** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 10-Q**

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** **

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

**of the Securities Exchange Act of 1934**

** **

**For the Quarter Ended September 30, 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 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 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  ý  No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as definedin Rule 12b-2). Yes o   No ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of November 10,2005.

 

23,712,953 shares of commonstock, $.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,  2005 and December 31, 2004 |   |
|                                                               |                                                                                        |   |   |
|                                                               | b)                                                                                          | Consolidated  Statements of Operations |   |
|                                                               |                                                                                        | for the three and  nine months ended September 30, 2005 |   |
|                                                               |                                                                                        | and  September 30, 2004 |   |
|                                                               |                                                                                        |   |   |
|                                                               | c)                                                                                          | Consolidated  Statement of Shareholders’ Equity |   |
|                                                               |                                                                                        | for the nine  months ended September 30, 2005 |   |
|                                                               |                                                                                        |   |   |
|                                                               | d)                                                                                          | Consolidated  Statements of Cash Flows |   |
|                                                               |                                                                                        | for the nine  months ended September 30, 2005 |   |
|                                                               |                                                                                        | and  September 30, 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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**Alpha Pro Tech, Ltd.**

 

**PART I.  FINANCIAL INFORMATION**

##### *** ***

 

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

#### ** **

We have prepared thefollowing unaudited interim consolidated financial statements pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to these rules andregulations.

 

You should read thefollowing unaudited interim consolidated financial statements and theaccompanying notes together with our Annual Report on Form 10-K for the yearended 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 and nine months ended September 30,2005 with the same period in 2004.

 

 

1

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**Alpha Pro Tech, Ltd.**

 

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

 
| ** **                                                                                                                                                                          | ** ** | **September 30, 2005** | ** ** | **December 31,  2004 (1)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                          | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| **Assets**                                                                                                                                                                          |       |                        |       |                            |       |
| Current assets:                                                                                                                                                                     |       |                        |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                          |       | $                           | 294,000    |                            | $          | 4,875,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $83,000 at  September 30, 2005 and $75,000 at December 31, 2004                                           |       | 5,128,000                   |       | 4,261,000                       |       |
| Inventories, net                                                                                                                                                                    |       | 9,800,000                   |       | 4,802,000                       |       |
| Prepaid expenses  and other current assets                                                                                                                                          |       | 595,000                     |       | 949,000                         |       |
| Deferred income  taxes                                                                                                                                                              |       | 461,000                     |       | 461,000                         |       |
| Total current  assets                                                                                                                                                               |       | 16,278,000                  |       | 15,348,000                      |       |
|                                                                                                                                                                                |       |                        |       |                            |       |
| Property and  equipment, net                                                                                                                                                        |       | 3,418,000                   |       | 3,256,000                       |       |
| Goodwill, net                                                                                                                                                                       |       | 55,000                      |       | 55,000                          |       |
| Intangible  assets, net                                                                                                                                                             |       | 114,000                     |       | 130,000                         |       |
| Other assets                                                                                                                                                                        |       | 1,350,000                   |       | —                          |       |
| Total assets                                                                                                                                                                        |       | $                           | 21,215,000 |                            | $          | 18,789,000 |   |
|                                                                                                                                                                                |       |                        |       |                            |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                      |       |                        |       |                            |       |
| Current  liabilities:                                                                                                                                                               |       |                        |       |                            |       |
| Accounts payable                                                                                                                                                                    |       | $                           | 558,000    |                            | $          | 1,363,000 |   |
| Accrued  liabilities                                                                                                                                                                |       | 1,712,000                   |       | 1,074,000                       |       |
| Note payable                                                                                                                                                                        |       | 177,000                     |       | —                          |       |
| Total current  liabilities                                                                                                                                                          |       | 2,447,000                   |       | 2,437,000                       |       |
|                                                                                                                                                                                |       |                        |       |                            |       |
| Deferred income  taxes                                                                                                                                                              |       | 652,000                     |       | 652,000                         |       |
| Total  liabilities                                                                                                                                                                  |       | 3,099,000                   |       | 3,089,000                       |       |
|                                                                                                                                                                                |       |                        |       |                            |       |
| Shareholders’  equity                                                                                                                                                          |       |                        |       |                            |       |
| Common stock,  $.01 par value, 50,000,000 shares authorized, 23,683,955 and 23,456,849  issued and outstanding at September 30, 2005 and December 31, 2004,  respectively |       | 237,000                     |       | 235,000                         |       |
| Additional  paid-in capital                                                                                                                                                         |       | 24,466,000                  |       | 24,193,000                      |       |
| Accumulated  deficit                                                                                                                                                                |       | (6,587,000                  | )          | (8,728,000                      | )          |
| Total  shareholders’ equity                                                                                                                                                    |       | 18,116,000                  |       | 15,700,000                      |       |
| Total  liabilities and shareholders’ equity                                                                                                                                    |       | $                           | 21,215,000 |                            | $          | 18,789,000 |   |

 

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(1)                                  Thecondensed consolidated balance sheet as of December 31, 2004 has beenprepared using information from the audited financial statements at that date.

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

2

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**Alpha Pro Tech, Ltd.**

 

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

 
| ** **                                                   | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                    |       | $                                                  | 8,056,000  |                                              | $          | 5,827,000 |   | $ | 24,078,000 |   | $ | 18,428,000 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Cost of goods  sold, excluding depreciation and amortization |       | 4,407,000                                          |       | 2,910,000                                         |       | 13,040,000 |   | 9,281,000 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Gross margin                                                 |       | 3,649,000                                          |       | 2,917,000                                         |       | 11,038,000 |   | 9,147,000 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Expenses:                                                    |       |                                               |       |                                              |       |   |   |   |   |
| Selling, general  and administrative                         |       | 2,421,000                                          |       | 2,198,000                                         |       | 7,289,000 |   | 6,711,000 |   |
| Depreciation and  amortization                               |       | 130,000                                            |       | 127,000                                           |       | 375,000 |   | 393,000 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Income from  operations                                      |       | 1,098,000                                          |       | 592,000                                           |       | 3,374,000 |   | 2,043,000 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Other income  (expense)                                      |       |                                               |       |                                              |       |   |   |   |   |
| Gain on sale of  assets                                      |       | —                                             |       | —                                            |       | — |   | 7,000 |   |
| Interest, net                                                |       | 2,000                                              |       | —                                            |       | 24,000 |   | (4,000 | ) |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Income before  provision for income taxes                    |       | 1,100,000                                          |       | 592,000                                           |       | 3,398,000 |   | 2,046,000 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Provision for  income taxes                                  |       | 407,000                                            |       | 218,000                                           |       | 1,257,000 |   | 756,000 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Net income                                                   |       | $                                                  | 693,000    |                                              | $          | 374,000 |   | $ | 2,141,000 |   | $ | 1,290,000 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Basic net income  per share                                  |       | $                                                  | 0.03       |                                              | $          | 0.02 |   | $ | 0.09 |   | $ | 0.06 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Diluted net  income per share                                |       | $                                                  | 0.03       |                                              | $          | 0.02 |   | $ | 0.09 |   | $ | 0.05 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Basic weighted  average shares outstanding                   |       | 23,679,933                                         |       | 23,270,478                                        |       | 23,668,386 |   | 23,155,358 |   |
|                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Diluted weighted  average shares outstanding                 |       | 25,347,172                                         |       | 24,467,474                                        |       | 25,155,335 |   | 24,642,728 |   |

 

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

 

3

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**Alpha Pro Tech, Ltd.**

### ** **

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

 
| ** **                         | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                         | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                         | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| Balance at December 31, 2004  |       | 23,456,849       |       | $           | 235,000    |            | $          | 24,193,000  |       | $          | (8,728,000 | ) | $ | 15,700,000 |   |
|                               |       |             |       |        |       |            |       |        |       |       |       |
| Options exercised                  |       | 237,106          |       | 2,000       |       | 295,000         |       | —      |       | 297,000    |       |
|                               |       |             |       |        |       |            |       |        |       |       |       |
| Common stock repurchased           |       | (10,000          | )          | —      |       | (22,000         | )          | —      |       | (22,000    | )          |
|                               |       |             |       |        |       |            |       |        |       |       |       |
| Net income                         |       | —           |       | —      |       | —          |       | 2,141,000   |       | 2,141,000  |       |
|                               |       |             |       |        |       |            |       |        |       |       |       |
| Balance at September 30, 2005 |       | 23,683,955       |       | $           | 237,000    |            | $          | 24,466,000  |       | $          | (6,587,000 | ) | $ | 18,116,000 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

4

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**Alpha Pro Tech, Ltd.**

 

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

 
| ** **                                                                     | ** ** | **For the Nine months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                          | ** ** | **2004** | ** ** |
| **Cash  Flows From Operating Activities:**                                     |       |                                              |       |   |   |
| Net income                                                                     |       | $                                                 | 2,141,000  |   | $ | 1,290,000 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                              |       |   |   |
| Depreciation and  amortization                                                 |       | 375,000                                           |       | 393,000 |   |
| Gain on sale of  asset                                                         |       | —                                            |       | (7,000 | ) |
| Changes in  assets and liabilities:                                            |       |                                              |       |   |   |
| Accounts  receivable, net                                                      |       | (867,000                                          | )          | (1,116,000 | ) |
| Inventories, net                                                               |       | (4,998,000                                        | )          | 853,000 |   |
| Prepaid expenses  and other current assets                                     |       | 354,000                                           |       | (564,000 | ) |
| Accounts payable  and accrued liabilities                                      |       | (167,000                                          | )          | (1,003,000 | ) |
|                                                                           |       |                                              |       |   |   |
| Net cash used in  operating activities:                                        |       | (3,162,000                                        | )          | (154,000 | ) |
|                                                                           |       |                                              |       |   |   |
| **Cash  Flows From Investing Activities:**                                     |       |                                              |       |   |   |
| Purchase of  property and equipment                                            |       | (509,000                                          | )          | (238,000 | ) |
| Purchase of  intangible assets                                                 |       | (12,000                                           | )          | (39,000 | ) |
| Proceeds from  sale of assets                                                  |       | —                                            |       | 16,000 |   |
| Investment in  and advances to Joint Venture                                   |       | (1,350,000                                        | )          | — |   |
|                                                                           |       |                                              |       |   |   |
| Net cash used in  investing activities                                         |       | (1,871,000                                        | )          | (261,000 | ) |
|                                                                           |       |                                              |       |   |   |
| **Cash  Flows From Financing Activities:**                                     |       |                                              |       |   |   |
| Proceeds from  exercise of warrants                                            |       | —                                            |       | 208,000 |   |
| Proceeds from  the exercise of stock options                                   |       | 297,000                                           |       | 651,000 |   |
| Payments for the  repurchase of common stock                                   |       | (22,000                                           | )          | (371,000 | ) |
| Proceeds from  note                                                            |       | 177,000                                           |       | — |   |
| Net cash  provided by financing activities                                     |       | 452,000                                           |       | 488,000 |   |
|                                                                           |       |                                              |       |   |   |
| Decrease/increase  in cash during the period                                   |       | (4,581,000                                        | )          | 73,000 |   |
|                                                                           |       |                                              |       |   |   |
| Cash and cash  equivalents, beginning of period                                |       | 4,875,000                                         |       | 3,427,000 |   |
| Cash and cash  equivalents, end of period                                      |       | $                                                 | 294,000    |   | $ | 3,500,000 |   |

 

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

 

5

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**Alpha Pro Tech, Ltd.**

 

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

 

**1.****                                      TheCompany**

 

AlphaPro Tech, Ltd. (Alpha ProTech, the Company, we, our, us) manufactures and distributesa line of disposable protective apparel and a line of infection controlproducts for the cleanroom, industrial, pharmaceutical, medical and dentalmarkets. The disposable protective apparel consists of a complete line ofshoecovers, bouffant caps, coveralls, gowns, frocks and lab coats. Theinfection control line of products includes a line of face masks and eyeshields. The Company also manufactures and distributes a line of medical bedpads 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.

 

Duringthe second quarter 2004, the Company announced the formation of a new businesssegment, Alpha ProTech Engineered Products, Inc., a wholly-ownedsubsidiary of Alpha Pro Tech. This segment consists of a line of constructionsupply weatherization products as well as a line of paint with antimicrobials.The construction supply weatherization products consist of building wrap,synthetic roof underlayment and antimicrobial mold resistant framing sealant.The line of paint with antimicrobials is designed to inhibit growth ofbacteria, fungi and algae on the painted surfaces in hospitals, surgical roomsand cleanrooms and associated controlled environments.

 

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

 

Theinterim financial information included herein is unaudited; however, theinformation reflects all adjustments (consisting of normal recurringadjustments) that are, in the opinion of management, necessary for the fairpresentation of the consolidated financial position, results of operations andcash flows for the interim periods. The consolidated financial statementsshould be read in conjunction with the consolidated financial statements forthe year ended December 31, 2004, which are included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004 (“200410-K”). The results of operations for the three months and nine months ended September 30,2005 are not necessarily indicative of the results to be expected for the fullyear. The consolidated balance sheet at December 31, 2004 was extractedfrom the audited consolidated financial statements contained in the 2004 10-Kand does not include all disclosures required by accounting principlesgenerally accepted in the United States of America for annual consolidatedfinancial statements.

 

**3.****                                      StockBased 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.

 

TheCompany accounts for stock options granted using Accounting Principles Board (“APB”)Opinion 25. Accordingly, no compensation cost has been recognized for its fixedstock option plans. Had compensation cost for the Company’s stock-basedcompensation plans been determined based on the fair value at the grant datesfor awards under those plans consistent with SFAS No. 123,”Accounting forStock-Based Compensation”, as amended by SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure”, the Company’s net incomeand net income per common share would have changed to the pro forma amountsindicated below:

 

6

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| ** **                                                                                                                                   | ** ** | **For the Three Months Ended  September 30,** | ** **    | **For the Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|---------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                                                | ** **    | **2004**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income, as  reported                                                                                                                     |       | $                                                       |  693,000 |                                                   | $          |  374,000 |   | $ |  2,141,000 |   | $ |  1,290,000 |   |
| 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 |       | (78,000                                                 | )             | (60,000                                                | )          | (261,000 | ) | (60,000 | ) |
|                                                                                                                                         |       |                                                    |          |                                                   |       |   |   |   |   |
| Pro forma net  income                                                                                                                        |       | $                                                       |  615,000 |                                                   | $          |  314,000 |   | $ |  1,880,000 |   | $ |  1,230,000 |   |
|                                                                                                                                         |       |                                                    |          |                                                   |       |   |   |   |   |
| Net income per  share:                                                                                                                       |       |                                                    |          |                                                   |       |   |   |   |   |
| Basic - as  reported                                                                                                                         |       | $                                                       |  0.03    |                                                   | $          |  0.02 |   | $ |  0.09 |   | $ |  0.06 |   |
| Basic - pro  forma                                                                                                                           |       | 0.03                                                    |          | 0.02                                                   |       | 0.08 |   | 0.06 |   |
| Diluted – as  reported                                                                                                                  |       | 0.03                                                    |          | 0.02                                                   |       | 0.09 |   | 0.05 |   |
| Diluted - pro  forma                                                                                                                         |       | 0.02                                                    |          | 0.02                                                   |       | 0.07 |   | 0.05 |   |

 

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

 

Basedon the Company’s review of new accounting standards released during the quarterended September 30, 2005 the Company did not identify any standardsrequiring adoption that would have a significant impact on its consolidatedfinancial statements.

 

**5.****                                      Inventories**

 

Inventoriesconsist of the following:

 
| ** **                                                    | ** ** | **September 30,  2005** | ** **      | **December 31,  2004** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|-----------------|-----------------------------|------------|
| Raw materials                                                 |       | $                            |  6,743,000 |                        | $          |  2,719,000 |   |
| Work in process                                               |       | 266,000                      |            | 57,000                      |       |
| Finished goods                                                |       | 3,186,000                    |            | 2,452,000                   |       |
|                                                          |       | 10,195,000                   |            | 5,228,000                   |       |
| Less reserve for slow-moving, obsolete or unusable  inventory |       | (395,000                     | )               | (426,000                    | )          |
|                                                          |       | $                            |  9,800,000 |                        | $          |  4,802,000 |   |

 

7

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**6.         OtherAssets**

 

On June 14,2005, Alpha ProTech Engineered Products, Inc. entered into a 50/50 jointventure agreement with Maple Industries and Associates (“Maple”), a manufacturerin India, for the production of building products. The name of the joint ventureis Harmony Plastics Private Limited (“Harmony”).   As of September 30, 2005, Alpha ProTechEngineered Products has invested $1,350,000 in the joint venture; $408,000 forshare capital and $942,000 in the form of a long term advance.

 

Inorder to fund the joint venture, the agreement calls for Alpha ProTechEngineered Products, Inc. and Maple to each contribute $408,000 for sharecapital, and for Alpha ProTech Engineered Products, Inc. to make a longterm, non interest bearing advance of $942,000 for materials. Half of this advanceis to be repaid monthly over a six year term commencing in July 2006 andthe balance is to be paid in the seventh year. The agreement also calls for Harmony to arrange a bank loan of $1.25million, guaranteed exclusively by Maple and the assets of Harmony PlasticsPrivate Limited. As a result, the total funding will be approximately $3.0million, of which Alpha ProTech Engineered Products, Inc. will contribute$1.35 million.

 

Harmony’sstart up funding was utilized to purchase an existing 33,000 square-footmanufacturing facility in India; this facility includes manufacturing equipmentnecessary to produce roof underlayment. Harmony will also build a new 60,000 square-foot facility for theadditional manufacturing of roof underlayment and other building products.

 

TheCompany is subject to the provisions of FASB interpretation No. 46,”Consolidationof Variable Interest Entities—an interpretation of ARB No. 51,” (FIN 46)which redefines the criteria by which the Company determines the properaccounting for its investments in related entities.  Specifically, FIN 46 requires the Company toassess whether or not related entities are variable interest entities (VIEs),as defined.  For those related entitiesthat qualify as variable interest entities, FIN 46 requires the Company todetermine whether or not the Company is the primary beneficiary of the VIE, andif so, to consolidate the VIE. The Company is in the process of making suchdetermination with respect to Harmony.

 

If theCompany determines that Harmony is a VIE and that the Company is the primarybeneficiary, Harmony would be subject to consolidation by the Company.  Under such circumstances, the consolidatedfinancial statements of the Company would be impacted as follows: Cash wouldincrease by approximately $600,000, prepaid expenses and other current assetswould increase by approximately $300,000, property and equipment would increaseby approximately $900,000, other assets would be offset completely and minorityinterests of approximately $400,000 would be recorded.  No other balance sheet accounts would bematerially affected.  In addition, netincome, revenues and expenses would not be materially affected.

 

TheCompany expects to complete its analysis in the fourth quarter of 2005.

 

**7. AccruedLiabilities**

 

Accrued liabilities consist of the following:

 
| ** **                | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Bonuses payable           |       | $                            | 552,000    |                        | $          | 516,000 |   |
| Income tax                |       | 698,000                      |       | —                      |       |
| Accrued payroll           |       | 90,000                       |       | 163,000                     |       |
| Accrued rebates and other |       | 372,000                      |       | 395,000                     |       |
|                      |       | $                            | 1,712,000  |                        | $          | 1,074,000 |   |

 

8

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

 

Thefollowing table provides a reconciliation of both net income and the number ofshares used in the computation of “basic” earnings per share (EPS), whichutilizes the weighted average number of shares outstanding without regard topotential shares, and “diluted” EPS, which includes all such dilutive shares.

 
| ** **                                          | ** ** | **For the Three months ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                |       |                                               |       |                                              |       |   |   |   |   |
| Net income (Numerator)                              |       | $                                                  | 693,000    |                                              | $          | 374,000 |   | $ | 2,141,000 |   | $ | 1,290,000 |   |
|                                                |       |                                               |       |                                              |       |   |   |   |   |
| Shares (Denominator):                               |       |                                               |       |                                              |       |   |   |   |   |
|                                                |       |                                               |       |                                              |       |   |   |   |   |
| Basic weighted average  shares outstanding          |       | 23,679,933                                         |       | 23,270,478                                        |       | 23,668,386 |   | 23,155,358 |   |
|                                                |       |                                               |       |                                              |       |   |   |   |   |
| Add: Dilutive  effect of stock options and warrants |       | 1,677,238                                          |       | 1,196,996                                         |       | 1,486,949 |   | 1,487,370 |   |
|                                                |       |                                               |       |                                              |       |   |   |   |   |
| Diluted weighted  average shares outstanding        |       | 25,347,172                                         |       | 24,467,474                                        |       | 25,155,335 |   | 24,642,728 |   |
|                                                |       |                                               |       |                                              |       |   |   |   |   |
| Net income per share:                               |       |                                               |       |                                              |       |   |   |   |   |
|                                                |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                               |       | $                                                  | 0.03       |                                              | $          | 0.02 |   | $ | 0.09 |   | $ | 0.06 |   |
|                                                |       |                                               |       |                                              |       |   |   |   |   |
| Diluted                                             |       | $                                                  | 0.03       |                                              | $          | 0.02 |   | $ | 0.09 |   | $ | 0.05 |   |

** **

**9.  Activity of Business Segments**

 

TheCompany operates through four segments:

 

DisposableProtective Apparel Products: consisting of a complete line of disposableprotective clothing such as shoecovers (including the Aqua Track and spunbondshoecovers), bouffant caps, coveralls, frocks, lab coats and hoods, for thepharmaceutical, cleanroom, industrial and medical markets.

 

InfectionControl Products: consisting of a line of face masks and eye shieldsprincipally 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 to

 

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manufacturebedrail pads, knee and elbow protectors, as well as wheelchair accessories. TheCompany also manufactures a line of pet beds and pet toy accessories with thismaterial.

 

EngineeredProducts: this fourth segment was announced during the second quarter 2004 withthe 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. Theconstruction supply weatherization products consist of building wrap, syntheticroof underlayment and antimicrobial mold resistant framing sealant. 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.

 

Theaccounting policies of the segments are the same as those described previouslyunder “Summary of Significant 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

 

Thefollowing table shows net sales for each segment for the three and nine monthsended September 30, 2005 and 2004:

 
| ** **                     | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months  Ended  September 30,** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                           | ** ** | **2004**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | ** **                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Disposable  protective apparel |       | $                                                  | 5,109,000  |                                               | $          | 4,300,000 |   | $ | 15,771,000 |   | $ | 13,130,000 |   |
| Infection  control             |       | 1,201,000                                          |       | 1,109,000                                          |       | 3,583,000 |   | 3,944,000 |   |
| Engineered  products           |       | 1,390,000                                          |       | —                                             |       | 3,495,000 |   | — |   |
| Extended care                  |       | 356,000                                            |       | 418,000                                            |       | 1,229,000 |   | 1,354,000 |   |
|                           |       |                                               |       |                                               |       |   |   |   |   |
| Consolidated  total net sales  |       | $                                                  | 8,056,000  |                                               | $          | 5,827,000 |   | $ | 24,078,000 |   | $ | 18,428,000 |   |
|                                |            |                                                    |            |                                                    |            |  |  |  |  |  |  |  |  |  |

 

Thefollowing table shows the reconciliation of total segment income to totalconsolidated net income for the three months and nine months ended September 30,2005 and 2004:

 
| ** **                               | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Disposable  protective apparel           |       | $                                                  | 1,825,000  |                                              | $          | 1,613,000 |   | $ | 5,881,000 |   | $ | 4,711,000 |   |
| Infection  control                       |       | 501,000                                            |       | 418,000                                           |       | 1,460,000 |   | 1,449,000 |   |
| Engineered  products                     |       | 65,000                                             |       | (155,000                                          | )          | (16,000 | ) | (180,000 | ) |
| Extended care                            |       | 32,000                                             |       | 52,000                                            |       | 136,000 |   | 189,000 |   |
|                                     |       |                                               |       |                                              |       |   |   |   |   |
| Total segment  income                    |       | 2,423,000                                          |       | 1,928,000                                         |       | 7,461,000 |   | 6,169,000 |   |
| Unallocated  corporate overhead expenses |       | (1,323,000                                         | )          | (1,336,000                                        | )          | (4,063,000 | ) | (4,123,000 | ) |
| Provision for  income taxes              |       | (407,000                                           | )          | (218,000                                          | )          | (1,257,000 | ) | (756,000 | ) |
|                                     |       |                                               |       |                                              |       |   |   |   |   |
| Consolidated net  income                 |       | $                                                  | 693,000    |                                              | $          | 374,000 |   | $ | 2,141,000 |   | $ | 1,290,000 |   |
|                                          |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |  |

 

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

 

You should read thefollowing discussion and analysis together with our consolidated financialstatements and the notes to our consolidated financial statements, which appearelsewhere in this report.

 

**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

 

This report on Form 10-Qcontains “forward-looking statements” that are made pursuant to the safe-harborprovisions of the Private Securities Litigation Reform Act of 1995.Forward-looking statements include statements concerning plans, objectives,goals, strategies, future events, future revenues or performance, capitalexpenditures and other information that is not historical information. Whenused in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,”“plans,” “intends,” “believes” and variations of such words or similarexpressions are intended to identify forward-looking statements. Additionalforward-looking statements may be made by us from time to time. All such subsequentforward-looking statements, whether written or oral and whether made by or onbehalf of us, are also expressly qualified by these cautionary statements.

 

Our forward-looking statementsare 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 more information about us.** We make available free of charge onour Internet website (http://www.alphaprotech.com) our most recent AnnualReport on Form 10-K, our most recent Quarterly Report on Form 10-Q,any current reports on Form 8-K filed since our most recent Annual Reporton Form 10-K and any amendments to such reports as soon as reasonablypracticable following the electronic filing of such report with the SEC. Inaddition, we provide electronic or paper copies of our filings free of chargeupon request.

 

**CriticalAccounting Policies**

 

The preparation of ourfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of net sales and expenses during thereported periods.  We base estimates onpast experience and on various other assumptions that are believed to be reasonableunder the circumstances.  The applicationof these accounting policies on a consistent basis enables us to provide timelyand reliable financial information.  Webelieve our critical accounting polices include the following:

 

Inventories: Inventoriesinclude freight-in, materials, labor and overhead costs and are stated at thelower of cost (computed on a standard cost basis, which approximates averagecost) or market.  Provision is made forslow-moving, obsolete or unusable inventory. We assess our inventory forestimated obsolescence or unmarketable inventory and write down the differencebetween the cost of inventory and the estimated market value based uponassumptions about future sales and supply on-hand. If actual market conditionsare less favorable than those projected by management, additional inventorywrite-downs may be required.

 

Revenue Recognition: Forsales transactions, we comply with the provisions of Staff Accounting Bulletin104 “Revenue Recognition,” which states that revenue should be recognized whenthe following revenue recognition criteria are met: (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped andthe customer takes ownership and assumes the risk of loss; (3) the sellingprice is fixed or

 

11

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determinable; and (4) collectionof the resulting receivable is reasonably assured. These criteria are satisfiedupon shipment of product and revenues are recognized accordingly.

 

Sales are reduced for anyanticipated sales returns, rebates and allowances based on historicalexperience.  Since our return policy isonly 90 days and our products are not generally susceptible to external factorssuch as technological obsolescence or significant changes in demand, we areable to make a reasonable estimate for returns. We offer end user productspecific and sales volume rebates to select distributors.  Our rebates are based on actual sales andaccrued for monthly.

 

Stock BasedCompensation:  We account for stockoptions granted to employees and directors under the recognition andmeasurement principles of APB opinion No. 25 instead of the fair valuerecognition provisions of SFAS No. 123, “Accounting for Stock BasedCompensation,” as amended by SFAS No. 148. Under APB opinion No. 25, no stock-based employee compensation isreflected in net income, as all options granted under the Company’s plan havean exercise price equal to the market value of the stock on the date of thegrant.  The effect on net income if wehad applied the fair value recognition provisions of SFAS No. 123 wouldhave been a decrease of $78,000 for the quarter ended September 30, 2005and $258,000 for the nine months ended September 30, 2005.

 

The fair values of stockoption grants are determined using the Black-Scholes option pricing model andthe following assumptions: expected stock price volatility based on historicand management’s expectations of future volatility, risk-free interest ratesfrom published sources, weighted average expected option lives based onhistorical data and no dividend yield, as management currently does not intendto pay dividends in the near future. The Black-Scholes option valuation modelwas developed for use in estimating the fair value of traded options that haveno vesting restrictions and that are fully transferable. In addition, optionvaluation models require the input of highly subjective assumptions includingexpected stock price volatility.  Ourstock options have characteristics significantly different from those of tradedoptions and changes in the subjective input assumptions can materially affecttheir fair value.

 

In December 2004,the FASB issued a revision to SFAS No. 123, “Accounting for Stock-BasedCompensation,” SFAS No. 123-R, “Share-Based Payment.” SFAS No. 123-Rfocuses primarily on transactions in which an entity exchanges its equityinstruments for employee services and generally establishes standards for theaccounting for transactions in which an entity obtains goods or services inshare-based payment transactions.  We willadopt SFAS No. 123-R effective January 1, 2006 using the modifiedprospective application with no restatement of prior interim periods. TheCompany does not expect the adoption of this standard to have a significantimpact on its financial position or results of operations.

 

Consolidations: TheCompany is subject to the provisions of FASB interpretation No. 46,”Consolidationof Variable Interest Entities—an interpretation of ARB No. 51,” (FIN 46)which redefines the criteria by which the Company determines the properaccounting for its investments in related entities.  Specifically, FIN 46 requires the Company toassess whether or not related entities are variable interest entities (VIEs),as defined.  For those related entitiesthat qualify as variable interest entities, FIN 46 requires the Company todetermine whether or not the Company is the primary beneficiary of the VIE, andif so, to consolidate the VIE.  TheCompany is in the process of making such determination with respect to Harmony.

 

The Company expects tocomplete its analysis in the fourth quarter of 2005

 

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**OVERVIEW**

 

Alpha Pro Tech is in thebusiness of protecting people, products and environments. We accomplish this bydeveloping, manufacturing and marketing a line of disposable protective appareland infection 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, synthetic roof underlayment, antimicrobial mold resistantframing sealant, as well as a line of antimicrobial paint.  Our products are sold both under the “AlphaPro Tech” brand name as well as under private label.

 

Our products areclassified into six groups:  Disposableprotective apparel, consisting of a complete line of shoecovers, bouffant caps,gowns, coveralls and lab coats; infection control products, consisting of aline of face masks and eye shields; extended care products, consisting of aline of medical bed pads, wheelchair covers, geriatric chair surfaces, operatingroom table surfaces and pediatric surfaces; a line of pet beds; construction weatherization products, consisting of housewrap, synthetic roof underlayment and antimicrobial mold resistant framingsealant; and a line of paint with antimicrobials designed to inhibit growth ofbacteria, fungi and algae on painted surfaces.

 

Our products asclassified above are grouped into four business segments.  The Disposable Protective Apparel segment,consisting of disposable protective apparel; the Infection Control segment,consisting of face masks and eye shields; the Extended Care segment, consistingof extended care products, namely medical bed pads and pet beds; and theEngineered Products segment, consisting of construction weatherization productssuch as house wrap, synthetic roof underlayment and antimicrobial moldresistant framing sealant as well as the line of antimicrobial paint.

 

Our target markets arepharmaceutical manufacturing, bio-pharmaceutical manufacturing and medicaldevice manufacturing, lab animal research, high technology electronicsmanufacturing which includes the semi-conductor market, medical and dentaldistributors, pet stores and pet distributors and construction supply androofing distributors.

 

Our products are usedprimarily in cleanrooms, industrial safety manufacturing environments, healthcare facilities 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 the first quarterof 2005, we announced two sales and marketing agreements for our line ofconstruction supply weatherization products. On January 31, 2005 we announced that we signed a 3 year mutuallyexclusive agreement with Perma “R” Products, Inc., (Perma “R”) a Grenada,Mississippi based company. As part of the agreement, Perma “R” will beresponsible for all marketing of our house wrap products, and has agreed tominimum sales of $5 million per year.  On February 28, 2005 we announced the signing of a second 3 year,mutually exclusive agreement with Perma “R”. This second agreement stipulates that Perma “R” will be responsible forall sales & marketing of our synthetic roof underlayment product andhas agreed to minimum sales of $3 million per year.

 

Engineered Products beganproduction of house wrap and synthetic roof underlayment during the firstquarter of 2005 and revenue for this segment for the quarter ended September 30,2005 and the nine months ended September 30, 2005 was $1,390,000 and $3,495,000,respectively.  This segment is expectedto grow in the coming quarters and contribute significantly to revenue growth.

 

We are also focused on appreciablyimproving sales in the pharmaceutical, cleanroom and industrial safetymarkets.  We expect reasonable growth in2005 from our largest distributor as they implement their strategy, introducedin late 2004, to focus more on private label suppliers.  Our key sales growth strategies for thesemarkets are based on a strategy of communicating directly with end users anddeveloping innovative products to suit individual end users’ specific needs.  Our Disposable Protective

 

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Apparel segment thatservices these markets has grown by 18.8% for the third quarter ended September 30,2005 and 20.1% for the nine months ended September 30, 2005.  We expect sales in this segment to continueto be strong for the remainder of 2005.

 

# **RESULTSOF OPERATIONS**

# ** **

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

 
| ** **                               | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales                                    |       | 100.0                                              | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
|                                     |       |                                               |       |                                              |       |   |   |   |   |
| Gross profit                             |       | 45.3                                               |       | 50.1                                              |       | 45.8 |   | 49.6 |   |
|                                     |       |                                               |       |                                              |       |   |   |   |   |
| Selling, general and administrative      |       | 30.1                                               |       | 37.7                                              |       | 30.3 |   | 36.4 |   |
|                                     |       |                                               |       |                                              |       |   |   |   |   |
| Income from operations                   |       | 13.6                                               |       | 10.2                                              |       | 14.0 |   | 11.1 |   |
|                                     |       |                                               |       |                                              |       |   |   |   |   |
| Income before provision for income taxes |       | 13.7                                               |       | 10.2                                              |       | 14.1 |   | 11.1 |   |
|                                     |       |                                               |       |                                              |       |   |   |   |   |
| Net income                               |       | 8.6                                                |       | 6.4                                               |       | 8.9 |   | 7.0 |   |

##  

## **Three months and nine months ended September 30, 2005, compared tothe three and nine months ended September 30, 2004**

##  

**Sales.**  Consolidatedsales for the quarter ended September 30, 2005 increased to $8,056,000from $5,827,000 for the quarter ended September 30, 2004, representing an increaseof $2,229,000 or 38.3%.  We attribute theincrease primarily to increased sales of disposable protective apparel of $809,000,to new sales of construction supply weatherization products of $1,390,000 andincreased infection control segment sales of $92,000, partially offset by decreasedsales from our Extended Care Unreal Lambskin segment of $62,000.

 

Sales for the DisposableProtective Apparel segment for the quarter ended September 30, 2005 were $5,109,000compared to $4,300,000 for the same period of 2004.  The Disposable Protective Apparel segmentsales increase of $809,000 or 18.8% was primarily due to increased sales of approximately$400,000 to our largest distributor, and approximately a $400,000 increase dueto other distributors that concentrate on the industrial safety and cleanroom industry.  We expect growth in 2005 from our largestdistributor as they continue to implement their strategy, introduced in late2004, to focus more on private label suppliers. We also expect growth with other distributors as we continue to gain astronger presence into the pharmaceutical, industrial safety and cleanroommarkets.

 

Infection Control segmentsales for the quarter ended September 30, 2005 increased by $92,000 or 8.3%to $1,201,000 compared to $1,109,000 for the same period of 2004.  The increase is primarily due to increasedmedical, dental and industry mask sales, partially offset by decreased shieldsales in the third quarter of 2005

 

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The Engineered Productssegment consists of a line of construction supply weatherization products(house wrap, roof underlayment and antimicrobial mold resistant framing sealant)as well as a line of paint with antimicrobials. Engineered Products sales for the quarter ended September 30, 2005was $1,390,000 as compared to $0 for the same period of 2004.  The breakdown of the construction supplyweatherization products is as follows for the third quarter of 2005: 69% housewrap and 31% roof underlayment.  Theconstruction supply weatherization products account for all but 2% of the salesfor the third quarter of 2005.  We havereceived Notice of Acceptance from the Miami-Dade County Building CodeCompliance Office for our Synthetic Roof Underlayment which is recognized aspossessing stringent criteria for building products.  This will facilitate our exclusivedistributor Perma “R” Products’ ability to sell our synthetic roofunderlayment, as it is a standard for many builders nationwide.  We expect significant growth from this segmentin the coming quarters.

 

Sales from our ExtendedCare Unreal Lambskin and other related products, which includes a line ofmedical bed pads as well as pet beds, decreased by $62,000 or 14.8% to $356,000for the quarter ended September 30, 2005 from $418,000 for the quarterended September 30, 2004.  The decreaseof $62,000 in sales is primarily the result of lower medical bed pad sales.

 

Consolidated sales for the nine months ended September 30,2005 increased to $24,078,000 from $18,428,000 for the nine months ended September 30,2004, representing an increase of $5,650,000 or 30.7%.  Weattribute the increase primarily to increased sales of disposable protectiveapparel of $2,641,000, to new sales of construction supply weatherizationproducts of $3,495,000, partially offset by decreased infection control segmentsales of $361,000 relating to one international sale in 2004, as well asdecreased sales from our Extended Care Unreal Lambskin segment of $125,000.

 

Sales for the DisposableProtective Apparel segment for the nine months ended September 30, 2005were $15,771,000 compared to $13,130,000 for the same period of 2004, anincrease of $2,641,000 or 20.1%.  TheApparel segment sales increase was due to higher sales to the pharmaceuticaland cleanroom industry and to lesser extent sales to the industrial safetyindustry.  Sixty percent of the salesincrease is from our largest distributor and the balance from distributors thatconcentrate on the cleanroom industry and the industrial safety industry.  We anticipate continued long-term growth inthis segment.

 

Infection Control segmentsales for the nine months ended September 30, 2005 decreased by $361,000or 9.2% to $3,583,000 from $3,944,000 in the same period of 2004.  The decrease is primarily due to a $600,000international sale for N-95 respirator masks in the second quarter of 2004 thathas not occurred at this point in 2005, partially offset by increased medical,dental and industry mask sales.  Excludingthis international sale, the infection control segment was up $239,000 or 7.1%for the nine months ended September 30, 2005.    From time to time, large orders couldperiodically occur that will influence this segments revenue.

 

The Engineered Productssegment sales for the nine months ended September 30, 2005 was $3,495,000as compared to $0 for the same period of 2004. The breakdown of the construction supply weatherization products is asfollows for the nine months ended September 30, 2005: 74% house wrap and 26%roof underlayment.  The constructionsupply weatherization products account for almost all of the sales for the ninemonths ended September 30, 2005. Management expects this segment to contribute significantly to overallconsolidated revenue growth.

 

Sales of the Company’sExtended Care Unreal Lambskin and other related products, which includes a lineof medical bed pads as well as pet beds, decreased by $125,000 or 9.2% to $1,229,000for the nine months ended September 30, 2005 from $1,354,000 for the ninemonths ended September 30, 2004. This decrease of $125,000 in sales is primarily the result of a decreasein medical bed pad sales.

 

**Gross Profit  **Grossprofit increased by 25.1% to $3,649,000 for the quarter ended September 30,2005 from $2,917,000 for the same period in 2004.  Gross profit margin decreased to 45.3% forthe quarter ended September 30, 2005 from 50.1% for the same period in 2004.  Gross profit margin

 

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decreased to 45.8% forthe nine months ended September 30, 2005 from 49.6% for the same period in2004.

 

Gross profit margin isdown primarily due to lower margins on the Engineered Products segment.

 

Excluding Engineered Products,gross profit margin was 48.9% for the quarter ended September 30, 2005 and49.4% for the nine months ended September 30, 2005.  This gross profit margin is in line with thegross profit margin of 49.5% for fiscal 2004.

 

Gross profit on the EngineeredProducts segment improved to 28.2% for the third quarter ended September 30,2005 from 25.2% for the second quarter of 2005 and from 20.6% for the firstquarter of 2005.  Gross profit on thissegment for the nine months ended September 30, 2005 was 25.1%.  Gross profit on this product line is expectedto increase to the mid 30% range by the second quarter of 2006 as ourproduction facility in India becomes fully operational.

 

Management expects some pressureon consolidated gross profit margins over the next twelve months primarily dueto increasing sales on the lower gross margin Engineered Products segment.

 

**Selling, General and Administrative Expenses.**  Selling,general and administrative expenses increased by $223,000 or 10.1% to $2,421,000for the quarter ended September 30, 2005 from $2,198,000 for the quarterended September 30, 2004.  As a percentageof net sales, selling, general and administrative expenses decreased to 30.1% forthe quarter ended September 30, 2005 from 37.7% for the same period in 2004.  The increase in selling, general andadministrative expenses primarily consists of increased payroll costs of $55,000,increased expense for the executive bonus program of $57,000, increased rentand utilities expense of $54,000, increased insurance expense of $45,000, increasedprofessional fees and public company expenses of $9,000, increased office expensesand miscellaneous  expenses of $60,000and  increased factory indirect expensesof $13,000, partially offset by decreased travel expense of $26,000, decreasedmarketing and commission expenses of $38,000 and decreased telecommunicationsexpense of $6,000.

 

Selling, general andadministrative expenses for the quarter ended September 30, 2005 for theEngineered Products segment was $314,000 as compared to $155,000 for the sameperiod of 2004. We believe that we have built the infrastructure required to substantiallygrow Engineered Products.  Expenses areexpected to decrease as a percentage of sales as Engineered Products sales grow.

 

Excluding the EngineeredProducts segment expenses, selling, general and administrative expenses in the thirdquarter of 2005 increased by $64,000 or 3.1% to $2,107,000 as compared to $2,043,000for the same period of 2004.

 

Selling, general andadministrative expenses increased by $578,000 or 8.6% to $7,289,000 for the ninemonth ended September 30, 2005 from $6,711,000 for the nine months ended September 30,2004.  As a percentage of net sales,selling, general and administrative expenses decreased to 30.3% for the ninemonths ended September 30, 2005 from 36.4% for the same period in2004.  The increase in selling, generaland administrative expenses primarily consists of increased payroll costs of $97,000,increased expense for the executive bonus program of $151,000, increased rentand utilities expense of $104,000, increased insurance expense of $161,000,increased professional fees and public company expenses of $77,000,Sarbanes-Oxley Corporate Governance costs of $91,000, increased office expensesand miscellaneous expenses of $57,000 and increased factory indirect expensesof $58,000, partially offset by decreased travel expense of $107,000, decreasedmarketing and commission expenses of $96,000, and decreased telecommunicationsexpense of $15,000.

 

Excluding the year todate Engineered Products segment expenses of $870,000, selling, general andadministrative expenses for the nine months ended September 30, 2005decreased by $112,000 or 1.7% to $6,419,000 as compared to $6,531,000 for thesame period of 2004.

 

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The chief executiveofficer and president are each entitled to a bonus equal to 5% of the pre-taxprofits of the Company.  A total bonus of$378,000 was accrued for the nine months ended September 30, 2005 ascompared to $227,000 in the same period of 2004.

 

**Depreciation and Amortization.**  Depreciation andamortization expense increased by $3,000 to $130,000 for the quarter ended September 30,2005 from $127,000 for the same period in 2004 and decreased by $18,000 to $375,000for the nine months ended September 30, 2005 compared to $393,000 for thesame period in 2004.  The decrease isprimarily attributable to the closure of our facility located in Mexico.

 

**Income from Operations**.  Income from operations increasedby $506,000 or 85.5%, to $1,098,000 for the quarter ended September 30,2005 as compared to income from operations of $592,000 for the quarter ended September 30,2004.  The increase in income fromoperations is due to an increase in gross profit of $732,000, partially offsetby an increase in selling, general and administrative expenses of $223,000 andan increase in depreciation and amortization of $3,000.

 

Income from operationsincreased by $1,331,000 or 65.1%, to $3,374,000 for the nine months ended September 30,2005 as compared to income from operations of $2,043,000 for the nine monthsended September 30, 2004. The increase in income from operations isprimarily due to an increase in gross profit of $1,891,000 and a decrease indepreciation and amortization of $18,000, partially offset by an increase inselling, general and administrative expenses of $578,000.

 

**Net Interest.**  For the quarter ended September 30,2005, we had net interest income of $2,000 compared to net interest income of $0for the quarter ended September 30, 2004. Interest expense remained constant at $2,000 for the quarter ended September 30,2005 and for the same period of 2004.  Interestincome increased to $4,000 for the quarter ended September 30, 2005 ascompared to $2,000 for the same period of 2004.

 

For the nine months endedSeptember 30, 2005, we had net interest income of $24,000 compared to netinterest expense of $4,000 for the quarter ended September 30, 2004.  Interest expense decreased to $7,000 for the ninemonths ended September 30, 2005 compared to $8,000 for the same period of2004.  Interest income increased by $27,000to $31,000 for the nine months ended September 30, 2005 as compared to $4,000for the same period of 2004.

 

**Income Before Provision for Income Taxes**.  Incomebefore provision for income taxes for the quarter ended September 30, 2005was $1,100,000 compared to $592,000 for the quarter ended September 30,2004, representing an increase of $508,000 or 85.8%.  The increase in income from operations is dueto an increase in gross profit of $732,000 and net interest income of $2,000,partially offset by an increase in selling, general and administrative expensesof $223,000 and an increase in depreciation and amortization of $3,000.

 

Income before provisionfor income taxes for the nine months ended September 30, 2005 was $3,398,000compared to $2,046,000 for the six months ended September 30, 2004,representing an increase of $1,352,000 or 66.1%.  The increase in income from operations isprimarily due to an increase in gross profit of $1,891,000 and a decrease indepreciation and amortization of $18,000 and a net change in interest income of$28,000, partially offset by an increase in selling, general and administrativeexpenses of $578,000 and a decrease in gain on sale of assets of $7,000.

 

For the EngineeredProducts segment, income before provision for income taxes for the thirdquarter ended September 30, 2005 was $65,000 as compared to $34,000 forthe second quarter of 2005 and

 

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compared to a loss beforeprovision for income taxes of $115,000 for the first quarter of 2005.  We expect profitability on this segment tocontinue to improve in the coming quarters as our sales grow.

 

**Provision for Income Taxes**  The provision for incometaxes for the quarter ended September 30, 2005 was $407,000 compared to $218,000for the quarter ended September 30, 2004.  The increase in income taxes is due to higher income before provisionfor income taxes in 2005.  The effectivetax rate was 37.0% for the three months ended September 30, 2005 as comparedto 36.8% for the same period in 2004.

 

The provision for incometaxes for the nine months ended September 30, 2005 was $1,257,000, ascompared to $756,000 for the nine months ended September 30, 2004.  The increase in income taxes is due to higherincome before provision for income taxes in 2005.  The effective tax rate was approximately 37.0%for both the nine months ended September 30, 2005 and the same period in2004.

 

**Net Income.**  Net income for the quarter ended September 30,2005 was $693,000 compared to net income of $374,000 for the quarter ended September 30,2004, an increase of $319,000 or 85.3%. The net income increase was primarily due to an increase in incomebefore provision for income taxes of $508,000, partially offset by an increasein income taxes of $189,000.  Basic andDiluted income per share for the quarter ended September 30, 2005 and 2004was $0.03 and $0.02, respectively.

 

Net income for the ninemonths ended September 30, 2005 was $2,141,000 compared to net income of $1,290,000for the same period of 2004, an increase of $851,000 or 66.0%.  The net income increase was primarily due toan increase in income before provision for income taxes of $1,352,000,partially offset by an increase in income taxes of $501,000.  Basic and Diluted income per share for the ninemonths ended September 30, 2005 was $0.09. Basic and Diluted income per share for the nine months ended September 30,2004 was $0.06 and $0.05, respectively.

 

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### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

As of September 30,2005, we had cash and cash equivalents of $294,000 and working capital of$13,831,000, an increase in working capital of $920,000 since December 31,2004.  As of September 30, 2005, ourcurrent ratio was 6.65:1 as compared to 6.30:1 as of December 30,2004.  Cash decreased $4,581,000 for thequarter ended September 30, 2005. The decrease in cash is primarily due tocash used in operating activities of $3,162,000, the purchase of property andequipment of $509,000, the investment in the India joint venture of $1,350,000and the repurchase of $22,000 of common stock, partially offset by cashproceeds of $297,000 from the exercise of stock options.

 

We have a $3,500,000 creditfacility with a bank, consisting of a line of credit with interest at primeplus 0.5%.  At September 30, 2005,the prime interest rate was 6.75%.  Theline of credit was renewed in May 2005 and expires in May 2007.  The Company’s borrowing capacity on the lineof credit was $3,257,000 at September 30, 2005.  The available line of credit is based on aformula of eligible accounts receivable and inventories. As of September 30,2005, we had borrowed $177,000 on this line of credit.

 

Net cash used inoperating activities was $3,162,000 for the nine months ended September 30,2005 compared to $154,000 for the nine months ended September 30,2004.  The net cash used in operatingactivities of $3,162,000 for the nine months ended September 30, 2005 isdue to an increase in accounts receivable of $867,000, an increase in inventoryof $4,998,000, a decrease in accounts payable and accrued liabilities of$167,000 partially offset by net income of $2,141,000, a decrease in prepaidexpenses and other current assets of $354,000 and depreciation and amortizationof $375,000.  The net cash used inoperating activities of $154,000 for the nine months ended September 30,2004 was due to an increase in accounts receivable of $1,116,000 and a decreasein accounts payable and accrued liabilities of $1,003,000, a increase inprepaid expenses and other current assets of $564,000 and a gain on the sale ofassets of $7,000, partially offset by net income of $1,290,000, depreciationand amortization of $393,000 and a decrease in inventory of $853,000.

 

Accounts receivable increasedby $867,000 or 20.3% to $5,128,000 for the nine months ended September 30,2005 from $4,261,000 as of December 31, 2004. The majority of thisincrease is due to increased sales of 38.3% for the third quarter of 2005,primarily attributable to increased sales to our largest distributor as well asthe new Engineered Products segment sales. The number of days sales outstanding as of September 30, 2005 was 49 days as compared to 62days for the year ending December 31, 2004.

 

Inventory increased by$4,998,000 or 104.1% to $9,800,000 for the nine months ended September 30,2005 from $4,802,000 as of December 31, 2004.  The increase is primarily attributable to abuild up of $4.2 million in inventory for the Engineered Product segment.  Current inventory levels for the EngineeredProduct segment are high, which will allow us to service anticipated salesgrowth.  In addition, inventory for theDisposable Protective Apparel segment increased by $0.8 million primarily as aresult of increased sales.

 

Prepaid expenses andother current assets decreased by $354,000 or 37.3% to $595,000 for the ninemonths ended September 30, 2005 from $949,000 as of December 31,2004.  The decrease of $354,000 isprimarily due to a $400,000 decrease in prepaid tax installment payments and adecrease of $14,000 in refunds from the Mexican government, partially offset byan increase of $60,000 in prepaid insurance for Alpha Pro Tech, Inc.

 

Accounts payable andaccrued liabilities in the nine months ended September 30, 2005 decreased by$167,000 to $2,270,000 from $2,437,000.

 

Net cash used ininvesting activities was $1,871,000 and $261,000 for the nine months September 30,2005 and 2004, respectively.  Ourinvesting activities for the nine months ended September 30, 2005consisted primarily of expenditures for property and equipment of $509,000 andthe purchase of intangible assets of $12,000 and an investment in an Indiajoint venture of $1,350,000, compared to expenditures for property andequipment of $238,000, the purchases of intangible assets of $39,000 and theproceeds from the sales of assets of $16,000 for the nine months ended September 30,2004.  The 

 

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expenditures for propertyand equipment of $509,000 in 2005 were principally for the purchase ofequipment for our Engineered Products segment.

 

Alpha ProTech EngineeredProducts, Inc. on June 14, 2005 entered into a joint venture with amanufacturer in India for the production of building products.  As of September 30, 2005, Alpha ProTechEngineered Products has invested $1,350,000 in the joint venture; $408,000 forshare capital and $942,000 in  long termadvance.

 

Under terms of the jointventure agreement, a private company, Harmony Plastics Private Limited(Harmony), will be owned on a 50/50 basis by Alpha ProTech Engineered Products, Inc.and Maple Industries and Associates the India shareholders. Alpha ProTechEngineered Products, Inc. and Maple Industries and Associates have eachcontributed $408,000 for share capital, and Alpha ProTech Engineered Products, Inc.has made a long term non interest bearing advance of $942,000 formaterials.  Half of this $942,000 advanceis to be repaid monthly over a six year term commencing in July 2006 andthe balance is to be paid in the seventh year. The India shareholders will arrange a bank loan of $1.25 million,guaranteed exclusively by the India shareholders and the assets of HarmonyPlastics Private Limited. As a result, the total initial funding will beapproximately $3.0 million, of which Alpha ProTech Engineered Products, Inc.has contributed $1.35 million.  Thecapital was utilized to purchase an existing 33,000 square-foot manufacturingfacility in India; this facility includes manufacturing equipment necessary toproduce roof underlayment.  Harmony isbuilding a new 60,000 square-foot facility for the additional manufacturing ofroof underlayment and other building products.

 

This joint venturepositions Alpha ProTech Engineered Products to respond to current and expectedincreased product demand for synthetic roofing underlayment, and futurecapacity for sales of specialty roofing component products and custom productsfor industrial applications requiring high quality extrusion coated fabrics.

 

We expect to purchase anominal amount of equipment during the remainder of 2005.

 

In August 2004, weannounced that our Board of Directors had approved the buy-back of up to anadditional $500,000 of the Company’s outstanding common stock.  This new share repurchase program is the sixth$500,000 buyback authorized by the Board of Directors.  In all instances,we are retiring the shares.  For the ninemonths ended September 30, 2005, we bought back a total of 10,000 sharesof common stock at a cost of $21,000.  Asof September 30, 2005, we have bought back a total of 2,333,800 shares ofcommon stock at a cost of $2,518,000 since the end of 1999.

 

For the nine months endedSeptember 30, 2005, net cash provided by financing activities was $452,000compared to $488,000 for the same period of 2004.  Our financing activities in 2005 consistedprimarily of cash proceeds of $297,000 from the exercise of 237,106 stockoptions and proceeds from notes payable of $177,000, partially offset bypayments of $22,000 for the repurchase of 10,000 shares of common stock.  Our financing activities for the nine monthsended September 30, 2004 consisted primarily of cash proceeds of $651,000from the exercise of 724,894 stock options and $208,000 from the exercise ofwarrants, partially offset by payments of $371,000 for the repurchase of215,000 shares of common stock

 

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As shown below, at September 30,2005, our contractual cash obligations totaled approximately $1,329,000.

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5  years** | ** ** |
| Operating leases (1)               |       | $                          | 1,152,000  |   | $ | 150,000 |   | $ | 670,000 |   | $ | 304,000 |   | $ | 28,000 |   |
|                               |       |                       |       |   |   |   |   |   |   |   |   |
| Line of credit                     |       | 177,000                    |       | 177,000 |   | — |   | — |   | — |   |
|                               |       |                       |       |   |   |   |   |   |   |   |   |
| Total contractual cash obligations |       | $                          | 1,329,000  |   | $ | 327,000 |   | $ | 670,000 |   | $ | 304,000 |   | $ | 28,000 |   |

 

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(1) Theamount for the year ending December 31, 2005 includes only payments to bemade after September 30, 2005.

 

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

 

**New Accounting Standards**

 

Based on the Company’sreview of new accounting standards released during the quarter ended September 30,2005, the Company did not identify any standards requiring adoption that wouldhave a significant impact on its consolidated financial statements.

 

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

# ** **

We subcontract themanufacture of products in China and to a lesser extent in India, Thailand 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 andProcedures

 

Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934), as of September 30, 2005. Based on this evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures were effective to provide reasonableassurance that material information related to the Company and its consolidatedsubsidiaries would be made known to them by others within those entities,particularly during the period ending September 30, 2005, the period inwhich this report was prepared.

 

In designing andevaluating the disclosure controls and procedures, management recognized thatany controls and procedures no matter how well designed and operated, canprovide only reasonable, not absolute, assurances of achieving the desiredcontrol objectives, and management necessarily was required to apply itsjudgment in evaluating and implementing possible disclosure controls andprocedures.

 

 Changes in Internal Control Over FinancialReporting.

 

There has been no changein our internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) that occurred during our fiscal quarterended September 30, 2005, that has materially affected, or is reasonablylikely to materially affect, 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) ofthe Exchange Act, Signed by Chief Executive Officer (filed herewith)

 

31.2Certification Pursuant to Rule 13a-14(b) and Rule 15d-14(b) ofthe Exchange Act, Signed by Chief Financial Officer (filed herewith)

 

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

 

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

 

(b) Reportson Form 8-K

 

On August 8,2005 registrant issued a release announcing its financial results for thesecond quarter of 2005.

 

On August 25,2005 registrant issued a release announcing that it will make a presentation atthe Roth Capital Partners New York Conference on September 8, 2005.

 

On September 12,2005 registrant issued a release announcing that it plans to donate 5% of salesof certain products to the hurricane fundraising effort of states affected byHurricane Katrina.

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has fully caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|        | **ALPHA  PRO TECH, LTD**.  |       |   |                                                     |
|-------------|----------------------------|------------|--------|----------------------------------------------------------|
|        |                       |       |   |                                                     |   |   |   |
|  DATE: | **November 14, 2005** | ** ** | BY:    |                                                     | /s/ **Sheldon Hoffman** |   |   |   |
|        | ** **                 | ** ** |   |                                                     |   |   |   |   |
|        |                       |       |   |    Sheldon Hoffman                             |   |   |   |
|        |                       |       |   |                                                     |   |   |   |
|        |                       |       |   | Chief Executive  Officer and Director                    |
|        |                       |       |   |                                                     |   |   |   |
|  DATE: | **November 14, 2005** | ** ** | BY:    |                                                     | /s/ **Lloyd Hoffman** |   |   |   |
|        | ** **                 | ** ** |   |                                                     |   |   |   |   |
|        |                       |       |   | Lloyd Hoffman                                            |   |   |   |
|        |                       |       |   |                                                     |   |   |   |
|        |                       |       |   |  Chief Financial Officer and Senior Vice  President |
|             |                            |            |        |                                                          |  |  |  |  |  |

 

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