Table of Contents

 

 

 

**UNITED STATES**

**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 of1934**

 

**For theQuarterly Period Ended June 30, 2009**

 

**CommissionFile No. 01-15725**

 

**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 areacode:  **(905)479-0654**

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).   Yes oNo o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2of the Exchange Act).

 

| Large accelerated filer o |   | Non-accelerated filer x     |
|--------------------------------|--------|-----------------------------|
|                           |   |                        |
| Accelerated filer o            |   | Smaller Reporting Company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.) Yes o No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practical date.

 

| **Class**                     | ** ** | **Outstanding August 3, 2009** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| Common Stock, $0.01 par value |       | 23,541,053 shares                   |       |

 

 

 

 

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Table of Contents

 

**Alpha Pro Tech, Ltd.**

 

Table of Contents

 
|                                                                                                | **Page No.**                                            |
|-----------------------------------------------------------------------------------------------------|--------------------------------------------------------------|
|                                                                                                |                                                         |
| PART I.  FINANCIAL INFORMATION                                                                 |                                                         |
|                                                                                                |                                                         |
| ITEM  1  Consolidated Financial Statements  (Unaudited)                                        |                                                         |
|                                                                                                |                                                         |   |
|                                                                                                | a)                                                           | Consolidated  Balance Sheets | 2 |
|                                                                                                |                                                         |   |   |
|                                                                                                | b)                                                           | Consolidated  Income Statements | 3 |
|                                                                                                |                                                         |   |   |
|                                                                                                | c)                                                           | Consolidated  Statement of Shareholders’ Equity | 4 |
|                                                                                                |                                                         |   |   |
|                                                                                                | d)                                                           | Consolidated  Statements of Cash Flows | 5 |
|                                                                                                |                                                         |   |   |
|                                                                                                | e)                                                           | Notes to  Consolidated Financial Statements (Unaudited) | 6 |
|                                                                                                |                                                         |   |
| ITEM 2  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 14                                                           |
|                                                                                                |                                                         |   |
|                                                                                                | Cautionary  Statements Regarding Forward-Looking Information | 14 |
|                                                                                                |                                                         |   |
|                                                                                                | New Accounting Standards                                     | 21 |
|                                                                                                |                                                         |   |
| ITEM 3  Quantitative and Qualitative Disclosures  About Market Risk                            | 23                                                           |
|                                                                                                |                                                         |   |
| ITEM 4  Controls and Procedures                                                                | 23                                                           |
|                                                                                                |                                                         |   |
| PART II.   OTHER INFORMATION                                                         |                                                         |
|                                                                                                |                                                         |   |
| ITEM 1  Legal Proceedings                                                                      | 24                                                           |
|                                                                                                |                                                         |   |
| ITEM  1A. Risk Factors                                                                              | 24                                                           |
|                                                                                                |                                                         |   |
| ITEM 2  Unregistered Sales of Equity Securities and Use of Proceeds                                 | 24                                                           |
|                                                                                                |                                                         |
| ITEM 3  Defaults upon Senior Securities                                                             | 24                                                           |
|                                                                                                |                                                         |
| ITEM 4  Submission of Matters to a Vote Security Holders                                            | 25                                                           |
|                                                                                                |                                                         |
| ITEM 5 Other Information                                                                            | 25                                                           |
|                                                                                                |                                                         |
| ITEM  6 Exhibits                                                                                    |                                                         |
|                                                                                                |                                                         |   |
| SIGNATURES                                                                                          | 26                                                           |
|                                                                                                |                                                         |
| EXHIBITS                                                                                            |                                                         |
|                                                                                                     |                                                              |  |  |  |

 

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##### ***Table of Contents***

##### *** ***

##### ***PART I. FINANCIAL INFORMATION***

##### *** ***

#### **ITEM 1. FINANCIAL STATEMENTS**

#### ** **

Alpha Pro Tech, Ltd. (“Alpha Pro Tech” or the “Company”)prepared the following unaudited interim consolidated financial statementspursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted pursuant to these rules and regulations, although theCompany believes that the disclosures made are adequate to make the informationnot misleading.

 

You should read the following unaudited interimconsolidated financial statements and the accompanying notes together with theCompany’s current year 10-Q and 8-K as well as the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. The Company’s 2008 Annual Report contains information that may behelpful in analyzing the financial information contained in this report and incomparing its results of operations for the three and six months ended June 30,2009 with the same period in 2008.

 

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

 
| ** **                                                                                                                                                                    | ** ** | **June 30,  2009** | ** ** | **December 31,  2008 (1)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
|                                                                                                                                                                          |       |                    |       |                            |       |
| **Assets**                                                                                                                                                                    |       |                    |       |                            |       |
| Current assets:                                                                                                                                                               |       |                    |       |                            |       |
| Cash and cash equivalents                                                                                                                                                     |       | $                       | 6,455,000  |                            | $          | 4,578,000 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $83,000 at June 30, 2009 and $71,000 at December 31,  2008                                          |       | 8,132,000               |       | 5,091,000                       |       |
| Inventories, net                                                                                                                                                              |       | 9,359,000               |       | 12,057,000                      |       |
| Prepaid expenses and other current assets                                                                                                                                     |       | 1,894,000               |       | 1,340,000                       |       |
| Deferred income taxes                                                                                                                                                         |       | 515,000                 |       | 510,000                         |       |
| Total current assets                                                                                                                                                          |       | 26,355,000              |       | 23,576,000                      |       |
|                                                                                                                                                                          |       |                    |       |                            |       |
| Property and equipment, net                                                                                                                                                   |       | 3,829,000               |       | 3,942,000                       |       |
| Goodwill, net                                                                                                                                                                 |       | 55,000                  |       | 55,000                          |       |
| Intangible assets, net                                                                                                                                                        |       | 195,000                 |       | 202,000                         |       |
| Equity investments in and advances to unconsolidated  affiliates                                                                                                              |       | 1,563,000               |       | 1,393,000                       |       |
| Total assets                                                                                                                                                                  |       | $                       | 31,997,000 |                            | $          | 29,168,000 |   |
|                                                                                                                                                                          |       |                    |       |                            |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                                 |       |                    |       |                            |       |
| Current liabilities:                                                                                                                                                          |       |                    |       |                            |       |
| Accounts payable                                                                                                                                                              |       | $                       | 1,499,000  |                            | $          | 620,000 |   |
| Accrued liabilities                                                                                                                                                           |       | 2,163,000               |       | 1,263,000                       |       |
| Total current liabilities                                                                                                                                                     |       | 3,662,000               |       | 1,883,000                       |       |
|                                                                                                                                                                          |       |                    |       |                            |       |
| Deferred income taxes                                                                                                                                                         |       | 862,000                 |       | 819,000                         |       |
| Total liabilities                                                                                                                                                             |       | 4,524,000               |       | 2,702,000                       |       |
|                                                                                                                                                                          |       |                    |       |                            |       |
| Shareholders’ equity:                                                                                                                                                    |       |                    |       |                            |       |
| Common stock, $.01 par value, 50,000,000 shares  authorized, 22,403,255 and 23,850,855 issued and outstanding at June 30,  2009 and December 31, 2008, respectively |       | 224,000                 |       | 239,000                         |       |
| Additional paid-in capital                                                                                                                                                    |       | 23,124,000              |       | 24,785,000                      |       |
| Retained earnings                                                                                                                                                             |       | 4,125,000               |       | 1,442,000                       |       |
| Total shareholders’ equity                                                                                                                                               |       | 27,473,000              |       | 26,466,000                      |       |
| Total liabilities and shareholders’ equity                                                                                                                               |       | $                       | 31,997,000 |                            | $          | 29,168,000 |   |

 

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(1)                                 The condensed consolidated balance sheetas of December 31, 2008 has been prepared using information from theaudited financial statements at that date.

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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### **ConsolidatedIncome Statements (Unaudited)**

 
| ** **                                                   | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                                      | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Net  sales                                                   |       | $                                             | 14,547,000 |                                        | $          | 8,913,000 |   | $ | 23,874,000 |   | $ | 16,437,000 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Cost  of goods sold, excluding depreciation and amortization |       | 7,676,000                                     |       | 4,995,000                                   |       | 12,884,000 |   | 9,069,000 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Gross  margin                                                |       | 6,871,000                                     |       | 3,918,000                                   |       | 10,990,000 |   | 7,368,000 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Expenses:                                                    |       |                                          |       |                                        |       |   |   |   |   |
| Selling,  general and administrative                         |       | 3,399,000                                     |       | 3,194,000                                   |       | 6,639,000 |   | 6,335,000 |   |
| Depreciation  and amortization                               |       | 162,000                                       |       | 141,000                                     |       | 322,000 |   | 282,000 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Income  from operations                                      |       | 3,310,000                                     |       | 583,000                                     |       | 4,029,000 |   | 751,000 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Other  income:                                               |       |                                          |       |                                        |       |   |   |   |   |
| Equity  in income of unconsolidated affiliates               |       | 72,000                                        |       | 17,000                                      |       | 170,000 |   | 38,000 |   |
| Interest,  net                                               |       | —                                        |       | 17,000                                      |       | 1,000 |   | 51,000 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Income  before provision for income taxes                    |       | 3,382,000                                     |       | 617,000                                     |       | 4,200,000 |   | 840,000 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Provision  for income taxes                                  |       | 1,214,000                                     |       | 232,000                                     |       | 1,517,000 |   | 316,000 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Net  income                                                  |       | $                                             | 2,168,000  |                                        | $          | 385,000 |   | $ | 2,683,000 |   | $ | 524,000 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Basic  net income per share                                  |       | $                                             | 0.10       |                                        | $          | 0.02 |   | $ | 0.12 |   | $ | 0.02 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Diluted  net income per share                                |       | $                                             | 0.10       |                                        | $          | 0.02 |   | $ | 0.12 |   | $ | 0.02 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Basic  weighted average shares outstanding                   |       | 22,795,003                                    |       | 24,979,571                                  |       | 23,245,300 |   | 25,094,775 |   |
|                                                         |       |                                          |       |                                        |       |   |   |   |   |
| Diluted  weighted average shares outstanding                 |       | 22,820,145                                    |       | 24,979,571                                  |       | 23,245,300 |   | 25,094,775 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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

 
| ** **                           | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                           | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                           | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                 |       |             |       |        |       |           |       |         |       |       |       |
| Balance at December 31, 2008    |       | 23,850,855       |       | $           | 239,000    |           | $          | 24,785,000   |       | $          | 1,442,000  |   | $ | 26,466,000 |   |
|                                 |       |             |       |        |       |           |       |         |       |       |       |
| Share-based compensation expense     |       | —           |       | —      |       | 119,000        |       | —       |       | 119,000    |       |
|                                 |       |             |       |        |       |           |       |         |       |       |       |
| Common stock repurchased and retired |       | (1,447,600       | )          | (15,000     | )          | (1,780,000     | )          | —       |       | (1,795,000 | )          |
|                                 |       |             |       |        |       |           |       |         |       |       |       |
| Net income                           |       | —           |       | —      |       | —         |       | 2,683,000    |       | 2,683,000  |       |
|                                 |       |             |       |        |       |           |       |         |       |       |       |
| Balance at June 30, 2009        |       | 22,403,255       |       | $           | 224,000    |           | $          | 23,124,000   |       | $          | 4,125,000  |   | $ | 27,473,000 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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### ** **

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

 
| ** **                                                                     | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| **Cash Flows From Operating Activities:**                                      |       |                                        |       |   |   |
| Net income                                                                     |       | $                                           | 2,683,000  |   | $ | 524,000 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                        |       |   |   |
| Share-based compensation expense                                               |       | 119,000                                     |       | 97,000 |   |
| Depreciation and amortization                                                  |       | 322,000                                     |       | 282,000 |   |
| Deferred income taxes                                                          |       | 38,000                                      |       | (85,000 | ) |
| Equity in income of unconsolidated affiliates                                  |       | (170,000                                    | )          | (38,000 | ) |
| Changes in assets and liabilities:                                             |       |                                        |       |   |   |
| Accounts receivable, net                                                       |       | (3,041,000                                  | )          | (905,000 | ) |
| Inventories, net                                                               |       | 2,698,000                                   |       | 219,000 |   |
| Prepaid expenses and other current assets                                      |       | (554,000                                    | )          | (333,000 | ) |
| Accounts payable and accrued liabilities                                       |       | 1,779,000                                   |       | (169,000 | ) |
|                                                                           |       |                                        |       |   |   |
| Net cash provided by (used in) operating activities                            |       | 3,874,000                                   |       | (408,000 | ) |
|                                                                           |       |                                        |       |   |   |
| **Cash Flows From Investing Activities:**                                      |       |                                        |       |   |   |
| Purchase of property and equipment                                             |       | (194,000                                    | )          | (45,000 | ) |
| Purchase of intangible assets                                                  |       | (8,000                                      | )          | (34,000 | ) |
|                                                                           |       |                                        |       |   |   |
| Net cash used in investing activities                                          |       | (202,000                                    | )          | (79,000 | ) |
|                                                                           |       |                                        |       |   |   |
| **Cash Flows From Financing Activities:**                                      |       |                                        |       |   |   |
| Payments for the repurchase and retirement of common  stock                    |       | (1,795,000                                  | )          | (972,000 | ) |
|                                                                           |       |                                        |       |   |   |
| Net cash used in financing activities                                          |       | (1,795,000                                  | )          | (972,000 | ) |
|                                                                           |       |                                        |       |   |   |
| Increase (decrease) in cash during the period                                  |       | 1,877,000                                   |       | (1,459,000 | ) |
|                                                                           |       |                                        |       |   |   |
| Cash and cash equivalents, beginning of period                                 |       | 4,578,000                                   |       | 4,064,000 |   |
| Cash and cash equivalents, end of period                                       |       | $                                           | 6,455,000  |   | $ | 2,605,000 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**Notes to Consolidated Financial Statements(Unaudited)**

 

**1.****                                    ****The Company**

 

Alpha Pro Tech,Ltd. (“Alpha Pro Tech” or the “Company”) is in the business of protectingpeople, products and environments.  TheCompany accomplishes this by developing, manufacturing and marketing a line ofdisposable protective apparel for the cleanroom, industrial and pharmaceuticalmarkets, a line of building supply products for the new home and re-roofingmarkets and a line of infection control products for the medical and dentalmarkets.

 

The disposableprotective apparel consists of a complete line of shoecovers, bouffant caps,coveralls, gowns, frocks and lab coats. The line of building supply products(formerly known as Engineered Products) consists of construction weatherizationproducts such as house wrap and synthetic roof underlayment.   The infection control line of products includesa line of face masks, eye shields and medical bed pads, as well as a line ofpet beds. Previously, the line of medical bed pads and pet beds were reportedas a separate segment under the name Extended Care. Because management is nowlooking at the Extended Care segment in conjunction with the Infection Controlsegment, and since the majority of the Extended Care segment revenue is nowgenerated from the medical bed pads, it is now appropriate for these segmentsto be consolidated in the Infection Control segment.  All numbers have been updated to reflect theupdated segmentation.

 

The Company’sproducts are sold both under the “Alpha Pro Tech” brand name, as well as underprivate label, and are predominantly sold in the United States of America.

 

**2.****                                    ****Basis of 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. These consolidated financialstatements have been prepared in accordance with the rules and regulationsof the Securities and Exchange Commission, and, therefore, omit certaininformation and footnote disclosure necessary to present the statements inaccordance with accounting principles generally accepted in the United Statesof America.  The consolidated financialstatements should be read in conjunction with the Company’s current year 10-Qand 8-K filings, as well as the consolidated financial statements for the yearended December 31, 2008, which are included in the Company’s Annual Reporton Form 10-K (“the 2008 10-K”), which was filed on March 11, 2009.The results of operations for the three and six months ended June 30, 2009are not necessarily indicative of the results to be expected for the full year.The consolidated balance sheet at December 31, 2008 was extracted from theaudited consolidated financial statements contained in the 2008 10-K and doesnot include all disclosures required by accounting principles generallyaccepted in the United States of America for annual consolidated financialstatements.

 

Also, management has reviewed and evaluated material subsequent eventsfrom the balance sheet date of June 30, 2009 through the financialstatements issue date of August 6, 2009. All appropriate subsequent event disclosures, if any, have been made inthe notes to the unaudited consolidated financial statements.

 

**3.****                                    ****Stock Based Compensation**

 

The Company maintains a stock option plan under which the Company maygrant incentive stock options and non-qualified stock options to employees andnon-employee directors.  Stock optionshave been granted with exercise prices at or above the fair market value of theunderlying shares of common stock on the date of grant.  Options vest and expire according to termsestablished at the grant date.

 

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**Notes to Consolidated Financial Statements(Unaudited)**

 

The Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 123R, “Share-Based Payment” (“SFAS 123R”), effective January 1,2006, using the modified prospective application method. SFAS 123R requirescompanies to record compensation expense for the value of all outstanding andunvested share-based payments, including employee stock options and similarawards.  During the first six months of2009 and 2008, there were no stock options granted under the option plan.  The Company recognized $62,000 and $51,000 inshare-based compensation expense in its consolidated financial statements forthe three months ended June 30, 2009 and 2008, respectively, related topreviously issued options.  The Companyrecognized $119,000 and $97,000 in share-based compensation expense in itsconsolidated financial statements for the six months ended June 30, 2009and 2008, respectively, related to previously issued options.

 

Stock options topurchase 1,695,000 and 1,320,000 shares of common stock were outstanding at June 30,2009 and 2008, respectively.  As of June 30,2009, 25,142 incremental shares were included in the computation of dilutedearnings per share because the exercise prices of those stock options were lessthan the average share price of the Company’s common stock for the quarter and,therefore, the effect was dilutive.   Theremaining 1,669,858 were not included in the computation of the dilutedearnings per share because the exercise prices of these stock options weregreater than the average share price of the Company’s common stock for thequarter and, therefore, there was no dilutive effect. As of June 30, 2008,none of the 1,320,000 outstanding stock options were included in thecomputation of diluted earnings per share because the exercise prices of allstock options were greater than the average share price of the Company’s commonstock for the quarter and, therefore, there was no dilutive effect.

 

The Company usedthe Black-Scholes-Merton option pricing model to value the options.  Prior to 2008, the Company used thesimplified method as discussed in Staff Accounting Bulletin (“SAB”) No.107, “Share-BasedPayment”, for estimating the expected life of the options.  For options granted during a quarter, ofwhich there were none in the first six months of 2009, the Company would usehistorical data to estimate the expected life of the options.  The risk-free interest rate for periodswithin the contractual life of the award is based on the U.S. Treasury yieldcurve in effect at the time of grant. The expected volatility is based onhistorical volatility of the expected life in years.  The Company uses an estimated dividend payoutratio of zero as the Company has not paid dividends in the past and does notexpect to in the future.

 

Thefollowing table summarizes stock option activity during the six months ended June 30,2009:

 
| ** **                                    | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted –  Average  Remaining  Contractual  Term (in  years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------|------------|-------------|------------|-----------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------|------------|
| Options outstanding at December 31, 2008 |       | 1,870,000   |       | $                                       | 1.56       |                                                                   | 4.22       |                            | —     |   |
| Exercised                                     |       | —      |       | —                                  |       | —                                                                 |       | —                          |       |
| Granted                                       |       | —      |       | —                                  |       | —                                                                 |       | —                          |       |
| Forfeited or expired                          |       | (175,000    | )          | $                                       | 1.62       |                                                                   | —     |                            | —     |   |
|                                          |       |        |       |                                    |       |                                                                   |       |                            |       |
| Options outstanding at June 30, 2009     |       | 1,695,000   |       | $                                       | 1.56       |                                                                   | 3.73       |                            | $          | 937,000 |   |
|                                          |       |        |       |                                    |       |                                                                   |       |                            |       |
| Options exercisable at June 30, 2009     |       | 783,000     |       | $                                       | 1.73       |                                                                   | 3.87       |                            | $          | 297,000 |   |

 

As of June 30,2009, $260,000 of total unrecognized compensation cost related to stock optionsis expected to be recognized over a weighted average period of 1.83 years.

 

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** **

**Notes to Consolidated Financial Statements(Unaudited)**

** **

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

 

In February 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159 “TheFair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”).”Under SFAS 159, companies may elect to measure certain financial instrumentsand certain other items at fair value. The standard requires that unrealizedgains and losses on items for which the fair value option has been elected bereported in earnings. SFAS 159 is effective for fiscal years beginning after November 15,2007. SFAS 159 was adopted for fiscal year 2008; however, the Company did notelect to apply the fair value option to any financial instruments or otheritems upon adoption of SFAS 159 or during the twelve months ended December 31,2008. Therefore, the adoption of SFAS 159 did not impact the Company’sconsolidated financial position, results of operations or cash flows.

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements (“SFAS 157”)”. SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. SFAS 157 does notrequire any new fair value measurements but rather eliminates inconsistenciesin guidance found in prior accounting pronouncements. In February 2008,the FASB decided to postpone, for one year, the effective date of SFAS 157 forassets and liabilities measured at fair value on a non-recurring basis. TheCompany adopted SFAS 157 as of January 1, 2008 for assets and liabilitiesmeasured at fair value on a recurring basis and as of January 1, 2009 forassets and liabilities measured at fair value on a non-recurring basis. Theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations, (“SFAS141R”),” which changes how business combinations are accounted for and willimpact financial statements both on the acquisition date and in subsequentperiods. SFAS 141R was effective January 1, 2009 and did not have animpact on the Company’s consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements (“SFAS 160”),” which changes the accounting and reportingstandards for the noncontrolling interests in a subsidiary in consolidatedfinancial statements.  SFAS 160 recharacterizes minority interests asnoncontrolling interests and requires noncontrolling interests to be classifiedas a component of shareholders’ equity.  SFAS 160 was effective January 1,2009 and required retroactive adoption of the presentation and disclosurerequirements for existing minority interests. The Company does not consolidate its partially owned affiliate and,therefore, SFAS 160 did not have a material impact on its consolidatedfinancial statements.

 

In April 2009,the FASB issued FASB Staff Position (“FSP”) FAS No. 107-1 and AccountingPrinciples Board (“APB”) Opinion No. 28-1, “Interim Disclosures about FairValue of Financial Instruments (“FSP FAS No. 107-1 and APB Opinion No. 28-1”)”,which amends the disclosure requirements of SFAS No. 107 and APB Opinion No. 28and requires disclosure about the fair value of the Company’s financial instrumentswhenever it issues summarized financial information for interim reportingperiods. FSP FAS No. 107-1 and APB Opinion No. 28-1 are effective forfinancial statements issued for interim reporting periods ending after June 15,2009.  The adoption of this standard didnot have a material impact on the Company’s consolidated financial statements.

 

In April 2009,the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments  (“FSP FAS No. 115-2 and FAS No. 124-2”)”,which amends SFAS No. 115 and FSP FAS No. 115-1 and FSP FAS No. 124-1and conforms changes to other standards including EITF Issue No. 99-20 andAICPA Statement of Position (“SOP”) No. 03-3,  “Accounting for Certain Loans or Debt SecuritiesAcquired in a 

 

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**Notes to Consolidated Financial Statements(Unaudited)**

 

Transfer”,  and improves the presentation and disclosureof other-than-temporary impairments on debt and equity securities in thefinancial statements. FSP FAS No. 115-2 and FAS No. 124-2 areeffective for interim and annual reporting periods ending after June 15,2009.  The adoption of this standard didnot have a material impact on the Company’s consolidated financial statements.

 

In April 2009,the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volumeand Level of Activity for the Asset or Liability Have Significantly Decreasedand Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”)”,which provides additional guidance for estimating fair value in accordance withSFAS No. 157, “Fair Value Measurements”, when the volume and level ofactivity for the asset or liability have significantly decreased. This FSP alsoincludes guidance on identifying circumstances that indicate a transaction isnot orderly and applies to all assets and liabilities within the scope ofaccounting pronouncements that require or permit fair value measurements,except in paragraphs 2 and 3 of SFAS No. 157. FSP FAS No. 157-4 iseffective for interim and annual reporting periods ending after June 15,2009.  The adoption of this standard didnot have a material impact on the Company’s consolidated financial statements.

 

Effective April 1,2009, the Company adopted SFAS No. 165, “Subsequent Events”.  The standard modifies the names of the twotypes of subsequent events either as recognized subsequent events (previouslyreferred to in practice as Type I subsequent events) or non-recognizedsubsequent events (previously referred to in practice as Type II subsequentevents).  In addition, the standardmodifies the definition of subsequent events to refer to events or transactionsthat occur after the balance sheet date, but before the financial statementsare issued (for public entities) or available to be issued (for nonpublicentities).  It also requires thedisclosure of the date through which subsequent events have beenevaluated.  The standard did not resultin significant changes in the practice of subsequent event disclosures or therelated accounting thereof and therefore the adoption did not have any impacton the Company’s consolidated financial statements.

 

In June 2009,the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(SFAS 167).  SFAS 167 eliminates arequired quantitative approach to determine whether a variable interest givesthe entity a controlling financial interest in a variable interest entity infavor of a qualitatively focused analysis. It requires an ongoing reassessment of whether an entity is the primarybeneficiary.  It also nullifies FSP FAS140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) aboutTransfers of Financial Assets and Interests in Variable Interest Entities” (FSPFAS 140-4 and FIN 46(R)-8).  However, thecontent of the disclosures required by SFAS 167 is generally consistent withFSP FAS 140-4 and FIN 46(R)-8.  SFAS 167is effective for the Company beginning in the first quarter of fiscal year2010.  The Company is currentlyevaluating the impact that the adoption of SFAS 167 will have on itsconsolidated financial statements.

 

In June 2009,the FASB issued SFAS No. 168, the “FASB Accounting Standards Codification”and the Hierarchy of Generally Accepted Accounting Principles.  This standard replaces SFAS No. 162, “TheHierarchy of Generally Accepted Accounting Principles”, and establishes onlytwo levels of U.S. generally accepted accounting principles (“GAAP”), authoritativeand nonauthoritative.  The FASBAccounting Standards Codification (the “Codification”) will become the sourceof authoritative, nongovernmental GAAP, except for rules and interpretivereleases of the SEC, which are sources of authoritative GAAP for SECregistrants.  All othernon-grandfathered, non-SEC accounting literature not included in theCodification will become nonauthoritative. This standard is effective for financial statements for interim orannual reporting periods ending after September 15, 2009.  The Company will begin to use the newguidelines and numbering system prescribed by the Codification when referringto GAAP in the third quarter of fiscal year 2009.  As the Codification was not intended tochange or alter existing GAAP, it should not have any impact on the Company’sconsolidated financial statements.

 

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**Notes to Consolidated Financial Statements(Unaudited)**

 

**5.****                                    ****Inventories**

 

Inventories consist ofthe following:

 
| ** **                                                     | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials                                                  |       | $                       | 6,294,000  |                        | $          | 7,760,000 |   |
| Work in process                                                |       | 506,000                 |       | 797,000                     |       |
| Finished goods                                                 |       | 2,947,000               |       | 3,915,000                   |       |
|                                                           |       | 9,747,000               |       | 12,472,000                  |       |
| Less: reserve for slow-moving, obsolete or unusable  inventory |       | (388,000                | )          | (415,000                    | )          |
|                                                           |       | $                       | 9,359,000  |                        | $          | 12,057,000 |   |

 

**6.****                                     ****Investment in and Advances toUnconsolidated Affiliates**

 

On June 14,2005, Alpha ProTech Engineered Products, Inc., a subsidiary of theCompany, entered into a joint venture with a manufacturer in India for theproduction of building products.  Underterms of the joint venture agreement, a private company, Harmony PlasticsPrivate Limited (“Harmony”), was created with 41.66% ownership, by AlphaProTech Engineered Products, Inc. and 58.34% ownership, by MapleIndustries and Associates.  Alpha ProTechEngineered Products, Inc. contributed $508,000 for share capital and MapleIndustries and Associates contributed $708,000.

 

This joint venture positions Alpha ProTech Engineered Products, Inc.to respond to current and expected increased product demand for house wrap andsynthetic roofing underlayment and provides future capacity for sales ofspecialty roofing component products and custom products for industrialapplications requiring high quality extrusion coated fabrics.

 

The capital from the initial funding, along with a bank loan toHarmony, which is guaranteed exclusively by Maple Industries and Associates andsecured by the assets of Harmony, was utilized to purchase an existing 33,000square-foot manufacturing facility in India. The manufacturing includes manufacturing equipment necessary to producesynthetic roof underlayment.  Harmony hasalso built a 60,000 square-foot facility for the manufacturing of house wrapand other building products.

 

The Company is subject to the provisions of FASB Interpretation (“FIN”)No. 46R, “Consolidation of Variable Interest Entities an Interpretation ofARB No. 51” (“FIN 46R”), which defines the criteria by which the Companydetermines the proper accounting for its investments in related entities.  Specifically, FIN 46R requires the Company toassess whether or not related entities are variable interest entities (“VIEs”),as defined.  For those related entitiesthat qualify as VIEs, FIN 46R requires the Company to determine whether or notthe Company is the primary beneficiary of the VIE, and, if so, to consolidatethe VIE.

 

The Company has determined that Harmony is not a VIE and is, therefore,considered to be an unconsolidated affiliate.

 

The Company records its investment in Harmony as “Equity investments inand advances to unconsolidated affiliates” on the accompanying ConsolidatedBalance Sheets (Unaudited).  The Companyrecords its equity interest in Harmony’s results of operations as “Equity inincome of unconsolidated affiliates” on the accompanying Consolidated IncomeStatements (Unaudited).

 

The Company reviews annually its investment in Harmony for impairmentin accordance with APB No. 18, “The Equity Method of Accounting forInvestments in Common Stock” (“APB 18”). APB 18 requires recognition of a losswhen the decline in an investment is other-than-temporary.  In 

 

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**Notes to Consolidated Financial Statements(Unaudited)**

 

determining whether the decline is other-than-temporary, the Companyconsiders the nature of the industry in which Harmony operates, theirhistorical performance, their performance in relation to their peers and thecurrent economic environment.  TheCompany has concluded that no impairment was identified.

 

Alpha ProTech Engineered Products, Inc. initially invested$1,450,000 in the joint venture; $508,000 for share capital and $942,000 as along term advance for materials.  Fiftypercent of the $942,000 long term advance was to be repaid over a six-year termcommencing in July 2006, and the balance is to be paid in the seventhyear.  During 2006, Harmony repaid$39,000 in scheduled payments and $461,000 in additional payments for a totalof $500,000, leaving a balance of $442,000. Harmony has not made any further payments to date.  Interest of 3.5% is to be paid annually onthis advance, and the Company has an interest receivable of $8,000 as of June 30,2009 related to this agreement.

 

For the three months ended June 30, 2009 and2008, the Company purchased $1,119,000 and $806,000, respectively, fromHarmony.  For the six months ended June 30,2009 and 2008, Alpha Pro Tech purchased $1,343,000 and $1,607,000, respectivelyfrom Harmony.  For the six months ended June 30,2009 and 2008, the Company recorded equity income in unconsolidated affiliatesof $170,000 and $38,000, respectively. As of June 30, 2009, the Company’s investment in Harmony is$1,563,000, which comprises its original $1,450,000 investment and cumulativeequity in income of unconsolidated affiliates of $613,000, of which the Companyhas received $0 in dividends, less $500,000 in repayments of the advance.

 

**7.****                                    ****Accrued Liabilities**

 

Accrued liabilitiesconsist of the following:

 
| ** **                   | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------|------------|------------------------|------------|----------------------------|------------|
| Payroll                      |       | $                      | 247,000    |                       | $          | 280,000 |   |
| Income tax                   |       | 761,000                |       | —                     |       |
| Commission and bonus accrual |       | 752,000                |       | 545,000                    |       |
| Accrued professional fees    |       | 86,000                 |       | 240,000                    |       |
| Accrued rebates and other    |       | 317,000                |       | 198,000                    |       |
|                         |       | $                      | 2,163,000  |                       | $          | 1,263,000 |   |

 

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**Notes to Consolidated Financial Statements(Unaudited)**

 

**8.****                                    ****Basic and Diluted Net Income PerShare**

 

The following table provides a reconciliation of bothnet income and the number of shares used in the computation of “basic” earningsper share (“EPS”), which utilizes the weighted average number of sharesoutstanding without regard to potential shares, and “diluted” EPS, whichincludes all such dilutive shares for the three and six months ended June 30,2009 and 2008, respectively:

 
| ** **                                        | ** ** | **For the Three Months  Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                       | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                              |       |                                           |       |                                        |       |   |   |   |   |
| Net income (Numerator)                            |       | $                                              | 2,168,000  |                                        | $          | 385,000 |   | $ | 2,683,000 |   | $ | 524,000 |   |
|                                              |       |                                           |       |                                        |       |   |   |   |   |
| Shares (Denominator):                             |       |                                           |       |                                        |       |   |   |   |   |
|                                              |       |                                           |       |                                        |       |   |   |   |   |
| Basic weighted average shares outstanding         |       | 22,795,003                                     |       | 24,979,571                                  |       | 23,245,300 |   | 25,094,775 |   |
|                                              |       |                                           |       |                                        |       |   |   |   |   |
| Add: Dilutive effect of outstanding stock options |       | 25,142                                         |       | —                                      |       | — |   | — |   |
|                                              |       |                                           |       |                                        |       |   |   |   |   |
| Diluted weighted average shares outstanding       |       | 22,820,145                                     |       | 24,979,571                                  |       | 23,245,300 |   | 25,094,775 |   |
|                                              |       |                                           |       |                                        |       |   |   |   |   |
| Net income per share:                             |       |                                           |       |                                        |       |   |   |   |   |
|                                              |       |                                           |       |                                        |       |   |   |   |   |
| Basic                                             |       | $                                              | 0.10       |                                        | $          | 0.02 |   | $ | 0.12 |   | $ | 0.02 |   |
|                                              |       |                                           |       |                                        |       |   |   |   |   |
| Diluted                                           |       | $                                              | 0.10       |                                        | $          | 0.02 |   | $ | 0.12 |   | $ | 0.02 |   |

 

**9.****                                    ****Activity of Business Segments**

 

The Companyoperates through three product segments:

 

**DisposableProtective Apparel:**consisting of a complete line of disposable protective clothing such asshoecovers (including the Aqua Trak® and spunbond shoecovers), bouffant caps,coveralls, frocks, lab coats and hoods, for the pharmaceutical, cleanroom,industrial and medical markets.

 

**Building Supply (formerly known as EngineeredProducts**):consisting of a line of construction weatherization products, such as housewrap and synthetic roof underlayment, for the building and re-roofingmarkets.  The Company’s equity in incomeof unconsolidated affiliates (Harmony) is included in the total segment incomefor Building Supply in the table below.

 

**InfectionControl:** consistingof a line of face masks and eye shields principally for the medical, dental andindustrial markets.  It also consists ofa line of medical bed pads as well as a line of pet beds. Previously, the lineof medical bed pads and pet beds were reported as a separate segment under thename of Extended Care. Because management is now looking at the Extended Caresegment in conjunction with the Infection Control segment, and since themajority of the Extended Care revenue is now generated from the medical bedpads, it is now appropriate for these segments be consolidated in the InfectionControl segment.  All numbers reflect theupdated segmentation.

 

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**Notes to Consolidated Financial Statements(Unaudited)**

 

The accountingpolicies of the segments exclude charges allocated to corporate officeexpenses, professional fees, public company expenses, executive and managementbonuses and income taxes.  The Companyevaluates the performance of its segments and allocates resources to them basedprimarily on net sales.

 

The following table shows net sales for each segment for the three andsix months ended June 30, 2009 and 2008, respectively:

 
| ** **                    | ** ** | **For the Three Months  Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2009**                                       | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|                          | ** ** | ** **                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Disposable Protective Apparel |       | $                                              | 6,077,000  |                                        | $          | 5,333,000 |   | $ | 10,911,000 |   | $ | 9,787,000 |   |
| Building Supply               |       | 3,758,000                                      |       | 1,924,000                                   |       | 6,015,000 |   | 3,284,000 |   |
| Infection Control             |       | 4,712,000                                      |       | 1,656,000                                   |       | 6,948,000 |   | 3,366,000 |   |
|                          |       |                                           |       |                                        |       |   |   |   |   |
| Consolidated total net sales  |       | $                                              | 14,547,000 |                                        | $          | 8,913,000 |   | $ | 23,874,000 |   | $ | 16,437,000 |   |

 

The following table shows the reconciliation of total segment income tototal consolidated net income for the three and six months ended June 30,2009 and 2008, respectively:

 
| ** **                      | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                      | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Disposable  Protective Apparel  |       | $                                             | 1,674,000  |                                        | $          | 1,251,000 |   | $ | 2,884,000 |   | $ | 2,315,000 |   |
| Building Supply                 |       | 642,000                                       |       | 116,000                                     |       | 734,000 |   | (192,000 | ) |
| Infection  Control              |       | 2,510,000                                     |       | 518,000                                     |       | 3,314,000 |   | 1,040,000 |   |
|                            |       |                                          |       |                                        |       |   |   |   |   |
| Total segment  income           |       | 4,826,000                                     |       | 1,885,000                                   |       | 6,932,000 |   | 3,163,000 |   |
| Unallocated  corporate expenses |       | (1,444,000                                    | )          | (1,268,000                                  | )          | (2,732,000 | ) | (2,323,000 | ) |
| Provision for  income taxes     |       | (1,214,000                                    | )          | (232,000                                    | )          | (1,517,000 | ) | (316,000 | ) |
|                            |       |                                          |       |                                        |       |   |   |   |   |
| Consolidated net  income        |       | $                                             | 2,168,000  |                                        | $          | 385,000 |   | $ | 2,683,000 |   | $ | 524,000 |   |

 

**10.****                             ****Subsequent Events**

 

On July 21, 2009, the Company dismissed itsindependent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”),and engaged Mayer Hoffman McCann P.C. (“MHM”) to serve as the Company’sindependent registered public accounting firm. The dismissal of PwC and the appointment of MHM were approved by theCompany’s Audit Committee.  MHM willreview the Company’s quarterly financial statements beginning with the fiscalquarter ended June 30, 2009 and will audit the Company’s financialstatements for the fiscal year ending December 31, 2009.

 

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

You should read the following discussion and analysistogether with our consolidated financial statements (unaudited) and the notesto our consolidated financial statements (unaudited), which appear elsewhere inthis report and with our Form 10-K as of December 31, 2008.

 

**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING INFORMATION**

 

Thisreport on Form 10-Q contains “forward-looking statements” that are madepursuant to the safe-harbor provisions of the Private Securities LitigationReform Act of 1995. Forward-looking statements include statements concerningplans, objectives, goals, strategies, future events, future revenues orperformance, capital expenditures and other information that is not historicalinformation. When used in this report, the words “estimates,” “expects,” “anticipates,”“forecasts,” “plans,” “intends,” “believes” and variations of such words orsimilar expressions are intended to identify forward-looking statements.Additional forward-looking statements may be made by us from time to time. Allsuch subsequent forward-looking statements, whether written or oral and whethermade by or on behalf of us, are also expressly qualified by these cautionarystatements.

 

Our forward-looking statementsare based upon our current expectations and various assumptions. Ourexpectations, beliefs and projections are expressed in good faith, and webelieve that there is a reasonable basis for them, including, withoutlimitation, management’s examination of historical operating trends, datacontained in our records and other data available from third parties. However,we cannot assure you that management’s expectations, beliefs and projectionswill result or be achieved or accomplished. Our forward-looking statementsapply only as of the date made. Except as required by law, we undertake noobligation to publicly update or revise forward-looking statements that may bemade to reflect events or circumstances after the date made or to reflect theoccurrence of unanticipated events.

 

**Where to find more information about us.** We make available, free of charge, onour Internet website (http://www.alphaprotech.com) our most recent AnnualReport on Form 10-K, our most recent Quarterly Report on Form 10-Q,any current reports on Form 8-K furnished or filed since our most recentAnnual Report on Form 10-K and any amendments to such reports as soon asreasonably practicable following the electronic filing of such report with theSecurities and Exchange Commission (“SEC”). In addition, we provide electronicor paper copies of our filings free of charge upon request.

 

**Critical Accounting Policies**

 

The preparation of our financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the dates of the financial statements and the reportedamounts of net sales and expenses during the reported periods.  We base estimates on past experience and onvarious other assumptions that are believed to be reasonable under thecircumstances.  The application of theseaccounting policies on a consistent basis enables us to provide timely andreliable financial information.  Ourcritical accounting polices include the following:

 

**Inventories:** Inventories include freight-in,materials, labor and overhead costs and are stated at the lower of cost(computed on a standard cost basis, which approximates average cost) ormarket.  Provision is made forslow-moving, obsolete or unusable inventory. We assess our inventory forestimated obsolescence or unmarketable inventory and, if necessary, write downthe difference between the cost of inventory and the estimated market value,less cost to sell, based upon assumptions about future sales and supplyon-hand. If actual market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required.

 

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** **

**Revenue Recognition**: For sales transactions, we comply with theprovisions of the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition,” which states that revenue should be recognized when the followingrevenue recognition criteria are met: (1) persuasive evidence of anarrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured. These criteria are satisfied upon shipment of product andrevenues are recognized accordingly.

 

Sales are reduced for any anticipated sales returns,rebates and allowances based on historical experience.  Since our return policy is only 90 days andour products are not generally susceptible to external factors such astechnological obsolescence or significant changes in demand, we are able tomake a reasonable estimate for returns. We offer end-user product specific andsales volume rebates to select distributors. Our rebates are based on actual sales and are accrued monthly.

 

**StockBased Compensation:**  Alpha Pro Tech adopted Statement of FinancialAccounting Standards  (“SFAS”) No. 123R,“Share-Based Payment” (“SFAS 123R”) effective January 1, 2006, using themodified prospective application method. SFAS 123R requires companies to recordcompensation expense for the value of all outstanding and unvested share-basedpayments, including employee stock options and similar awards.

 

The fair values of stock option grants are determinedusing the Black-Scholes-Merton option pricing model and the followingassumptions: expected stock price volatility based on historical and management’sexpectations of future volatility, risk-free interest rates from publishedsources, years to maturity based on historical data and no dividend yield, asmanagement currently does not intend to pay dividends in the near future. TheBlack-Scholes-Merton option valuation model was developed for use in estimatingthe fair value of traded options that have no vesting restrictions and that arefully transferable. In addition, the option valuation model requires the inputof highly subjective assumptions, including expected stock price volatility.  Our stock options have characteristicssignificantly different from those of traded options and changes in thesubjective input assumptions can materially affect their fair value.

 

**OVERVIEW**

 

Alpha Pro Tech is in the business of protectingpeople, products and environments. We accomplish this by developing,manufacturing and marketing a line of high-value, disposable protective appareland infection control products for the cleanroom, industrial, pharmaceutical,medical and dental markets. We also manufacture a line of building supplyconstruction weatherization products. Our products are sold both under the “Alpha Pro Tech” brand name, aswell as under private label.

 

Our products are grouped into three businesssegments:  The Disposable ProtectiveApparel segment, consisting of disposable protective apparel; the BuildingSupply segment (formerly known as the Engineered Products segment), consistingof construction weatherization products, such as house wrap and synthetic roofunderlayment; and the Infection Control segment, consisting of face masks, eyeshields and medical bed pads as well as a line of pet beds.  Previously, the line of medical bed pads andpet beds were reported as a separate segment under the name of Extended Care.Because management is now looking at the Extended Care segment in conjunctionwith the Infection Control segment, and since the majority of the Extended Carerevenue is now generated from the medical bed pads, as of the first quarter2009, these products are consolidated in the Infection Control segment.  All numbers have been updated to reflect theupdated segmentation.

 

Our target markets are pharmaceutical manufacturing,bio-pharmaceutical manufacturing and medical device manufacturing, lab animalresearch, high technology electronics manufacturing, (which includes thesemi-conductor market), medical and dental distributors, pet distributors andconstruction, building supply and roofing distributors.

 

Our products are used primarily in cleanrooms,industrial safety manufacturing environments, health care facilities, such ashospitals, laboratories and dental offices, as well as building and re-roofingsites.  

 

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Our products are distributed principally in the UnitedStates through a network consisting of purchasing groups, nationaldistributors, local distributors, independent sales representatives and our ownsales and marketing force.

 

# **RESULTSOF OPERATIONS**

# ** **

The following table sets forth certain operationaldata as a percentage of sales for the periods indicated:

 
| ** **                               | ** ** | **For the Three Months  Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                       | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                                    |       | 100.0                                          | %          | 100.0                                       | %          | 100 | % | 100.0 | % |
|                                     |       |                                           |       |                                        |       |   |   |   |   |
| Gross profit                             |       | 47.2                                           | %          | 44.0                                        | %          | 46.0 | % | 44.8 | % |
|                                     |       |                                           |       |                                        |       |   |   |   |   |
| Selling, general and administrative      |       | 23.4                                           | %          | 35.8                                        | %          | 27.8 | % | 38.5 | % |
|                                     |       |                                           |       |                                        |       |   |   |   |   |
| Income from operations                   |       | 22.8                                           | %          | 6.5                                         | %          | 16.9 | % | 4.6 | % |
|                                     |       |                                           |       |                                        |       |   |   |   |   |
| Income before provision for income taxes |       | 23.2                                           | %          | 6.9                                         | %          | 17.6 | % | 5.1 | % |
|                                     |       |                                           |       |                                        |       |   |   |   |   |
| Net income                               |       | 14.9                                           | %          | 4.3                                         | %          | 11.2 | % | 3.2 | % |

## ** **

## **Three and six months ended June 30,2009, compared to the three and six months ended June 30, 2008**

## ** **

**Sales:**  Consolidated sales for the three months endedJune 30, 2009 increased to $14,547,000 from $8,913,000 for the threemonths ended June 30, 2008, representing an increase of $5,634,000, or63.2%.  This increase consisted ofincreased sales in the Infection Control segment of $3,056,000, increasedBuilding Supply segment sales of $1,834,000 and increased Disposable ProtectiveApparel segment sales of $744,000.

 

Sales for the Disposable Protective Apparel segmentfor the three months ended June 30, 2009 increased by $744,000, or 14.0%,to $6,077,000, compared to $5,333,000 for the same period of 2008.  Sales in the second quarter were the highestin almost two years, since third quarter of 2007.  The increase was related to an increase insales to our largest distributor, as well as to a major national distributorwith which we received preferred vendor status in 2008, and as increased salesto other cleanroom and industrial distributors.

 

The Building Supply segment (formerly known as theEngineered Products segment) sales for the three months ended June 30,2009 increased by $1,834,000, or 95.3%, to a quarterly record of $3,758,000,compared to $1,924,000 for the same period of 2008.  The segment increase was primarily due to a171.7% increase in sales of REXTM Synfelt synthetic roof underlayment and a14.3% increase in sales of REXTM Wrap house wrap.  The sales mix within the Building Supplysales for the second quarter of 2009 and 2008 was 71% and 51%, respectively forsynthetic roof underlayment and 29% and 49%, respectively for house wrap.

 

Our Building Supply segment distribution channelstrategy continues to strengthen each and every quarter as we bring newdistributors into the mix.  Our REXTMSynfelt synthetic roof underlayment is being positively received as a superior product in the industry, and webelieve that it is a cost effective and a better alternative to feltpaper.  As the market evolves from feltpaper to sythethic roof underlayment, which is a significant opportunity forus, we believe that we are in a very good position to 

 

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pick up market share. Additionally, our high-quality, multi-color printed house wrap gives usa distinct competitive advantage in the marketplace and our market share isgrowing even during this weak building market and economic downturn.

 

Our distribution channel strategy should continue tobroaden our ability to take advantage of market opportunities, particularly forsynthetic roof underlayment and house wrap, throughout this year and into thefuture.

 

Infection Control segment sales for the three monthsended June 30, 2009 increased by $3,056,000, or 184.5%, to a quarterlyrecord of $4,712,000, compared to $1,656,000 for the same period of 2008.  Mask sales were up by 222.8%, or $2,475,000,shield sales were up by 172.1%, or $642,000, and medical bed pad and pet bedswere down 35.5%, or $61,000, when compared to the quarter ended June 30,2008.

 

Respiratory N-95 mask sales were up significantly inthe second quarter and are expected to continue to be substantially strongerthan normal for the foreseeable future amidst concerns regarding the globalH1N1 Influenza A (commonly known as “Swine Flu”) pandemic.

 

Shield sales improved in the second quarter of 2009, primarilydue to the shipment of approximately $400,000, which was the balance of a $1.7million shield order received in the fourth quarter of 2008, from the samecustomer from whom we received the non-recurring order in the first quarter of2007.  This non-recurring order commencedshipping in the fourth quarter of 2008, was shipped out over a period of threequarters and is now complete.  Generalshield sales also increased in the second quarter.

 

Consolidated sales for the sixmonths ended June 30, 2009, increased to $23,874,000 from $16,437,000 forthe six months ended June 30, 2008, representing an increase of$7,437,000, or 45.2%.  This increaseconsisted of increased sales in the Infection Control segment of $3,582,000,increased Building Supply segment sales of $2,731,000 and increased DisposableProtective Apparel segment sales of $1,124,000.

 

Sales for the Disposable Protective Apparel segmentfor the six months ended June 30, 2009, increased by $1,124,000, or 11.5%,to $10,911,000, compared to $9,787,000 for the same period of 2008.  The year to date increase was relatedprimarily to increased sales from our largest distributor as wells as,increased sales from a broad base of our distribution network.

 

Building Supply segment sales for the six months endedJune 30, 2009, increased by $2,731,000, or 83.2%, to $6,015,000, comparedto $3,284,000 for the same period of 2008. The segment increase was primarily due to a 136.5% increase in sales of REXTMSynfelt synthetic roof underlayment and a 17.4% increase in sales of REXTM Wraphouse wrap.  The sales mix within theBuilding Supply sales for the first six months of 2009 and 2008 was 68% and53%, respectively, for synthetic roof underlayment and 32% and 47%,respectively, for house wrap.

 

Infection Control segment sales for the six monthsended June 30, 2009, increased by $3,582,000, or 106.4%, to $6,948,000,compared to $3,366,000 for the same period of 2008.  Mask sales were up by 111.7%, or $2,440,000,shield sales were up by 181.9%, or $1,337,000, and medical bed pad and pet bedswere down 44.5%, or $195,000, when compared to the six months ended June 30,2008.

 

The overall mask sales for the first six months of2009 is primarily due the surge in N-95 respirator mask sales in the secondquarter of 2009 due to concerns regarding an outbreak of H1N1.  Shield sales were up primarily due toapproximately $1.3 million in shields being shipped in 2009 from the total $1.7million shield order received in the fourth quarter of 2008.

 

**Gross Profit:**   Gross profitincreased $2,953,000 by 75.4% to $6,871,000 for the three months ended June 30,2009, from $3,918,000 for the same period of 2008.  The gross profit margin was 47.2% for thethree months ended June 30, 2009, compared to 44.0% for the three monthsended June 30, 2008.

 

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Gross profit increased $3,622,000 by 49.2% to$10,990,000 for the six months ended June 30, 2009, from $7,368,000 forthe same period of 2008.  The grossprofit margin was 46.0% for the six months ended June 30, 2009, comparedto 44.8% for the six months ended June 30, 2008.

 

Gross profit margin for the three and six months endedJune 30, 2009, was positively affected by the change in product mix inwhich Infection Control sales, which have higher margins, increased as apercentage of total sales.  Conversely,gross profit margin for the Disposable Protective Apparel segment for the threeand six months was lower than the same periods of 2008; but sales from thissegment declined as a percentage of total sales.

 

**Selling, General and Administrative Expenses:** Selling, general and administrative expenses increased by $205,000, or6.4%, to $3,399,000 for the three months ended June 30, 2009 from$3,194,000 for the three months ended June 30, 2008.  As a percentage of net sales, selling,general and administrative expenses decreased to 23.4% for the three monthsended June 30, 2009 from 35.8% for the same period of 2008.  The $205,000 increase was primarily due toincreased employee compensation of $57,000, increased executive bonus of$308,000 (which is based on pre-tax income), and increased sales commission of$114,000, partially offset by decreased professional fees and public companyexpenses of $124,000, decreased marketing expenses of $61,000, decreasedforeign exchange loss of $45,000 and decreased travel expense of $44,000.

 

Selling, general and administrative expenses increasedby $304,000, or 4.8%, to $6,639,000 for the six months ended June 30, 2009from $6,335,000 for the six months ended June 30, 2008.  As a percentage of net sales, selling,general and administrative expenses decreased to 27.8% for the six months endedJune 30, 2009 from 38.5% for the same period of 2008.  The increase of $304,000 was primarily due toa $225,000 severance agreement for our previous Senior Vice President ofMarketing, which was expensed during the first quarter of 2009, increasedexecutive bonus of $376,000 and increased commissions of $137,000.  The increase was partially offset bydecreased travel expenses of $123,000, decreased marketing expenses of $98,000,decreased professional fees and public company expenses of $96,000, a decreasedforeign exchange loss of $108,000 and decreased miscellaneous expenses of$9,000.

 

Selling, general and administrative expenses as apercentage of sales were significantly lower for the three and six months endedJune 30, 2009, as compared to the same periods of 2008.  We believe that we can now effectivelyleverage the infrastructure we have built to substantially grow the business,while decreasing expenses as a percentage of sales from historical levels.

 

The chief executive officer and president are eachentitled to a bonus equal to 5% of the pre-tax profits of the Company.  Bonuses of $376,000 were accrued for thethree months ended June 30, 2009 as compared to $68,000 in the same periodof 2008.  Total bonuses of $467,000 wereaccrued for the six months ended June 30, 2009, compared to $93,000 in thesame period of 2008.

 

**Depreciation and Amortization:** Depreciation and amortization expense increased by $21,000 or 14.5% to$162,000 for the three months ended June 30, 2009 from $141,000 for thesame period of 2008.  Depreciation andamortization expense increased by $40,000 or $14.2% to $322,000 for the sixmonths ended June 30, 2009 from $282,000 for the same period of 2008.  The increase was primarily attributable toincreased depreciation for the Building Supply segment.

 

**Income from Operations:** Income from operations increased by $2,727,000, or 468.3%, to $3,310,000for the three months ended June 30, 2009, compared to income fromoperations of $583,000 for the three months ended June 30, 2008.  The increase in income from operations wasdue to an increase in gross profit of $2,953,000, partially offset by anincrease in selling, general and administrative expenses of $205,000 and anincrease in depreciation and amortization of $21,000.

 

Income from operations increased by $3,278,000, or436.5%, to $4,029,000 for the six months ended June 30, 2009 compared toincome from operations of $751,000 for the six months ended June 30,2008.  The increase in income fromoperations was due to an increase in gross profit of $3,622,000, 

 

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partially offset by an increase in selling, generaland administrative expenses of $304,000 and an increase in depreciation andamortization of $40,000.

 

**Equity in Income of Unconsolidated Affiliates:**  For the three months ended June 30, 2009, we recorded equity inincome of unconsolidated affiliates of $72,000, compared to $17,000 for thesame period of 2008.  For the six monthsended June 30, 2009, we recorded equity in income of unconsolidatedaffiliates of $170,000, compared to $38,000 for the same period of 2008.

 

**Net Interest:**  For the threemonths ended June 30, 2009, we had no net interest income, compared to netinterest income of $17,000 for the same period of 2008.  For the six months ended June 30, 2009,net interest income was $1,000 compared to net interest income of $51,000 forthe same period of 2008.  The net changein net interest income for the three and six months ended June 30, 2009was primarily due to lower interest rates in 2009 compared to 2008.

 

**Income Before Provision for Income Taxes:** Income before provision for income taxes for the three months ended June 30,2009 was $3,382,000, compared to $617,000 for the three months ended June 30,2008, representing an increase of $2,765,000, or 448.1%.  The increase in income before provision forincome taxes was due primarily to an increase in income from operations of$2,727,000, an increase of $55,000 in equity in income of unconsolidatedaffiliates (Harmony) and a decrease in net interest income of $17,000.

 

Income before provision for income taxes for the sixmonths ended June 30, 2009 was $4,200,000, compared to $840,000 for thesix months ended June 30, 2008, representing an increase of $3,360,000, or400.0%.  The increase in income beforeprovision for income taxes was due primarily to an increase in income fromoperations of $3,278,000, an increase of $132,000 in equity in income ofunconsolidated affiliates (Harmony) and a decrease in net interest income of$50,000.

 

**Provision for Income Taxes:** The provision for income taxes for the three months ended June 30,2009 was $1,214,000, compared to $232,000 for the same period of 2008.  The effective tax rate was 35.9% for thethree months ended June 30, 2009, compared to 37.6% for the same period of2008.

 

The provision for income taxes for the six monthsended June 30, 2009 was $1,517,000, compared to $316,000 for the sameperiod of 2008.  The effective tax ratewas 36.1% for the six months ended June 30, 2009, compared to 37.6% forthe same period of 2008.

 

Management expects the effective tax rate to be in the36% - 37% range for 2009.

 

**Net Income:**  Net income forthe three months ended June 30, 2009 was $2,168,000, compared to netincome of $385,000 for the three months ended June 30, 2008, an increaseof $1,783,000, or 463.4%.  The net incomeincrease was primarily due to an increase in income before provision for incometaxes of $2,765,000, partially offset by an increase in income taxes of$982,000.  Net income as a percentage ofsales for the three months ended June 30, 2009 and 2008 was 14.9% and4.3%, respectively.  Basic and diluted incomeper share for the three months ended June 30, 2009 and 2008 was $0.10 and$0.02, respectively.

 

Net income for the six months ended June 30, 2009was $2,683,000, compared to net income of $524,000 for the six months ended June 30,2008, an increase of $2,159,000, or 412.0%. The net income increase was primarily due to an increase in incomebefore provision for income taxes of $3,360,000, partially offset by anincrease in income taxes of $1,201,000. Net income as a percentage of sales for the six months ended June 30,2009 and 2008 was 11.2% and 3.2%, respectively. Basic and diluted income per share for the six months ended June 30,2009 and 2008 was $0.12 and $0.02, respectively.

 

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### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

As of June 30, 2009, we had cash and cashequivalents of $6,455,000 and working capital of $22,693,000, an increase inworking capital of 4.6%, or $1,000,000, since December 31, 2008.  As of June 30, 2009, our current ratiowas 7:1, compared to 13:1 as of December 31, 2008.  Cash increased by $1,877,000 to $6,455,000 asof June 30, 2009 as compared to $4,578,000 as of December 31,2008.  The increase in cash was due tocash provided by operating activities of $3,874,000, offset by cash paid forthe repurchase of common stock of $1,795,000 and cash used in investingactivities of $202,000 for the aggregate purchase of property and equipment andintangible assets.

 

We have a $3,500,000 credit facility with a bank,consisting of a line of credit with interest at prime plus 0.5%.  At June 30, 2009, the prime interestrate was 3.25%.  This credit line wasrenewed in May 2009 and expires in May 2011.  Our borrowing capacity on the line of creditwas $3,500,000 at June 30, 2009. The available line of credit is based on a formula of eligible accountsreceivable and inventories.  As of June 30,2009, we did not have any borrowings under this credit facility.

 

Net cash provided by operating activities was$3,874,000 for the six months ended June 30, 2009, compared to $408,000net cash used in operating activities for the six months ended June 30,2008.  The net cash provided by operatingactivities of $3,874,000 for the six months ended June 30, 2009 was due tonet income of $2,683,000, adjusted by the following: an increase inamortization of share-based compensation expense of $119,000, depreciation andamortization of $322,000, a decrease in the deferred income taxes of $38,000,an increase in equity in income of unconsolidated affiliates of $170,000, an inaccounts receivable of $3,041,000, a decrease in inventory of $2,698,000, anincrease in prepaid expenses of $554,000 and increase in accounts payable and accruedliabilities of $1,779,000.

 

The net cash used in operating activities of $408,000for the six months ended June 30, 2008 was due to net income of $524,000,adjusted by the following: amortization of share-based compensation of $97,000,depreciation and amortization of $282,000 and an increase in the net deferredtax asset of $85,000, equity in income of unconsolidated affiliates of $38,000an increase in accounts receivable of $905,000, a decrease in inventory of$219,000, an increase in prepaid expenses of $333,000, a decrease in accountspayable and accrued liabilities of $169,000.

 

Accounts receivable increased by $3,041,000, or 59.7%,to $8,132,000 as of June 30, 2009 from $5,091,000 as of December 31,2008.  The increase in accountsreceivable is primarily related to the increase in sales.  The number of days of sales outstanding as ofJune 30, 2009 was 45 days, as compared to 51 days as of December 31,2008.

 

Inventory decreased by $2,698,000, or 22.4%, to$9,359,000 as of June 30, 2009 from $12,057,000 as of December 31,2008.  The decrease was primarily due toa decrease in inventory for the Building Supply Segment (formerly theEngineered Products segment) of approximately $2,080,000, or 35.0%, to$3,860,000 as of June 30, 2009. Inventory levels for this segment are now more closely aligned withcurrent demand.

 

Prepaid expenses and other current assets increased by$554,000 to $1,894,000 as of June 30, 2009 from $1,340,000 as of December 31,2008.  The increase was primarily due toan increase in prepaid inventory from Asia.

 

Accounts payable and accrued liabilities as of June 30,2009 increased by $1,779,000 to $3,662,000 from $1,883,000 as of December 31,2008.  The net change was primarily dueto an increase in accrued liabilities of $900,000 and an increase in tradepayables of $879,000.  Accruedliabilities for the six months increased as follows: commission and bonusaccrual increased by $207,000, accrued rebates and other increased by $119,000and income tax payable increased by $761,000. This was partially offset by decreases in accrued payroll expenses of$33,000 and accrued professional fees of $154,000.

 

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Net cash used in investing activities was $202,000 forthe six months ended June 30, 2009, compared to net cash used in investingactivities of $79,000 for the same period of 2008.  Our investing activity for the six months in2009 consisted of expenditures for property and equipment of $194,000 and thepurchase of intangible assets of $8,000, compared to $45,000 and $34,000,respectively, for the same period of 2008. The expenditures for property and equipment in 2009 are primarily forthe Building Supply segment.

 

For the six months ended June 30, 2009, net cashused in financing activities was $1,795,000, compared to net cash used infinancing activities of $972,000 for the same period of 2008.  Our financing activities for both periodswere solely due to the repurchase of common stock.

 

As of June 30, 2009 we had $1,175,000 availablefor additional stock purchases under our repurchase program.  During the six months ended June 30,2009, we repurchased 1,447,600 shares of common stock at a cost of$1,795,000.   As of June 30, 2009,we had repurchased a total of 6,086,500 shares of common stock at a cost of$7,345,000 through our repurchase program. We retire all stock repurchases.Future repurchases are expected to be funded from cash on hand and cash flowfrom operations.

 

As shown below, at June 30, 2009, our contractualcash obligations totaled approximately $698,000.

 
| ** **                         | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------|------------|---------------------------|------------|
| **Contractual Obligations**        | ** ** | **Total**                 | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** |
|                               |       |                      |       |   |   |   |   |   |   |
| Operating lease obligations        |       | $                         | 698,000    |   | $ | 330,000 |   | $ | 360,000 |   | $ | 8,000 |   |
|                               |       |                      |       |   |   |   |   |   |   |
| Total contractual cash obligations |       | $                         | 698,000    |   | $ | 330,000 |   | $ | 360,000 |   | $ | 8,000 |   |

 

We believe that cash generated from operations, ourcurrent cash balance and the funds available under our credit facility will besufficient to satisfy our projected working capital and planned capitalexpenditures for the foreseeable future.

 

**New Accounting Standards**

 

In February 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159 “TheFair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”).”Under SFAS 159, companies may elect to measure certain financial instrumentsand certain other items at fair value. The standard requires that unrealizedgains and losses on items for which the fair value option has been elected bereported in earnings. SFAS 159 is effective for fiscal years beginning after November 15,2007. SFAS 159 was adopted for fiscal year 2008; however, the Company did notelect to apply the fair value option to any financial instruments or otheritems upon adoption of SFAS 159 or during the twelve months ended December 31,2008. Therefore, the adoption of SFAS 159 did not impact the Company’sconsolidated financial position, results of operations or cash flows.

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements (“SFAS 157”)”. SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS 157 does not require any new fair value measurements but rather eliminatesinconsistencies in guidance found in prior accounting pronouncements. In February 2008,the FASB decided to postpone, for one year, the effective date of SFAS 157 forassets and liabilities measured at fair value on a non-recurring basis. TheCompany adopted SFAS 157 as of January 1, 2008 for assets and liabilitiesmeasured at fair value on a recurring basis and as of January 1, 2009 forassets and liabilities measured at fair value on a non-recurring basis. Theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

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In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations, (“SFAS141R”),” which changes how business combinations are accounted for and willimpact financial statements both on the acquisition date and in subsequentperiods. SFAS 141R was effective January 1, 2009 and did not have animpact on the Company’s consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements (“SFAS 160”),” which changes the accounting and reportingstandards for the noncontrolling interests in a subsidiary in consolidatedfinancial statements.  SFAS 160 recharacterizes minority interests asnoncontrolling interests and requires noncontrolling interests to be classifiedas a component of shareholders’ equity.  SFAS 160 was effective January 1,2009 and required retroactive adoption of the presentation and disclosurerequirements for existing minority interests. The Company does not consolidate its partially owned affiliate and,therefore, SFAS 160 did not have a material impact on its consolidatedfinancial statements.

 

In April 2009,the FASB issued FASB Staff Position (“FSP”) FAS No. 107-1 and AccountingPrinciples Board (“APB”) Opinion No. 28-1, “Interim Disclosures about FairValue of Financial Instruments (“FSP FAS No. 107-1 and APB Opinion No. 28-1”)”,which amends the disclosure requirements of SFAS No. 107 and APB Opinion No. 28and requires disclosure about the fair value of the Company’s financialinstruments whenever it issues summarized financial information for interimreporting periods. FSP FAS No. 107-1 and APB Opinion No. 28-1 are effectivefor financial statements issued for interim reporting periods ending after June 15,2009.  The adoption of this standard didnot have a material impact on the Company’s consolidated financial statements.

 

In April 2009,the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments  (“FSP FAS No. 115-2 and FAS No. 124-2”)”,which amends SFAS No. 115 and FSP FAS No. 115-1 and FSP FAS No. 124-1and conforms changes to other standards including EITF Issue No. 99-20 andAICPA Statement of Position (“SOP”) No. 03-3,  “Accounting for Certain Loans or DebtSecurities Acquired in a Transfer”,  andimproves the presentation and disclosure of other-than-temporary impairments ondebt and equity securities in the financial statements. FSP FAS No. 115-2and FAS No. 124-2 are effective for interim and annual reporting periodsending after June 15, 2009.  Theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

In April 2009,the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volumeand Level of Activity for the Asset or Liability Have Significantly Decreasedand Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”)”,which provides additional guidance for estimating fair value in accordance withSFAS No. 157, “Fair Value Measurements”, when the volume and level ofactivity for the asset or liability have significantly decreased. This FSP alsoincludes guidance on identifying circumstances that indicate a transaction isnot orderly and applies to all assets and liabilities within the scope ofaccounting pronouncements that require or permit fair value measurements,except in paragraphs 2 and 3 of SFAS No. 157. FSP FAS No. 157-4 iseffective for interim and annual reporting periods ending after June 15,2009.  The adoption of this standard didnot have a material impact on the Company’s consolidated financial statements.

 

Effective April 1,2009, the Company adopted SFAS No. 165, “Subsequent Events”.  The standard modifies the names of the twotypes of subsequent events either as recognized subsequent events (previouslyreferred to in practice as Type I subsequent events) or non-recognizedsubsequent events (previously referred to in practice as Type II subsequentevents).  In addition, the standardmodifies the definition of subsequent events to refer to events or transactionsthat occur after the balance sheet date, but before the financial statementsare issued (for public entities) or available to be issued (for nonpublicentities).  It also requires thedisclosure of the date through which subsequent events have beenevaluated.  The standard did not resultin significant changes in the practice of subsequent event disclosures or therelated accounting thereof and therefore the adoption did not have any impacton the Company’s consolidated financial statements.

 

In June 2009,the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(SFAS 

 

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167).  SFAS 167 eliminates a required quantitativeapproach to determine whether a variable interest gives the entity acontrolling financial interest in a variable interest entity in favor of aqualitatively focused analysis.  Itrequires an ongoing reassessment of whether an entity is the primarybeneficiary.  It also nullifies FSP FAS140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) aboutTransfers of Financial Assets and Interests in Variable Interest Entities” (FSPFAS 140-4 and FIN 46(R)-8).  However, thecontent of the disclosures required by SFAS 167 is generally consistent withFSP FAS 140-4 and FIN 46(R)-8.  SFAS 167is effective for the Company beginning in the first quarter of fiscal year2010.  The Company is currentlyevaluating the impact that the adoption of SFAS 167 will have on itsconsolidated financial statements.

 

In June 2009,the FASB issued SFAS No. 168, the “FASB Accounting Standards Codification”and the Hierarchy of Generally Accepted Accounting Principles.  This standard replaces SFAS No. 162, “TheHierarchy of Generally Accepted Accounting Principles”, and establishes onlytwo levels of U.S. generally accepted accounting principles (“GAAP”),authoritative and nonauthoritative.  TheFASB Accounting Standards Codification (the “Codification”) will become thesource of authoritative, nongovernmental GAAP, except for rules andinterpretive releases of the SEC, which are sources of authoritative GAAP forSEC registrants.  All othernon-grandfathered, non-SEC accounting literature not included in theCodification will become nonauthoritative. This standard is effective for financial statements for interim orannual reporting periods ending after September 15, 2009.  The Company will begin to use the newguidelines and numbering system prescribed by the Codification when referringto GAAP in the third quarter of fiscal year 2009.  As the Codification was not intended tochange or alter existing GAAP, it should not have any impact on the Company’sconsolidated financial statements.

 

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

# ** **

We subcontract the manufacture of products in Chinaand Mexico and have a joint venture in India. Our results of operations could be negatively affected by factors suchas changes in foreign currency exchange rates due to stronger economicconditions in those countries.

 

Changes in interest rates may result in changes in thefair market value of our cash and cash equivalents and interest income. Due tothe short duration and conservative nature of the cash equivalent investmentportfolio, we do not expect any material loss with respect to our cash equivalents.The book value for cash equivalents is considered to be representative of itsfair value.

 

As of June 30, 2009, we had no debt outstanding.

 

We do not expect any significant effect on our resultsof operations from inflationary or interest and currency ratefluctuations.  We do not hedge ourinterest rate or foreign exchange risks.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**.

 

Under the supervision and with the participation ofour management, including our Chief Executive Officer (principal executiveofficer) and Chief Financial Officer (principal financial officer), weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as such term is defined in Rule 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Disclosure controls and procedures are thecontrols and other procedures that we designed to ensure that we record,process, summarize and report in a timely manner the information we mustdisclose in reports that we file with or submit to the Securities and ExchangeCommission under the Exchange Act.

 

In designing and evaluating our disclosure controlsand procedures, we recognize that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of 

 

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achieving the desired control objectives, and we arerequired to apply our judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

Based on the evaluation, our principal executive andfinancial officers concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this report.

 

**Changes in Internal Controls**.

 

During the quarter to which this report relates, therewas no change in our internal control over financial reporting (as such term isdefined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act)that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A. RISK FACTORS**

 

There have been no material changes in our riskfactors from those disclosed in our 2008 Annual Report on Form 10-K.

 

**ITEM 2. UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

**Issuer Purchases of Equity Securities**

 
| **Period**             | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Approximate Dollar  Value of Shares that  May yet be Purchased  Under the Plan (1)** | ** ** |
|------------------------|------------|----------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| April 1- 30, 2009 |       | 504,400                                |       | $                                  | 1.06       |                                                                                | 504,400    |                                                                                        | $          | 2,146,000 |   |
| May 1- 31, 2009   |       | 557,000                                |       | $                                  | 1.50       |                                                                                | 557,000    |                                                                                        | $          | 1,306,000 |   |
| June 1- 30, 2009  |       | 76,400                                 |       | $                                  | 1.70       |                                                                                | 76,400     |                                                                                        | $          | 1,175,000 |   |

 

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(1)         On April 8, 2009, our Board of Directorsauthorized the expansion of the Company’s share repurchase program previouslyannounced in December 1999.  Underthe repurchase program, the Company is authorized to repurchase up to a totalof $8,520,000 of common stock.

 

We did not sell any unregistered equity securitiesduring the period covered by this Form 10-Q.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

None.

 

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**ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

TheCompany held its Annual Meeting of Shareholders on June 9, 2009 the (the “AnnualMeeting”).

 

The following persons wereelected to the Company’s Board of Directors at the Annual Meeting pursuant tothe votes indicated:

 
| **NAME**         | ** ** | **FOR**    | ** ** | **WITHHELD** |
|------------------|------------|------------|------------|--------------|
|             |       |       |       |         |
| Sheldon Hoffman  |       | 15,620,425 |       | 2,968,457    |
|             |       |       |       |         |
| Alexander Millar |       | 15,519,224 |       | 3,069,658    |
|             |       |       |       |         |
| Danny Montgomery |       | 15,634,646 |       | 2,954,236    |
|             |       |       |       |         |
| Robert Isaly     |       | 15,516,914 |       | 3,071,968    |
|             |       |       |       |         |
| John Ritota      |       | 15,532,136 |       | 3,056,746    |
|             |       |       |       |         |
| Russell Manock   |       | 15,635,622 |       | 2,953,260    |
|             |       |       |       |         |
| David Anderson   |       | 15,634,098 |       | 2,954,784    |

 

The only other matter votedupon at the Annual Meeting was the ratification of the appointment ofPricewaterhouseCoopers LLP as the Company’s independent registered publicaccountants.  The results of thestockholder voting on this matter are summarized as follows:

 

| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
|       |       |        |       |        |       |
| 16,648,158 |       | 1,919,757   |       | 20,967      |       |

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 

31.1 Certification Pursuant to Rule 13a-14(a) andRule 15d-14(a) of the Exchange Act, signed by Chief Executive Officer(filed herewith)

 

31.2 Certification Pursuant to Rule 13a-14(a) andRule 15d-14(a) of the Exchange Act, signed by Chief Financial Officer(filed herewith)

 

32.1 Certification Pursuant to 18 U.S.C Section 1350,as Adopted Pursuant to Section 906 of         the Sarbanes-Oxley Act of 2002, signedby Chief Executive Officer (filed herewith)

 

32.2 Certification Pursuant to 18 U.S.C Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,signed by Chief Financial Officer (filed herewith)

 

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** **

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, duly authorized.

 
|             ALPHA  PRO TECH, LTD. |                    |       |
|-----------------------------------------------------------------------------------------------|-------------------------|------------|
|                                                                                          |                    |       |   |
| DATE:                                                                                         | **August 6, 2009** | ** ** | BY: | /s/ **Sheldon Hoffman** |
|                                                                                          | ** **              | ** ** |   |   |
|                                                                                          |                    |       |   | Sheldon Hoffman |
|                                                                                          |                    |       |   | Chief Executive Officer and Director |
|                                                                                          |                    |       |   |   |
| DATE:                                                                                         | **August 6, 2009** | ** ** | BY: | /s/ **Lloyd Hoffman** |
|                                                                                          | ** **              | ** ** |   |   |
|                                                                                          |                    |       |   | Lloyd Hoffman |
|                                                                                          |                    |       |   | Chief Financial Officer |

 

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