   |                                       |    |   |   |
| Net income as  reported                                                                      |   | $                                          | 465,000 |   | $ | 421,000 |   |
| Deduct: Total  stock-based employee compensation                                             |   |                                       |    |   |   |
| Expense  determined using the fair value method for all rewards, net of related tax  effects |   | —                                     |    | (95,000 | ) |
|                                                                                         |   |                                       |    |   |   |
| Pro forma net  income                                                                        |   | $                                          | 465,000 |   | $ | 326,000 |   |
|                                                                                         |   |                                       |    |   |   |
| Net income per share:                                                                        |   |                                       |    |   |   |
| Basic — as  reported                                                                    |   | $                                          | 0.02    |   | $ | 0.02 |   |
| Basic — pro  forma                                                                      |   | 0.02                                       |    | 0.01 |   |
| Diluted — as  reported                                                                  |   | 0.02                                       |    | 0.02 |   |
| Diluted — pro  forma                                                                    |   | 0.02                                       |    | 0.01 |   |
|                                                                                         |   |                                       |    |   |   |

 

 

**3. New accounting standards:**

 

In June 2001, theFASB issued SFAS No. 143 (“SFAS 143”), Accounting for Asset RetirementObligations, which is effective for fiscal years beginning after June 15,2002.  SFAS 143 requires recognition ofthe fair value of liabilities associated with the retirement of long-livedassets when a legal obligation to incur such costs arises as a result of theacquisition, construction, development and/or the normal operation of along-lived asset.  Upon recognition ofthe liability, a corresponding asset is recorded and depreciated over theremaining life of the long-lived asset. The Company will adopt SFAS 143 effective January 1, 2003.  The Company does not believe that theadoption of SFAS 143 will have a significant effect on its financialstatements.

 

In August 2001,the FASB issued SFAS No. 144 (“SFAS 144”), Accounting for the Impairment orDisposal of Long-Lived Assets, which is effective for fiscal years beginningafter December 15, 2001. SFAS 144 requires that one accounting model be usedfor the long-lived assets to be disposed of by sale, whether previously heldand used or newly acquired, and broadens the presentation of discontinuedoperations to include more disposal transactions and resolves implementationissues.  The adoption of SFAS 144 didnot have a significant effect on the Company’s financial statements.

 

 

6

----

 

 

In April 2002, the FASBissued SFAS No. 145 (“SFAS 145”), Rescission of FASB Statements No. 4, 44 and64, Amendment of FASB Statement No.13, and Technical Corrections. Among otherthings, SFAS 145 eliminates the requirement that gains and losses from theextinguishment of debt be classified as extraordinary items. SFAS 145 iseffective for fiscal years beginning after May 15, 2002, with early adoptionpermitted. The Company does not expect the adoption of this standard to have asignificant impact on its financial statements.

 

In June 2002, the FASBissued SFAS No. 146 (“SFAS 146”), Accounting for Costs Associated with Exit orDisposal Activities. Under SFAS 146, exit costs are recorded when the liabilityis incurred and not as a result of an entity’s commitment to an exit plan.  The statement addresses significant issuesrelated to the recognition, measurement, and reporting of costs associated withexit and disposal activities, including restructuring activities, and nullifiesthe guidance in Emerging Issues Task Force Issue No. 94-3, LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring.) SFAS 146 iseffective for exit or disposal activities initiated after December 31, 2002,with early adoption encouraged. The Company does not expect the adoption ofthis standard to have a significant impact on its financial statements.

 

In December 2002, the FASBissued SFAS No. 148 (“SFAS 148”), Accounting for Stock-Based Compensation -Transition and Disclosure, an Amendment ofSFAS No. 123, Accounting for Stock-Based Compensation.  SFAS No. 148, which is effective foryears ending after December 15, 2002, provides alternative methods for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation and requires prominent disclosure about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results. The Company will continue to account for its stockbased compensation according to the provisions of APB Opinion No. 25.

 

 

**4. Basis of Presentation**

 

The accompanyingconsolidated financial statements are unaudited but, in the opinion ofmanagement, contain all the adjustments (consisting of those of a normalrecurring nature) considered necessary to present fairly the financialposition, results of operations and cash flows for the periods presented inconformity with accounting principles generally accepted in the United Statesof America.  The accompanyingconsolidated financial statements should be read in conjunction with theCompany’s Form 10-K for the year ended December 31, 2002.

 

There have been nosignificant changes since December 31, 2002 in accounting principles andpractices utilized in the preparation of these consolidated financialstatements.

 

 

7

----

 

 

**5.  Inventories**

 
|                           |   | **March 31,  2003** |      | **December  31,  2002** |   |
|--------------------------------|--------|---------------------|-----------|-------------------------|--------|
|                           |   |                |      |                    |   |
| Raw materials                  |   | $                   | 2,332,000 |                    | $      | 1,751,000 |   |
| Work in process                |   | 91,000              |      | 85,000                  |   |
| Finished goods                 |   | 1,889,000           |      | 1,854,000               |   |
|                           |   | 4,312,000           |      | 3,890,000               |   |
| Less reserve for  obsolescence |   | (332,000            | )         | (332,000                | )      |
|                           |   | $                   | 3,980,000 |                    | $      | 3,358,000 |   |

 

 

**6.  Reclassifications**

 

Certain2002 balances have been reclassified to conform to the current periodpresentation.  These reclassificationshad no effect on net income, total assets or liabilities.

 

 

**7.  AccruedLiabilities**

 
|                       |   | **March 31,  2003** |      | **December  31,  2002** |   |
|----------------------------|--------|---------------------|-----------|-------------------------|--------|
|                       |   |                |      |                    |   |
| Income taxes  payable      |   | $                   | 298,000   |                    | $      | 745,000 |   |
| Commission  payable        |   | 530,000             |      | 444,000                 |   |
| Payroll and  payroll taxes |   | 211,000             |      | 135,000                 |   |
| Accrued rebates  and other |   | 257,000             |      | 268,000                 |   |
|                       |   | $                   | 1,296,000 |                    | $      | 1,592,000 |   |

 

 

8

----

 

 

**8.  Basic and DilutedNet Income Per Share**

 

The following tableprovides a reconciliation of both the net income and the number of shares usedin the computation of “basic” EPS, which utilizes the weighted average numberof shares outstanding without regard to potential shares, and “diluted” EPS,which includes all such shares.

 

 

 
|                                                |   | **For the  Three Months Ended  March 31,** |    |
|-----------------------------------------------------|--------|--------------------------------------------|---------|
|                                                |   | **2003**                                   |    | **2002** |   |
|                                                |   |                                       |    |   |   |
| Net income  (Numerator)                        |   | $                                          | 465,000 |   | $ | 421,000 |   |
|                                                |   |                                       |    |   |   |
| Shares  (Denominator):                              |   |                                       |    |   |   |
| Basic weighted average  shares outstanding          |   | 22,500,134                                 |    | 23,547,216 |   |
| Add: Dilutive  effect of stock options and warrants |   | 512,005                                    |    | 632,702 |   |
|                                                |   |                                       |    |   |   |
| Diluted weighted  average shares outstanding        |   | 23,012,139                                 |    | 24,179,918 |   |
|                                                |   |                                       |    |   |   |
| Net income per  share:                              |   |                                       |    |   |   |
| Basic                                               |   | $                                          | 0.02    |   | $ | 0.02 |   |
| Diluted                                             |   | $                                          | 0.02    |   | $ | 0.02 |   |
|                                                |   |                                       |    |   |   |

 

 

9

----

 

**9.    Activity ofBusiness Segments**

 

The Company classifies its businesses into threefundamental segments:  Apparel,consisting of a complete line of disposable clothing such as coveralls, frocks,lab coats, hoods, bouffant caps and shoe covers; Mask and eye shields,consisting principally of medical, dental and industrial masks and eye shields;and Extended Care Unreal Lambskin®, consisting principally of fleece and otherrelated products which includes a line of pet beds.

 

The accounting policiesof the segments are the same as those described previously under “Summary ofSignificant Accounting Policies.” Segment data excludes charges allocated to head office and corporatesales/marketing departments.  TheCompany evaluates the performance of its segments and allocates resources tothem based primarily on net sales.

 

The following table shows net sales for each segmentfor the three months ended March 31, 2003 and 2002:

 

 
|                          |   | **For the  Three Months Ended  March 31,** |      |
|-------------------------------|--------|--------------------------------------------|-----------|
|                          |   | **2003**                                   |      | **2002** |   |
|                          |   |                                       |      |   |   |
| Apparel                       |   | $                                          | 3,425,000 |   | $ | 3,385,000 |   |
| Mask and eye  shields         |   | 1,307,000                                  |      | 1,222,000 |   |
| Extended care                 |   | 512,000                                    |      | 596,000 |   |
|                          |   |                                       |      |   |   |
| Consolidated  total net sales |   | $                                          | 5,244,000 |   | $ | 5,203,000 |   |

 

 

A reconciliation of total segment income to totalconsolidated net income for the three months ended March 31, 2003 and 2002 ispresented below:

 
|                                     |   | **For the  Three Months Ended  March 31,** |      |
|------------------------------------------|--------|--------------------------------------------|-----------|
|                                     |   | **2003**                                   |      | **2002** |   |
|                                     |   |                                       |      |   |   |
| Apparel                                  |   | $                                          | 1,009,000 |   | $ | 974,000 |   |
| Mask and eye  shields                    |   | 545,000                                    |      | 364,000 |   |
| Extended care                            |   | 105,000                                    |      | 149,000 |   |
| Total segment  income                    |   | 1,659,000                                  |      | 1,487,000 |   |
|                                     |   |                                       |      |   |   |
| Unallocated  corporate overhead expenses |   | (919,000                                   | )         | (838,000 | ) |
| Provision for  income taxes              |   | (275,000                                   | )         | (228,000 | ) |
|                                     |   |                                       |      |   |   |
| Consolidated net  income                 |   | $                                          | 465,000   |   | $ | 421,000 |   |

 

 

10

----

 

|        |   |                                                                                             |
|-------------|--------|--------------------------------------------------------------------------------------------------|
| **ITEM 2.** |   | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |

 

 

**RESULTS OF OPERATIONS**

 

**Three months ended March 31, 2003, compared to the threemonths ended March 31, 2002**

 

Alpha Pro Tech, Ltd.(“Alpha” or the “Company”) reported net income for the quarter ended March 31,2003 of $465,000 as compared to $421,000 for the quarter ended March 31, 2002,representing an increase of $44,000 or 10.5%. The increase is attributable to an increase in income before provisionfor income taxes of $91,000, partially offset by an increase in income taxes of$47,000.

 

**Sales**Consolidated sales for thequarter ended March 31, 2003 increased slightly to $5,244,000 from $5,203,000for the quarter ended March 31, 2002, representing an increase of $41,000 or0.8%.  The Company attributes the slightincrease to sales in the Pharmaceutical industry, partially offset by weakeconomic conditions, primarily in the Semiconductor clean room market.

Management expects salesgrowth during the balance of 2003, as we continue to gain momentum in thePharmaceutical industry.  Additionally,commencing at the very end of the first quarter of 2003, in response to theoutbreak of **Severe Acute Respiratory Syndrome(SARS)**, the Company received a significant increase in demand forthe N-95 Particulate Respirator mask as well as, to a lesser extent, otherprotective products.  Although it is unknownhow long this demand will continue, the Company believes that it is likely thiswill have a significant impact on at least the next two quarters of 2003.

 

Sales for the ApparelDivision for the quarter ended March 31, 2003 were $3,425,000 as compared to$3,385,000 for the same period of 2002. The Apparel Division sales increase of $40,000 or 1.2% was due primarilyto improved sales to the Pharmaceutical industry, partially offset by slightlydecreased sales to the Industrial Safety/Clean-Room industry.  The Company began servicing thePharmaceutical industry in 2002, and management expects significant growth inthis market segment.  Apparel sales arestill being negatively impacted by the continued weakness in the Semiconductormarket.  The Company does not expect arecovery in the Semiconductor market until late 2003 at the earliest.

 

Mask and eye shield salesincreased by $85,000 or 7.0% to $1,307,000 in 2003 from $1,222,000 in2002.  The increase is primarily theresult of an increase in medical mask sales and in dental mask sales, partiallyoffset by decreased industrial mask and shield sales.  As noted above, in response to the outbreak of SARS, the Companyanticipates a significant increase in sales for the N-95 Particulate Respiratormask for at least the next two quarters of 2003.

 

Sales from the Company’sExtended Care and other related products, which includes a line of pet beds,decreased by $84,000 or 14.1% to $512,000 for the quarter ended March 31, 2003from  $596,000 for the quarter endedMarch 31, 2002.  The decrease in salesof $84,000 is primarily the result of a decrease in pet  product sales.

 

 

11

----

 

 

**Cost ofGoods Sold**Costof goods sold, excluding depreciation and amortization, decreased to $2,518,000for the quarter ended March 31, 2003 from $2,778,000 for the same period in2002.   Gross profit margin increased to52.0% for the quarter ended March 31, 2003 from 46.6% for the same period in2002.  Management expects that grossprofit margin should continue to be strong for the balance of 2003.

 

**Selling,General and Administrative Expenses**Selling, general and administrative expenses increasedby $209,000 or 12.6% to $1,867,000 for the quarter ended March 31, 2003 from$1,658,000 for the quarter ended March 31, 2002.  As a percentage of net sales, selling, general and administrativeexpenses increased to 35.6% in the quarter ended March 31, 2003 from31.9% for the same period in 2002.  Theincrease in selling, general and administrative expenses primarily consists ofincreased payroll related costs of $147,000; increased travel, marketing andcommission expenses of $44,000, and increased professional fees and publiccompany expenses of $45,000, partially offset by decreased rent and utilitiesof $22,000.

The majority of the increase in both payroll andtravel related costs are largely due to the addition of sales and marketingpersonnel. The Company has increased the sales and marketing team to 18 peopleat March 31, 2003 as compared to 14 people at March 31,2002.  Management anticipates that the addition ofthese personnel will yield improved sales results in the coming quarters.

 

**Depreciation and Amortization******Depreciation andamortization expense increased by $12,000 to $120,000 for the quarter endedMarch 31, 2003 from $108,000 for the same period in 2002.  The increase is primarily attributable tomask machine additions and the purchase of computer equipment.

 

**Income from Operations**Income from operations increased by $80,000 or12.1%, to $739,000****for the quarter ended March 31, 2003 ascompared to income from operations of $659,000 for the quarter ended March 31,2002.  The increase in income fromoperations is due to an increase in gross profit of $301,000, partially offsetby an increase in selling, general and administrative expenses of $209,000, andan increase in depreciation and amortization of $12,000.

 

**Net Interest**Net interest decreased by $11,000 to interestincome of $1,000 for the quarter ended March 31, 2003 from net interest expenseof $10,000 for the quarter ended March 31, 2002.  The decrease in net interest is due to increased interest incomeand decreased interest expense. Interest income increased by $7,000, to $11,000for the quarter ended March 31, 2003 from $4,000 in the same period of 2002.

 

**Income Before Provision for Income Taxes******Income before provision for income taxes for the quarterended March 31, 2003 was $740,000 as compared to $649,000 for the quarter endedMarch 31, 2002, representing an increase of $91,000 or 14.0%.  This increase is attributable primarily toan increase in gross profit of $301,000 and a decrease in net interest expenseof $11,000, partially offset by an increase in selling, general andadministrative expenses of $209,000 and an increase in depreciation andamortization of $12,000.

 

 

12

----

 

 

**Provision forIncome Taxes******The provision for income taxes for thequarter ended March 31, 2003 was $275,000, as compared to $228,000 for thequarter ended March 31, 2002.  Theincrease in income taxes is due to higher income before provision for incometaxes in 2003.  The estimated tax rateis approximately 37% in 2003 compared to 35.1% in 2002.

 

**Net Income**Net income for the quarter ended March 31, 2003was $465,000 compared to net income of $421,000 for the quarter ended March 31,2002, an increase of $44,000 or 10.5%. The net income increase of $44,000 is comprised of an increase in incomefrom operations of  $80,000, a decreasein net interest expense of $11,000, partially offset by an increase in incometaxes of $47,000.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of March 31, 2003, the Company had cash of$2,449,000 and working capital of $7,292,000. During the quarter ended March 31, 2003, cash decreased by $430,000.  The decrease in the Company’s cash isprimarily due to cash used in operating activities, purchase of property andequipment, net payments on notes payable and the repurchase of common stock.

The Company has a $4,076,000 credit facility with abank, consisting of a line of credit of up to $3,500,000 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 March 31, 2003, the prime interest ratewas 4.25%.  The line of credit expiresin May 2004, and the equipment loans expire between November 2005 and June2006.  At March 31, 2003, the Company’sunused portion of the line of credit is $2,466,000.

Net cash used in operating activities was $62,000 forthe quarter ended March 31, 2003 compared to net cash provided by operatingactivities of $805,000 for the same period of 2002.  The Company’s use of cash from operating activities of $62,000for the quarter ended March 31, 2003 is primarily due an increase in accountsreceivable, an increase in inventories, partially offset an increase inaccounts payable and accrued liabilities and an increase in net income.

The Company’s investing activities have consistedprimarily of expenditures for property and equipment of $49,000 for the quarterended March 31, 2003 compared to $72,000 for the quarter ended March 31, 2002.

 

The Company expects to purchase $250,000 of additionalequipment in 2003.

In March 2003, the Company announced that itsBoard of Directors had approved the buy-back of up to an additional $500,000 ofthe Company’s outstanding common stock. This new share repurchase program is the fifth $500,000 buybackauthorized by the Board of Directors.  In all instances, the Company isretiring the shares.  In the firstquarter of 2003, the Company bought back a total of 290,000 common shares at acost of $274,000.  As of March 31, 2003,the Company has bought back a total of 2,098,800 common shares at a cost of$2,112,000 since the end of 1999.

 

During the quarter ended March 31, 2003, the Company’scash used in financing activities resulted primarily from payments on theCompany’s notes payable of $45,000 and from payments of $274,000 for therepurchase of common stock.

 

The Company believes that cash generated fromoperations, its current cash balance, and the funds available under its creditfacility, will be sufficient to satisfy the Company’s projected working capitaland planned capital expenditures for the foreseeable future.

 

 

13

----

 

**New****Accounting Standards**

 

In June 2001, the FASB issuedSFAS No. 143 (“SFAS 143”), Accounting for Asset Retirement Obligations, whichis effective for fiscal years beginning after June 15, 2002.  SFAS 143 requires recognition of the fairvalue of liabilities associated with the retirement of long-lived assets when alegal obligation to incur such costs arises as a result of the acquisition,construction, development and/or the normal operation of a long-lived asset.  Upon recognition of the liability, acorresponding asset is recorded and depreciated over the remaining life of thelong-lived asset.  The Company willadopt SFAS 143 effective January 1, 2003. The Company does not believe that the adoption of SFAS 143 will have asignificant effect on its financial statements.

 

In August 2001, the FASB issuedSFAS No. 144 (“SFAS 144”), Accounting for the Impairment or Disposal ofLong-Lived Assets, which is effective for fiscal years beginning after December15, 2001.  SFAS 144 requires that oneaccounting model be used for the long-lived assets to be disposed of by sale,whether previously held and used or newly acquired, and broadens thepresentation of discontinued operations to include more disposal transactionsand resolves implementation issues.  Theadoption of SFAS 144 did not have a significant effect on the Company’sfinancial statements.

 

In April 2002, the FASB issuedSFAS No. 145 (“SFAS 145”), Rescission of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement No.13, and Technical Corrections. Among otherthings, SFAS 145 eliminates the requirement that gains and losses from theextinguishment of debt be classified as extraordinary items. SFAS 145 iseffective for fiscal years beginning after May 15, 2002, with early adoptionpermitted. The Company does not expect the adoption of this standard to have asignificant impact on its financial statements.

 

In June 2002, the FASB issued SFAS No. 146 (“SFAS146”), Accounting for Costs Associated with Exit or Disposal Activities.  Under SFAS 146, exit costs are recorded whenthe liability is incurred and not as a result of an entity’s commitment to anexit plan.  The statement addresses significantissues related to the recognition, measurement, and reporting of costsassociated with exit and disposal activities, including restructuringactivities, and nullifies the guidance in Emerging Issues Task Force Issue No.94-3, Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring.) SFAS 146 is effective for exit or disposal activities initiatedafter December 31, 2002, with early adoption encouraged. The Company does notexpect the adoption of this standard to have a significant impact on itsfinancial statements.

 

In December 2002, the FASB issued SFAS No. 148 (“SFAS 148”), Accountingfor Stock-Based Compensation - Transition and Disclosure, an Amendment of SFASNo. 123, Accounting for Stock-Based Compensation.  SFAS 148, which is effective for years ending after December 15,2002, provides alternative methods for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation and requiresprominent disclosure about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. The Companywill continue to account for its stock based compensation according to theprovisions of APB Opinion No. 25.

 

 

14

----

 

 

**ITEM3.****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

There have been no material changes to Item 7A in the Fiscal 2002Annual Report to Shareholders on Form 10-K for the year ended December 31,2002, regarding this matter.

 

 

**ITEM4.****CONTROLS AND PROCEDURES**

 

EVALUATION OF DISCLOSURECONTROLS AND PROCEDURESWe maintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our filings under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within theperiods specified in the rules and forms of the Securities and ExchangeCommission. This information is accumulated and communicated to our management,including our principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosure. Ourmanagement, including our principal executive officer and principal financialofficer, recognizes that any set of controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives.

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures within 90 days of the filing date of thisreport. Based on this evaluation, our principal executive officer and principalfinancial officer concluded that our disclosure controls and procedures areeffective in alerting them on a timely basis to material information requiredto be disclosed in our periodic filings.

 

CHANGES IN INTERNAL CONTROLSThere were no significant changes in our internal controls or in other factorsthat could significantly affect these controls subsequent to the date of theevaluation referenced in the foregoing paragraph.

 

 

15

----

 

 

**SIGNATURES**

 

**Pursuantto the requirements of Section 13 or 15 (d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.**

 
|   |           | Alpha Pro Tech, Ltd. |
|--------|----------------|----------------------|
|   |           |                 |   |
| DATE:  | April 21, 2003 | BY:                  | /s/ Sheldon  Hoffman |
|   |           |                 | SHELDON HOFFMAN |
|   |           |                 | CHIEF EXECUTIVE OFFICER |
|   |           |                 |   |
|   |           | Alpha Pro Tech, Ltd. |
|   |           |                 |   |
| DATE:  | April 21, 2003 | BY:                  | /s/ Lloyd Hoffman |
|   |           |                 | LLOYD HOFFMAN |
|   |           |                 | CHIEF FINANCIAL OFFICER |

 

 

16

----

 

##### ***CERTIFICATIONS***

 

I, Sheldon Hoffman, certify that:

 

1.                           I have reviewed this quarterly report onForm 10-Q of Alpha Pro Tech, Ltd;

 

2.                           Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                           Based on my knowledge, the financialstatements, and other financial information included in they quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.                           The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a)                          designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                         evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within  90 days prior to  the filing date of this quarterly report (the “Evaluation Date”);and

 

c)                          presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                           The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)                          all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)                          any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                           The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| DATE:  | April 21, 2003 | BY:    | /s/ Sheldon****Hoffman  |
|--------|----------------|--------|-------------------------|
|   |           |   | SHELDON HOFFMAN         |
|   |           |   | CHIEF EXECUTIVE OFFICER |

 

 

17

----

 

##### ***CERTIFICATIONS***

 

I, Lloyd Hoffman, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q ofAlpha Pro Tech, Ltd;

 

2.               Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, andother financial information included in they quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.               The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)                          designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                         evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within  90 days prior to  the filing date of this quarterly report (the “Evaluation Date”);and

 

c)                          presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board of directors(or persons performing the equivalent function):

 

a)                          all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)                         any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recentevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| DATE:  | April 21, 2003 | BY:    | /s/ Lloyd Hoffman       |
|--------|----------------|--------|-------------------------|
|   |           |   | LLOYD HOFFMAN           |
|   |           |   | CHIEF FINANCIAL OFFICER |

 

 

18

----