**SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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**QuarterlyReport pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

 

**For the Quarter Ended March 31, 2004**

 

**Commission File No. 0-19893**

 

| **Alpha Pro Tech, Ltd.**                                    |
|-------------------------------------------------------------|
| (exact name of registrant as specified in  its charter)     |
|                                                        |
| **Delaware, U.S.A.**                                        |   | **63-1009183** |
| (State or other jurisdiction of  incorporation)             |   | (I.R.S. Employer Identification No.) |
|                                                        |   |   |
| **Suite 112, 60 Centurian Drive  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 Actof 1934 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 27, 2004.

 

23,134,907 Shares of Common stock, $.01 par value

 

 

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**AlphaPro Tech, Ltd.**

 

Table of Contents

 
| PART I.    | FINANCIAL  INFORMATION                                                                      |                                                                                                           |
|------------|---------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
|       |                                                                                        |                                                                                                           |   |
| ITEM 1     | Consolidated  Financial Statements (Unaudited)                                              |                                                                                                           |
|       |                                                                                        |                                                                                                           |   |
|       | a)                                                                                          | Consolidated Balance Sheets  -  March 31, 2004 and December 31, 2003                                 |   |
|       |                                                                                        |                                                                                                           |   |
|       | b)                                                                                          | Consolidated  Statements of Operations  for the three months ended March 31, 2004 and March 31, 2003 |   |
|       |                                                                                        |                                                                                                           |   |
|       | c)                                                                                          | Consolidated  Statement of Shareholders’ Equity  for the three months ended March 31, 2004           |   |
|       |                                                                                        |                                                                                                           |   |
|       | d)                                                                                          | Consolidated  Statements of Cash Flows  for the three months ended March 31, 2004 and March 31, 2003 |   |
|       |                                                                                        |                                                                                                           |   |
|       | e)                                                                                          | Notes to  Consolidated Financial Statements                                                                    |   |
|       |                                                                                        |                                                                                                           |   |
| ITEM  2    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                           |
|       |                                                                                        |
|       | New  Accounting Standards                                                                   |                                                                                                           |
|       |                                                                                        |
|       | Cautionary  Statements Regarding Forward-Looking Information                                |                                                                                                           |
|       |                                                                                        |
| ITEM 3     | Quantitative  and Qualitative Disclosures About Market Risk                                 |                                                                                                           |   |
|       |                                                                                        |
| ITEM 4     | Controls and  Procedures                                                                    |                                                                                                           |
|       |                                                                                        |
| PART II.   | OTHER INFORMATION                                                                           |                                                                                                           |
|       |                                                                                        |
| ITEM 6     | Exhibits  and Reports on Form 8-K                                                           |                                                                                                           |
|       |                                                                                        |
| SIGNATURES |                                                                                        |
|       |                                                                                        |
| EXHIBITS   |                                                                                        |
|       |                                                                                        |
|       | Exhibit  31.1:                                                                              | Certification  by CEO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act  (filed herewith)      |   |
|       |                                                                                        |
|       | Exhibit  31.2:                                                                              | Certification  by CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act  (filed herewith)      |   |
|       |                                                                                        |
|       | Exhibit  32.1:                                                                              | Certification  by CEO pursuant to Section 906 of the Sarbanes-Oxley Act (filed  herewith)                 |   |
|       |                                                                                        |
|       | Exhibit  32.2:                                                                              | Certification  by CFO pursuant to Section 906 of the Sarbanes-Oxley Act (filed  herewith)                 |   |
|            |                                                                                             |                                                                                                                |  |  |  |

 

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**Alpha Pro Tech, Ltd.**

 

##### ***PART I.***  FINANCIALINFORMATION

 

#### **ITEM1**.     FINANCIAL STATEMENTS

 

We have prepared the following unaudited interim consolidated financialstatements pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to these rules and regulations.

 

You should read the following unaudited interim consolidated financialstatements and the accompanying notes together with our Annual Report on Form10-K for the year ended December 31, 2003. Our 2003 Annual Report containsinformation that may be helpful in analyzing the financial informationcontained in this report and in comparing our results of operations for thethree months ended March 31, 2004 with the same period in 2003.

 

1

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**Alpha Pro Tech, Ltd.**

 

# ** **

# **                                                                                               **CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

**ConsolidatedBalance Sheets****(Unaudited)**

 
|                                                                                                                                                                           |   | **March 31,  2004** |       | **December 31,  2003 (1)** |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|---------------------------------|---------|
|                                                                                                                                                                           |   |                     |       |                            |    |
| **Assets**                                                                                                                                                                     |   |                     |       |                            |    |
| Current assets:                                                                                                                                                                |   |                     |       |                            |    |
| Cash and cash equivalents                                                                                                                                                      |   | $                        | 2,800,000  |                            | $       | 3,427,000 |   |
| Accounts receivable, net of allowance for  doubtful accounts of  $69,000 at  March 31, 2004 and December 31, 2003                                          |   | 3,077,000                |       | 2,707,000                       |    |
| Inventories, net                                                                                                                                                               |   | 5,757,000                |       | 6,015,000                       |    |
| Prepaid expenses and other current assets                                                                                                                                      |   | 227,000                  |       | 245,000                         |    |
| Deferred income taxes                                                                                                                                                          |   | 362,000                  |       | 362,000                         |    |
| Total current assets                                                                                                                                                           |   | 12,223,000               |       | 12,756,000                      |    |
|                                                                                                                                                                           |   |                     |       |                            |    |
| Property and equipment, net                                                                                                                                                    |   | 3,085,000                |       | 3,166,000                       |    |
| Goodwill                                                                                                                                                                       |   | 55,000                   |       | 55,000                          |    |
| Intangible assets, net                                                                                                                                                         |   | 127,000                  |       | 119,000                         |    |
| Total assets                                                                                                                                                                   |   | $                        | 15,490,000 |                            | $       | 16,096,000 |   |
|                                                                                                                                                                           |   |                     |       |                            |    |
| **Liabilities and  Shareholders’ Equity**                                                                                                                                 |   |                     |       |                            |    |
| Current liabilities:                                                                                                                                                           |   |                     |       |                            |    |
| Accounts payable                                                                                                                                                               |   | 659,000                  |       | $                               | 956,000 |   |
| Accrued liabilities                                                                                                                                                            |   | 538,000                  |       | 1,539,000                       |    |
| Total current liabilities                                                                                                                                                      |   | 1,197,000                |       | 2,495,000                       |    |
|                                                                                                                                                                           |   |                     |       |                            |    |
| Deferred income taxes                                                                                                                                                          |   | 574,000                  |       | 574,000                         |    |
| Total liabilities                                                                                                                                                              |   | 1,771,000                |       | 3,069,000                       |    |
|                                                                                                                                                                           |   |                     |       |                            |    |
| Shareholders’ equity                                                                                                                                                      |   |                     |       |                            |    |
| Common stock, $.01 par value, 50,000,000  shares authorized, 23,134,907 and 22,727,907 issued and outstanding at  March 31, 2004 and December 31, 2003, respectively |   | 231,000                  |       | 227,000                         |    |
| Additional paid-in capital                                                                                                                                                     |   | 23,596,000               |       | 23,375,000                      |    |
| Accumulated deficit                                                                                                                                                            |   | (10,108,000              | )          | (10,575,000                     | )       |
| Total shareholders’ equity                                                                                                                                                |   | 13,719,000               |       | 13,027,000                      |    |
| Total liabilities and shareholders’ equity                                                                                                                                |   | $                        | 15,490,000 |                            | $       | 16,096,000 |   |

 

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(1)                                  The condensedconsolidated balance sheet as of December 31, 2003 has been prepared usinginformation form the audited financial statements at that date.

 

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

 

2

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**Alpha Pro Tech, Ltd.**

 

**ConsolidatedStatements of Operations****(Unaudited)**

 
|                                                         |   | **For the  Three Months Ended  March 31,** |      |
|--------------------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                                         |   | **2004**                                        |      | **2003** |   |
| Sales                                                        |   | $                                               | 5,853,000 |   | $ | 5,356,000 |   |
|                                                         |   |                                            |      |   |   |
| Cost of goods sold, excluding depreciation  and amortization |   | 2,863,000                                       |      | 2,630,000 |   |
|                                                         |   |                                            |      |   |   |
| Gross margin                                                 |   | 2,990,000                                       |      | 2,726,000 |   |
|                                                         |   |                                            |      |   |   |
| Expenses:                                                    |   |                                            |      |   |   |
| Selling, general and administrative                          |   | 2,115,000                                       |      | 1,867,000 |   |
| Depreciation and amortization                                |   | 132,000                                         |      | 120,000 |   |
|                                                         |   |                                            |      |   |   |
| Income from operations                                       |   | 743,000                                         |      | 739,000 |   |
|                                                         |   |                                            |      |   |   |
| Interest, net                                                |   | 1,000                                           |      | (1,000 | ) |
|                                                         |   |                                            |      |   |   |
| Income before provision for income taxes                     |   | 742,000                                         |      | 740,000 |   |
|                                                         |   |                                            |      |   |   |
| Provision for income taxes                                   |   | 275,000                                         |      | 275,000 |   |
|                                                         |   |                                            |      |   |   |
| Net income                                                   |   | $                                               | 467,000   |   | $ | 465,000 |   |
|                                                         |   |                                            |      |   |   |
| Basic net income per share                                   |   | $                                               | 0.02      |   | $ | 0.02 |   |
|                                                         |   |                                            |      |   |   |
| Diluted net income per share                                 |   | $                                               | 0.02      |   | $ | 0.02 |   |
|                                                         |   |                                            |      |   |   |
| Basic weighted average shares outstanding                    |   | 23,106,731                                      |      | 22,500,134 |   |
|                                                         |   |                                            |      |   |   |
| Diluted weighted average shares outstanding                  |   | 24,891,891                                      |      | 23,012,139 |   |

 

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

 

3

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**Alpha Pro Tech, Ltd.**

 

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

 
|                                   |   | **Shares** |   | **Common  Stock** |    | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Total** |        |
|----------------------------------------|--------|------------|--------|-------------------|---------|----------------------------------|--------|--------------------------|--------|-----------|-------------|
| Balance at December 31, 2003 |   | 22,727,907 |   | $                 | 227,000 |                             | $      | 23,375,000               |   | $         | (10,575,000 | ) | $ | 13,027,000 |   |
| Options exercised                      |   | 417,000    |   | 4,000             |    | 244,000                          |   | —                   |   | 248,000   |        |
| Common stock repurchased               |   | (10,000    | )      | —            |    | (23,000                          | )      | —                   |   | (23,000   | )           |
| Net income                             |   |       |   |              |    |                             |   | 467,000                  |   | 467,000   |        |
| Balance at March 31, 2004         |   | 23,134,907 |   | $                 | 231,000 |                             | $      | 23,596,000               |   | $         | (10,108,000 | ) | $ | 13,719,000 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

4

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**Alpha Pro Tech, Ltd.**

 

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

 
|                                                                              |   | **For the  Three months Ended  March 31,** |      |
|-----------------------------------------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                                                              |   | **2004**                                        |      | **2003** |   |
| **Cash Flows From  Operating Activities:**                                        |   |                                            |      |   |   |
| Net income                                                                        |   | $                                               | 467,000   |   | $ | 465,000 |   |
| Adjustments to reconcile net income to net  cash used in by operating activities: |   |                                            |      |   |   |
| Depreciation and amortization                                                     |   | 132,000                                         |      | 120,000 |   |
| Changes in assets and liabilities:                                                |   |                                            |      |   |   |
| Accounts receivable, net                                                          |   | (370,000                                        | )         | (258,000 | ) |
| Inventories, net                                                                  |   | 258,000                                         |      | (622,000 | ) |
| Prepaid expenses and other current assets                                         |   | 18,000                                          |      | 38,000 |   |
| Accounts payable and accrued liabilities                                          |   | (1,298,000                                      | )         | 195,000 |   |
|                                                                              |   |                                            |      |   |   |
| Net cash used in operating activities:                                            |   | (793,000                                        | )         | (62,000 | ) |
|                                                                              |   |                                            |      |   |   |
| **Cash Flows From  Investing Activities:**                                        |   |                                            |      |   |   |
| Purchase of property and equipment                                                |   | (44,000                                         | )         | (49,000 | ) |
| Purchase of intangible assets                                                     |   | (15,000                                         | )         | — |   |
|                                                                              |   |                                            |      |   |   |
| Net cash used in investing activities                                             |   | (59,000                                         | )         | (49,000 | ) |
|                                                                              |   |                                            |      |   |   |
| **Cash Flows From  Financing Activities:**                                        |   |                                            |      |   |   |
| Payments on notes payable                                                         |   | —                                          |      | (45,000 | ) |
| Proceeds from the exercise of stock options                                       |   | 248,000                                         |      | — |   |
| Payments for the repurchase of common stock                                       |   | (23,000                                         | )         | (274,000 | ) |
| Net cash provided by (used in) financing  activities                              |   | 225,000                                         |      | (319,000 | ) |
|                                                                              |   |                                            |      |   |   |
| Decrease in cash during the period                                                |   | (627,000                                        | )         | (430,000 | ) |
|                                                                              |   |                                            |      |   |   |
| Cash and cash equivalents, beginning of  period                                   |   | $                                               | 3,427,000 |   | $ | 2,879,000 |   |
| Cash and cash equivalents, end of period                                          |   | $                                               | 2,800,000 |   | $ | 2,449,000 |   |

 

The accompanying notes are an integral part of these consolidated financialstatements.

 

5

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**Alpha Pro Tech, Ltd.**

 

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

 

**1.****                                      TheCompany**

 

Alpha Pro Tech, Ltd. (the “Company”) manufactures and distributes avariety of disposable mask, shield, shoe cover, apparel and wound careproducts.  Most of the Company’sdisposable apparel, mask and shield products, and wound care products aredistributed to medical, dental, industrial safety and clean room markets,predominantly in the United States of America.

 

**2.****                                      Basisof Presentation**

 

The interim financial information included herein is unaudited;however, the information reflects all adjustments (consisting of normalrecurring adjustments) that are, in the opinion of management, necessary forthe fair presentation of the consolidated financial position, results ofoperations and cash flows for the interim periods. The consolidated financialstatements should be read in conjunction with the consolidated financialstatements for the year ended December 31, 2003, which are included in ourAnnual Report on Form 10-K for the year ended December 31, 2003 (“200310-K”). The results of operations for the three months ended March 31,2004 are not necessarily indicative of the results to be expected for the fullyear. The consolidated balance sheet at December 31, 2003 was extractedfrom the audited consolidated financial statements contained in the 2003 10-Kand does not include all disclosures required by accounting principlesgenerally accepted in the United States of America for annual consolidatedfinancial statements.

 

Certain amounts for prior periods have been reclassified to beconsistent with the 2004 presentation. Such reclassifications had no effect on total assets, total liabilities,shareholders’ equity or net income.

 

**3.****                                      StockBased Compensation**

 

Accounting for Stock-based Compensation.  The Company maintains a stock option planunder which the Company may grant incentive stock options and non-qualifiedstock options to employees and non-employee directors.  Stock options have been granted withexercise prices at or above the fair market value on the date of grant.  Options vest and expire according to terms establishedat the grant date.

 

The Company accounts for stock options granted using AccountingPrinciples Board (“APB”) Opinion 25. Accordingly, no compensation cost has beenrecognized for its fixed stock option plans. Had compensation cost for theCompany’s stock-based compensation plans been determined based on the fairvalue at the grant dates for awards under those plans consistent with SFAS No.123, the Company’s net income and net income per common share would havechanged to the pro forma amounts indicated below:

 

6

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|                                                                                                                                               |   | **For the Three  Months  Ended  March 31,** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                                                                                                               |   | **2004**                                         |    | **2003** |   |
| Net income, as reported                                                                                                                            |   | $                                                | 467,000 |   | $ | 465,000 |   |
| Add:   Total stock-based employee compensation expense included in reported  net income, net of related tax effects                           |   | —                                           |    | — |   |
| Deduct:   Total stock-based employee compensation expense determined using the  fair value method for all rewards, net of related tax effects |   | —                                           |    | — |   |
|                                                                                                                                               |   |                                             |    |   |   |
| Pro forma net income                                                                                                                               |   | $                                                | 467,000 |   | $ | 465,000 |   |
|                                                                                                                                               |   |                                             |    |   |   |
| Net income per share:                                                                                                                              |   |                                             |    |   |   |
| Basic - as reported                                                                                                                                |   | $                                                | 0.02    |   | $ | 0.02 |   |
| Basic - pro forma                                                                                                                                  |   | 0.02                                             |    | 0.02 |   |
| Diluted – as reported                                                                                                                         |   | 0.02                                             |    | 0.02 |   |
| Diluted - pro forma                                                                                                                                |   | 0.02                                             |    | 0.02 |   |

 

**4.****                                     ****New Accounting Standards**

 

The Company has reviewed all recently issued accounting standards whichhave not yet been adopted in order to determine their potential effect, if any,on the results of operations or financial position of Alpha Pro Tech.  Based on that review, Alpha Pro Tech doesnot currently believe that any of these recent accounting pronouncements willhave a significant effect on its current or future financial position, resultsof operations, cash flows or disclosures. .

 

**5.****                                      Inventories**

 

Inventories consist of the following:

 
|                                                          |   | **March 31,  2004** |      | **December 31,  2003** |   |
|---------------------------------------------------------------|--------|--------------------------|-----------|-----------------------------|--------|
| Raw materials                                                 |   | $                        | 3,432,000 |                        | $      | 3,174,000 |   |
| Work in process                                               |   | 46,000                   |      | 44,000                      |   |
| Finished goods                                                |   | 2,665,000                |      | 3,183,000                   |   |
|                                                          |   | 6,143,000                |      | 6,401,000                   |   |
| Less reserve for slow-moving, obsolete or  unusable inventory |   | (386,000                 | )         | (386,000                    | )      |
|                                                          |   | $                        | 5,757,000 |                        | $      | 6,015,000 |   |

 

7

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**6.****                                      AccruedLiabilities**

 

The****following table represents the components of accruedliabilities.

 
|                      |   | **March 31,  2004** |    | **December 31,  2003** |   |
|---------------------------|--------|--------------------------|---------|-----------------------------|--------|
| Income taxes payable      |   | $                        | 49,000  |                        | $      | 480,000 |   |
| Bonuses payable           |   | 105,000                  |    | 737,000                     |   |
| Accrued payroll           |   | 227,000                  |    | 148,000                     |   |
| Accrued rebates and other |   | 157,000                  |    | 174,000                     |   |
|                      |   | $                        | 538,000 |                        | $      | 1,539,000 |   |

 

**7.****                                      Basicand Diluted Net Income Per Share**

 

The following table provides a reconciliation of both the net incomeand the number of shares used in the computation of “basic” earnings per share(EPS), which utilizes the weighted average number of shares outstanding withoutregard to potential shares, and “diluted” EPS, which includes all such dilutiveshares.

 
|                                                |   | **For the  Three Months  Ended March 31,** |    |
|-----------------------------------------------------|--------|-------------------------------------------------|---------|
|                                                |   | **2004**                                        |    | **2003** |   |
| Net income   (Numerator)                       |   | $                                               | 467,000 |   | $ | 465,000 |   |
| Shares (Denominator):                               |   |                                            |    |   |   |
| Basic weighted average shares outstanding           |   | 23,106,731                                      |    | 22,500,134 |   |
| Add: Dilutive effect of stock options and  warrants |   | 1,785,160                                       |    | 512,005 |   |
| Diluted weighted average shares outstanding         |   | 24,891,891                                      |    | 23,012,139 |   |
| Net income   per share:                        |   |                                            |    |   |   |
| Basic                                               |   | $                                               | 0.02    |   | $ | 0.02 |   |
| Diluted                                             |   | $                                               | 0.02    |   | $ | 0.02 |   |

 

8

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**8.****                                      Activityof Business Segments**

 

The Company operates through three segments:  Apparel, consisting of a complete line of disposable clothingsuch as coveralls, frocks, lab coats, hoods, bouffant caps and shoe covers;Mask and shields, consisting principally of medical, dental and industrialmasks and eye shields; and Extended Care, consisting principally of fleece andother related products which includes a line of pet beds.

 

The accounting policies of the segments are the same as those describedin the “Summary of Significant Accounting Policies” in the Company’s Form 10-Kfor the year ended December 31, 2003. Segment data excludes charges allocated to head office and corporatesales/marketing departments and income taxes. The Company evaluates the performance of its segments and allocatesresources to them based primarily on net sales.

 

The following table shows net sales for each segment for the threemonths ended March 31, 2004 and 2003:

 
|                         |   | **For the  Three Months Ended  March 31,** |      |
|------------------------------|--------|-------------------------------------------------|-----------|
|                         |   | **2004**                                        |      | **2003** |   |
|                         |   |                                            |      |   |   |
| Apparel                      |   | $                                               | 4,092,000 |   | $ | 3,470,000 |   |
| Mask and shield              |   | 1,216,000                                       |      | 1,337,000 |   |
| Extended care                |   | 545,000                                         |      | 549,000 |   |
|                         |   |                                            |      |   |   |
| Consolidated total net sales |   | $                                               | 5,853,000 |   | $ | 5,356,000 |   |

 

The following table shows the reconciliation of total segment income tototal consolidated net income for the three months ended March 31, 2004and 2003:

 
|                                    |   | **For the  Three Months Ended  March 31,** |      |
|-----------------------------------------|--------|-------------------------------------------------|-----------|
|                                    |   | **2004**                                        |      | **2003** |   |
|                                    |   |                                            |      |   |   |
| Apparel                                 |   | $                                               | 1,559,000 |   | $ | 1,009,000 |   |
| Mask and shield                         |   | 399,000                                         |      | 545,000 |   |
| Extended care                           |   | 96,000                                          |      | 105,000 |   |
|                                    |   |                                            |      |   |   |
| Total segment income                    |   | 2,054,000                                       |      | 1,659,000 |   |
| Unallocated corporate overhead expenses |   | (1,312,000                                      | )         | (919,000 | ) |
| Provision for income taxes              |   | (275,000                                        | )         | (275,000 | ) |
|                                    |   |                                            |      |   |   |
| Consolidated net income                 |   | $                                               | 467,000   |   | $ | 465,000 |   |

 

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# **ITEM5**                                                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis together with ourconsolidated financial statements and the notes to our consolidated financialstatements, which appear elsewhere in this report.

 

**OVERVIEW**

 

Alpha Pro Tech is in the business of protecting people, products andenvironments. We accomplish this by developing, manufacturing and marketing aline of disposable protective apparel and consumer products for the cleanroom,industrial, medical, dental and consumer markets.  Our products are primarily sold under the “Alpha Pro Tech” brandname, but are also sold for use under private label.

 

Our products are classified into four groups:  Disposable protective apparel, consisting of a complete line ofshoecovers, headcovers, gowns, coveralls and lab coats; infection controlproducts consisting of a line of face masks and face shields; extended careproducts consisting of a line of mattress overlays, wheelchair covers,geriatric chair surfaces, operating room table surfaces and pediatric surfaces;and consumer products consisting of a line of pet bedding and pet toys.  Our products are sold through threesegments.  The Apparel segment,consisting of disposable protective apparel; the Mask and Shield segment,consisting of infection control products; and the Extended Care segment,consisting of extended care products and consumer products.

 

Our target markets are pharmaceutical manufacturing, bio-pharmaceuticalmanufacturing and medical device manufacturing, lab animal research, hightechnology electronics manufacturing which includes the semi-conductor market,as well as medical and dental markets. Our products are used primarily incleanrooms, industrial safety manufacturing environments and health carefacilities such as hospitals, laboratories and dental offices. Our products aredistributed principally in the United States through a network consisting ofpurchasing groups, national distributors, local distributors, independent salesrepresentatives and our own sales and marketing force.

 

We are committed to growing the sales line in our core business.  In order to achieve our sales growthobjectives, we have initiated two strategies. One key strategy is based upon our innovative initiatives.  We provide innovative solutions by sellingproducts to our end users that best satisfy the end users’ requirements.  Our strategy of communicating directly withthe end users in conjunction with our distributors enables us to betterunderstand the end users true needs and therefore provide innovative products.

 

Our second key growth strategy is investing in sales andmarketing.  During 2003 we increased oursales team by five to fifteen.  Although it takes time for new salespersons to achieve their potential,we are starting to experience some positive results and expect sales growth toimprove in the coming quarters.  As wegain market share, we will invest in additional sales personnel.

 

In the first quarter of 2004, we experienced sales growth of 9.3%.  Gross profit remained strong at 51.1% andnet income was flat at $467,000.  Netincome was flat primarily due to higher sales and marketing expenses.  We believe that we have developed a solidsales team and that our core business sales growth will improve.

 

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**RESULTS OF OPERATIONS**

 

**Three months ended March 31, 2004, compared to the three monthsended March 31, 2003**

 

Alpha Pro Tech, Ltd. (“Alpha” or the “Company”) reported net income forthe quarter ended March 31, 2004 of $467,000 as compared to $465,000 forthe quarter ended March 31, 2003, representing an increase of $2,000 or0.4%.  The increase is attributable toan increase in gross profit of $264,000, partially offset by an increase inselling, general and administrative expenses of $248,000, an increase indepreciation and amortization of $12,000 and an increase in net interestexpense of $2,000.

 

**Sales.**  Consolidated sales for the quarter endedMarch 31, 2004 increased to $5,853,000 from $5,356,000 for the quarterended March 31, 2003, representing an increase of $497,000 or 9.3%.  We attribute the increase primarily to salesto the Pharmaceutical industry and to a lesser extent sales to the industrialsafety industry.

 

Sales for the Apparel Division for the quarter ended March 31,2004 were $4,092,000 compared to $3,470,000 for the same period of 2003, anincrease of $622,000 or 17.9%.   TheApparel Division sales increase is due to higher sales to the pharmaceuticalindustry and to a lesser extent sales to the industrial safety industry.  We expect long-term growth as we gain astronger foothold in the pharmaceutical market segment.

 

Mask and shield sales for the quarter ended March 31, 2004decreased by $121,000 or 9.1% to $1,216,000 from $1,337,000 in the same periodof 2003.  The decrease is primarily theresult of higher than normal sales of the N-95 Particulate Respirator masksales in the first quarter of 2003 related to the initial stages of the SARSoutbreak.

 

Sales of the Company’s Extended Care Unreal Lambskin and other relatedproducts, which includes a line of pet beds, decreased by $4,000 or 0.7% to$545,000 for the quarter ended March 31, 2004 from $549,000 for thequarter ended March 31, 2003.  Theslight decrease of $4,000 in sales is primarily the result of a decrease inmedical pad sales, partially offset by an increase in pet bed sales.

 

**Cost of Goods Sold.**  Cost of goods sold, excluding depreciationand amortization, increased to $2,863,000 for the quarter ended March 31,2004 from $2,630,000 for the same period in 2003.  Gross profit margin increased to 51.1% for the quarter endedMarch 31, 2004 from 50.9% for the same period in 2003.  Management expects that gross profit marginsshould remain at this level for the balance of 2004.

 

**Selling, General and Administrative Expenses.**  Selling,general and administrative expenses increased by $248,000 or 13.3% to$2,115,000 for the quarter ended March 31, 2004 from $1,867,000 for thequarter ended March 31, 2003.  As apercentage of net sales, selling, general and administrative expenses increasedto 36.1% in the quarter ended March 31, 2004 from 34.9% for the sameperiod in 2003.  The increase inselling, general and administrative expenses primarily consists of increasedpayroll related costs of $128,000, increased travel, marketing and commissionexpenses of $58,000, increased rent and utilities expense of $32,000, increasedoffice supplies of $25,000, increased telecommunication and insurance expenseof $12,000 and increased foreign exchange loss of $44,000, partially offset bydecreased professional fees and public company expenses of $37,000 anddecreased miscellaneous expenses of $14,000.

 

Of the $248,000 increase in selling, general and administrativeexpenses, 64.9% relates to increased sales and marketing expenses. Total salesand marketing expenses were up $161,000 in the first quarter of 2004 ascompared to the same period in 2003.  Weanticipate that these additional costs will yield improved sales results in thecoming quarters.

 

**Depreciation andAmortization.** Depreciation and amortization expense increased by $12,000 to $132,000for the quarter ended March 31, 2004 from $120,000 for the same period in2003.  The

 

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increase is primarily attributable to mask machine additions and thepurchase of computer equipment in 2004 and late 2003.

 

**Income fromOperations.** Income from operations increased slightly by $4,000 or 0.5%, to $743,000for the quarter ended March 31, 2004 as compared to income from operationsof $739,000 for the quarter ended March 31, 2003.  The increase in income from operations isdue to an increase in gross profit of $264,000, partially offset by an increasein selling, general and administrative expenses of $248,000, and an increase indepreciation and amortization of $12,000.

 

**Net Interest.**  Net interest expense increased by $2,000 tointerest expense of $1,000 for the quarter ended March 31, 2004 from netinterest income of $1,000 for the quarter ended March 31, 2003.  The increase in net interest expense is primarilydue to lower interest income, partially offset by lower interest expense due tothe Company being debt free since the second quarter of 2003.  Interest income decreased by $10,000, to$1,000 for the quarter ended March 31, 2004 from $11,000 in the sameperiod of 2003.  Interest expensedecreased by $8,000, to $2,000 for the quarter ended March 31, 2004 from$10,000 in the same period of 2003.

 

**Income BeforeProvision for Income Taxes.**  Income before provision for income taxes for the quarter ended March 31,2004 was $742,000 as compared to $740,000 for the quarter ended March 31,2003, representing an increase of $2,000 or 0.3%.  This increase is attributable primarily to an increase in grossprofit of $264,000; partially offset by an increase in selling, general andadministrative expenses of $248,000, an increase in depreciation andamortization of $12,000 and an increase in net interest expense of $2,000.

 

**Provision for IncomeTaxes **Theprovision for income taxes for the three months ended March 31, 2004 andfor the same period of 2003 was $275,000. The effective tax rate is approximately 37% in first quarter of 2004 and2003.

 

**Net Income.**  Net income for the quarter endedMarch 31, 2004 was $467,000 compared to net income of $465,000 for thequarter ended March 31, 2003, an increase of $2,000 or 0.4%.  The net income increase of $2,000 iscomprised of an increase in income from operations of $4,000, partially offsetby an increase in net interest expense of $2,000.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

As of March 31, 2004, we had cash and cash equivalents of$2,800,000 and working capital of $11,026,000, an increase in working capitalof $765,000 since December 31, 2003. Cash decreased by $627,000 for the three months ended March 31,2004. The decrease in our cash is primarily due to cash used in operatingactivities and to the purchase of property and equipment, partially offset bycash proceeds from the exercise of stock options.

 

We have a $3,500,000 credit facility with a bank, consisting of a lineof credit with interest at prime plus 0.5%. At March 31, 2004, the prime interest rate was 4.00%.  The line of credit expires in May 2004.  At March 31, 2004, our borrowingcapacity on the line of credit was $2,910,000, which is based on a formula ofaccounts receivable and inventory.  AtMarch 31, 2004, we had not borrowed on this line of credit.  As of March 31, 2004, we do not haveany debt.

 

As shown below, at March 31, 2004, our contractual cash obligationstotaled approximately $1,041,000.

 

**ContractualObligations**

 
|                               |   | **Payments  Due by Period** |      |
|------------------------------------|--------|-----------------------------|-----------|
|                               |   | **Total**                   |      | **Less than  1  Year** |   | **2-3 Years** |   | **4-5 Years** |   | **After 5  years** |   |
|                               |   |                        |      |   |   |   |   |   |   |   |   |
| Operating leases                   |   | $                           | 1,041,000 |   | $ | 350,000 |   | $ | 599,000 |   | $ | 92,000 |   | $ | — |   |
| Line of credit                     |   | —                      |      | — |   | — |   | — |   | — |   |
|                               |   |                        |      |   |   |   |   |   |   |   |   |
| Total contractual cash obligations |   | $                           | 1,041,000 |   | $ | 350,000 |   | $ | 599,000 |   | $ | 92,000 |   | $ | — |   |

 

Net cash used in operating activities was $793,000 for the three monthsended March 31, 2004.  Net cashused in operating activities increased by $731,000 to $793,000 for the threemonths ended March 31, 2004 as compared to $62,000 for the three monthsended March 31, 2003.  The increasein cash used in operating activities is primarily due to an increase in accountsreceivable and a decrease in accounts payable and accrued liabilities,partially offset an increase in depreciation and amortization and a decrease ininventories.

 

Net cash used in investing activities was $59,000 and $49,000 for thequarter ended March 31, 2004 and 2003, respectively. Our investingactivities in 2004 consisted primarily of expenditures for property andequipment of $44,000 and the purchase of intangible assets of $15,000, comparedto expenditures for property and equipment $49,000 for the three months endedMarch 31, 2003.

 

The Company expects to purchase $450,000 of additional equipment in2004.

 

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In March 2003, we announced that our Board of Directors hadapproved the buy-back of up to an additional $500,000 of the Company’soutstanding common stock.  This newshare repurchase program is the fifth $500,000 buyback authorized by the Boardof Directors.  In all instances, we are retiring the shares.  For the three months ended March 31,2004, we bought back a total of 10,000 common shares at a cost of $23,000.  As of March 31, 2004, we have boughtback a total of 2,118,800 common shares at a cost of $2,148,000 since the endof 1999.

 

During the three months ended March 31, 2004, cash provided byfinancing activities was $225,000 as compared to cash used in financingactivities of $319,000 for the same period of 2003. Our financing activities in2004 consisted primarily of cash proceeds of $248,000 from the exercise ofstock options, partially offset by payments of $23,000 for the repurchase ofcommon stock.  Our financing activitiesin 2003 consisted primarily of net payments on our notes payable of $45,000 andfrom payments of $274,000 for the repurchase of common stock.

 

We believe that cash generated from operations, our current cashbalance and the funds available under our credit facility, will be sufficientto satisfy our projected working capital and planned capital expenditures forthe foreseeable future.

 

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**NEW ACCOUNTINGSTANDARDS**

 

Based on the Company’s review of new accounting standards releasedduring the quarter ended March 31, 2004, the Company did not identify anystandards requiring adoption that would have a significant impact on its  consolidated financial statements.

 

**CAUTIONARY STATEMENTS REGARDING FORWARD-L****OOKINGINFORMATION**

 

Certain information set forth in this report contains “forward-lookingstatements” within the meaning of federal securities laws. These forward-lookingstatements are made pursuant to the safe-harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements includestatements concerning plans, objectives, goals, strategies, future events,future revenues or performance, capital expenditures and other information thatis not historical information. When used in this report, the words “estimates,”“expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” andvariations of such words or similar expressions are intended to identifyforward-looking statements. Additional forward-looking statements may be madeby 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 expresslyqualified by these cautionary statements.

 

Our forward-looking statements are based upon our current expectationsand various assumptions. Our expectations, beliefs and projections areexpressed in good faith and we believe there is a reasonable basis for them,including without limitation, management’s examination of historical operatingtrends, data contained in our records and other data available from thirdparties. However, we cannot assure you that management’s expectations, beliefsand projections will result or be achieved or accomplished. Our forward-lookingstatements apply only as of the date made. Except as required by law, weundertake no obligation to publicly update or revise forward-looking statementswhich may be made to reflect events or circumstances after the date made or toreflect the occurrence of unanticipated events.

 

We make available free of charge on our Internet website(http://www.alphaprotech.com) our most recent Annual Report on Form 10-K, ourmost recent Quarterly Report on Form 10-Q, any current reports on Form 8-Kfiled since our most recent Annual Report on Form 10-K and any amendments tosuch reports as soon as reasonably practicable following the electronic filingof such report with the SEC. In addition, we provide electronic or paper copiesof our filings free of charge upon request.

 

**ITEM 3****                                                      QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We manufacture some products in Mexico and subcontract the manufactureof some products in China.  TheCompany’s results of operations could be negatively affected by factors such aschanges in foreign currency exchange rates due to stronger economic conditionsin those countries.

 

The Company doesn’t expect any significant effect on its results ofoperations from inflationary or interest and currency rate fluctuations.  The Company does not hedge its interest rateor foreign exchange risks.

 

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**ITEM 4.****     CONTROLSAND PROCEDURES**

 

Disclosure Controls and Procedures

 

Our management evaluated, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934), as of March 31, 2004. Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective as ofMarch 31, 2004.

 

Changes in Internal Control Over FinancialReporting

 

There has been no change in our internal controlover financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) that occurred during our fiscal quarter ended March 31,2004, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II****- OTHERINFORMATION**

 

**ITEM6****EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)Exhibits

 

31.1Certification Pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the ExchangeAct, Signed by Chief Executive Officer (filed herewith)

 

31.2Certification Pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the ExchangeAct, Signed by Chief Financial Officer (filed herewith)

 

32.1Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2003, Signed by Chief ExecutiveOfficer (filed herewith)

 

32.2Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2003, Signed by Chief FinancialOfficer (filed herewith)

 

(b)Reports on Form 8-K

 

Noreports were filed on Form 8-K during the first quarter of 2004

 

## **SIGNATURES**

## ** **

Pursuant to the requirements of Section 13 or 15 (d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | Alpha Pro Tech, Ltd. |
|--------|----------------------|
|   |                 |   |
|   |                 |   |
| DATE:  | April 27, 2004  |   | BY: | /s/ Sheldon Hoffman |   |
|   |                 | SHELDON HOFFMAN |
|   |                 | CHIEF EXECUTIVE OFFICER |
|   |                 |   |
|   |                 |   |
|   | Alpha Pro Tech, Ltd. |
|   |                 |   |
|   |                 |   |
| DATE:  | April 27, 2004  |   | BY: | /s/ Lloyd Hoffman |   |
|   |                 | LLOYD HOFFMAN |
|   |                 | CHIEF FINANCIAL OFFICER |

 

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