**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the Quarter Ended September 30, 2004**

 

**Commission File No. 0-19893**

 

**Alpha Pro Tech, Ltd.**

(exact name of registrant as specified in its charter)

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

 

Registrant’s telephonenumber, including area code:  **(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 12 months(or for such shorter period that the registrant was required to file suchreports) and (2) has been subject to such filing requirements for the past 90days.

 

Yes   ý  No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

Yes   o  No  ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of November 1,2004.

 

23,356,849 Shares ofCommon stock, $.01 par value

 

 

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**Alpha Pro Tech, Ltd.**

 

Table of Contents

 
| PART I. FINANCIAL  INFORMATION                                                                            |                                                         |
|-----------------------------------------------------------------------------------------------------------|--------------------------------------------------------------|
|                                                                                                      |                                                         |   |
| ITEM 1 Consolidated  Financial Statements (Unaudited)                                                     |                                                         |
|                                                                                                      |                                                         |   |
|                                                                                                      | a)                                                           | Consolidated  Balance Sheets   September 30, 2004 and December 31, 2003 |   |
|                                                                                                      |                                                         |   |   |
|                                                                                                      | b)                                                           | Consolidated  Statements of Operations  for the three and nine months ended September 30, 2004 and 2003 |   |
|                                                                                                      |                                                         |   |   |
|                                                                                                      | c)                                                           | Consolidated  Statement of Shareholders’ Equity  for the nine months ended September 30, 2004 |   |
|                                                                                                      |                                                         |   |   |
|                                                                                                      | d)                                                           | Consolidated  Statements of Cash Flows  for the nine months ended September 30, 2004 and 2003 |   |
|                                                                                                      |                                                         |   |   |
|                                                                                                      | e)                                                           | Notes  to Consolidated Financial Statements |   |
|                                                                                                      |                                                         |   |
| ITEM 2 Management’s  Discussion and Analysis of Financial   Condition and Results of Operations |                                                         |
|                                                                                                      |                                                         |   |
|                                                                                                      | New Accounting Standards                                     |   |
|                                                                                                      |                                                         |   |
|                                                                                                      | Cautionary  Statements Regarding Forward-Looking Information |   |
|                                                                                                      |                                                         |   |
| ITEM 3 Quantitative and  Qualitative Disclosures About Market Risk                                        |                                                         |
|                                                                                                      |                                                         |   |
| ITEM 4 Controls and  Procedures                                                                           |                                                         |
|                                                                                                      |                                                         |   |
| PART II. OTHER  INFORMATION                                                                               |                                                         |
|                                                                                                      |                                                         |   |
| ITEM 5 Exhibits and  Reports on Form 8-K                                                                  |                                                         |
|                                                                                                      |                                                         |   |
| SIGNATURES                                                                                                |                                                         |
|                                                                                                      |                                                         |   |
| EXHIBITS                                                                                                  |                                                         |
|                                                                                                      |                                                         |   |
|                                                                                                      | Exhibit  31.1:                                               | Certification  by CEO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act  (filed herewith) |   |
|                                                                                                      |                                                         |   |   |
|                                                                                                      | Exhibit  31.2:                                               | Certification  by CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act  (filed herewith) |   |
|                                                                                                      |                                                         |   |   |
|                                                                                                      | Exhibit  32.1:                                               | Certification  by CEO pursuant to Section 906 of the Sarbanes-Oxley Act (filed  herewith) |   |
|                                                                                                      |                                                         |   |   |
|                                                                                                      | Exhibit  32.2:                                               | Certification  by CFO pursuant to Section 906 of the Sarbanes-Oxley Act (filed  herewith) |   |
|                                                                                                           |                                                              |  |  |  |

 

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**Alpha Pro Tech, Ltd.**

 

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

 

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

 

We have prepared the following unaudited interimconsolidated financial statements pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to these rules and regulations.

 

You should read the following unaudited interimconsolidated financial statements and the accompanying notes together with ourAnnual Report on Form 10-K for the year ended December 31, 2003. Our 2003Annual Report contains information that may be helpful in analyzing thefinancial information contained in this report and in comparing our results ofoperations for the three and nine months ended September 30, 2004 with thesame periods in 2003.

 

1

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**Alpha Pro Tech, Ltd.**

 

**Consolidated Balance Sheets (Unaudited)**

 
| ** **                                                                                                                                                                          | ** ** | **September 30,  2004** | ** ** | **December 31,  2003 (1)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                                                                                                                                                                                |       |                         |       |                            |       |
| **Assets**                                                                                                                                                                          |       |                         |       |                            |       |
| Current assets:                                                                                                                                                                     |       |                         |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                          |       | $                            | 3,500,000  |                            | $          | 3,427,000 |   |
| Accounts receivable,  net of allowance for doubtful accounts of $69,000 at September 30, 2004  and December 31, 2003                                                 |       | 3,823,000                    |       | 2,707,000                       |       |
| Inventories, net                                                                                                                                                                    |       | 5,162,000                    |       | 6,015,000                       |       |
| Prepaid expenses and  other current assets                                                                                                                                          |       | 809,000                      |       | 245,000                         |       |
| Deferred income taxes                                                                                                                                                               |       | 362,000                      |       | 362,000                         |       |
| Total current assets                                                                                                                                                                |       | 13,656,000                   |       | 12,756,000                      |       |
|                                                                                                                                                                                |       |                         |       |                            |       |
| Property and equipment,  net                                                                                                                                                        |       | 3,023,000                    |       | 3,166,000                       |       |
| Goodwill                                                                                                                                                                            |       | 55,000                       |       | 55,000                          |       |
| Intangible assets, net                                                                                                                                                              |       | 137,000                      |       | 119,000                         |       |
| Total assets                                                                                                                                                                        |       | $                            | 16,871,000 |                            | $          | 16,096,000 |   |
|                                                                                                                                                                                |       |                         |       |                            |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                      |       |                         |       |                            |       |
| Current liabilities:                                                                                                                                                                |       |                         |       |                            |       |
| Accounts payable                                                                                                                                                                    |       | 572,000                      |       | 956,000                         |       |
| Accrued liabilities                                                                                                                                                                 |       | 920,000                      |       | 1,539,000                       |       |
| Total current  liabilities                                                                                                                                                          |       | 1,492,000                    |       | 2,495,000                       |       |
|                                                                                                                                                                                |       |                         |       |                            |       |
| Deferred income taxes                                                                                                                                                               |       | 574,000                      |       | 574,000                         |       |
| Total liabilities                                                                                                                                                                   |       | 2,066,000                    |       | 3,069,000                       |       |
|                                                                                                                                                                                |       |                         |       |                            |       |
| Shareholders’ equity                                                                                                                                                           |       |                         |       |                            |       |
| Common stock, $.01 par  value, 50,000,000 shares authorized, 23,356,849 and 22,727,907 issued and  outstanding at September 30, 2004 and December 31, 2003,  respectively |       | 234,000                      |       | 227,000                         |       |
| Additional paid-in  capital                                                                                                                                                         |       | 23,856,000                   |       | 23,375,000                      |       |
| Accumulated deficit                                                                                                                                                                 |       | (9,285,000                   | )          | (10,575,000                     | )          |
| Total shareholders’  equity                                                                                                                                                    |       | 14,805,000                   |       | 13,027,000                      |       |
| Total liabilities and  shareholders’ equity                                                                                                                                    |       | $                            | 16,871,000 |                            | $          | 16,096,000 |   |

 

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(1)                                  Thecondensed consolidated balance sheet as of December 31, 2003 has beenprepared using information from the audited financial statements at that date.

 

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

 

2

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**AlphaPro Tech, Ltd.**

 

**Consolidated Statements of Operations (Unaudited)**

 
| ** **                                                   | ** ** | **For  the Three Months Ended  September 30,** | ** ** | **For  the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                                            | ** ** | **2003**                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Sales                                                        |       | $                                                   | 5,827,000  |                                               | $          | 6,517,000 |   | $ | 18,428,000 |   | $ | 20,467,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Cost of goods sold,  excluding depreciation and amortization |       | 2,910,000                                           |       | 3,299,000                                          |       | 9,281,000 |   | 9,748,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Gross margin                                                 |       | 2,917,000                                           |       | 3,218,000                                          |       | 9,147,000 |   | 10,719,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Expenses:                                                    |       |                                                |       |                                               |       |   |   |   |   |
| Selling, general and administrative                          |       | 2,198,000                                           |       | 2,141,000                                          |       | 6,711,000 |   | 6,427,000 |   |
| Depreciation and  amortization                               |       | 127,000                                             |       | 131,000                                            |       | 393,000 |   | 373,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Income from operations                                       |       | 592,000                                             |       | 946,000                                            |       | 2,043,000 |   | 3,919,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Other income (expense)                                       |       |                                                |       |                                               |       |   |   |   |   |
| Gain on sale of assets                                       |       | —                                              |       | —                                             |       | 7,000 |   | — |   |
| Interest, net                                                |       | —                                              |       | (2,000                                             | )          | (4,000 | ) | (18,000 | ) |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Income before provision  for income taxes                    |       | 592,000                                             |       | 944,000                                            |       | 2,046,000 |   | 3,901,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Provision for income  taxes                                  |       | 218,000                                             |       | 243,000                                            |       | 756,000 |   | 1,372,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Net income                                                   |       | $                                                   | 374,000    |                                               | $          | 701,000 |   | $ | 1,290,000 |   | $ | 2,529,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Basic net income per  share                                  |       | $                                                   | 0.02       |                                               | $          | 0.03 |   | $ | 0.06 |   | $ | 0.11 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Diluted net income per  share                                |       | $                                                   | 0.02       |                                               | $          | 0.03 |   | $ | 0.05 |   | $ | 0.11 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Basic weighted average  shares outstanding                   |       | 23,270,478                                          |       | 22,478,537                                         |       | 23,155,358 |   | 22,438,723 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Diluted weighted  average shares outstanding                 |       | 24,467,474                                          |       | 24,065,723                                         |       | 24,642,728 |   | 23,865,847 |   |

 

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

 

3

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**AlphaPro Tech, Ltd.**

 

**Consolidated Statement of Shareholders’ Equity(Unaudited)**

 
| ** **                             | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** **  |
|----------------------------------------|------------|------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|-----------|-------------|
|                                   |       |       |       |              |       |                             |       |                     |       |      |        |
| Balance at December 31, 2003 |       | 22,727,907 |       | $                 | 227,000    |                             | $          | 23,375,000               |       | $         | (10,575,000 | ) | $ | 13,027,000 |   |
|                                   |       |       |       |              |       |                             |       |                     |       |      |        |
| Stock options exercised                |       | 724,894    |       | 7,000             |       | 644,000                          |       | —                   |       | 651,000   |        |
|                                   |       |       |       |              |       |                             |       |                     |       |      |        |
| Common stock  repurchased              |       | (215,000   | )          | (1,000            | )          | (370,000                         | )          | —                   |       | (371,000  | )           |
|                                   |       |       |       |              |       |                             |       |                     |       |      |        |
| Warrants exercised                     |       | 119,048    |       | 1,000             |       | 207,000                          |       |                     |       | 208,000   |        |
|                                   |       |       |       |              |       |                             |       |                     |       |      |        |
| Net income                             |       |       |       |              |       |                             |       | 1,290,000                |       | 1,290,000 |        |
|                                   |       |       |       |              |       |                             |       |                     |       |      |        |
| Balance at September 30,  2004    |       | 23,356,849 |       | $                 | 234,000    |                             | $          | 23,856,000               |       | $         | (9,285,000  | ) | $ | 14,805,000 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements

 

4

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**AlphaPro Tech, Ltd.**

 

**Consolidated Statements of Cash Flows (Unaudited)**

 
| ** **                                                                                   | ** ** | **For  the Nine months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                                           | ** ** | **2003** | ** ** |
| **Cash  Flows From Operating Activities:**                                                   |       |                                               |       |   |   |
| Net income                                                                                   |       | $                                                  | 1,290,000  |   | $ | 2,529,000 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                               |       |   |   |
| Depreciation and  amortization                                                               |       | 393,000                                            |       | 373,000 |   |
| Gain on sale of assets                                                                       |       | (7,000                                             | )          | — |   |
| Changes in assets and  liabilities:                                                          |       |                                               |       |   |   |
| Accounts receivable,  net                                                                    |       | (1,116,000                                         | )          | (668,000 | ) |
| Inventories, net                                                                             |       | 853,000                                            |       | (2,253,000 | ) |
| Prepaid expenses and  other current assets                                                   |       | (564,000                                           | )          | (21,000 | ) |
| Accounts payable and  accrued liabilities                                                    |       | (1,003,000                                         | )          | 1,023,000 |   |
|                                                                                         |       |                                               |       |   |   |
| Net cash provided by  (used in) operating activities:                                        |       | (154,000                                           | )          | 1,025,000 |   |
|                                                                                         |       |                                               |       |   |   |
| **Cash  Flows From Investing Activities:**                                                   |       |                                               |       |   |   |
| Proceeds from related  party loans                                                           |       | —                                             |       | 70,000 |   |
| Purchase of property  and equipment                                                          |       | (238,000                                           | )          | (327,000 | ) |
| Proceeds from sale of  assets                                                                |       | 16,000                                             |       | — |   |
| Purchase of intangible  assets                                                               |       | (39,000                                            | )          | (18,000 | ) |
|                                                                                         |       |                                               |       |   |   |
| Net cash used in  investing activities                                                       |       | (261,000                                           | )          | (275,000 | ) |
|                                                                                         |       |                                               |       |   |   |
| **Cash  Flows From Financing Activities:**                                                   |       |                                               |       |   |   |
| Payments on notes  payable                                                                   |       | —                                             |       | (415,000 | ) |
| Proceeds from the  exercise of stock options                                                 |       | 651,000                                            |       | 253,000 |   |
| Proceeds from the  exercise of warrants                                                      |       | 208,000                                            |       | — |   |
| Payments for the repurchase  of common stock                                                 |       | (371,000                                           | )          | (287,000 | ) |
| Net cash provided by  (used in) financing activities                                         |       | 488,000                                            |       | (449,000 | ) |
|                                                                                         |       |                                               |       |   |   |
| Increase in cash during  the period                                                          |       | 73,000                                             |       | 301,000 |   |
|                                                                                         |       |                                               |       |   |   |
| Cash and cash  equivalents, beginning of period                                              |       | 3,427,000                                          |       | 2,879,000 |   |
| Cash and cash  equivalents, end of period                                                    |       | $                                                  | 3,500,000  |   | $ | 3,180,000 |   |

 

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

 

5

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**AlphaPro Tech, Ltd.**

 

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

 

**1.****                                      TheCompany**

 

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

 

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

 

The interim financial information included herein isunaudited; however, the information reflects all adjustments (consisting ofnormal recurring adjustments) that are, in the opinion of management, necessaryfor the fair presentation of the consolidated financial position, results of operationsand cash flows for the interim periods. The consolidated financial statementsshould be read in conjunction with the consolidated financial statements forthe year ended December 31, 2003, which are included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003 (“200310-K”). The results of operations for the three and nine months ended September 30,2004 are not necessarily indicative of the results to be expected for the fullyear. The consolidated balance sheet at December 31, 2003 was extractedfrom the audited consolidated financial statements contained in the 2003 10-Kand does not include all disclosures required by accounting principlesgenerally accepted in the United States of America for annual consolidated financialstatements.

 

Certain amounts for prior periods have beenreclassified to be consistent with the 2004 presentation.  Such reclassifications had no effect on totalassets, total liabilities, shareholders’ equity or net income.

 

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

 

Accounting for Stock-based Compensation.  The Company maintains two stock option plansunder which the Company may grant incentive stock options and non-qualifiedstock options to employees and non-employee directors.  Stock options have been granted with exerciseprices at or above the fair market value on the date of grant.  Options vest and expire according to termsestablished at the grant date.

 

The Company accounts for stock options granted usingAccounting Principles Board (“APB”) Opinion 25. Accordingly, no compensationcost has been recognized for its fixed stock option plans. Had compensationcost for the Company’s stock-based compensation plans been determined based onthe fair value at the grant dates for awards under those plans consistent withSFAS No. 123,”Accounting for Stock-Based Compensation”, as amended by SFAS No.148, “Accounting for Stock-Based Compensation-transition and disclosure”, theCompany’s net income and net income per common share would have changed to thepro forma amounts indicated below:

 

6

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| ** **                                                                                                                                   | ** ** | **For  the Three Months  Ended  September 30,** | ** ** | **For  the Nine Months  Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                                             | ** ** | **2003**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as reported                                                                                                                      |       | $                                                    | 374,000    |                                                | $          | 701,000 |   | $ | 1,290,000 |   | $ | 2,529,000 |   |
| Add: Total stock-based  employee compensation expense included in reported net income, net of related  tax effects                           |       | —                                               |       | —                                              |       | — |   | — |   |
| Deduct: Total  stock-based employee compensation expense determined using the fair value  method for all rewards, net of related tax effects |       | (60,000                                              | )          | —                                              |       | (60,000 | ) | — |   |
|                                                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Pro forma net income                                                                                                                         |       | $                                                    | 314,000    |                                                | $          | 701,000 |   | $ | 1,230,000 |   | $ | 2,529,000 |   |
|                                                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net income per share:                                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Basic - as reported                                                                                                                          |       | $                                                    | 0.02       |                                                | $          | 0.03 |   | $ | 0.06 |   | $ | 0.11 |   |
| Basic - pro forma                                                                                                                            |       | 0.02                                                 |       | 0.03                                                |       | 0.06 |   | 0.11 |   |
| Diluted – as reported                                                                                                                   |       | 0.02                                                 |       | 0.03                                                |       | 0.05 |   | 0.11 |   |
| Diluted - pro forma                                                                                                                          |       | 0.02                                                 |       | 0.03                                                |       | 0.05 |   | 0.11 |   |
|                                                                                                                                              |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

Based on the Company’s review of new accountingstandards released during the quarter ended September 30, 2004, theCompany did not identify any standards requiring adoption that would have asignificant impact on its consolidated financial statement.

 

**5.****                                      Inventories**

 

Inventories consist of the following:

 
| ** **                                                    | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials                                                 |       | $                            | 2,684,000  |                        | $          | 3,174,000 |   |
| Work in process                                               |       | 125,000                      |       | 44,000                      |       |
| Finished goods                                                |       | 2,769,000                    |       | 3,183,000                   |       |
|                                                          |       | 5,578,000                    |       | 6,401,000                   |       |
| Less reserve for  slow-moving, obsolete or unusable inventory |       | (416,000                     | )          | (386,000                    | )          |
|                                                          |       | $                            | 5,162,000  |                        | $          | 6,015,000 |   |

 

7

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**6.****                                      AccruedLiabilities**

 

Accrued liabilities consist of the following:

 
| ** **                 | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Income taxes payable       |       | $                            | —     |                        | $          | 480,000 |   |
| Bonuses payable            |       | 390,000                      |       | 737,000                     |       |
| Accrued payroll            |       | 212,000                      |       | 148,000                     |       |
| Accrued rebates and  other |       | 318,000                      |       | 174,000                     |       |
|                       |       | $                            | 920,000    |                        | $          | 1,539,000 |   |

 

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

 

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 Months Ended  September 30,** | ** ** | **For  the Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                            | ** ** | **2003**                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                |       |                                                |       |                                               |       |   |   |   |   |
| Net income (Numerator)                              |       | $                                                   | 374,000    |                                               | $          | 701,000 |   | $ | 1,290,000 |   | $ | 2,529,000 |   |
|                                                |       |                                                |       |                                               |       |   |   |   |   |
| Shares (Denominator):                               |       |                                                |       |                                               |       |   |   |   |   |
|                                                |       |                                                |       |                                               |       |   |   |   |   |
| Basic weighted average  shares outstanding          |       | 23,270,478                                          |       | 22,478,537                                         |       | 23,155,358 |   | 22,438,723 |   |
|                                                |       |                                                |       |                                               |       |   |   |   |   |
| Add: Dilutive effect of  stock options and warrants |       | 1,196,996                                           |       | 1,587,186                                          |       | 1,487,370 |   | 1,427,124 |   |
|                                                |       |                                                |       |                                               |       |   |   |   |   |
| Diluted weighted  average shares outstanding        |       | 24,467,474                                          |       | 24,065,723                                         |       | 24,642,728 |   | 23,865,847 |   |
|                                                |       |                                                |       |                                               |       |   |   |   |   |
| Net income per share:                               |       |                                                |       |                                               |       |   |   |   |   |
|                                                |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                               |       | $                                                   | 0.02       |                                               | $          | 0.03 |   | $ | 0.06 |   | $ | 0.11 |   |
|                                                |       |                                                |       |                                               |       |   |   |   |   |
| Diluted                                             |       | $                                                   | 0.02       |                                               | $          | 0.03 |   | $ | 0.05 |   | $ | 0.11 |   |

 

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

 

The Company operates through four segments:  Apparel, consisting of a complete line ofdisposable clothing such as coveralls, frocks, lab coats, hoods, bouffant capsand shoe covers; Mask and shields, consisting principally of medical, dentaland industrial masks and eye shields; Extended care, consisting principally of fleece and other relatedproducts which include a line of pet beds and Engineered Products, consistingof a line of construction supply weatherization products as well as a line ofpaint with antimicrobials.  TheEngineered products segment began operations in June 2004 and through September 30,2004 had not begun generating sales.

 

The accounting policies of the segments are the sameas those described in the “Summary of Significant Accounting Policies” in the2003 10-K .  Segment data excludescharges allocated to head office and corporate sales/marketing departments andincome taxes.  The Company evaluates theperformance of its segments and allocates resources to them based primarily onnet sales.

 

The following table shows net sales for each segmentfor the three and nine months ended September 30, 2004 and 2003:

 
| ** **                    | ** ** | **For  the Three Months Ended  September 30,** | ** ** | **For  the Nine Months  Ended  September 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                            | ** ** | **2003**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                    | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Apparel                       |       | $                                                   | 4,300,000  |                                                | $          | 4,161,000 |   | $ | 13,130,000 |   | $ | 11,506,000 |   |
| Mask and shield               |       | 1,109,000                                           |       | 1,960,000                                           |       | 3,944,000 |   | 7,728,000 |   |
| Extended care                 |       | 418,000                                             |       | 396,000                                             |       | 1,354,000 |   | 1,233,000 |   |
|                          |       |                                                |       |                                                |       |   |   |   |   |
| Consolidated total net  sales |       | $                                                   | 5,827,000  |                                                | $          | 6,517,000 |   | $ | 18,428,000 |   | $ | 20,467,000 |   |

 

The following table shows the reconciliation of totalsegment income to total consolidated net income for the three and nine monthsended September 30, 2004 and 2003:

 
| ** **                               | ** ** | **For  the Three Months Ended  September 30,** | ** ** | **For  the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                            | ** ** | **2003**                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Apparel                                  |       | $                                                   | 1,613,000  |                                               | $          | 1,293,000 |   | $ | 4,711,000 |   | $ | 3,553,000 |   |
| Mask and shield                          |       | 418,000                                             |       | 889,000                                            |       | 1,449,000 |   | 3,916,000 |   |
| Engineered products                      |       | (155,000                                            | )          | —                                             |       | (180,000 | ) | — |   |
| Extended care                            |       | 52,000                                              |       | 72,000                                             |       | 189,000 |   | 207,000 |   |
|                                     |       |                                                |       |                                               |       |   |   |   |   |
| Total segment income                     |       | 1,928,000                                           |       | 2,254,000                                          |       | 6,169,000 |   | 7,676,000 |   |
| Unallocated corporate  overhead expenses |       | (1,336,000                                          | )          | (1,310,000                                         | )          | (4,123,000 | ) | (3,775,000 | ) |
| Provision for income  taxes              |       | (218,000                                            | )          | (243,000                                           | )          | (756,000 | ) | (1,372,000 | ) |
|                                     |       |                                                |       |                                               |       |   |   |   |   |
| Consolidated net income                  |       | $                                                   | 374,000    |                                               | $          | 701,000 |   | $ | 1,290,000 |   | $ | 2,529,000 |   |

 

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# **ITEM2**                                                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

**OVERVIEW**

 

Alpha Pro Tech is in the business of protectingpeople, products and environments. We accomplish this by developing,manufacturing and marketing a line of disposable protective apparel andconsumer products for the cleanroom, industrial, medical, dental and consumermarkets.  Our products are sold under the“Alpha Pro Tech” brand name as well as sold for use under private label.

 

Our current products are classified into fourgroups:  Disposable protective apparel,consisting of a complete line of shoecovers, headcovers, gowns, coveralls andlab coats; infection control products consisting of a line of face masks andface shields; extended care products consisting of a line of mattress overlays,wheelchair covers, geriatric chair surfaces, operating room table surfaces andpediatric surfaces; and consumer products consisting of a line of pet beddingand pet toys.

 

Our current products are sold through threesegments.  The Apparel segment,consisting of disposable protective apparel; the Mask and Shield segment,consisting of infection control products; and the Extended Care segment,consisting of extended care products and consumer products.

 

Our target markets are pharmaceutical manufacturing,bio-pharmaceutical manufacturing and medical device manufacturing, lab animalresearch, high technology electronics manufacturing which includes thesemi-conductor market, as well as medical and dental markets. Our products areused primarily in cleanrooms, industrial safety manufacturing environments andhealth care facilities such as hospitals, laboratories and dental offices. Ourproducts are distributed principally in the United States through a networkconsisting of purchasing groups, national distributors, local distributors,independent sales representatives and our own sales and marketing force.

 

A new fourth business segment, Engineered Products,was announced during the second quarter 2004 with the formation of AlphaProTech Engineered Products, Inc., a wholly-owned subsidiary.  This Engineered Products segment will consistof a line of construction supply weatherization products as well as a line ofpaint with antimicrobials.  Theconstruction supply weatherization products will consist of building wrap and asynthetic roof underlayment.  This lineof products is a natural extension of our core capabilities: creatingproprietary products designed to protect people and environments.  The building wrap will offer a weatherresistant barrier designed to lower energy consumption costs.  The proprietary synthetic roof underlaymentis designed to resist the environment, as opposed to conventional roofingunderlayment that is prone to rapid degradation and mold growth.

 

The line of paint with antimicrobials is designed toinhibit growth of bacteria, fungi and algae on the painted surfaces inhospitals, surgical rooms and cleanrooms and associated controlledenvironments.  We have an exclusivelicensing agreement for the proprietary antimicrobial formulation to be used inthe paint.  This product is designed toreduce operating costs in cleanrooms and hospitals while preservingenvironmental safety.

 

We expect to begin manufacturing and distributingthese new Engineered Products in the fourth quarter of 2004.  The Engineered Products segment is expectedto contribute significantly to revenue growth in 2005.

 

We are also focused on appreciably improving sales inour current core business.  Our key salesgrowth strategies for our core business are based on a strategy of developinginnovative products to suit

 

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individual end users true needs and on investing inadditional sales personnel.  As we gainmarket share, we will invest in additional sales personnel.  In 2004, we have started to experiencepositive results from these growth strategies and expect sales growth toimprove in the coming quarters.

 

Our results of operations in 2003 were significantlyinfluenced by the outbreak of Severe Acute Respiratory Syndrome (SARS).    During the third quarter and nine monthsended September 30, 2003, we had approximately $0.5 million and $3.5million, respectively of non-core SARS related N-95 Respiratory mask and eyeshield sales.  Excluding the non-coresales related to SARS last year, we experienced a core sales decline of 3.2%for the three months ended September 30, 2004 and core sales growth of8.6% for the nine months ended September 30, 2004.

 

Net income for the quarter was $374,000 compared to$701,000 for the same quarter last year. A number of factors adversely affected net income for the 2004 quarter,namely $0.5 million in SARS related sales in the third quarter last year, a$100,000 tax credit in the third quarter last year related to our internationalsales and start-up costs of $155,000 in the third quarter of 2004 from thenewly formed Engineered Products segment.

 

**RESULTS OF OPERATIONS**

 

**Three months and nine months ended September 30,2004, compared to the three and nine months ended September 30, 2003**

 

Alpha Pro Tech, Ltd. (Alpha or the Company) reportednet income for the quarter ended September 30, 2004 of $374,000 comparedto $701,000 for the quarter ended September 30, 2003, representing adecrease of $327,000 or 46.6%.  Thedecrease is attributable to a decrease in gross margin of $301,000 and anincrease in selling, general and administrative expenses of $57,000, partiallyoffset by a decrease in depreciation and amortization of $4,000, a decrease innet interest expense of $2,000 and a decrease in income taxes of $25,000.

 

Net income in the third quarter of 2004 was adverselyaffected by a number of factors.  Thethird quarter of 2003 was positively impacted by $0.5 million of non-core SARSrelated sales which generated a gross margin of approximately $0.3 million andthe $100,000 tax credit referred to above. The Company also had start-up costs of $155,000 in the third quarter of2004 for the newly formed Engineered Products segment.

 

**Sales.**  Consolidated sales for the quarter ended September 30,2004 decreased to $5,827,000 from $6,517,000 for the quarter ended September 30,2003, representing a decrease of $690,000 or 10.6%.  Sales in the third quarter of last year werepositively affected by the SARS outbreak. Excluding the $0.5 million non-core SARS related sales during the thirdquarter of 2003, our core business decreased by $190,000 or 3.2% to $5,827,000for the quarter ended September 30, 2004 from $6,017,000 for the sameperiod in 2003.

 

Sales for the Apparel segment for the quarter ended September 30,2004 were $4,300,000 compared to $4,161,000 for the same period of 2003, anincrease of $139,000 or 3.3%.   TheApparel segment sales increase was due to higher sales to the industrial safetyindustry.  Although sales to our largestdistributor were down 6.3% for the quarter, end-user sales of our products bythis distributor were up approximately 10%. We expect long-term growth with this distributor as we continue to gaina stronger presence into the pharmaceutical and cleanroom markets.

 

Mask and eye shield sales for the quarter ended September 30,2004 decreased by $851,000 or 43.4% to $1,109,000 from $1,960,000 in the sameperiod of 2003.  The decrease isprimarily the result of $0.5

 

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million of N-95 Particulate Respirator mask and eyeshield sales in the third quarter of last year related to the SARS outbreak and$351,000 decrease in medical and dental sales which was due to an increasedawareness of infection control concerns during the third quarter of 2003.

 

Sales of the Company’s Extended Care Unreal Lambskinand other related products, which includes a line of pet beds, increased by$22,000 or 5.6% to $418,000 for the quarter ended September 30, 2004 from$396,000 for the quarter ended September 30, 2003.  This increase in sales is primarily the resultof an increase in pet bed sales.

 

Consolidated sales for the nine months ended September 30,2004 decreased to $18,428,000 from $20,467,000 for the nine months ended September 30,2003, representing a decrease of $2,039,000 or 10.0%.  Excluding the $3.5 million non-core SARSrelated sales during the second and third quarter of 2003, our core businessgrew by $1,461,000 or 8.6% to $18,428,000 for the nine months ended September 30,2004 from $16,967,000 for the same period in 2003.  We attribute this core business increaseprimarily to sales to the pharmaceutical and cleanroom industry and to a lesserextent sales to the industrial safety industry.

 

Sales for the Apparel segment for the nine monthsended September 30, 2004 were $13,130,000 compared to $11,506,000 for thesame period of 2003, an increase of $1,624,000 or 14.1%.   The Apparel segment sales increase was dueto higher sales to the pharmaceutical and cleanroom industry and to a lesserextent sales to the industrial safety industry. We expect continued long-term growth in this segment.

 

Mask and eye shield sales for the nine months ended September 30,2004 decreased by $3,784,000 or 49.0% to $3,944,000 from $7,728,000 in the sameperiod of 2003.  The decrease isprimarily the result of $3.5 million of N-95 Particulate Respirator mask andeye shield sales in the second and third quarter of 2003 related to the SARSoutbreak.  Excluding the $3.5 million inSARS related sales in 2003, mask and eye shield sales in 2004 are down $284,000or 6.7% due to decreased  medical anddental sales due to and increased awareness of infection control concernsduring the third quarter of 2003.

 

Sales of the Company’s Extended Care Unreal Lambskinand other related products, which includes a line of pet beds, increased by$121,000 or 9.8% to $1,354,000 for the nine months ended September 30,2004 from $1,233,000 for the quarter ended September 30, 2003.  This increase of $121,000 in sales isprimarily the result of an increase in pet bed sales.

 

**Cost of Goods Sold.**  Cost of goods sold, excluding depreciationand amortization, decreased to $2,910,000 for the quarter ended September 30,2004 from $3,299,000 for the same period in 2003.  Gross profit margin increased to 50.1% forthe quarter ended September 30, 2004 from 49.4% for the same period in2003.  For the nine months ended September 30,2004, cost of goods sold decreased to $9,281,000 from $9,748,000 for the sameperiod in 2003.  Gross profit margindecreased to 49.6% for the nine months ended September 30, 2004 from 52.4%for the same period in 2003.

 

The decrease in gross profit margin for nine monthsended September 30, 2004 as compared to the same period of 2003 was dueprimarily to the higher gross profit margin on the $3.5 million SARS relatedsales in the second and third quarter of 2003. Gross profit margin in 2004 was also adversely affected by severancepayments made due to the closing of our facility located in Benjamin Hill,Mexico during the second quarter of 2004 as well as start-up costs from our newthird party contractor in Mexico, totaling $68,000.

 

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**Selling, General and Administrative Expenses**.  Selling, general and administrative expensesincreased by $57,000 or 2.7% to $2,198,000 for the quarter ended September 30,2004 from $2,141,000 for the quarter ended September 30, 2003.  The increase in selling, general andadministrative expenses primarily consists of  increased marketing and commission expenses of $30,000, increasedinsurance expense of $12,000, increased travel expense of $35,000, andincreased professional fees and public company expense of $25,000, partiallyoffset by decreased expense for the executive bonus program of $39,000 anddecreased other expenses of $6,000. Included in the selling, general and administrative expenses for thequarter ended September 30, 2004 is $155,000 of expenses that relate tostart-up costs for the newly formed Engineered Products segment.  Excluding the Engineered Products expenses,selling, general and administrative expenses decreased by $98,000 or 4.6%

 

Selling, general and administrative expenses increasedby $284,000 or 4.4% to $6,711,000 for the nine months ended September 30,2004 from $6,427,000 for the nine months ended September 30, 2003.  The increase in selling, general andadministrative expenses primarily consists of increased payroll costs of$212,000, of which $52,000 is for severance payments on the closing of ourBenjamin Hill, Mexico facility, increased marketing and commission expenses of$87,000, increased travel of $120,000, increased rent and utilities expense of$75,000, increased professional fees and public company expenses of $12,000 andincreased miscellaneous expenses of $3,000, partially offset by a decreasedexpense for the executive bonus program of $207,000 and decreased credit cardprocessing expense of $18,000.  Includedin selling, general and administrative expenses for the nine months ended September 30,2004 is $180,000 of expenses that relate to start-up costs for the newly formedEngineered Products segment.  Excludingthe Engineered Products expenses, selling, general and administrative expensesincreased by $104,000 or 1.6%

 

**Depreciation and Amortization.**  Depreciation and amortization expensedecreased by $4,000 to $127,000 for the quarter ended September 30, 2004from $131,000 for the same period in 2003 and increased by $20,000 to $393,000for the nine months ended September 30, 2004 compared to the same periodin 2003.  The increase for the ninemonths is primarily attributable to mask machine additions and the purchase ofcomputer equipment in 2003.

 

**Income from Operations.**  Income from operations decreased by $354,000or 37.4%, to $592,000 for the quarter ended September 30, 2004 as comparedto income from operations of $946,000 for the quarter ended September 30,2003.  The decrease in income fromoperations is primarily due to a decrease in gross profit margin of $301,000,an increase in selling, general and administrative expenses of $57,000,partially offset by a decrease in depreciation and amortization of $4,000.

 

Income from operations decreased by $1,876,000 or47.9%, to $2,043,000 for the nine months ended September 30, 2004 ascompared to income from operations of $3,919,000 for the nine months ended September 30,2003.  The decrease in income fromoperations is primarily due to a decrease in gross profit of $1,572,000 and anincrease in selling, general and administrative expenses of $284,000 and anincrease in depreciation and amortization of $20,000

 

**Net Interest**.  Net interest expense decreased by $2,000 to$0 for the quarter ended September 30, 2004 from net interest expense of$2,000 for the quarter ended September 30, 2003.  Interest expense remained flat at $2,000 forthe quarter ended September 30, 2004 as compared to the same period of2003.  Interest income increased by$2,000 for the quarter ended September 30, 2004 as compared to the sameperiod of 2003.

 

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Net interest expense decreased by $14,000 to $4,000for the nine months ended September 30, 2004 from net interest expense of$18,000 for the nine months ended September 30, 2003.  Interest expense decreased by $23,000 to$8,000 for the nine months ended September 30, 2004 as compared to $31,000the same period of 2003.  The decrease ininterest expense is primarily due to paying off all our notes payable duringthe second quarter of 2003.  Interestincome decreased by $9,000 to $4,000 for the nine months ended September 30,2004 as compared to $13,000 for the same period of 2003.

 

**Income Before Provision for Income Taxes.**  Income before provision for income taxes forthe quarter ended September 30, 2004 was $592,000 as compared to $944,000for the quarter ended September 30, 2003, representing a decrease of$352,000 or 37.3%.  This decrease isattributable to a decrease in gross profit of $301,000,   an increase in selling, general andadministrative expenses of $57,000, partially offset a decrease in depreciationand amortization of $4,000 and a decrease in net interest expense of $2,000.

 

Income before provision for income taxes for the ninemonths ended September 30, 2004 was $2,046,000 as compared to $3,901,000for the nine months ended September 30, 2003, representing a decrease of$1,855,000 or 47.6%.  This decrease isattributable to a decrease in gross profit of $1,572,000,  an increase in selling, general andadministrative expenses of $284,000 and an increase in depreciation andamortization of $20,000, partially offset by a gain on sale of assets of $7,000and a decrease in net interest expense of $14,000.

 

**Provision for Income Taxes**  The provision for income taxes for the threemonths ended September 30, 2004 was $218,000 as compared to $243,000 forthe three months ended September 30, 2003. The effective tax rate was approximately 37% for the three months ended September 30,2004 as compared to approximately 26% for the same period of 2003.  The lower marginal tax rate in the thirdquarter of last year was due primarily to extra territorial tax credits on 2003international SARS related sales

 

The provision for income taxes for the nine monthsended September 30, 2004 was $756,000, as compared to $1,372,000 for thenine months ended September 30, 2003. The decrease in income taxes is primarily due to lower income beforeprovision for income taxes in 2004.  Theeffective tax rate was approximately 37% for the nine months ended September 30,2004 as compared to approximately 35% for the same period of 2003. The lowermarginal tax rate in the nine months of last year was due primarily to extraterritorial tax credits on 2003 international SARS related sales.

 

**Net Income.**  Net income for the quarter ended September 30,2004 was $374,000 compared to net income of $701,000 for the quarter ended September 30,2003, a decrease of $327,000 or 46.6%. The net income decrease was primarily due to a decrease in income beforeprovision for income taxes of $352,000, partially offset by a decrease inincomes taxes of $25,000.

 

Net income in the third quarter of 2004 was adverselyaffected by a number of factors.  Thethird quarter of last year was positively impacted by $0.5 million of non-coreSARS related sales which resulted in a gross profit decline of approximately$0.3 million for the third quarter 2004. The Company also had start-up costs of $155,000 in the third quarter of2004 for the newly formed Engineered Products segment.  In addition, the effective tax rate for the thirdquarter of last year was lower due to extra territorial tax credits.

 

Net income for the nine months ended September 30,2004 was $1,290,000 compared to net income of $2,529,000 for the nine monthsended September 30, 2003, a decrease of $1,239,000 or 49.1%.  The net income decrease was due primarily toa decrease in income before provision for income taxes of

 

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$1,855,000, partially offset by a decrease in incomestaxes of $616,000. The net income decline in 2004 is primarily due to the $3.5million non-core SARS related sales in 2003.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of September 30, 2004, we had cash and cashequivalents of $3,500,000 and working capital of $12,164,000, an increase inworking capital of $1,903,000 since December 31, 2003.  Cash increased by $73,000 for the nine monthsended September 30, 2004. The slight increase in our cash is primarily dueto cash provided by financing activities, partially offset by cash used inoperating activities and the purchase of property and equipment.

 

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 September 30, 2004, the primeinterest rate was 4.75%.  The line ofcredit was renewed in the second quarter of 2004 and expires May 2006.  At September 30, 2004, our borrowingcapacity on the line of credit was $2,996,000, which is based on a formula ofaccounts receivable and inventories.  At September 30,2004, we had not borrowed on this line of credit.  As of September 30, 2004, we do not haveany debt.

 

As shown below, at September 30, 2004, ourcontractual cash obligations totaled approximately $1,486,000.

 

**Contractual Obligations**

 
| ** **                          | ** ** | **Payments  Due by Period** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **Total**                   | ** ** | **Less  than 1  Year** | ** ** | **2-3  Years** | ** ** | **4-5  Years** | ** ** | **After  5 years** | ** ** |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Operating leases                    |       | $                           | 1,486,000  |   | $ | 147,000 |   | $ | 848,000 |   | $ | 346,000 |   | $ | 145,000 |   |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Line of credit                      |       | —                      |       | — |   | — |   | — |   | — |   |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Total contractual cash  obligations |       | $                           | 1,486,000  |   | $ | 147,000 |   | $ | 848,000 |   | $ | 346,000 |   | $ | 145,000 |   |

 

The amount for the year ending December 31, 2004includes only payments to be made after September 30, 2004.

 

Net cash used in operating activities was $154,000 forthe nine months ended September 30, 2004 as compared to $1,025,000 of cashprovided by operating activities for the nine months ended September 30,2003.  The increase in cash used inoperating activities is primarily due to a decrease in net income, an increasein accounts receivable, an increase in prepaid expenses and other currentassets and a decrease in accounts payable and accrued liabilities, partiallyoffset by an increase in depreciation and amortization and a decrease ininventories.

 

Net cash used in investing activities was $261,000 and$275,000 for the nine months ended September 30, 2004 and 2003, respectively.Our investing activities in 2004 consisted primarily of expenditures forproperty and equipment of $238,000, the purchase of intangible assets of$39,000, offset by proceeds from the sale of fixed assets of $16,000 ascompared to expenditures for property and equipment of

 

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$327,000, the purchase of intangibles of $18,000,offset by the proceeds from a related party loan of $70,000 for the nine monthsended September 30, 2003.

 

The Company expects to purchase $300,000 of additionalequipment in 2004.  These expenditureswill be primarily for equipment to be used by our new Engineered Productssubsidiary.

 

In August 2004, we announced that our Board ofDirectors had approved the buy-back of up to an additional $500,000 of theCompany’s outstanding common stock.  Thisnew share repurchase program is the sixth $500,000 buyback authorized by theBoard of Directors.  In all instances, we are retiring the shares.  For the nine months ended September 30,2004, we bought back a total of 215,000 common shares at a cost of$371,000.  As of September 30, 2004,we have bought back a total of 2,323,800 common shares at a cost of $2,497,000since the end of 1999.

 

During the nine months ended September 30, 2004,cash provided by financing activities was $488,000 as compared to cash used infinancing activities of $449,000 for the same period of 2003. Our financingactivities in 2004 consisted primarily of cash proceeds of $651,000 from theexercise of stock options and $208,000 from the exercise of warrants, partiallyoffset by payments of $371,000 for the repurchase of common stock.  Our financing activities in 2003 consistedprimarily of net payments on our notes payable of $415,000 and payments of$287,000 for the repurchase of common stock, partially offset by the proceedsfrom the exercise of stock options of $253,000.

 

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 needs and planned capitalexpenditures for the foreseeable future.

 

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**NEWACCOUNTING STANDARDS**

 

Based on the Company’s review of new accountingstandards released during the quarter ended September 30, 2004, theCompany did not identify any standards requiring adoption that would have asignificant impact on its consolidated financial statements.

 

**CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGINFORMATION**

 

Certaininformation set forth in this report contains “forward-looking statements”within the meaning of federal securities laws. These forward-looking statementsare made pursuant to the safe-harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements include statementsconcerning plans, objectives, goals, strategies, future events, future revenuesor performance, capital expenditures and other information that is nothistorical information. When used in this report, the words “estimates,” “expects,”“anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations ofsuch words or similar expressions are intended to identify forward-lookingstatements. Additional forward-looking statements may be made by us from timeto time. All such subsequent forward-looking statements, whether written ororal and whether made by or on behalf of us, are also expressly qualified bythese cautionary statements.

 

Ourforward-looking statements are based upon our current expectations and variousassumptions. Our expectations, beliefs and projections are expressed in goodfaith and we believe 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 which 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 on our Internet website(http://www.alphaprotech.com) our most recent Annual Report on Form 10-K, ourmost recent Quarterly Report on Form 10-Q, any current reports on Form 8-Kfiled since our most recent Annual Report on Form 10-K and any amendments tosuch reports as soon as reasonably practicable following the electronic filingof such report with the SEC. In addition, we provide electronic or paper copiesof our filings free of charge upon request.

 

# **ITEM 3**                                                        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

 

We subcontract themanufacture of some products in China and Mexico.  The Company’s results of operations could benegatively affected by factors such as changes in foreign currency exchangerates due to stronger economic conditions in those countries.

 

The Company doesn’texpect any significant effect on its results of operations from inflationary orinterest and currency rate fluctuations. The Company does not hedge its interest rate or foreign exchange risks.

 

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

 

Disclosure Controls and Procedures

 

Our management evaluated, with the participation ofour Chief Executive Officer and Chief Financial Officer, the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934), as of September 30,2004. Based on this evaluation, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective as of September 30, 2004.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) that occurred during our fiscal quarter ended September 30,2004, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II****   OTHERINFORMATION**

 

**ITEM 5****                                                        EXHIBITSAND REPORTS ON FORM 8-K**

 
| (a)  Exhibits            |
|--------------------------|
|                     |
|                     | 31.1  Certification Pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange  Act, Signed by Chief Executive Officer (filed herewith) |
|                     |   |
|                     | 31.2  Certification Pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange  Act, Signed by Chief Financial Officer (filed herewith) |
|                     |   |
|                     | 32.1  Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2003, Signed by Chief Executive Officer (filed  herewith) |
|                     |   |
|                     | 32.2  Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2003, Signed by Chief Financial Officer (filed  herewith) |
|                     |
| (b)  Reports on Form 8-K |
|                     |
|                     | No  reports were filed on Form 8-K during the second quarter of 2004 |

 

 

**SIGNATURES**

 

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

 
|   |                   | Alpha Pro Tech, Ltd. |
|--------|------------------------|----------------------|
|   |                   |                 |
|   |                   |                 |
| DATE:  | November 1,  2004 |                 |   | BY: | /S/ Sheldon  Hoffman |   |
|   |                   |                 | SHELDON HOFFMAN |   |
|   |                   |                 | CHIEF EXECUTIVE OFFICER |   |
|   |                   |                 |
|   |                   |                 |
|   |                   | Alpha Pro Tech, Ltd. |
|   |                   |                 |
|   |                   |                 |
| DATE:  | November 1,  2004 |                 |   | BY: | /S/ Lloyd  Hoffman |   |
|   |                   |                 | LLOYD HOFFMAN |   |
|   |                   |                 | CHIEF FINANCIAL OFFICER |   |

 

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