**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 or 15(d)of the Securities Exchange Act of 1934**

 

**For theQuarter Ended June 30, 2004**

 

**CommissionFile No. 0-19893**

 

**Alpha Pro Tech, Ltd.**

(exact name of registrantas 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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

 

Yes  ý  No  o

 

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

 

Yes  o  No  ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as ofAugust 2, 2004.

 

23,043,953 Shares ofCommon stock, $.01 par value

 

 

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**AlphaPro Tech, Ltd.**

 

Table of Contents

 
| PART I.    | FINANCIAL INFORMATION                                                                       |                                                                                                       |
|------------|---------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|
|       |                                                                                        |                                                                                                       |
| ITEM 1     | Consolidated Financial  Statements (Unaudited)                                              |                                                                                                       |
|       |                                                                                        |                                                                                                       |   |
|       | a)                                                                                          | Consolidated  Balance Sheets - June 30, 2004 and December 31, 2003                                         |   |
|       |                                                                                        |                                                                                                       |   |
|       | b)                                                                                          | Consolidated  Statements of Operations for the three and six months ended June 30, 2004 and  June 30, 2003 |   |
|       |                                                                                        |                                                                                                       |   |
|       | c)                                                                                          | Consolidated  Statement of Shareholders’ Equity for the six months ended June 30, 2004                |   |
|       |                                                                                        |                                                                                                       |   |
|       | d)                                                                                          | Consolidated  Statements of Cash Flows for the six months ended June 30, 2004 and June 30,  2003           |   |
|       |                                                                                        |                                                                                                       |   |
|       | e)                                                                                          | Notes  to Consolidated Financial Statements                                                                |   |
|       |                                                                                        |                                                                                                       |   |
| ITEM  2    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                       |
|       |                                                                                        |                                                                                                       |   |
|       | New  Accounting Standards                                                                   |                                                                                                       |
|       |                                                                                        |                                                                                                       |   |
|       | Cautionary  Statements Regarding Forward-Looking Information                                |                                                                                                       |
|       |                                                                                        |                                                                                                       |   |
| ITEM  3    | Quantitative  and Qualitative Disclosures About Market Risk                                 |                                                                                                       |
|       |                                                                                        |                                                                                                       |   |
| ITEM 4     | Controls and Procedures                                                                     |                                                                                                       |
|       |                                                                                        |                                                                                                       |   |
| PART II.   | OTHER INFORMATION]                                                                          |                                                                                                       |
|       |                                                                                        |                                                                                                       |   |
| ITEM  5    | Submission  of Matters to a Vote Security Holders                                           |                                                                                                       |
|       |                                                                                        |
| ITEM 6     | Exhibits and  Reports on Form 8-K                                                           |                                                                                                       |
|       |                                                                                        |
| SIGNATURES |                                                                                        |
|       |                                                                                        |
| EXHIBITS   |                                                                                        |
|       |                                                                                        |                                                                                                       |   |
|       | Exhibit  31.1:                                                                              | Certification by CEO  pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act (filed  herewith)  |   |
|       |                                                                                        |                                                                                                       |   |
|       | Exhibit  31.2:                                                                              | Certification by CFO  pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act (filed  herewith)  |   |
|       |                                                                                        |                                                                                                       |   |
|       | Exhibit  32.1:                                                                              | Certification by CEO  pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith)                   |   |
|       |                                                                                        |                                                                                                       |   |
|       | Exhibit  32.2:                                                                              | Certification by CFO  pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith)                   |   |
|            |                                                                                             |                                                                                                            |  |  |

 

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**Alpha Pro Tech,Ltd.**

 

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

 

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

 

We have preparedthe following unaudited interim consolidated financial statements pursuant tothe rules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to these rulesand regulations.

 

You should readthe following unaudited interim consolidated financial statements and theaccompanying notes together with our Annual Report on Form 10-K for the yearended December 31, 2003. Our 2003 Annual Report contains information that maybe helpful in analyzing the financial information contained in this report andin comparing our results of operations for the three months ended June 30, 2004with the same period in 2003.

 

1

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**Alpha Pro Tech,Ltd.**

 

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

 
| ** **                                                                                                                                                          | ** ** | **June 30,  2004** | ** ** | **December 31,  2003 (1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|
|                                                                                                                                                                |       |               |       |                       |       |
| **Assets**                                                                                                                                                          |       |               |       |                       |       |
| Current assets:                                                                                                                                                     |       |               |       |                       |       |
| Cash and cash equivalents                                                                                                                                           |       | $                  | 3,008,000  |                       | $          | 3,427,000 |   |
| Accounts receivable, net of allowance for doubtful  accounts of  $69,000 at June 30, 2004  and December 31, 2003                                          |       | 3,310,000          |       | 2,707,000                  |       |
| Inventories, net                                                                                                                                                    |       | 5,723,000          |       | 6,015,000                  |       |
| Prepaid expenses and other current assets                                                                                                                           |       | 836,000            |       | 245,000                    |       |
| Deferred income taxes                                                                                                                                               |       | 362,000            |       | 362,000                    |       |
| Total current assets                                                                                                                                                |       | 13,239,000         |       | 12,756,000                 |       |
|                                                                                                                                                                |       |               |       |                       |       |
| Property and equipment, net                                                                                                                                         |       | 3,008,000          |       | 3,166,000                  |       |
| Goodwill                                                                                                                                                            |       | 55,000             |       | 55,000                     |       |
| Intangible assets, net                                                                                                                                              |       | 140,000            |       | 119,000                    |       |
| Total assets                                                                                                                                                        |       | $                  | 16,442,000 |                       | $          | 16,096,000 |   |
|                                                                                                                                                                |       |               |       |                       |       |
| **Liabilities and Shareholders’  Equity**                                                                                                                      |       |               |       |                       |       |
| Current liabilities:                                                                                                                                                |       |               |       |                       |       |
| Accounts payable                                                                                                                                                    |       | 1,212,000          |       | $                          | 956,000    |   |
| Accrued liabilities                                                                                                                                                 |       | 655,000            |       | 1,539,000                  |       |
| Total current liabilities                                                                                                                                           |       | 1,867,000          |       | 2,495,000                  |       |
|                                                                                                                                                                |       |               |       |                       |       |
| Deferred income taxes                                                                                                                                               |       | 574,000            |       | 574,000                    |       |
| Total liabilities                                                                                                                                                   |       | 2,441,000          |       | 3,069,000                  |       |
|                                                                                                                                                                |       |               |       |                       |       |
| Shareholders’ equity                                                                                                                                           |       |               |       |                       |       |
| Common stock, $.01 par value, 50,000,000 shares  authorized, 23,044,907 and 22,727,907 issued and outstanding at June 30, 2004  and December 31, 2003, respectively |       | 230,000            |       | 227,000                    |       |
| Additional paid-in capital                                                                                                                                          |       | 23,429,000         |       | 23,375,000                 |       |
| Accumulated deficit                                                                                                                                                 |       | (9,658,000         | )          | (10,575,000                | )          |
| Total shareholders’ equity                                                                                                                                     |       | 14,001,000         |       | 13,027,000                 |       |
| Total liabilities and shareholders’ equity                                                                                                                     |       | $                  | 16,442,000 |                       | $          | 16,096,000 |   |

 

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(1)                                  Thecondensed consolidated balance sheet as of December 31, 2003 has been preparedusing information form the audited financial statements at that date.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

2

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**Alpha Pro Tech,Ltd.**

 

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

 
| ** **                                                   | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Sales                                                        |       | $                                        | 6,748,000  |                                   | $          | 8,895,000 |   | $ | 12,601,000 |   | $ | 14,251,000 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Cost of goods sold, excluding depreciation and  amortization |       | 3,508,000                                |       | 4,119,000                              |       | 6,371,000 |   | 6,749,000 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Gross margin                                                 |       | 3,240,000                                |       | 4,776,000                              |       | 6,230,000 |   | 7,502,000 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Expenses:                                                    |       |                                     |       |                                   |       |   |   |   |   |
| Selling, general and administrative                          |       | 2,398,000                                |       | 2,418,000                              |       | 4,513,000 |   | 4,285,000 |   |
| Depreciation and amortization                                |       | 135,000                                  |       | 123,000                                |       | 267,000 |   | 243,000 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Income from operations                                       |       | 707,000                                  |       | 2,235,000                              |       | 1,450,000 |   | 2,974,000 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Other income (expense)                                       |       |                                     |       |                                   |       |   |   |   |   |
| Gain on sale of assets                                       |       | 7,000                                    |       | —                                 |       | 7,000 |   | — |   |
| Interest, net                                                |       | (2,000                                   | )          | (17,000                                | )          | (3,000 | ) | (16,000 | ) |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Income before provision for income taxes                     |       | 712,000                                  |       | 2,218,000                              |       | 1,454,000 |   | 2,958,000 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Provision for income taxes                                   |       | 262,000                                  |       | 854,000                                |       | 537,000 |   | 1,129,000 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Net income                                                   |       | $                                        | 450,000    |                                   | $          | 1,364,000 |   | $ | 917,000 |   | $ | 1,829,000 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Basic net income per share                                   |       | $                                        | 0.02       |                                   | $          | 0.06 |   | $ | 0.04 |   | $ | 0.08 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Diluted net income per share                                 |       | $                                        | 0.02       |                                   | $          | 0.06 |   | $ | 0.04 |   | $ | 0.08 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Basic weighted average shares outstanding                    |       | 23,087,599                               |       | 22,398,063                             |       | 23,278,768 |   | 22,430,679 |   |
|                                                         |       |                                     |       |                                   |       |   |   |   |   |
| Diluted weighted average shares outstanding                  |       | 24,567,552                               |       | 24,557,002                             |       | 24,911,324 |   | 23,766,151 |   |

 

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)**

 
| ** **                             | ** ** | **Shares** | ** ** | **Common Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total**    | ** ** |
|----------------------------------------|------------|------------|------------|------------------|------------|----------------------------------|------------|--------------------------|------------|--------------|------------|
| Balance at December 31, 2003 |       | 22,727,907 |       | $                | 227,000    |                             | $          | 23,375,000               |       | ($10,575,000 | )          | $ | 13,027,000 |   |
| Stock options exercised                |       | 422,000    |       | 4,000            |       | 247,000                          |       | —                   |       | 251,000      |       |
| Common stock repurchased               |       | (105,000   | )          | (1,000           | )          | (193,000                         | )          | —                   |       | (194,000     | )          |
| Net income                             |       |       |       |             |       |                             |       | 917,000                  |       | 917,000      |       |
| Balance at June 30, 2004               |       | 23,044,907 |       | $                | 230,000    |                             | $          | 23,429,000               |       | ($9,658,000  | )          | $ | 14,001,000 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

4

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**Alpha Pro Tech,Ltd.**

 

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

 
| ** **                                                                                   | ** ** | **For the Six months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| **Cash Flows From Operating  Activities:**                                                   |       |                                   |       |   |   |
| Net income                                                                                   |       | $                                      | 917,000    |   | $ | 1,829,000 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                                |       | 267,000                                |       | 243,000 |   |
| Gain on sale of assets                                                                       |       | (7,000                                 | )          | — |   |
| Changes in assets and liabilities:                                                           |       |                                   |       |   |   |
| Accounts receivable, net                                                                     |       | (603,000                               | )          | (2,533,000 | ) |
| Inventories, net                                                                             |       | 292,000                                |       | (1,230,000 | ) |
| Prepaid expenses and other current assets                                                    |       | (591,000                               | )          | (19,000 | ) |
| Accounts payable and accrued liabilities                                                     |       | (628,000                               | )          | 1,825,000 |   |
|                                                                                         |       |                                   |       |   |   |
| Net cash provided by (used in) operating activities:                                         |       | (353,000                               | )          | 115,000 |   |
|                                                                                         |       |                                   |       |   |   |
| **Cash Flows From Investing  Activities:**                                                   |       |                                   |       |   |   |
| Proceeds from related party loans                                                            |       | —                                 |       | 70,000 |   |
| Purchase of property and equipment                                                           |       | (105,000                               | )          | (245,000 | ) |
| Proceeds from sale of assets                                                                 |       | 16,000                                 |       | — |   |
| Purchase of intangible assets                                                                |       | (34,000                                | )          | (8,000 | ) |
|                                                                                         |       |                                   |       |   |   |
| Net cash used in investing activities                                                        |       | (123,000                               | )          | (183,000 | ) |
|                                                                                         |       |                                   |       |   |   |
| **Cash Flows From Financing  Activities:**                                                   |       |                                   |       |   |   |
| Payments on notes payable                                                                    |       | —                                 |       | (415,000 | ) |
| Proceeds from the exercise of stock options                                                  |       | 251,000                                |       | 94,000 |   |
| Payments for the repurchase of common stock                                                  |       | (194,000                               | )          | (274,000 | ) |
| Net cash provided by (used in) financing activities                                          |       | 57,000                                 |       | (595,000 | ) |
|                                                                                         |       |                                   |       |   |   |
| Decrease in cash during the period                                                           |       | (419,000                               | )          | (663,000 | ) |
|                                                                                         |       |                                   |       |   |   |
| Cash and cash equivalents, beginning of period                                               |       | 3,427,000                              |       | 2,879,000 |   |
| Cash and cash equivalents, end of period                                                     |       | $                                      | 3,008,000  |   | $ | 2,216,000 |   |

 

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

 

5

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**Alpha Pro Tech, Ltd.**

 

### **Notes toConsolidated Financial Statements (Unaudited)**

 

**1.****                                      TheCompany**

 

Alpha Pro Tech,Ltd. (the “Company”) manufactures and distributes a variety of disposable mask,shield, shoe cover, apparel and wound care products.  Most of the Company’s disposable apparel,mask and shield products, and wound care products are distributed to medical,dental, industrial safety and clean room markets, predominantly in the UnitedStates of America.

 

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

 

The interimfinancial information included herein is unaudited; however, the informationreflects all adjustments (consisting of normal recurring adjustments) that are,in the opinion of management, necessary for the fair presentation of theconsolidated financial position, results of operations and cash flows for theinterim periods. The consolidated financial statements should be read inconjunction with the consolidated financial statements for the year endedDecember 31, 2003, which are included in our Annual Report on Form 10-K for theyear ended December 31, 2003 (“2003 10-K”). The results of operations for thethree and six months ended June 30, 2004 are not necessarily indicative of theresults to be expected for the full year. The consolidated balance sheet atDecember 31, 2003 was extracted from the audited consolidated financialstatements contained in the 2003 10-K and does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica for annual consolidated financial statements.

 

Certain amountsfor prior periods have been reclassified to be consistent with the 2004presentation.  Such reclassifications hadno effect on total assets, total liabilities, shareholders’ equity or netincome.

 

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

 

Accounting forStock-based Compensation. The Company maintains a stock option plan under which the Company maygrant incentive stock options and non-qualified stock options to employees andnon-employee directors.  Stock optionshave been granted with exercise prices at or above the fair market value on thedate of grant.  Options vest and expireaccording to terms established at the grant date.

 

The Companyaccounts 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” to its stock based employeecompensation, the Company’s net income and net income per common share wouldhave changed to the pro forma amounts indicated below:

 

6

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** **
| ** **                                                                                                                                         | ** ** | **For the Three Months  Ended  June 30,** | ** ** | **For the Six Months  Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as reported                                                                                                                            |       | $                                         | 450,000    |                                    | $          | 1,364,000 |   | $ | 917,000 |   | $ | 1,829,000 |   |
| Add:  Total  stock-based employee compensation expense included in reported net income,  net of related tax effects                           |       | —                                    |       | —                                  |       | — |   | — |   |
| Deduct:  Total  stock-based employee compensation expense determined using the fair value  method for all rewards, net of related tax effects |       | —                                    |       | —                                  |       | — |   | — |   |
| Pro forma net income                                                                                                                               |       | $                                         | 450,000    |                                    | $          | 1,364,000 |   | $ | 917,000 |   | $ | 1,829,000 |   |
|                                                                                                                                               |       |                                      |       |                                    |       |   |   |   |   |
| Net income per share:                                                                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Basic - as reported                                                                                                                                |       | $                                         | 0.02       |                                    | $          | 0.06 |   | $ | 0.04 |   | $ | 0.08 |   |
| Basic - pro forma                                                                                                                                  |       | 0.02                                      |       | 0.06                                    |       | 0.04 |   | 0.08 |   |
| Diluted – as reported                                                                                                                         |       | 0.02                                      |       | 0.06                                    |       | 0.04 |   | 0.08 |   |
| Diluted - pro forma                                                                                                                                |       | 0.02                                      |       | 0.06                                    |       | 0.04 |   | 0.08 |   |

 

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

 

The Company hasreviewed all recently issued accounting standards which have not yet beenadopted in order to determine their potential effect, if any, on the results ofoperations or financial position of Alpha Pro Tech.  Based on that review, Alpha Pro Tech does notcurrently believe that any of these recent accounting pronouncements will havea significant effect on its current or future financial position, results of operations,cash flows or disclosures. .

 

**5.****                                      Inventories**

 

Inventoriesconsist of the following:

 
| ** **                                                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| Raw materials                                                 |       | $                  | 3,211,000  |                   | $          | 3,174,000 |   |
| Work in process                                               |       | 81,000             |       | 44,000                 |       |
| Finished goods                                                |       | 2,817,000          |       | 3,183,000              |       |
|                                                          |       | 6,109,000          |       | 6,401,000              |       |
| Less reserve for slow-moving, obsolete or unusable  inventory |       | (386,000           | )          | (386,000               | )          |
|                                                          |       | $                  | 5,723,000  |                   | $          | 6,015,000 |   |

 

7

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**6.****                                      AccruedLiabilities**

 

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

 
| ** **                | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------|------------|--------------------|------------|------------------------|------------|
| Income taxes payable      |       | $                  | —     |                   | $          | 480,000 |   |
| Bonuses payable           |       | 254,000            |       | 737,000                |       |
| Accrued payroll           |       | 144,000            |       | 148,000                |       |
| Accrued rebates and other |       | 257,000            |       | 174,000                |       |
|                      |       | $                  | 655,000    |                   | $          | 1,539,000 |   |

 

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

 

The followingtable provides a reconciliation of both the net income and the number of sharesused in the computation of “basic” earnings per share (EPS), which utilizes theweighted average number of shares outstanding without regard to potentialshares, and “diluted” EPS, which includes all such dilutive shares.

 
| ** **                                         | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income   (Numerator)                      |       | $                                        | 450,000    |                                   | $          | 1,364,000 |   | $ | 917,000 |   | $ | 1,829,000 |   |
| Shares (Denominator):                              |       |                                     |       |                                   |       |   |   |   |   |
| Basic weighted average shares outstanding          |       | 23,087,599                               |       | 22,398,063                             |       | 23,278,768 |   | 22,430,679 |   |
| Add: Dilutive effect of stock options and warrants |       | 1,479,953                                |       | 2,158,939                              |       | 1,632,556 |   | 1,335,472 |   |
| Diluted weighted average shares outstanding        |       | 24,567,552                               |       | 24,557,002                             |       | 24,911,324 |   | 23,766,151 |   |
| Net income   per share:                       |       |                                     |       |                                   |       |   |   |   |   |
| Basic                                              |       | $                                        | 0.02       |                                   | $          | 0.06 |   | $ | 0.04 |   | $ | 0.08 |   |
| Diluted                                            |       | $                                        | 0.02       |                                   | $          | 0.06 |   | $ | 0.04 |   | $ | 0.08 |   |

 

8

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

 

The Companyoperates through three segments: Apparel, consisting of a complete line of disposable clothing such ascoveralls, frocks, lab coats, hoods, bouffant caps and shoe covers; Mask andshields, consisting principally of medical, dental and industrial masks and eyeshields; and Extended Care, consisting principally of fleece and other relatedproducts which includes a line of pet beds.

 

The accountingpolicies of the segments are the same as those described in the “Summary ofSignificant Accounting Policies” in the Company’s Form 10-K for the year endedDecember 31, 2003.  Segment data excludescharges allocated to head office and corporate sales/marketing departments andincome taxes.  The Company evaluates theperformance of its segments and allocates resources to them based primarily onnet sales.

 

The followingtable shows net sales for each segment for the three and six months ended June30, 2004 and 2003:

 
| ** **                   | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                         |       |                                     |       |                                   |       |   |   |   |   |
| Apparel                      |       | $                                        | 4,737,000  |                                   | $          | 3,996,000 |   | $ | 8,830,000 |   | $ | 7,466,000 |   |
| Mask and shield              |       | 1,620,000                                |       | 4,544,000                              |       | 2,836,000 |   | 5,881,000 |   |
| Extended care                |       | 391,000                                  |       | 355,000                                |       | 935,000 |   | 904,000 |   |
|                         |       |                                     |       |                                   |       |   |   |   |   |
| Consolidated total net sales |       | $                                        | 6,748,000  |                                   | $          | 8,895,000 |   | $ | 12,601,000 |   | $ | 14,251,000 |   |

 

The followingtable shows the reconciliation of total segment income to total consolidatednet income for the three and six months ended June 30, 2004 and 2003:

 
| ** **                              | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                    |       |                                     |       |                                   |       |   |   |   |   |
| Apparel                                 |       | $                                        | 1,538,000  |                                   | $          | 1,252,000 |   | $ | 3,097,000 |   | $ | 2,261,000 |   |
| Mask and shield                         |       | 632,000                                  |       | 2,482,000                              |       | 1,032,000 |   | 3,027,000 |   |
| Extended care                           |       | 41,000                                   |       | 30,000                                 |       | 137,000 |   | 135,000 |   |
|                                    |       |                                     |       |                                   |       |   |   |   |   |
| Total segment income                    |       | 2,211,000                                |       | 3,764,000                              |       | 4,266,000 |   | 5,423,000 |   |
| Unallocated corporate overhead expenses |       | (1,499,000                               | )          | (1,546,000                             | )          | (2,812,000 | ) | (2,465,000 | ) |
| Provision for income taxes              |       | (262,000                                 | )          | (854,000                               | )          | (537,000 | ) | (1,129,000 | ) |
|                                    |       |                                     |       |                                   |       |   |   |   |   |
| Consolidated net income                 |       | $                                        | 450,000    |                                   | $          | 1,364,000 |   | $ | 917,000 |   | $ | 1,829,000 |   |

 

9

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# **ITEM 2**                                                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF 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.

 

**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 consumer products for the cleanroom, industrial, medical, dental andconsumer markets.  Our products are soldunder the “Alpha Pro Tech” brand name as well as sold for use under privatelabel.

 

Our products areclassified into four groups:  Disposableprotective apparel, consisting of a complete line of shoecovers, headcovers,gowns, coveralls and lab coats; infection control products consisting of a lineof face masks and face shields; extended care products consisting of a line ofmattress overlays, wheelchair covers, geriatric chair surfaces, operating roomtable surfaces and pediatric surfaces; and consumer products consisting of aline of pet bedding and pet toys.

 

Our products are soldthrough three segments.  The Apparelsegment, consisting of disposable protective apparel; the Mask and Shieldsegment, consisting of infection control products; and the Extended Caresegment, consisting of extended care products and consumer products.

 

Our target markets arepharmaceutical manufacturing, bio-pharmaceutical manufacturing and medicaldevice manufacturing, lab animal research, high technology electronicsmanufacturing which includes the semi-conductor market, as well as medical anddental markets. Our products are used primarily in cleanrooms, industrialsafety manufacturing environments and health care facilities such as hospitals,laboratories and dental offices. Our products are distributed principally inthe United States through a network consisting of purchasing groups, nationaldistributors, local distributors, independent sales representatives and our ownsales and marketing force.

 

A new fourth businesssegment, Engineered Products, was announced during the second quarter 2004 withthe formation of Alpha ProTech Engineered Products, Inc., a wholly-ownedsubsidiary.  This Engineered Productssegment will consist of a line of construction supply weatherization productsas well as a line of paint with antimicrobials. The construction supply weatherization products will consist of buildingwrap and a synthetic roof underlayment. This line of products is a natural extension of our core capabilities:creating proprietary products designed to protect people and environments.  Our expertise has now allowed us to createunique and improved materials which will protect homes and offices from theenvironment and nature’s elements, while improving efficiencies and reducingexpenses for contractors and homebuilders. The building wrap will offer a weather resistant barrier and lowerenergy consumption costs.  The proprietarysynthetic roof underlayment has the ability to resist the environment, as opposedto conventional roofing underlayment that are prone to rapid degradation andmold growth.

 

The line of paint withantimicrobials will inhibit growth of bacteria, fungi and algae on the paintedsurfaces in hospitals, surgical rooms, cleanrooms and associated controlledenvironments.  We have an existingexclusive licensing agreement for the proprietary antimicrobial formulation tobe used in the paint.  This product willfulfill a key need in cleanrooms and hospitals and in addition it will reducetheir operational costs while preserving environmental safety.

 

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We expect to beginmanufacturing and distributing these new Engineered Products in the fourthquarter of 2004.  The Engineered Productssegment is expected to contribute significantly to revenue growth in 2005.

 

We are also focused onappreciably improving sales in our current core business.  Our key sales growth strategies for our corebusiness are based upon an innovative strategy of developing innovativeproducts to suit individual end users true needs and on investing in additionalsales personnel.  As we gain marketshare, we will invest in additional sales personnel.  In 2004, we have started to experience somepositive results from these growth strategies and expect sales growth toimprove in the coming quarters.

 

Our results of operationslast year were significantly influenced by the outbreak of Severe AcuteRespiratory Syndrome (“SARS”).    Duringthe second quarter last year, we had approximately $3 million of non-core SARSrelated N-95 Respiratory mask and eye shield sales, which accounted forapproximately one-third of our revenue during the quarter.  Sales in the second quarter of 2004 decreasedby $2.1 million or 24.1%.

 

Excluding the non-coresales related to SARS last year, we have experienced core sales growth of 14.5%for the three months ended June 30, 2004. We believe that we have assembled a strong sales team and that our corebusiness sales growth will improve.

 

Gross profit marginslipped to 48.0% in the second quarter of 2004. This is primarily due to the higher gross profit on the SARS relatedsales in the second quarter last year. Gross profit was also adversely affected by severance payments made onthe closing of our Benjamin Hill, Mexico facility during the second quarter of2004.  Over the past two years we havebeen moving production to more profitable manufacturing in China.  We are retaining some manufacturing in Mexicothrough a sub-contractor.  Additionalstart-up costs were incurred in the second quarter in relation to the newcontractor.

 

Net income for thequarter was $450,000 compared to $1,364,000 for the same quarter lastyear.  Net income in the second quarterlast year was impacted positively by the non-core $3 million SARS relatedsales.  Net income in the second quarterof 2004, was negatively affected by expenses of $120,000 in relation toseverance payments on closing our Benjamin Hill, Mexico facility and start-upcosts from our new third party contractor in Mexico.

 

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**RESULTS OF OPERATIONS**

 

**Threemonths and six months ended June 30, 2004, compared to the three and six monthsended June 30, 2003**

 

Alpha Pro Tech, Ltd.(“Alpha” or the “Company”) reported net income for the quarter ended June 30,2004 of $450,000 as compared to $1,364,000 for the quarter ended June 30, 2003,representing a decrease of $914,000 or 67.0%. The decrease is attributable to a decrease in gross profit of$1,536,000, an increase in depreciation and amortization of $12,000, partiallyoffset by a decrease in selling, general and administrative expenses of$20,000, a decrease in net interest expense of $15,000, an increase in gain onsale of assets of $7,000 and a decrease in income taxes of $592,000.

 

Net income in the secondquarter of 2004, was adversely affected by severance payments on closing ourBenjamin Hill, Mexico facility and on start-up costs from our new third partycontractor in Mexico, totaling $120,000. Also, the decline of $1,536,000 in gross profit for the three monthsended June 30, 2004 as compared to the same period of 2003 is primarily theresult of the $3 million of non-core SARS related sales in the second quarterof 2003.

 

**Sales.**  Consolidated sales for the quarter ended June30, 2004 decreased to $6,748,000 from $8,895,000 for the quarter ended June 30,2003, representing a decrease of $2,147,000 or 24.1%.  Sales in the second quarter of last year weresignificantly affected by the SARS outbreak. Excluding the $3 million non-core SARS related sales during the secondquarter of 2003, our core business grew by $853,000 or 14.5% to $6,748,000 forthe quarter ended June 30, 2004 from $5,895,00 for the same period in2003.  We attribute this 14.5% corebusiness increase primarily to sales to the Pharmaceutical and cleanroomindustry and to a lesser extent sales to the industrial safety industry.

 

Sales for the ApparelDivision for the quarter ended June 30, 2004 were $4,737,000 compared to$3,996,000 for the same period of 2003, an increase of $741,000 or 18.5%.   The Apparel sales increase is due to highersales to the pharmaceutical and cleanroom industry and to lesser extent salesto the industrial safety industry.  Weexpect long-term growth in this segment as we continue to gain a strongerpresence in these markets.

 

Mask and eye shield salesfor the quarter ended June 30, 2004 decreased by $2,924,000 or 64.3% to$1,620,000 from $4,544,000 in the same period of 2003.  The decrease is primarily the result of $3million of N-95 Particulate Respirator mask and eye shield sales in the secondquarter of last year related to the SARS outbreak.  Excluding these non-core SARS sales, mask andeye shield sales were up 4.9% for the quarter ended June 30, 2004.

 

Sales of the Company’sExtended Care Unreal Lambskin and other related products, which includes a lineof pet beds, increased by $36,000 or 10.1% to $391,000 for the quarter endedJune 30, 2004 from $355,000 for the quarter ended June 30, 2003.  This increase of $36,000 in sales isprimarily the result of an increase in medical pad sales.

 

Consolidated sales forthe six months ended June 30, 2004 decreased to $12,601,000 from $14,251,000for the six months ended June 30, 2003, representing a decrease of $1,650,000or 11.6%.  Excluding the $3 millionnon-core SARS related sales during the second quarter of 2003, our corebusiness grew by $1,350,000 or 12.0% to $12,601,000 for the six months endedJune 30, 2004 from $11,251,000 for the same period in 2003.  We attribute this core business increaseprimarily to sales to the Pharmaceutical and cleanroom industry and to a lesserextent sales to the industrial safety industry.

 

12

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Sales for the ApparelDivision for the six months ended June 30, 2004 were $8,830,000 compared to$7,466,000 for the same period of 2003, an increase of $1,364,000 or18.3%.   The Apparel sales increase isdue to higher sales to the pharmaceutical and cleanroom industry and to alesser extent sales to the industrial safety industry.  We expect continued long-term growth in thissegment.

 

Mask and eye shield salesfor the six months ended June 30, 2004 decreased by $3,045,000 or 51.8% to$2,836,000 from $5,881,000 in the same period of 2003.  The decrease is primarily the result of $3million of N-95 Particulate Respirator mask and eye shield sales in the secondquarter of last year related to the SARS outbreak.  Excluding the $3 million in SARS relatedsales in 2003, mask and eye shield sales in 2004 are basically flat as comparedto sales in 2003.

 

Sales of the Company’sExtended Care Unreal Lambskin and other related products, which includes a lineof pet beds, increased by $31,000 or 3.4% to $935,000 for the six months endedJune 30, 2004 from $904,000 for the quarter ended June 30, 2003.  This increase of $31,000 in sales isprimarily the result of an increase in pet bed sales.

 

**Cost of Goods Sold.**  Cost of goods sold, excluding depreciationand amortization, decreased to $3,508,000 for the quarter ended June 30, 2004from $4,119,000 for the same period in 2003. Gross profit margin decreased to 48.0% for the quarter ended June 30,2004 from 53.7% for the same period in 2003. For the six months ended June 30, 2004 as compared to the same period in2003, cost of goods sold decreased to $6,371,000 from $6,749,000.  Gross profit margin decreased to 49.4% from52.6% for the six months ended June 30, 2004 as compared to 2003.

 

The decrease in grossprofit margin for the three and six months ended June 30, 2004 as compared tothe same period of 2003 is due primarily to higher gross profit margin on the$3 million SARS related sales in the second quarter of last year.  Gross profit was also adversely affected byseverance payments made on the closing of our Benjamin Hill, Mexico facilityduring the second quarter of 2004 as well as start-up costs from our new thirdparty contractor in Mexico, totaling $68,000.

 

Gross profit marginexcluding the non-recurring $68,000 in costs, would have been 49.0% and 50.0%for the three and six months ended June 30, 2004 respectively.

 

Management expects thatgross profit margins should remain strong for the balance of 2004.

 

**Selling,General and Administrative Expenses.**  Selling, general andadministrative expenses decreased by $20,000 or 0.8% to $2,398,000 for thequarter ended June 30, 2004 from $2,418,000 for the quarter ended June 30,2003.  The decrease in selling, generaland administrative expenses primarily consists of a decreased accrual for theexecutive bonus program of $168,000, decreased foreign exchange loss of$49,000, decreased credit card processing expense of  $15,000, decreased public company expense of$9,000, decreased insurance expense of $9,000 and decreased miscellaneousexpenses of $6,000, partially offset by increased other payroll costs of$84,000, increased travel of $53,000, increased marketing and commissionexpenses of $30,000, increased rent and utilities expense of $37,000 andincreased professional fees of $32,000. Of the $84,000 increase in other payroll costs,, $52,000 was factoryindirect severance payments made on the closing of our Benjamin Hill,Mexico  facility during the quarter.

 

Selling, general andadministrative expenses increased by $228,000 or 5.3% to $4,513,000 for the sixmonths ended June 30, 2004 from $4,285,000 for the six months ended June 30,2003.  The increase in selling, generaland administrative expenses primarily consists of increased payroll costs of$212,000, of which $52,000 is for severance payments on the closing of ourBenjamin Hill, Mexico facility, increased marketing and commission expenses of$57,000, increased travel of $85,000, increased rent and utilities 

 

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expense of $69,000 andincreased professional fees of $21,000 and increased miscellaneous expenses of$2,000, partially offset by a decreased accrual for the executive bonus programof $168,000, decreased public company expense of $35,000, decreased credit cardprocessing expense of $15,000

 

The increase in payrollrelated costs is largely due to the addition of sales and marketingpersonnel.  Management expects that theseadditional sales personnel will yield improved sales results in the upcomingquarters.

 

**Depreciation and Amortization.**  Depreciation and amortization expenseincreased by $12,000 to $135,000 for the quarter ended June 30, 2004 from$123,000 for the same period in 2003 and increased by $24,000 to $267,000 forthe six months ended June 30, 2004 compared to the same period in 2003.  The increase is primarily attributable tomask machine additions and the purchase of computer equipment

 

**Income from Operations.**  Income from operations decreased by$1,528,000 or 68.4%, to $707,000 for the quarter ended June 30, 2004 ascompared to income from operations of $2,235,000 for the quarter ended June 30,2003.  The decrease in income fromoperations is primarily due to a decrease in gross profit of $1,536,000 and anincrease in depreciation and amortization of $12,000, partially offset by adecrease in selling, general and administrative expenses of $20,000,

 

Income from operationsdecreased by $1,524,000 or 51.2%, to $1,450,000 for the six months ended June30, 2004 as compared to income from operations of $2,974,000 for the six monthsended June 30, 2003.  The decrease inincome from operations is primarily due to a decrease in gross profit of$1,272,000 and an increase in selling, general and administrative expenses of$228,000 and an increase in depreciation and amortization of $24,000

 

The decline in grossprofit for the three and six months ended June 30, 2004 as compared to the sameperiod of 2003, is primarily the result of the $3 million of non-core SARSrelated sales in the second quarter of 2003.

 

**Net Interest.**  Net interest expense decreased by $15,000 to$2,000 for the quarter ended June 30, 2004 from net interest expense of $17,000for the quarter ended June 30, 2003.  Thedecrease in net interest expense is primarily due to lower interest chargesduring the second quarter of 2004 as we had additional interest charges due topaying off all of our notes payable during the second quarter 2003.  Interest expense decreased by $15,000, to$3,000 for the quarter ended June 30, 2004 from $18,000 in the same period of2003.  Interest income remained flat at$1,000 for the quarter ended June 30, 2004 as compared to the same period of2003.

 

Net interest expensedecreased by $13,000 to $3,000 for the six months ended June 30, 2004 from netinterest expense of $16,000 for the six months ended June 30, 2003.  The decrease in net interest expense isprimarily due to additional interest charges during the second quarter of 2003for paying off all our notes payable, partially offset by decreased interestincome.  Interest expense decreased by$23,000, to $5,000 for the quarter ended June 30, 2004 from $28,000 in the sameperiod of 2003.  Interest incomedecreased by $10,000 to $2,000 for the six months ended June 30, 2004 from netinterest income of $12,000 for the six months ended June 30, 2004 as comparedto the same period of 2003.

 

**Income Before Provision forIncome Taxes.**  Incomebefore provision for income taxes for the quarter ended June 30, 2004 was$712,000 as compared to $2,218,000 for the quarter ended June 30, 2003,representing a decrease of $1,506,000 or 67.9%. This decrease is attributable to a decrease in gross profit of$1,536,000, an increase in depreciation and amortization of $12,000; partiallyoffset by a decrease in selling, general and administrative expenses of$20,000, an decrease in net interest expense of $15,000 and an increase in gainon assets of $7,000.

 

Income before provisionfor income taxes for six months ended June 30, 2004 was $1,454,000 as comparedto $2,958,000 for the six months ended June 30, 2003, representing a decreaseof $1,504,000 or 50.8%.  This decrease isattributable to a decrease in gross profit of $1,272,000, an increase in

 

14

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depreciation andamortization of $24,000, an increase in selling, general and administrativeexpenses of $228,000, partially offset by a decrease in net interest expense of$13,000 and an increase in gain on assets of $7,000

 

As stated previously, thedecline in gross profit for the three and six months ended June 30, 2004 ascompared to the same period of 2003, is primarily the result of the $3 millionof non-core SARS related sales in the second quarter of 2003.

 

**Provision for Income Taxes **The provision for incometaxes for the three months and six ended June 30, 2004 was $262,000 and$537,000 , as compared to $854,000 and $1,129,000 for the three and six monthsended June 30, 2003.  The decrease inincome taxes is due to lower income before provision for income taxes in 2004.  The effective tax rate is approximately 37%for the six months ended June 30, 2004 as compared to approximately 38% for thesame period of 2003.

 

**Net Income.**  Net income for the quarter ended June 30,2004 was $450,000 compared to net income of $1,364,000 for the quarter endedJune 30, 2003, a decrease of $914,000 or 67.0%. The net income decrease of $914,000 is primarily comprised of a decreasein income from operations of $1,528,000, partially offset by a decrease inincomes taxes of $592,000.

 

Net income in the secondquarter of 2004, was adversely affected by severance payments on closing ourBenjamin Hill, Mexico facility and on start-up costs from our new third partycontractor in Mexico, totaling $120,000. Net income in the same quarter last year was positively impacted by thenon-core $3 million SARS related sales.

 

Net income for the sixmonths ended June 30, 2004 was $917,000 compared to net income of $1,829,000for the six months ended June 30, 2003, a decrease of $912,000 or 49.9%.  The net income decrease of $912,000 is primarilycomprised of a decrease in income from operations of $1,524,000, partiallyoffset by a decrease in incomes taxes of $592,000

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

As of June 30, 2004, wehad cash and cash equivalents of $3,008,000 and working capital of $11,372,000,an increase in working capital of $1,111,000 since December 31, 2003.  Cash decreased by $419,000 for the six monthsended June 30, 2004. The decrease in our cash is primarily due to cash used inoperating activities and the purchase of property and equipment, partiallyoffset by cash provided by financing activities.

 

We have a $3,500,000credit facility with a bank, consisting of a line of credit with interest atprime plus 0.5%.  At June 30, 2004, theprime interest rate was 4.0%.  The lineof credit was renewed in the second quarter of 2004 and expires May 2006.  At June 30, 2004, our borrowing capacity onthe line of credit was $3,093,000, which is based on a formula of accountsreceivable and inventory.  At June 30,2004, we had not borrowed on this line of credit.  As of June 30, 2004, we do not have any debt.

 

As shown below, at June30, 2004, our contractual cash obligations totaled approximately $1,298,000.

 

**Contractual Obligations**

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Total**                  | ** ** | **Less than 1  Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 years** | ** ** |
|                               |       |                       |       |   |   |   |   |   |   |   |   |
| Operating leases                   |       | $                          | 1,298,000  |   | $ | 249,000 |   | $ | 728,000 |   | $ | 226,000 |   | $ | 95,000 |   |
| Line of credit                     |       | —                     |       | — |   | — |   | — |   | — |   |
|                               |       |                       |       |   |   |   |   |   |   |   |   |
| Total contractual cash obligations |       | $                          | 1,298,000  |   | $ | 249,000 |   | $ | 728,000 |   | $ | 226,000 |   | $ | 95,000 |   |

 

The amount for the yearending December 31, 2004 includes only payments to be made after June 30, 2004.

 

Net cash used inoperating activities was $353,000 for the six months ended June 30, 2004 ascompared to $115,000 of cash provided by operations for the six months endedJune 30, 2003.  The increase in cash usedin operating activities is primarily due to a decrease in net income, anincrease in accounts receivable, an increase in prepaid expenses and othercurrent assets and a decrease in accounts payable and accrued liabilitiespartially offset an increase in depreciation and amortization and a decrease ininventories.

 

Net cash used ininvesting activities was $123,000 and $183,000 for the six months ended June30, 2004 and 2003, respectively. Our investing activities in 2004 consistedprimarily of expenditures for property and equipment of $105,000, proceeds fromthe sale of fixed assets of $16,000 and the purchase of intangible assets of$34,000; as compared to expenditures for property and equipment of $245,000,the purchase of intangibles of $8,000 and offset by the proceeds from relatedparty loan of $70,000 for the six months ended June 30, 2003.

 

The Company expects topurchase $450,000 of additional equipment in 2004.  This expenditure will be primarily forequipment to be used by our new Engineered Products subsidiary.

 

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InMarch 2003, we announced that our Board of Directors had approved the buy-backof up to an additional $500,000 of the Company’s outstanding common stock.  This new share repurchase program is thefifth $500,000 buyback authorized by the Board of Directors.  In allinstances, we are retiring the shares. For the six months ended June 30, 2004, we bought back a total of105,000 common shares at a cost of $194,000. As of June 30, 2004, we have bought back a total of 2,213,800 commonshares at a cost of $2,319,000 since the end of 1999.

 

During the six monthsended June 30, 2004, cash provided by financing activities was $57,000 ascompared to cash used in financing activities of $595,000 for the same periodof 2003. Our financing activities in 2004 consisted primarily of cash proceedsof $251,000 from the exercise of stock options, partially offset by payments of$194,000 for the repurchase of common stock. Our financing activities in 2003 consisted primarily of net payments onour notes payable of $415,000 and payments of $274,000 for the repurchase ofcommon stock, partially offset by the proceeds from the exercise of stockoptions of $94,000.

 

We believe that cashgenerated from operations, our current cash balance and the funds availableunder our credit facility, will be sufficient to satisfy our projected workingcapital and planned capital expenditures for the foreseeable future.

 

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**NEW ACCOUNTING STANDARDS**

 

Based on the Company’sreview of new accounting standards released during the quarter ended June 30,2004, the Company did not identify any standards requiring adoption that wouldhave a significant impact on its consolidated financial statements.

 

**CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGINFORMATION**

 

Certain information setforth in this report contains “forward-looking statements” within the meaningof federal securities laws. These forward-looking statements are made pursuantto the safe-harbor provisions of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include statements concerning plans,objectives, goals, strategies, future events, future revenues or performance,capital expenditures and other information that is not historical information.When used in this report, the words “estimates,” “expects,” “anticipates,”“forecasts,” “plans,” “intends,” “believes” and variations of such words orsimilar expressions are intended to identify forward-looking statements.Additional forward-looking statements may be made by us from time to time. Allsuch subsequent forward-looking statements, whether written or oral and whethermade by or on behalf of us, are also expressly qualified by these cautionarystatements.

 

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

 

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

 

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

 

We manufacture someproducts in Mexico and subcontract the manufacture of some products inChina.  The Company’s results ofoperations could be negatively affected by factors such as changes in foreigncurrency exchange rates 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 Securities Exchange Act of1934), as of June 30, 2004. Based on this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures were effective as of June 30, 2004.

 

Changes in Internal Control Over Financial Reporting

 

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

 

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**PART II - OTHER INFORMATION**

 

**Item 5  Submission of Matters to a Vote of Security Holders**

 

(a)           Registrant held itsAnnual Meeting of Shareholders June 8, 2004.

 

(b)                                 The following persons were elected Directorspursuant to the votes indicated:

 
| **Name**            | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
|                |       |       |       |         |       |
| Sheldon Hoffman     |       | 19,698,299 |       | 824,512      |       |
|                |       |       |       |         |       |
| Alexander Millar    |       | 19,698,299 |       | 824,512      |       |
|                |       |       |       |         |       |
| Donald Bennett, Jr. |       | 20,267,857 |       | 254,954      |       |
|                |       |       |       |         |       |
| Robert Isaly        |       | 20,267,658 |       | 255,153      |       |
|                |       |       |       |         |       |
| John Ritota         |       | 20,069,323 |       | 453,488      |       |
|                |       |       |       |         |       |
| Russell Manock      |       | 20,267,858 |       | 254,953      |       |
|                |       |       |       |         |       |
| David Anderson      |       | 20,267,858 |       | 254,953      |       |

 

(c)                                  The 2004 Stock Option Plan was approved asfollows:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
|      |       |        |       |        |       |
| 7,632,755 |       | 1,738,590   |       | 71,631      |       |

 

(d)                                 The only other matter to be voted upon wasthe ratification of the appointment of PricewaterhouseCoopers LLP as theRegistrant’s independent accountants as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
|       |       |        |       |        |       |
| 20,304,143 |       | 201,010     |       | 17,658      |       |

 

20

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

 

(a)  Exhibits

 

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

 

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

 

32.1 Certification Pursuant to 18 U.S.C Section 1350, as AdoptedPursuant to Section 906 of         theSarbanes-Oxley Act of 2003, Signed by Chief Executive Officer (filed herewith)

 

32.2 Certification Pursuant to 18 U.S.C Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2003, Signed by ChiefFinancial Officer (filed herewith)

 

(b)  Reports on Form 8-K

 

No reports were filed on Form 8-K during the second quarter of 2004

 

## **SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | Alpha Pro Tech, Ltd. |
|--------|----------------------|
|   |                 |
|   |                 |
| DATE:  | August 4, 2004       |   |   |
|   |                 |
|   | BY:                  | /s/ Sheldon Hoffman |
|   |                 | SHELDON HOFFMAN |   |
|   |                 | CHIEF EXECUTIVE OFFICER |
|   |                 |
|   |                 |
|   | Alpha Pro Tech, Ltd. |
|   |                 |
|   |                 |
| DATE:  | August 4, 2004       |   | BY: | /s/ Lloyd Hoffman |
|   |                 |   |   | LLOYD HOFFMAN |   |
|   |                 |   |   | CHIEF FINANCIAL OFFICER |
|        |                      |  |  |  |  |  |

 

21

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