**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

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**QuarterlyReport pursuant to Section 13 or 15(d)**

**of****the Securities Exchange Act of 1934**

**For theQuarter Ended March 31, 2005**

** **

**Commission File 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 area code:  (905) 479-0654**

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2)has been subject to such filing requirements for the past 90 days.

Yes ý   No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2). Yes o   No ý

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of May 10, 2005.

 

23,678,953shares of common stock, $.01 par value

 

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**AlphaPro Tech, Ltd.**

Tableof Contents

 
| PART I.      | FINANCIAL INFORMATION                                                                                                        |                                                                                                           |
|--------------|------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                         |                                                                                                           |
| ITEM 1       | Consolidated Financial Statements (Unaudited)                                                                                |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
|         | a)                                                                                                                           | Consolidated  Balance Sheets -  March 31, 2005 and December 31, 2004                            |   |
|         |                                                                                                                         |                                                                                                           |   |
|         | b)                                                                                                                           | Consolidated Statements of  Operations for the three months ended March 31, 2005 and March 31,  2004 |   |
|         |                                                                                                                         |                                                                                                           |   |
|         | c)                                                                                                                           | Consolidated  Statement of Shareholders’ Equity for the three months ended March 31,  2005           |   |
|         |                                                                                                                         |                                                                                                           |   |
|         | d)                                                                                                                           | Consolidated Statements of  Cash Flows for the three months ended March 31, 2005 and March 31,  2004 |   |
|         |                                                                                                                         |                                                                                                           |   |
|         | e)                                                                                                                           | Notes to  Consolidated Financial Statements                                                                    |   |
|         |                                                                                                                         |                                                                                                           |
| ITEM 2  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                  |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
|         | Cautionary  Statements Regarding Forward-Looking Information                                                                 |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
|         | New Accounting Standards                                                                                                     |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
| ITEM 3       | Quantitative and Qualitative Disclosures About  Market Risk                                                                  |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
| ITEM 4       | Controls and Procedures                                                                                                      |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
| PART II.     | OTHER INFORMATION                                                                                                            |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
| ITEM 6       | Exhibits and Reports on Form 8-K                                                                                             |                                                                                                           |
|         |                                                                                                                         |
| SIGNATURES   |                                                                                                                         |
|         |                                                                                                                         |
| EXHIBITS     |                                                                                                                         |
|         |                                                                                                                         |                                                                                                           |
|         | Exhibit 31.1: Certification  by CEO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the  Exchange Act (filed herewith) |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
|         | Exhibit 31.2: Certification  by CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the  Exchange Act (filed herewith) |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
|         | Exhibit 32.1: Certification  by CEO pursuant to Section 906 of the Sarbanes-Oxley  Act (filed herewith)                 |                                                                                                           |
|         |                                                                                                                         |                                                                                                           |
|         | Exhibit 32.2: Certification  by CFO pursuant to Section 906 of the Sarbanes-Oxley  Act (filed herewith)                 |                                                                                                           |

 

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

 

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

 

Wehave prepared the following unaudited interim consolidated financial statementspursuant to the rules and regulations of the Securities and Exchange Commission.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant tothese rules and regulations.

 

Youshould read the following unaudited interim consolidated financial statementsand the accompanying notes together with our Annual Report on Form 10-K for theyear ended December 31, 2004. Our 2004 Annual Report contains information thatmay be helpful in analyzing the financial information contained in this reportand in comparing our results of operations for the three months ended March 31,2005 with the same period in 2004.

 

1

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### **Consolidated BalanceSheets (Unaudited)**

| ** **                                                                                                                                                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2005**           | ** ** | **2004 (1)**     | ** ** |
|                                                                                                                                                                      |       |               |       |             |       |
| **Assets**                                                                                                                                                                |       |               |       |             |       |
| Current assets:                                                                                                                                                           |       |               |       |             |       |
| Cash and cash equivalents                                                                                                                                                 |       | $                  | 3,368,000  |             | $          | 4,875,000 |   |
| Accounts receivable, net of allowance for doubtful accounts of  $75,000 at March 31, 2005 and December 31, 2004                                                 |       | 4,604,000          |       | 4,261,000        |       |
| Inventories, net                                                                                                                                                          |       | 6,060,000          |       | 4,802,000        |       |
| Prepaid expenses and other current assets                                                                                                                                 |       | 798,000            |       | 949,000          |       |
| Deferred income taxes                                                                                                                                                     |       | 461,000            |       | 461,000          |       |
| Total current assets                                                                                                                                                      |       | 15,291,000         |       | 15,348,000       |       |
|                                                                                                                                                                      |       |               |       |             |       |
| Property and equipment, net                                                                                                                                               |       | 3,409,000          |       | 3,256,000        |       |
| Goodwill, net                                                                                                                                                             |       | 55,000             |       | 55,000           |       |
| Intangible assets, net                                                                                                                                                    |       | 123,000            |       | 130,000          |       |
| Total assets                                                                                                                                                              |       | $                  | 18,878,000 |             | $          | 18,789,000 |   |
|                                                                                                                                                                      |       |               |       |             |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                             |       |               |       |             |       |
| Current liabilities:                                                                                                                                                      |       |               |       |             |       |
| Accounts payable                                                                                                                                                          |       | $                  | 1,335,000  |             | $          | 1,363,000 |   |
| Accrued liabilities                                                                                                                                                       |       | 479,000            |       | 1,074,000        |       |
| Total current liabilities                                                                                                                                                 |       | 1,814,000          |       | 2,437,000        |       |
|                                                                                                                                                                      |       |               |       |             |       |
| Deferred income taxes                                                                                                                                                     |       | 652,000            |       | 652,000          |       |
| Total liabilities                                                                                                                                                         |       | 2,466,000          |       | 3,089,000        |       |
|                                                                                                                                                                      |       |               |       |             |       |
| Shareholders’ equity                                                                                                                                                 |       |               |       |             |       |
| Common stock, $.01 par value, 50,000,000 shares authorized,  23,678,955 and 23,456,849 issued and outstanding at March 31, 2005 and  December 31, 2004, respectively |       | 237,000            |       | 235,000          |       |
| Additional paid-in capital                                                                                                                                                |       | 24,459,000         |       | 24,193,000       |       |
| Accumulated deficit                                                                                                                                                       |       | (8,284,000         | )          | (8,728,000       | )          |
| Total shareholders’ equity                                                                                                                                           |       | 16,412,000         |       | 15,700,000       |       |
| Total liabilities and shareholders’ equity                                                                                                                           |       | $                  | 18,878,000 |             | $          | 18,789,000 |   |

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| (1)    |   | The condensed consolidated  balance sheet as of December 31, 2004 has been prepared using information  from the audited financial statements at that date. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                       |
|   |   | The accompanying notes are  an integral part of these consolidated financial statements.                                                                   |

 

2

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

| ** **                                                  | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **March 31,**             | ** ** |
| ** **                                                  | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| Net sales                                                   |       | $                              | 6,982,000  |   | $ | 5,853,000 |   |
|                                                        |       |                           |       |   |   |
| Cost of goods sold, excluding depreciation and amortization |       | 3,821,000                      |       | 2,863,000 |   |
|                                                        |       |                           |       |   |   |
| Gross margin                                                |       | 3,161,000                      |       | 2,990,000 |   |
|                                                        |       |                           |       |   |   |
| Expenses:                                                   |       |                           |       |   |   |
| Selling, general andadministrative                          |       | 2,352,000                      |       | 2,115,000 |   |
| Depreciation and amortization                               |       | 123,000                        |       | 132,000 |   |
|                                                        |       |                           |       |   |   |
| Income from operations                                      |       | 686,000                        |       | 743,000 |   |
|                                                        |       |                           |       |   |   |
| Interest, net                                               |       | (16,000                        | )          | 1,000 |   |
|                                                        |       |                           |       |   |   |
| Income before provision for income taxes                    |       | 702,000                        |       | 742,000 |   |
|                                                        |       |                           |       |   |   |
| Provision for income taxes                                  |       | 258,000                        |       | 275,000 |   |
|                                                        |       |                           |       |   |   |
| Net income                                                  |       | $                              | 444,000    |   | $ | 467,000 |   |
|                                                        |       |                           |       |   |   |
| Basic net income per share                                  |       | $                              | 0.02       |   | $ | 0.02 |   |
|                                                        |       |                           |       |   |   |
| Diluted net income per share                                |       | $                              | 0.02       |   | $ | 0.02 |   |
|                                                        |       |                           |       |   |   |
| Basic weighted average shares outstanding                   |       | 23,646,008                     |       | 23,106,731 |   |
|                                                        |       |                           |       |   |   |
| Diluted weighted average shares outstanding                 |       | 25,042,812                     |       | 24,891,891 |   |

 

 

The accompanying notes are an integral partof these consolidated financial statements.

 

3

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

| ** **                        | ** ** | ** ** | ** ** | ** **       | ** ** | **Additional**      | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|------------------|------------|---------------------|------------|-----------------|------------|------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Common Stock** | ** ** | **Paid-in Capital** | ** ** | **Deficit**     | ** ** | **Total**  | ** ** |
| Balance at December 31, 2004 |       | 23,456,849 |       | $                | 235,000    |                | $          | 24,193,000      |       | $          | (8,728,000 | ) | $ | 15,700,000 |   |
| Options exercised                 |       | 232,106    |       | 2,000            |       | 287,000             |       | —          |       | 289,000    |       |
| Common stock repurchased          |       | (10,000    | )          | —           |       | (21,000             | )          | —          |       | (21,000    | )          |
| Net income                        |       | —     |       | —           |       | —              |       | 444,000         |       | 444,000    |       |
| Balance at March 31, 2005    |       | 23,678,955 |       | $                | 237,000    |                | $          | 24,459,000      |       | $          | (8,284,000 | ) | $ | 16,412,000 |   |

 

The accompanying notes are an integral partof these consolidated financial statements

 

4

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

| ** **                                                                        | ** ** | **For the Three months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**             | ** ** |
| ** **                                                                        | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| **Cash Flows From Operating Activities:**                                         |       |                           |       |   |   |
| Net income                                                                        |       | $                              | 444,000    |   | $ | 467,000 |   |
| Adjustments to reconcile net income to net cash used in by operating  activities: |       |                           |       |   |   |
| Depreciation and amortization                                                     |       | 123,000                        |       | 132,000 |   |
| Changes in assets and liabilities:                                                |       |                           |       |   |   |
| Accounts receivable, net                                                          |       | (343,000                       | )          | (370,000 | ) |
| Inventories, net                                                                  |       | (1,258,000                     | )          | 258,000 |   |
| Prepaid expenses and other current assets                                         |       | 151,000                        |       | 18,000 |   |
| Accounts payable and accrued liabilities                                          |       | (623,000                       | )          | (1,298,000 | ) |
|                                                                              |       |                           |       |   |   |
| Net cash used in operating activities:                                            |       | (1,506,000                     | )          | (793,000 | ) |
|                                                                              |       |                           |       |   |   |
| **Cash Flows From Investing Activities:**                                         |       |                           |       |   |   |
| Purchase of property and equipment                                                |       | (267,000                       | )          | (44,000 | ) |
| Purchase of intangible assets                                                     |       | (2,000                         | )          | (15,000 | ) |
|                                                                              |       |                           |       |   |   |
| Net cash used in investing activities                                             |       | (269,000                       | )          | (59,000 | ) |
|                                                                              |       |                           |       |   |   |
| **Cash Flows From Financing Activities:**                                         |       |                           |       |   |   |
| Proceeds from the exercise of stock options                                       |       | 289,000                        |       | 248,000 |   |
| Payments for the repurchase of common stock                                       |       | (21,000                        | )          | (23,000 | ) |
| Net cash provided by financing activities                                         |       | 268,000                        |       | 225,000 |   |
|                                                                              |       |                           |       |   |   |
| Decrease in cash during the period                                                |       | (1,507,000                     | )          | (627,000 | ) |
|                                                                              |       |                           |       |   |   |
| Cash and cash equivalents, beginning of period                                    |       | 4,875,000                      |       | 3,427,000 |   |
| Cash and cash equivalents, end of period                                          |       | $                              | 3,368,000  |   | $ | 2,800,000 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

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

**1.****                                     ****TheCompany**

Alpha Pro Tech, Ltd. (Alpha ProTech, the Company, we, our, us)manufactures and distributes a line of disposable protective apparel and a lineof infection control products for the cleanroom, industrial, pharmaceutical,medical and dental markets. The disposable protective apparel consists of acomplete line of shoecovers, bouffant caps, coveralls, gowns, frocks and labcoats. The infection control line of products includes a line of face masks andeye shields. The Company also manufactures and distributes a line of medicalbed pads and accessories as well as a line of pet beds.  The Company’s products are sold both underthe “Alpha Pro Tech” brand name as well as under private label and arepredominantly sold in the United States of America.

 

During the second quarter 2004, the Company announced the formation ofa new business segment, Alpha ProTech Engineered Products, Inc., a wholly-ownedsubsidiary of Alpha Pro Tech. This new segment consists of a line of constructionsupply weatherization products as well as a line of paint with antimicrobials.The construction supply weatherization products will consist of building wrapand a synthetic roof underlayment. The line of paint with antimicrobials isdesigned to inhibit growth of bacteria, fungi and algae on the painted surfacesin hospitals, surgical rooms and cleanrooms and associated controlledenvironments.

 

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

The interim financialinformation included herein is unaudited; however, the information reflects alladjustments (consisting of normal recurring adjustments) that are, in theopinion of management, necessary for the fair presentation of the consolidatedfinancial position, results of operations and cash flows for the interimperiods. The consolidated financial statements should be read in conjunctionwith the consolidated financial statements for the year ended December 31,2004, which are included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2004 (“2004 10-K”). The results of operations for thethree months ended March 31, 2005 are not necessarily indicative of theresults to be expected for the full year. The consolidated balance sheet atDecember 31, 2004 was extracted from the audited consolidated financialstatements contained in the 2004 10-K and does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica for annual consolidated financial statements.

 

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

Accountingfor 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 forstock options granted using Accounting Principles Board (“APB”) Opinion 25.Accordingly, no compensation cost has been recognized for its fixed stockoption plans. Had compensation cost for the Company’s stock-based compensationplans been determined based on the fair value at the grant dates for awardsunder those plans consistent with SFAS No. 123,”Accounting for Stock-BasedCompensation”, as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation-transition and disclosure”, the Company’s net income and netincome per common share would have changed to the pro forma amounts indicatedbelow:

 

6

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** **
| ** **                                                                                                                                  | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **March 31,**             | ** ** |
| ** **                                                                                                                                  | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| Net income, as  reported                                                                                                                    |       | $                              | 444,000    |   | $ | 467,000 |   |
| 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 |       | (90,000                        | )          | — |   |
|                                                                                                                                        |       |                           |       |   |   |
| Pro forma net income                                                                                                                        |       | $                              | 354,000    |   | $ | 467,000 |   |
|                                                                                                                                        |       |                           |       |   |   |
| Net income per share:                                                                                                                       |       |                           |       |   |   |
| Basic - as reported                                                                                                                         |       | $                              | 0.02       |   | $ | 0.02 |   |
| Basic - pro forma                                                                                                                           |       | 0.01                           |       | 0.02 |   |
| Diluted — as reported                                                                                                                  |       | 0.02                           |       | 0.02 |   |
| Diluted - pro forma                                                                                                                         |       | 0.01                           |       | 0.02 |   |

 

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

Based on the Company’s review of new accounting standards releasedduring the quarter ended March 31, 2005 the Company did not identify anystandards requiring adoption that would have a significant impact on itsconsolidated financial statement.

 

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

Inventories consist of the following:
| ** **                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **2005**           | ** ** | **2004**         | ** ** |
| Raw materials                                                |       | $                  | 3,304,000  |             | $          | 2,719,000 |   |
| Work in process                                              |       | 211,000            |       | 57,000           |       |
| Finished goods                                               |       | 2,909,000          |       | 2,452,000        |       |
|                                                         |       | 6,424,000          |       | 5,228,000        |       |
| Less reserve for slow-moving, obsolete or unusable inventory |       | (364,000           | )          | (426,000         | )          |
|                                                         |       | $                  | 6,060,000  |             | $          | 4,802,000 |   |

 

7

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**6.****                                     ****AccruedLiabilities**

Accrued liabilities consistof the following:

** **
| ** **                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|--------------------|------------|------------------|------------|
| ** **                | ** ** | **2005**           | ** ** | **2004**         | ** ** |
| Bonuses payable           |       | $                  | 98,000     |             | $          | 516,000 |   |
| Accrued payroll           |       | 247,000            |       | 163,000          |       |
| Accrued rebates and other |       | 134,000            |       | 395,000          |       |
|                      |       | $                  | 479,000    |             | $          | 1,074,000 |   |

 

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

The following table providesa reconciliation of both net income and the number of shares used in the computationof “basic” earnings per share (EPS), which utilizes the weighted average numberof shares outstanding without regard to potential shares, and “diluted” EPS,which includes all such dilutive shares.

 
| ** **                                         | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **March 31,**             | ** ** |
| ** **                                         | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| Net income (Numerator)                             |       | $                              | 444,000    |   | $ | 467,000 |   |
|                                               |       |                           |       |   |   |
| Shares (Denominator):                              |       |                           |       |   |   |
|                                               |       |                           |       |   |   |
| Basic weighted average shares outstanding          |       | 23,646,008                     |       | 23,106,731 |   |
|                                               |       |                           |       |   |   |
| Add: Dilutive effect of stock options and warrants |       | 1,396,804                      |       | 1,785,160 |   |
|                                               |       |                           |       |   |   |
| Diluted weighted average shares outstanding        |       | 25,042,812                     |       | 24,891,891 |   |
|                                               |       |                           |       |   |   |
| Net income per share:                              |       |                           |       |   |   |
|                                               |       |                           |       |   |   |
| Basic                                              |       | $                              | 0.02       |   | $ | 0.02 |   |
|                                               |       |                           |       |   |   |
| Diluted                                            |       | $                              | 0.02       |   | $ | 0.02 |   |
|                                               |       |                           |       |   |   |

 

8

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

The Company operates through four segments:

 

Disposable Protective Apparel Products: consisting of a complete lineof disposable protective clothing such as shoecovers (including the Aqua Trackand spunbond shoecovers), bouffant caps, coveralls, frocks, lab coats andhoods, for the pharmaceutical, cleanroom, industrial and medical markets.

 

Infection Control Products: consisting of a line of face masks and eyeshields principally for the medical, dental and industrial markets.

 

ExtendedCare Products: consisting of a line of medical bed pads using Unreal Lambskin ®(synthetic lambskin) The Unreal Lambskin ® is used to produce medical bed pads,which prevent decubitus ulcers or bedsores on long term care patients.  The Unreal Lambskin ® is also used tomanufacture bedrail pads, knee and elbow protectors, as well as wheelchairaccessories. The Company also manufactures a line of pet beds and pet toyaccessories with this material.

 

EngineeredProducts: this new fourth segment was announced during the second quarter 2004with the formation of Alpha ProTech Engineered Products, Inc., a wholly-ownedsubsidiary. This segment consists of a line of construction supplyweatherization products as well as a line of paint with antimicrobials. The constructionsupply weatherization products consist of building wrap and a synthetic roofunderlayment. The line of paint with antimicrobials is designed to inhibitgrowth of bacteria, fungi and algae on the painted surfaces in hospitals,surgical rooms and cleanrooms and associated controlled environments.

 

The accounting policies ofthe segments are the same as those described previously under “Summary ofSignificant Accounting Policies” in the 2004 10-K.  Segment data excludes charges allocated tohead office and corporate sales/marketing departments and income taxes.  The Company evaluates the performance of itssegments and allocates resources to them based primarily on net sales

 

The following table shows net sales for each segment for the threemonths ended March 31, 2005 and 2004:

 
| ** **                    | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **March 31,**             | ** ** |
| ** **                    | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Disposable protective apparel |       | $                              | 4,243,000  |   | $ | 4,092,000 |   |
| Infection control             |       | 1,216,000                      |       | 1,216,000 |   |
| Engineered products           |       | 990,000                        |       | — |   |
| Extended care                 |       | 533,000                        |       | 545,000 |   |
|                          |       |                           |       |   |   |
| Consolidated total net sales  |       | $                              | 6,982,000  |   | $ | 5,853,000 |   |

 

9

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The following table shows the reconciliation of total segment income tototal consolidated net income for the three months ended March 31, 2005and 2004:

 
| ** **                              | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **March 31,**             | ** ** |
| ** **                              | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| Disposable protective apparel           |       | $                              | 1,482,000  |   | $ | 1,559,000 |   |
| Infection control                       |       | 477,000                        |       | 399,000 |   |
| Engineered products                     |       | (115,000                       | )          | — |   |
| Extended care                           |       | 88,000                         |       | 96,000 |   |
|                                    |       |                           |       |   |   |
| Total segment income                    |       | 1,932,000                      |       | 2,054,000 |   |
| Unallocated corporate overhead expenses |       | (1,230,000                     | )          | (1,312,000 | ) |
| Provision for income taxes              |       | (258,000                       | )          | (275,000 | ) |
|                                    |       |                           |       |   |   |
| Consolidated net income                 |       | $                              | 444,000    |   | $ | 467,000 |   |

 

10

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

 

You should read the following discussion andanalysis together with our consolidated financial statements and the notes toour consolidated financial statements, which appear elsewhere in this report.

 

**CAUTIONARYSTATEMENTS REGARDING FORWARD-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. Additionalforward-looking statements may be made by us from time to time. All suchsubsequent forward-looking statements, whether written or oral and whether madeby or on behalf of us, are also expressly qualified by these cautionarystatements.

 

Our forward-lookingstatements are based upon our current expectations and various assumptions. Ourexpectations, beliefs and projections are expressed in good faith and webelieve there is a reasonable basis for them, including without limitation,management’s examination of historical operating trends, data contained in ourrecords and other data available from third parties. However, we cannot assureyou that management’s expectations; beliefs and projections will result or beachieved or accomplished. Our forward-looking statements apply only as of thedate made. Except as required by law, we undertake no obligation to publiclyupdate or revise forward-looking statements which may be made to reflect eventsor circumstances after the date made or to reflect the occurrence ofunanticipated events.

 

**Where to find moreinformation about us.**We make available free ofcharge on our Internet website (http://www.alphaprotech.com) our most recentAnnual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, anycurrent reports on Form 8-K filed since our most recent Annual Report on Form10-K and any amendments to such reports as soon as reasonably practicablefollowing the electronic filing of such report with the SEC. In addition, weprovide electronic or paper copies of our filings free of charge upon request.

** **

**Critical Accounting Policies**

 

The preparation of our financial statementsin conformity with accounting principles generally accepted in the UnitedStates of 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.  We believeour critical accounting polices include the following:

 

Inventories: Inventories include freight-in, materials, labor andoverhead costs and are stated at the lower of cost (computed on a standard costbasis, which approximates average cost) or market.  Provision is made for slow-moving, obsoleteor unusable inventory. We assess our inventory for estimated obsolescence orunmarketable inventory and write down the difference between the cost ofinventory and the estimated market value based upon assumptions about futuresales and supply on-hand. If actual market conditions are less favorable thanthose projected by management, additional inventory write-downs may berequired.

 

Revenue Recognition: For sales transactions,we comply with the provisions of Staff Accounting Bulletin 104 “RevenueRecognition,” which states that revenue should be recognized when the followingrevenue recognition criteria are met: (1) persuasive evidence of an arrangementexists; (2) the product has been shipped and the customer takes ownership andassumes the risk of loss; (3) the selling price is fixed or 

 

11

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determinable; and (4)collection of the resulting receivable is reasonably assured. These criteriaare satisfied upon shipment of product and revenues are recognized accordingly.

 

Sales are reduced for any anticipated salesreturns, 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 accrued for monthly.

 

Stock Based Compensation:  We account for stock options granted toemployees and directors under the recognition and measurement principles of APBopinion No. 25 instead of the fair value recognition provisions of SFAS No.123, “Accounting for Stock Based Compensation,” as amended by SFAS No.148.  Under APB opinion No. 25, nostock-based employee compensation is reflected in net income, as all optionsgranted under the Company’s plan have an exercise price equal to the marketvalue of the stock on the date of the grant. The effect on net income if we had applied the fair value recognitionprovisions of SFAS No. 123 would have been a decrease of $90,000 for thequarter ended March 31, 2005.

 

The fair values of stock option grants aredetermined using the Black-Scholes option pricing model and the followingassumptions: expected stock price volatility based on historic and management’sexpectations of future volatility, risk-free interest rates from publishedsources, weighted average expected option lives based on historical data and nodividend yield, as management currently does not intend to pay dividends in thenear future. The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand that are fully transferable. In addition, option valuation models requirethe input of highly subjective assumptions including expected stock pricevolatility.  Our stock options havecharacteristics significantly different from those of traded options andchanges in the subjective input assumptions can materially affect their fairvalue.

 

In December 2004, the FASB issued a revisionto SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123-R, “Share-BasedPayment.” SFAS No. 123-R focuses primarily on transactions in which an entityexchanges its equity instruments for employee services and generallyestablishes standards for the accounting for transactions in which an entityobtains goods or services in share-based payment transactions.  We will adopt SFAS No. 123-R effectiveJanuary 1, 2006 using the modified prospective application with no restatementof prior interim periods. The Company does not expect the adoption of thisstandard to have a significant impact on its financial position or results ofoperations.

 

 

**OVERVIEW**

 

Alpha Pro Tech is in the business ofprotecting people, products and environments. We accomplish this by developing,manufacturing and marketing a line of disposable protective apparel andinfection control products for the cleanroom, industrial, pharmaceutical,medical and dental markets. We also manufacture and distribute a line ofmedical bed pads and accessories as well as a line of pet beds.  Alpha ProTech Engineered Products developsand manufactures a line of construction supply weatherization products,including housewrap and roof underlayment, as well as a line of antimicrobialpaint.  Our products are sold both underthe “Alpha Pro Tech” brand name as well as under private label.

 

Our products are classified into sixgroups:  Disposable protective apparel,consisting of a complete line of shoecovers, bouffant caps, gowns, coverallsand lab coats; infection control products, consisting of a line of face masksand eye shields; extended care products, consisting of a line of medical bedpads, wheelchair covers, geriatric chair surfaces, operating room tablesurfaces and pediatric surfaces;  a lineof pet beds; construction weatherization products, consisting of house wrap andsynthetic roof 

 

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underlayment; and a line ofpaint with antimicrobials designed to inhibit growth of bacteria, fungi andalgae on painted surfaces.

 

Our products as classified above are grouped intofour business segments.  The DisposableProtective Apparel segment, consisting of disposable protective apparel; theInfection Control segment, consisting of face masks and eye shields; theExtended Care segment, consisting of extended care products, namely medical bedpads and pet beds; and the Engineered Products segment, consisting ofconstruction weatherization products such as house wrap and synthetic roofunderlayment as well as the line of antimicrobial paint.

 

Our target markets are pharmaceuticalmanufacturing, bio-pharmaceutical manufacturing and medical devicemanufacturing, lab animal research, high technology electronics manufacturingwhich includes the semi-conductor market, medical and dental distributors, petstores and pet distributors and construction supply and roofing distributors.

 

Our products are used primarily incleanrooms, industrial safety manufacturing environments, health carefacilities such as hospitals, laboratories and dental offices, as well asconstruction supply sites. Our pet beds are used by pet owners andveterinarians.  Our products aredistributed principally in the United States through a network consisting ofpurchasing groups, national distributors, local distributors, independent salesrepresentatives and our own sales and marketing force.

 

During 2004, we announced the formation of anew business segment, Alpha ProTech Engineered Products, Inc. (EngineeredProducts), a wholly-owned subsidiary of Alpha Pro Tech. This new segmentconsists of a line of construction supply weatherization products as well as aline of paint with antimicrobials.  Theconstruction supply weatherization products consist of house wrap and asynthetic roof underlayment.  The line ofpaint with antimicrobials is designed to inhibit growth of bacteria, fungi andalgae on the painted surfaces in hospitals, surgical rooms and cleanrooms andassociated controlled environments. Our paint has been tested at NelsonLaboratories, Inc., a privately owned testing lab specializing in microbiology,and confirmed by a leading university for its containment ability to inhibitmicro-organisms.  We have an exclusivelicensing agreement for the proprietary antimicrobial formulation to be used inthe paint.  In addition to our paint withantimicrobials, we are currently developing a line of sealants withantimicrobials to be used for mold remediation.

 

During the first quarter of 2005, weannounced two sales and marketing agreements for our line of constructionsupply weatherization products.  OnJanuary 31, 2005 we announced that we signed a 3 year mutually exclusiveagreement with Perma “R” Products, Inc., (Perma “R”) a Grenada, Mississippibased company. As part of the agreement, Perma “R” will be responsible for allmarketing of our house wrap products, and has agreed to minimum sales of $5million per year.   On February 28, 2005we announced the signing of a second 3 year, mutually exclusive agreement withPerma “R”.  This second agreementstipulates that Perma “R” will be responsible for all sales & marketing ofour synthetic roof underlayment product and has agreed to minimum sales of $3million per year.

 

Engineered Products began production of housewrap and synthetic roof underlayment during the first quarter of 2005 andrevenue for this segment for the quarter ended March 31, 2005 was$990,000.  This segment is expected tocontribute significantly to revenue growth in 2005.

 

We are also focused on appreciably improvingsales in the pharmaceutical, cleanroom and industrial safety markets.  We expect substantial growth in 2005 from ourlargest distributor as they implement their strategy, introduced in late 2004,to focus more on private label suppliers. Our key sales growth strategies for these markets are based on astrategy of communicating directly with end users and developing innovativeproducts to suit individual end users’ specific needs.  Our Disposable Protective Apparel segmentthat services these markets grew by only 3.7% in the first quarter of 2005, dueto some unforeseen circumstances in the supply chain.  However, orders from our largest distributorin the first quarter of 2005 exceeded orders for the same period in 2004 byapproximately 25% or $1,000,000. We expect sales growth to significantly improvein this segment in the coming quarters

 

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# **RESULTSOF OPERATIONS**

The following table setsforth certain operational data as a percentage of sales for the periodsindicated:

 
| ** **                               | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **March 31,**             | ** ** |
| ** **                               | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| Sales                                    |       | 100.0                          | %          | 100.0 | % |
|                                     |       |                           |       |   |   |
| Gross profit                             |       | 45.3                           |       | 51.1 |   |
|                                     |       |                           |       |   |   |
| Selling, general and administrative      |       | 33.7                           |       | 36.1 |   |
|                                     |       |                           |       |   |   |
| Income from operations                   |       | 9.8                            |       | 12.7 |   |
|                                     |       |                           |       |   |   |
| Income before provision for income taxes |       | 10.1                           |       | 12.7 |   |
|                                     |       |                           |       |   |   |
| Net income                               |       | 6.4                            |       | 8.0 |   |
|                                     |       |                           |       |   |   |

** **

**Three months ended March 31, 2005, comparedto the three months ended March 31, 2004**

** **

**Sales.**  Consolidatedsales for the quarter ended March 31, 2005 increased to $6,982,000 from$5,853,000 for the quarter ended March 31, 2004, representing an increaseof $1,129,000 or 19.3%.  We attribute theincrease primarily to new sales of construction supply weatherization productsof $990,000 and to increased sales of $110,000 to the industrial safetyindustry.

 

Sales for the Disposable Protective Apparelsegment for the quarter ended March 31, 2005 were $4,243,000 compared to$4,092,000 for the same period of 2004. The Disposable Protective Apparel segment sales increase of $151,000 or3.7% was primarily due to increased sales of $110,000 or 24.8% to distributors thatconcentrate on the industrial safety industry.

 

Disposable Protective Apparel sales to ourlargest distributor increased by a marginal 1.4% or approximately $50,000 inthe first quarter.  Orders from thisdistributor in the first quarter of 2005 exceeded orders for the same period in2004 by 25% or approximately $1,000,000. Due to a short-term issue with one of our raw materials, which has beenresolved, and the Chinese New Year, which resulted in two weeks of down-timewith one of our Chinese sub-contractor factories, we received fewer containersfrom China than ordered and therefore could not fulfill these orders within thefirst quarter.  We expect to fulfillthese in the second quarter.  We expectsubstantial growth in 2005 from this distributor as they implement theirstrategy, introduced in late 2004, to focus more on private labelsuppliers.  We also expect growth withother distributors that specialize in the industrial safety industry.

 

 Infection Control segment sales for thequarter ended March 31, 2005 and the same period of 2004, remained flat at$1,216,000.  Medical and dental masksales were slightly up and industrial mask sales were slightly down.  Eye shield sales were basically flat.

 

The Engineered Products segment consists of aline of construction supply weatherization products (housewrap and roof underlayment) as well as a line of paint withantimicrobials.  Engineered Productssales for the quarter ended March 31, 2005 was $990,000 as compared to $0for the same period of 2004.  Thebreakdown of the construction supply weatherization products is as follows forthe first quarter of 2005: 77% house wrap and 33% roof underlayment.  The construction supply weatherizationproducts account for almost all of the sales for the first quarter of2005.  Due to the industry’straditional seasonal 

 

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softness in the secondquarter, we do not anticipate sales to increase substantially in the secondquarter of 2005 however; we do expect significant growth in the second half of2005.  Management expects this segment tocontribute significantly to revenues in 2005.

 

Sales from our Extended Care Unreal Lambskinand other related products, which includes a line of medical bed pads as wellas pet beds, decreased by $12,000 or 2.2% to $533,000 for the quarter ended March 31,2005 from $545,000 for the quarter ended March 31, 2004.  The slight decrease of $12,000 in sales isprimarily the result of lower pet bed sales.

 

**Gross Profit  **Gross profit increased by5.7% to $3,161,000 for the quarter ended March 31, 2005 from $2,990,000for the same period in 2004.  Grossprofit margin decreased to 45.3% for the quarter ended March 31, 2005 from51.1% for the same period in 2004.

 

ExcludingEngineered Products, gross profit margin was 49.3% for the quarter ended March 31,2005.  This gross profit margin is inline with the gross profit margin of 49.5% for fiscal 2004.

 

Gross profit onEngineered Products was 20.6% for the quarter ended March 31, 2005.   Our gross profit margin was lower thanexpected in the first quarter of 2005 due to start-up issues.  Our innovative printing presses for housewrap were designed by us to enable fast change over on printing plates and inkcolor changes.  As is common with all newequipment, it required debugging and during this process the machine did notrun as efficiently resulting in low productivity and high scrap.  Furthermore, the machine operators had to betrained to run this new machine, again resulting in high scrap and lowproductivity.  In addition gross profitwas affected due to the fact that we had to outsource the printing andconverting of roof underlayment.  Weexpect the printing and converting to be in house by the end of the secondquarter.  Gross profit on this productline is expected to increase to the mid 20% range for the second quarter of2005 and to 30% by the fourth quarter of 2005. We anticipate gross margin to improve to the mid 30% range by the secondquarter of 2006.

 

Gross profit marginis primarily down due to lower margins on the Engineered Products segment andto a lesser extent, some raw material price increases and competitive pressureon pricing.

 

Management expectssome pressure on consolidated gross profit margins over the next twelve monthsprimarily due to the lower gross margin on the Engineered Products segment.

 

 

**Selling, General andAdministrative Expenses.**  Selling, general andadministrative expenses increased by $237,000 or 11.2% to $2,352,000 for thequarter ended March 31, 2005 from $2,115,000 for the quarter ended March 31,2004.  As a percentage of net sales,selling, general and administrative expenses decreased to 33.7% for the quarterended March 31, 2005 from 36.1% for the same period in 2004.  The increase in selling, general andadministrative expenses primarily consists of increased payroll costs of$13,000, increased travel expense of $12,000, increased marketing andcommission expenses of $18,000, increased rent and utilities expense of$31,000, increased insurance expense of $39,000, increased professional feesand public company expenses of $48,000, Sarbanes-Oxley Corporate Governancecosts of $45,000, increased factory indirect expenses of $22,000 which areprimarily related to the Engineered Products division, increased officeexpenses of $9,000 and increased miscellaneous general expenses of $9,000,partially offset by decreased expense for the executive bonus program of $4,000and decreased telecommunication expenses of $5,000.

 

Selling, general and administrative expensesfor the quarter ended March 31, 2005 for the Engineered Products segmentwas $317,000 as compared to $0 for the same period of 2004. We believe that wehave built the infrastructure required to substantially grow EngineeredProducts and do not anticipate expenses to change substantially from currentlevels for at least the next twelve months if sales increase as expected.  Expenses are expected to decreasesignificantly as a percentage of sales as Engineered Products sales grow.

 

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Excluding the Engineered Products segmentexpenses, selling, general and administrative expenses in the first quarter of2005 decreased by $80,000 or 3.8% to $2,035,000 as compared to $2,115,000 forthe same period of 2004.

 

The chief executive officer and president areeach entitled to a bonus equal to 5% of the pre-tax profits of theCompany.  A total bonus of $78,000 wasaccrued for the first quarter of in 2005 as compared to $82,000 in the sameperiod of 2004.

 

**Depreciation andAmortization.**  Depreciationand amortization expense decreased by $9,000 to $123,000 for the quarter ended March 31,2005 from $132,000 for the same period in 2004. The decrease is primarily attributable to the closure of our facilitylocated in Mexico.

 

**Income from Operations**.  Income from operationsdecreased by $57,000 or 7.7%, to $686,000 for the quarter ended March 31,2005 as compared to income from operations of $743,000 for the quarter ended March 31,2004.  The decrease in income fromoperations is due to an increase in selling, general and administrativeexpenses of $237,000, partially offset by an increase in gross profit of$171,000 and a decrease in depreciation and amortization of $9,000.

 

The decrease in income from operations in2005 of $57,000 is primarily due to the loss on the Engineered Products segmentof $115,000.  Excluding this segment,income from operations would be up $46,000 or 6.2%.

 

**Net Interest.**  For the quarter ended March 31,2005, we had net interest income of $16,000 compared to net interest expense of$1,000 for the quarter ended March 31, 2004.  Interest expense remained flat at $2,000 forthe quarter ended March 31, 2005 compared to $2,000 for the same period of2004.  Interest income increased by$17,000 to $18,000 for the quarter ended March 31, 2005 as compared to$1,000 for the same period of 2004.

 

**Income BeforeProvision for Income Taxes**.  Income before provision forincome taxes for the quarter ended March 31, 2005 was $702,000 compared to$742,000 for the quarter ended March 31, 2004, representing a decrease of$40,000 or 5.4%.  This decrease isattributable to an increase in selling, general and administrative expenses of$237,000, partially offset by an increase in gross profit of $171,000, adecrease in depreciation and amortization of $9,000 and a change in netinterest of $17,000.

 

The decrease in income before provision forincome taxes of $40,000 is primarily due to the loss on the Engineered Productssegment of $115,000.  Excluding thissegment, income before provision for income taxes would be up $63,000 or 8.5%.

 

**Provision for Income Taxes  The** provision for income taxesfor the quarter ended March 31, 2005 was $258,000 compared to $275,000 forthe quarter ended March 31, 2004.  The decrease in income taxes is primarily due to lower income beforeprovision for income taxes in 2004.  Theeffective tax rate was 36.8% in 2005 compared to 37.1% in 2004.

 

**Net Income.**  Net income for the quarterended March 31, 2005 was $444,000 compared to net income of $467,000 forthe quarter ended March 31, 2004, a decrease of $23,000 or 4.9%.  The net income decrease was primarily due toa decrease in income before provision for income taxes of $40,000, partiallyoffset by a decrease in income taxes of $17,000.  Basic and Diluted income per share for thequarter ended March 31, 2005 and 2004 was $0.02 and $0.02, respectively.

 

Net income for the first quarter of 2005 wasaffected by the pre-tax loss of $115,000 in connection with the EngineeredProducts segment.  Excluding thissegment, net income for thefirst quarter 2005 would be$507,000, up $40,000 or 8.6%.  We expectprofitability to begin on this segment in the second quarter of 2005.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

** **

As of March 31, 2005, we had cash andcash equivalents of $3,368,000 and working capital of $13,477,000, an increasein working capital of $566,000 since December 31, 2004. Cash decreased$1,507,000 for the quarter ended March 31, 2005. The decrease in cash isprimarily due to cash used in operating activities of $1,506,000, the purchaseof property and equipment of $267,000 and the repurchase of $21,000 of commonstock, partially offset by cash proceeds of $289,000 from the exercise of stockoptions.

 

We have a$3,500,000 credit facility with a bank, consisting of a line of credit withinterest at prime plus 0.5%.  At March 31,2005, the prime interest rate was 5.75%. The line of credit was renewed in May 2004 and expires in May 2005.  We intend to renew this facility.  The Company’s borrowing capacity on the lineof credit was $3,500,000 at March 31, 2005.  The available line of credit is based on aformula of eligible accounts receivable and inventories. During the quarterended March 31, 2005, we had not borrowed on this line of credit and havenot borrowed on it since 2002.  As of March 31,2005, we do not have any debt.

 

Net cash used in operating activities was$1,506,000 for the quarter ended March 31, 2005 compared to $793,000 forthe quarter ended March 31, 2004. The net cash used in operating activities of $1,506,000 for the quarterended March 31, 2005 is due to an increase in accounts receivable of$343,000, an increase in inventory of $1,258,000, and a decrease in accountspayable and accrued liabilities of $623,000, partially offset by net income of$444,000, a decrease in prepaid expenses and other current assets of $151,000and depreciation and amortization of $123,000. The net cash used in operating activities of $793,000 for the quarterended March 31, 2004 is due to an increase in accounts receivable of$370,000 and a decrease in accounts payable and accrued liabilities of$1,298,000, partially offset by net income of $467,000, depreciation andamortization of $132,000, a decrease in inventory of $258,000 and a decrease inprepaid expenses and other current assets of $18,000.

 

Accounts receivable increased by $343,000 or8.0% to $4,604,000 for the quarter ended March 31, 2005 from $4,261,000for the same period in 2004. The majority of this increase is due to increasedsales in the first quarter of 2005, primarily attributable to the EngineeredProducts segment and to a lesser extent increased industrial safety sales,partially offset by lower sales to our largest distributor.

 

Inventory increased by $1,258,000 or 26.2% to$6,060,000 for the quarter ended March 31, 2005 from $4,802,000 for thesame period in 2004.  The increase isprimarily attributable to a build up of inventory for the Engineered Productsegment.

 

Prepaid expenses and other current assetsdecreased by $151,000 to $798,000 for the quarter ended March 31, 2005from $949,000 for the same period in 2004. The decrease of $151,000 isprimarily due to a $242,000 decrease in prepaid tax installment payments,partially offset by an increase of $86,000 in prepaid insurance for EngineeredProducts.

 

Cash used for accounts payable and accruedliabilities in the quarter ended March 31, 2005 decreased by $623,000 to$1,814,000 from $2,437,000.  The decreaseis primarily attributable to paying the 2004 chief executive officer andpresident bonus, as well as paying the 2004 corporate rebate to our largestdistributor in the first quarter of 2005.

 

Net cash used in investing activities was$269,000 and $59,000 for the quarter ended March 31, 2005 and 2004,respectively.  Our investing activitiesin the first quarter of 2005 consisted primarily of expenditures for propertyand equipment of $267,000 and the purchase of intangible assets of $2,000,compared to expenditures for property and equipment of $44,000 and purchases ofintangible assets of $15,000 for the quarter ended March 31, 2004. Theexpenditures for property and equipment of $267,000 in 2005 were principallyfor the purchase of equipment for our Engineered Products segment.

 

We expect to purchase approximately anadditional $500,000 of equipment in 2005. These expenditures will be primarilyfor equipment for our new Engineered Products segment.

 

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In August 2004, we announced that our Boardof Directors 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 quarter ended March 31, 2005, webought back a total of 10,000 shares of common stock at a cost of $21,000.  As of March 31, 2005, we have boughtback a total of 2,333,800 shares of common stock at a cost of $2,518,000 sincethe end of 1999.

 

For the quarter ended March 31, 2005,net cash provided by financing activities was $268,000 compared to $225,000 forthe same period of 2004.  Our financingactivities in 2005 consisted primarily of cash proceeds of $289,000 from theexercise of 232,106 stock options, partially offset by payments of $21,000 forthe repurchase of 10,000 shares of common stock.  Our financing activities in 2004 consistedprimarily of cash proceeds of $248,000 from the exercise of 417,000 stockoptions, partially offset by payments of $23,000 for the repurchase of 10,000shares of common stock

 

 

As shown below, at March 31, 2005, ourcontractual cash obligations totaled approximately $1,193,000.

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 years** | ** ** |
| Operating leases (1)               |       | $                          | 1,193,000  |   | $ | 419,000 |   | $ | 499,000 |   | $ | 247,000 |   | $ | 28,000 |   |
| Line of credit                     |       | —                     |       | — |   | — |   | — |   | — |   |
| Total contractual cash obligations |       | $                          | 1,193,000  |   | $ | 419,000 |   | $ | 499,000 |   | $ | 247,000 |   | $ | 28,000 |   |

 

----

(1) The amount for the yearending December 31, 2005 includes only payments to be made after March 31,2005.

 

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

 

 

**New Accounting Standards**

Based on the Company’s review of newaccounting standards released during the quarter ended March 31, 2005, theCompany did not identify any standards requiring adoption that would have asignificant impact on its consolidated financial statements.

 

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

 

We subcontract the manufacture of products inChina and to a lesser extent in Mexico. The Company’s results of operations could be negatively affected byfactors such as changes in foreign currency exchange rates due to strongereconomic conditions in those countries.

 

The Company doesn’t expect any significanteffect on its results of operations from inflationary or interest and currencyrate fluctuations.  The Company does nothedge its interest rate or foreign exchange risks.

 

**ITEM 4****.****                  CONTROLS AND PROCEDURES**

 

Disclosure Controls and Procedures

 

Our management evaluated, with theparticipation of our Chief Executive Officer and Chief Financial Officer, theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of March 31,2005. Based on this evaluation, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that material information related tothe Company and its consolidated subsidiaries would be made known to them byothers within those entities, particularly during the period ending March 31,2005, the period in which this report was prepared.

 

In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls and proceduresno matter how well designed and operated, can provide only reasonable, notabsolute, assurances of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating andimplementing possible disclosure controls and procedures.

 

 Changes in Internal Control OverFinancial Reporting.

 

There has been no change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) that occurred during our fiscal quarter ended March 31,2005, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II****- OTHER INFORMATION**

** **

 

**ITEM 6****EXHIBITS AND REPORTS ON FORM 8-K**

      (a) Exhibits

 

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

 

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

 

32.1Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section906 of         the Sarbanes-Oxley Act of2002, Signed by Chief Executive Officer (filed herewith)

 

32.2Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section906 of the Sarbanes-Oxley Act of 2002, Signed by Chief Financial Officer (filedherewith)

 

      (b) Reports on Form 8-K

 

16.         On March 10, 2005 registrantfiled a report on Form 8-K with respect to Item 2.02 reporting that on March 9,2005 registrant issued a release announcing its financial results for thefourth quarter and fiscal year ended December 31, 2004

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15 (d) of the Securities Exchange Act of 1934, the Registrant has fully causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| ** **  | ** **    | ** ** | **ALPHA  PRO TECH, LTD**. |
|-------------|---------------|------------|---------------------------|
|        |          |       |                      |   |   |
| DATE:  | May  12, 2005 |       |                      | BY:  | /s/ Sheldon Hoffman |   |
|        |          |       |                      |   | Sheldon Hoffman |
|        |          |       |                      |   | Chief Executive Officer  and Director |
|        |          |       |                      |   |   |
| DATE:  | May  12, 2005 |       |                      | BY:  | /s/ Lloyd Hoffman |   |
|        |          |       |                      |   | Lloyd Hoffman |
|        |          |       |                      |   | Chief Financial Officer  and Senior Vice President |

 

20

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