**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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** **

**FORM 10-Q**

** **

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** **

**Quarterly Report pursuantto Section 13 or 15(d)**

**of the SecuritiesExchange Act of 1934**

** **

**For the Quarter Ended March 31,2006**

** **

**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’stelephone number, 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 x   Noo

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

Large acceleratedfiler o    Accelerated filer o   Non-accelerated filer x

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

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of May 5,2006.

24,090,953 sharesof common stock, $.01 par value

 

 

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**Alpha ProTech, Ltd.**

Table of Contents
|                                                                    | ** **                                                              | ** **                                                                                                               |
|--------------------------------------------------------------------|-------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
| PART I. FINANCIAL INFORMATION                                 |                                                                    |
|                                                               |                                                                    |                                                                                                                     |
| ITEM 1 Consolidated Financial  Statements (Unaudited)              |                                                                    |
|                                                               |                                                                    |                                                                                                                     |
| a)                                                                 | Consolidated  Balance Sheets -                                          |                                                                                                                     |
|                                                               | March 31,  2006 and December 31, 2005                         |                                                                                                                     |
|                                                               |                                                                    |                                                                                                                     |
| b)                                                                 | Consolidated  Statements of Operations                                  |                                                                                                                     |
|                                                               | for the three  months ended March 31, 2006 and March 31, 2005 |                                                                                                                     |
|                                                               |                                                                    |                                                                                                                     |
| c)                                                                 | Consolidated  Statement of Shareholders’ Equity               |                                                                                                                     |
|                                                               | for the three  months ended March 31, 2006                         |                                                                                                                     |
|                                                               |                                                                    |                                                                                                                     |
| d)                                                                 | Consolidated  Statements of Cash Flows                                  |                                                                                                                     |
|                                                               | for the three  months ended March 31, 2006 and March 31, 2005 |                                                                                                                     |
|                                                               |                                                                    |                                                                                                                     |
| e)                                                                 | Notes to  Consolidated Financial Statements                             |                                                                                                                     |
|                                                               |                                                                    |                                                                                                                     |
| ITEM 2  Management’s Discussion and Analysis of Financial     |                                                                    |
|                                                               | Condition and  Results of Operations                                    |                                                                                                                     |
|                                                               |                                                                    |                                                                                                                     |
|                                                               | Cautionary  Statements Regarding Forward-Looking Information            |                                                                                                                     |
|                                                               |                                                                    |                                                                                                                     |
|                                                               | New Accounting Standards                                                |                                                                                                                     |
|                                                               |                                                                    |                                                                                                                     |
| ITEM 3  Quantitative and Qualitative Disclosures About Market Risk |                                                                    |
|                                                               |                                                                    |
| ITEM 4 Controls and  Procedures                                    |                                                                    |
|                                                               |                                                                    |
| PART II. OTHER  INFORMATION                                   |                                                                    |
|                                                               |                                                                    |
| ITEM 6 Exhibits  and Reports on Form 8-K                      |                                                                    |
|                                                               |                                                                    |
| SIGNATURES                                                         |                                                                    |
|                                                               |                                                                    |
| EXHIBITS                                                           |                                                                    |
|                                                               |                                                                    |
|                                                               | Exhibit 31.1:                                                      | Certification by  CEO pursuant to Rule 13a-14(b) and Rule 15d-14(b)  of the Exchange Act (filed herewith) |   |
|                                                               |                                                                    |                                                                                                                     |   |
|                                                               | Exhibit 31.2:                                                      | Certification by  CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b)  of the Exchange Act (filed herewith) |   |
|                                                               |                                                                    |                                                                                                                     |   |
|                                                               | Exhibit 32.1:                                                      | Certification by CEO  pursuant to Section 906 of the                                                                |   |
|                                                               |                                                                    | Sarbanes-Oxley Act  (filed herewith)                                                                                     |   |
|                                                               |                                                                    |                                                                                                                     |   |
|                                                               | Exhibit 32.2:                                                      | Certification by CFO  pursuant to Section 906 of the                                                                |   |
|                                                               |                                                                    | Sarbanes-Oxley Act (filed herewith)                                                                                      |   |
|                                                                    |                                                                         |                                                                                                                          |  |  |

##### * *

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##### * *

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

#### **ITEM 1. FINANCIALSTATEMENTS**

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

You should readthe following unaudited interim consolidated financial statements and theaccompanying notes together with our Annual Report on Form 10-K forthe year ended December 31, 2005. Our 2005 Annual Report contains informationthat may be helpful in analyzing the financial information contained in thisreport and in comparing our results of operations for the three months ended March 31,2006 with the same period in 2005.

 

1

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

| ** **                                                                                                                                                                      | ** ** | **March 31, 2006** | ** ** | **December 31,  2005 (1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------|------------|
|                                                                                                                                                                            |       |                         |       |                                 |       |
| **Assets**                                                                                                                                                                      |       |                         |       |                                 |       |
| Current assets:                                                                                                                                                                 |       |                         |       |                                 |       |
| Cash and cash  equivalents                                                                                                                                                      |       | $                            | 882,000    |                                 | $          | 1,163,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $76,000 at March 31,  2006 and $76,000 at December 31, 2005                                           |       | 4,497,000                    |       | 3,954,000                            |       |
| Inventories, net                                                                                                                                                                |       | 10,811,000                   |       | 10,499,000                           |       |
| Prepaid expenses  and other current assets                                                                                                                                      |       | 844,000                      |       | 715,000                              |       |
| Deferred income  taxes                                                                                                                                                          |       | 430,000                      |       | 430,000                              |       |
| Total current  assets                                                                                                                                                           |       | 17,464,000                   |       | 16,761,000                           |       |
|                                                                                                                                                                            |       |                         |       |                                 |       |
| Property and equipment,  net                                                                                                                                                    |       | 3,374,000                    |       | 3,389,000                            |       |
| Goodwill, net                                                                                                                                                                   |       | 55,000                       |       | 55,000                               |       |
| Intangible assets, net                                                                                                                                                          |       | 133,000                      |       | 119,000                              |       |
| Equity investments in  and advances to unconsolidated affiliates                                                                                                                |       | 1,684,000                    |       | 1,547,000                            |       |
| Total assets                                                                                                                                                                    |       | $                            | 22,710,000 |                                 | $          | 21,871,000 |   |
|                                                                                                                                                                            |       |                         |       |                                 |       |
| **Liabilities and Shareholders’  Equity**                                                                                                                                  | ** ** | ** **                   | ** ** | ** **                           | ** ** |
| Current liabilities:                                                                                                                                                            |       |                         |       |                                 |       |
| Accounts payable                                                                                                                                                                |       | $                            | 940,000    |                                 | $          | 648,000 |   |
| Accrued  liabilities                                                                                                                                                            |       | 1,482,000                    |       | 1,928,000                            |       |
| Total current  liabilities                                                                                                                                                      |       | 2,422,000                    |       | 2,576,000                            |       |
|                                                                                                                                                                            |       |                         |       |                                 |       |
| Deferred income taxes                                                                                                                                                           |       | 652,000                      |       | 652,000                              |       |
| Total  liabilities                                                                                                                                                              |       | 3,074,000                    |       | 3,228,000                            |       |
|                                                                                                                                                                            |       |                         |       |                                 |       |
| Shareholders’ equity                                                                                                                                                       |       |                         |       |                                 |       |
| Common stock,  $.01 par value, 50,000,000 shares authorized, 24,090,955 and 23,787,955  issued and outstanding at March 31, 2006 and December 31, 2005,  respectively |       | 241,000                      |       | 238,000                              |       |
| Additional  paid-in capital                                                                                                                                                     |       | 25,024,000                   |       | 24,683,000                           |       |
| Accumulated  deficit                                                                                                                                                            |       | (5,629,000                   | )          | (6,278,000                           | )          |
| Total  shareholders’ equity                                                                                                                                                |       | 19,636,000                   |       | 18,643,000                           |       |
| Total liabilities and  shareholders’ equity                                                                                                                                |       | $                            | 22,710,000 |                                 | $          | 21,871,000 |   |

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(1)                                  Thecondensed consolidated balance sheet as of December 31, 2005 has beenprepared using information from the audited financial statements at that date.

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

2

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

| ** **                                                   | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| Net sales                                                    |       | $                                                                  | 7,971,000  |   | $ | 6,982,000 |   |
|                                                         |       |                                                               |       |   |   |
| Cost of goods  sold, excluding depreciation and amortization |       | 4,330,000                                                          |       | 3,821,000 |   |
|                                                         |       |                                                               |       |   |   |
| Gross margin                                                 |       | 3,641,000                                                          |       | 3,161,000 |   |
|                                                         |       |                                                               |       |   |   |
| Expenses:                                                    |       |                                                               |       |   |   |
| Selling, general and administrative                          |       | 2,496,000                                                          |       | 2,352,000 |   |
| Depreciation and amortization                                |       | 111,000                                                            |       | 123,000 |   |
|                                                         |       |                                                               |       |   |   |
| Income from  operations                                      |       | 1,034,000                                                          |       | 686,000 |   |
|                                                         |       |                                                               |       |   |   |
| Other income (expense)                                       |       |                                                               |       |   |   |
| Equity in income (loss) of unconsolidated affiliates         |       | (9,000                                                             | )          | — |   |
| Interest, net                                                |       | 5,000                                                              |       | 16,000 |   |
|                                                         |       |                                                               |       |   |   |
| Income before  provision for income taxes                    |       | 1,030,000                                                          |       | 702,000 |   |
|                                                         |       |                                                               |       |   |   |
| Provision for  income taxes                                  |       | 381,000                                                            |       | 258,000 |   |
|                                                         |       |                                                               |       |   |   |
| Net income                                                   |       | $                                                                  | 649,000    |   | $ | 444,000 |   |
|                                                         |       |                                                               |       |   |   |
| Basic net income  per share                                  |       | $                                                                  | 0.03       |   | $ | 0.02 |   |
|                                                         |       |                                                               |       |   |   |
| Diluted net  income per share                                |       | $                                                                  | 0.03       |   | $ | 0.02 |   |
|                                                         |       |                                                               |       |   |   |
| Basic weighted  average shares outstanding                   |       | 24,066,144                                                         |       | 23,646,008 |   |
|                                                         |       |                                                               |       |   |   |
| Diluted weighted  average shares outstanding                 |       | 25,035,255                                                         |       | 25,042,812 |   |

 

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

3

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

| ** **                         | ** ** | ** **            | ** ** | **Additional** | ** ** | ** **      | ** ** | ** **  | ** ** |
|------------------------------------|------------|-----------------------|------------|----------------|------------|-----------------|------------|-------------|------------|
| ** **                         | ** ** | **Common Stock** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                         | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2005 |       | 23,787,955            |       | $              | 238,000    |            | $          | 24,683,000  |       | $ | (6,278,000 | ) | $ | 18,643,000 |   |
|                               |       |                  |       |           |       |            |       |        |       |   |   |
| Options  exercised                 |       | 303,000               |       | 3,000          |       | 341,000         |       | —      |       | 344,000 |   |
|                               |       |                  |       |           |       |            |       |        |       |   |   |
| Net income                         |       | —                |       | —         |       | —          |       | 649,000     |       | 649,000 |   |
|                               |       |                  |       |           |       |            |       |        |       |   |   |
| Balance at  March 31, 2006    |       | 24,090,955            |       | $              | 241,000    |            | $          | 25,024,000  |       | $ | (5,629,000 | ) | $ | 19,636,000 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

4

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

| ** **                                                                     | ** ** | **For the Three months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                     | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net income                                                                     |       | $                                                                  | 649,000    |   | $ | 444,000 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                                               |       |   |   |
| Depreciation and amortization                                                  |       | 111,000                                                            |       | 123,000 |   |
| Equity in loss of unconsolidated affiliates                                    |       | 9,000                                                              |       | — |   |
| Changes in assets and liabilities:                                             |       |                                                               |       |   |   |
| Accounts receivable, net                                                       |       | (543,000                                                           | )          | (343,000 | ) |
| Inventories, net                                                               |       | (458,000                                                           | )          | (1,258,000 | ) |
| Prepaid expenses and other current assets                                      |       | (129,000                                                           | )          | 151,000 |   |
| Accounts payable and accrued liabilities                                       |       | (154,000                                                           | )          | (623,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| Net cash used in  operating activities:                                        |       | (515,000                                                           | )          | (1,506,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| **Cash  Flows From Investing Activities:**                                     | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                             |       | (86,000                                                            | )          | (267,000 | ) |
| Purchase of intangible assets                                                  |       | (24,000                                                            | )          | (2,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| Net cash used in  investing activities                                         |       | (110,000                                                           | )          | (269,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| **Cash  Flows From Financing Activities:**                                     | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Proceeds from the exercise of stock options                                    |       | 344,000                                                            |       | 289,000 |   |
| Payments for the repurchase of common stock                                    |       | —                                                             |       | (21,000 | ) |
| Net cash provided  by financing activities                                     |       | 344,000                                                            |       | 268,000 |   |
|                                                                           |       |                                                               |       |   |   |
| Decrease in cash  during the period                                            |       | (281,000                                                           | )          | (1,507,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| Cash and cash  equivalents, beginning of period                                |       | 1,163,000                                                          |       | 4,875,000 |   |
|                                                                           |       |                                                               |       |   |   |
| Cash and cash  equivalents, end of period                                      |       | $                                                                  | 882,000    |   | $ | 3,368,000 |   |
| Supplemental schedule  of non-cash operating activities:                       |       |                                                               |       |   |   |
| Elimination of gross  profit on inventory purchases from affiliate             |       | $                                                                  | 146,000    |   | — |   |

 

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

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

**1.****                                      TheCompany**

Alpha Pro Tech,Ltd. (Alpha ProTech, the Company, we, our, us) manufactures and distributes aline of disposable protective apparel and a line of infection control productsfor the cleanroom, industrial, pharmaceutical, medical and dental markets. Thedisposable protective apparel consists of a complete line of shoecovers,bouffant caps, coveralls, gowns, frocks and lab coats. The infection controlline of products includes a line of face masks and eye shields. The Companyalso manufactures and distributes a line of medical bed pads and accessories aswell as a line of pet beds. The Company’s products are sold both under the “AlphaPro Tech” brand name as well as under private label and are predominantly soldin the United States of America.

During the firstquarter of 2005, the Company commenced sales from a new business segment, AlphaProTech Engineered Products, Inc., a wholly-owned subsidiary of Alpha ProTech. This new segment consists of a line of construction supply weatherizationproducts as well as a line of paint with antimicrobials. The constructionsupply weatherization products consist of house wrap and synthetic roofunderlayment.

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

The interim financial information included herein is unaudited;however, the information reflects all adjustments (consisting of normalrecurring adjustments) that are, in the opinion of management, necessary forthe fair presentation of the consolidated financial position, results ofoperations and cash flows for the interim periods. The consolidated financialstatements should be read in conjunction with the consolidated financialstatements for the year ended December 31, 2005, which are included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2005 (“2005 10-K”). The results of operations for the three months ended March 31,2006 are not necessarily indicative of the results to be expected for the fullyear. The consolidated balance sheet at December 31, 2005 was extractedfrom the audited consolidated financial statements contained in the 2005 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 plans under which the Companymay grant incentive stock options and non-qualified stock options to employeesand non-employee directors. Stock options have been granted with exerciseprices at or above the fair market value on the date of grant. Options vest andexpire according to terms established at the grant date.

The Companyadopted Statement of Financial Accounting Standards No. 123R, Share-BasedPayment (“SFAS 123R”) effective January 1, 2006, using the modifiedprospective application method. SFAS 123R requires companies to recordcompensation expense for the value of all outstanding and unvested share-basedpayments, including employee stock options and similar awards. As of December 31,2005, the Company had no outstanding and unvested share-based payments. After December 31,2005, no new awards of any kind have been granted under any of the optionplans. As a result, the Company did not recognize any share-based compensationexpense in its consolidated financial statements for the three months ended March 31,2006.

Prior to theadoption of SFAS 123R, the Company accounted for its stock-based employeecompensation plans using the intrinsic value method prescribed by AccountingPrinciples Board Opinion No. 25, Accounting for Stock Issued to Employees.No stock-based employee compensation cost was reflected in net income as alloptions granted under those stock-based employee compensation plans hadexercise prices equal to the market values of the underlying common shares onthe dates of grant. The following table illustrates the effect on net incomeand

6

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earnings per shareas if the Company had applied the fair value recognition provisions of SFAS123R to stock-based employee compensation.

| _                                                                                                                                            | ** ** | **For the Three  Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
|                                                                                                                                              | ** ** | **2005**                                                       | ** ** |
| Net income, as  reported                                                                                                                     |       | $                                                              | 444,000    |   |
|                                                                                                                                         |       |                                                           |       |
| Add: Total  stock-based employee compensation expense included in reported net income,  net of related tax effects                           |       | —                                                         |       |
| Deduct: Total  stock-based employee compensation expense determined using the fair value  method for all rewards, net of related tax effects |       | (90,000                                                        | )          |
| Pro forma net  income                                                                                                                        |       | $                                                              | 354,000    |   |
|                                                                                                                                         |       |                                                           |       |
| Net income per  share:                                                                                                                       |       |                                                           |       |
| Basic—as reported                                                                                                                       |       | $                                                              | 0.02       |   |
| Basic—pro forma                                                                                                                         |       | 0.01                                                           |       |
| Diluted—as reported                                                                                                                     |       | 0.02                                                           |       |
| Diluted—pro  forma                                                                                                                      |       | 0.01                                                           |       |

 

Stock options topurchase 2,510,000 and 2,912,000 shares of common stock were outstanding at March 31,2006 and 2005, respectively. Of these outstanding stock options, none of theoptions to purchase common stock at March 31, 2006 and 2005 were excludedfrom the computation of diluted earnings per share because the exercise pricesof the stock options were greater than the average share price of the Company’scommon stock and, therefore, the effect would have been antidilutive.  Based on the application of the treasury stockmethod, the dilutive effect of stock options was 969,111 and 113,000 for thethree months ended March 31, 2006, and 2005 respectively.

Thefollowing table summarizes stock option activity during the three months ended March 31,2006:

|                                                             | ** ** | **# of Options** | ** ** | **Weighted-Average Price** | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| Options  outstanding and exercisable December 31, 2005 |       | 2,813,000                  |       | $                               | 1.03       |   |
|                                                        |       |                       |       |                            |       |
| Exercised                                                   |       | (303,000                   | )          | 1.13                            |       |
|                                                        |       |                       |       |                            |       |
| Forfeited or  expired                                       |       | 0                          |       | 0.00                            |       |
|                                                        |       |                       |       |                            |       |
| Options outstanding and  exercisable at March 31, 2006 |       | 2,510,000                  |       | $                               | 1.02       |   |

 

Theweighted-average contractual life of stock options outstanding and exercisableat March 31, 2006 was 2.7 years. At March 31, 2006, the aggregateintrinsic value of stock options outstanding and exercisable was $3,952,000.The intrinsic value is the amount by which the market value of 

7

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the underlyingcommon stock exceeds the exercise price of the respective stock option. Theintrinsic value of stock options exercised during the three months ended March 31,2006 and 2005 was $ 345,000 and $113,000 respectively.

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

Based on theCompany’s review of new accounting standards released during the quarter ended March 31,2006 the Company did not identify any standards requiring adoption that wouldhave a significant impact on its consolidated financial statements.

We adoptedStatement of Financial Accounting Standards No. 123R, Share-Based Payment(SFAS 123R) effective January 1, 2006, using the modified prospectiveapplication method. SFAS 123R requires companies to record compensation expensefor the value of all outstanding and unvested share-based payments, includingemployee stock options and similar awards. As of January 1, 2006, we hadno outstanding and unvested share-based payments. As a result, we did notrecognize any compensation expense related to share-based payments in ourconsolidated financial statements for the three months ended March 31,2006.

**5.****                                      Inventories**

Inventoriesconsist of the following:

|                                                               | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials                                                 |       | $                        | 8,397,000  |                        | $          | 7,376,000 |   |
| Work in process                                               |       | 185,000                  |       | 325,000                     |       |
| Finished goods                                                |       | 2,555,000                |       | 3,124,000                   |       |
|                                                          |       | 11,137,000               |       | 10,825,000                  |       |
| Less reserve for  slow-moving, obsolete or unusable inventory |       | (326,000                 | )          | (326,000                    | )          |
|                                                          |       | $                        | 10,811,000 |                        | $          | 10,499,000 |   |

 

**6.****                                      Investmentin and Advances to Unconsolidated Affiliates**

On June 14, 2005, Alpha ProTech EngineeredProducts, Inc. entered into a joint venture with a manufacturer in Indiafor the production of building products. Under terms of the joint ventureagreement, a private company, Harmony Plastics Private Limited (“Harmony”), wascreated with ownership interests of 41.66% by Alpha ProTech Engineered Products, Inc.and 58.34% by Maple Industries and Associates. Alpha ProTech EngineeredProducts, Inc. contributed $508,000 for share capital and Maple Industriesand Associates contributed $708,000.

This joint venture positions Alpha ProTech Engineered Products torespond to current and expected increased product demand for house wrap andsynthetic roofing underlayment, and future capacity for sales of specialtyroofing component products and custom products for industrial applicationsrequiring high quality extrusion coated fabrics.

The capital from the initial funding along with a bank loan, which isguaranteed exclusively by Maple Industries and Associates and the assets ofHarmony Plastics Private Limited, was utilized to purchase an existing 33,000square-foot manufacturing facility in India; this facility includes 

8

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manufacturing equipment necessary to produce roof underlayment. Harmonyhas also built a new 60,000 square-foot facility for the manufacturing of housewrap and other building products.

The Company is subject to the provisions of FIN 46 which defines thecriteria by which the Company determines the proper accounting for itsinvestments 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 entities that qualify as variable interestentities, FIN 46 requires the Company to determine whether or not the Companyis the primary beneficiary of the VIE, and if so, to consolidate the VIE.

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

The Company records its investment in Harmony as “Equity investments inand advances to unconsolidated affiliates” on the accompanying ConsolidatedBalance Sheets. The Company records its equity interest in Harmony’s results ofoperations as equity in income (loss) of unconsolidated affiliates on theaccompanying Consolidated Statements of Operations. The Company has notreceived distributions from Harmony related to its investment.

The Company reviews its investment in Harmony for impairment inaccordance with APB No. 18, “The Equity Method of Accounting forInvestments in Common Stock.” APB No. 18 requires recognition of a losswhen the decline in an investment is other-than-temporary. In determiningwhether the decline is other-than-temporary, the Company considers the natureof the industry in which Harmony operates, their historical performance, theirperformance in relation to their peers and the current economic environment.

As of March 31, 2006, Alpha ProTech EngineeredProducts has invested $1,450,000 in the joint venture; $508,000 for sharecapital and a $942,000 long term advance. The $942,000 long term non interestbearing advance for materials is to be fifty percent repaid monthly over a sixyear term commencing in July 2006 and the balance is to be paid in theseventh year.

Harmony commenced operations in August of 2005. Forthe three months ended March 31, 2006, we recorded and equity loss inunconsolidated affiliate of $9,000, consisting of our $137,000 proportionalownership of Harmony’s net income offset by a $146,000 adjustment for theelimination of Harmony’s profit related to inventory sold from Harmony to uswhich we had not yet sold to third parties. Prior to the three months ended March 31,2006, we recorded an equity loss in unconsolidated affiliate of $16,000,consisting of our $97,000 proportional ownership of Harmony’s net income offsetby a $113,000 elimination of Harmony’s profit related to inventory sold fromHarmony to us which we had not yet sold to third parties

**7.**                                     AccruedLiabilities

***Accrued liabilities consist of the following:***

|                            | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Payroll expenses           |       | $                        | 109,000    |                        | $          | 188,000 |   |
| Bonuses payable            |       | 833,000                  |       | 669,000                     |       |
| Accrued  professional fees |       | 78,000                   |       | 160,000                     |       |
| Accrued rebates  and other |       | 103,000                  |       | 354,000                     |       |
| Income taxes  payable      |       | 359,000                  |       | 557,000                     |       |
|                       |       | $                        | 1,482,000  |                        | $          | 1,928,000 |   |

** **

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** **

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

The following table provides a reconciliation of both net income andthe number of shares used in the computation of “basic” earnings per share(EPS), which utilizes the weighted average number of shares outstanding withoutregard to potential shares, and “diluted” EPS, which includes all such dilutiveshares:
| ** **                                         | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|                                                    | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| Net income  (Numerator)                            |       | $649,000                                                           |       | $444,000 |   |
| Shares (Denominator):                              |       |                                                               |       |   |   |
| Basic weighted average shares outstanding          |       | 24,066,144                                                         |       | 23,646,008 |   |
| Add: Dilutive effect of stock options and warrants |       | 969,111                                                            |       | 1,396,804 |   |
| Diluted weighted average shares outstanding        |       | 25,035,255                                                         |       | 25,042,812 |   |
| Net income per share:                              |       |                                                               |       |   |   |
| Basic                                              |       | $0.03                                                              |       | $0.02 |   |
| Diluted                                            |       | $0.03                                                              |       | $0.02 |   |

 

**9.****                                  Activityof 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.

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

Engineered Products: this fourth segment was formedduring the second quarter 2004 with the establishment of Alpha ProTechEngineered Products, Inc., a wholly-owned subsidiary. This segmentconsists of a line of construction supply weatherization products as well as aline of paint with antimicrobials. The construction supply weatherizationproducts consist of building wrap, 

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synthetic roof underlayment and antimicrobial moldresistant framing sealant. The line of paint with antimicrobials is designed toinhibit growth of bacteria, fungi and algae on the painted surfaces inhospitals, surgical rooms and cleanrooms and associated controlledenvironments.

The accountingpolicies of the segments are the same as those described previously under “Summaryof Significant Accounting Policies” in the 2005 10-K. Segment dataexcludes charges allocated to head office and corporate sales/marketingdepartments and income taxes. The Company evaluates the performance of itssegments and allocates resources to them based primarily on net sales

The following table shows net sales for each segmentfor the three months ended March 31, 2006 and 2005:

|                                | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|
|                                | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| Disposable  protective apparel |       | $                                                                  | 4,070,000  |   | $ | 4,243,000 |   |
| Infection  control             |       | 1,683,000                                                          |       | 1,216,000 |   |
| Engineered  products           |       | 1,782,000                                                          |       | 990,000 |   |
| Extended care                  |       | 436,000                                                            |       | 533,000 |   |
|                           |       |                                                               |       |   |   |
| Consolidated total net  sales  |       | $                                                                  | 7,971,000  |   | $ | 6,982,000 |   |

 

The following table shows the reconciliation of totalsegment income to total consolidated net income for the three months and ninemonths ended March 31, 2006 and 2005:

|                                          | ** ** | **For the Three Months Ended  March  31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                                 | ** ** | **2005** | ** ** |
| Disposable  protective apparel           |       | $                                                                        | 1,370,000  |   | $ | 1,482,000 |   |
| Infection  control                       |       | 793,000                                                                  |       | 477,000 |   |
| Engineered  products                     |       | 135,000                                                                  |       | (115,000 | ) |
| Extended care                            |       | 58,000                                                                   |       | 88,000 |   |
|                                     |       |                                                                     |       |   |   |
| Total segment  income                    |       | 2,356,000                                                                |       | 1,932,000 |   |
| Unallocated  corporate overhead expenses |       | (1,326,000                                                               | )          | (1,230,000 | ) |
| Provision for  income taxes              |       | (381,000                                                                 | )          | (258,000 | ) |
|                                     |       |                                                                     |       |   |   |
| Consolidated net income                  |       | $                                                                        | 649,000    |   | $ | 444,000 |   |

 

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**ITEM 2**                       MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND 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-Q contains “forward-lookingstatements” that are made pursuant to the safe-harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements includestatements concerning plans, objectives, goals, strategies, future events,future revenues or performance, capital expenditures and other information thatis not historical information. When used in this report, the words “estimates,”“expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” andvariations of such words or similar expressions are intended to identifyforward-looking statements. Additional forward-looking statements may be madeby us from time to time. All such subsequent forward-looking statements,whether written or oral and whether made by or on behalf of us, are alsoexpressly qualified by these cautionary statements.

Our forward-looking statements are based upon ourcurrent expectations and various assumptions. Our expectations, beliefs andprojections are expressed in good faith and we believe there is a reasonablebasis for them, including without limitation, management’s examination ofhistorical operating trends, data contained in our records and other dataavailable from third parties. However, we cannot assure you that management’sexpectations; beliefs and projections will result or be achieved oraccomplished. Our forward-looking statements apply only as of the date made.Except as required by law, we undertake no obligation to publicly update orrevise forward-looking statements which may be made to reflect events orcircumstances after the date made or to reflect the occurrence of unanticipatedevents.

**Whereto find more information about us.** We make available free of charge on our Internet website(http://www.alphaprotech.com) our most recent Annual Report on Form 10-K,our most recent Quarterly Report on Form 10-Q, any current reportson Form 8-K filed since our most recent Annual Report on Form 10-Kand 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.

**Critical Accounting 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 on past experience and on various otherassumptions that are believed to be reasonable under the circumstances. Theapplication of these accounting policies on a consistent basis enables us toprovide timely and reliable financial information. Our critical accountingpolices include the following:

Inventories:Inventories include freight-in, materials, labor and overhead costs and arestated at the lower of cost (computed on a standard cost basis, whichapproximates average cost) or market. Provision is made for slow-moving,obsolete or unusable inventory. We assess our inventory for estimatedobsolescence or unmarketable inventory and write down the difference betweenthe cost of inventory and the estimated market value based upon assumptionsabout future sales and supply on-hand. If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required.

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Revenue Recognition: Forsales transactions, we comply with the provisions of the SEC’s Staff AccountingBulletin (“SAB”) No. 104, “Revenue Recognition,” which states that revenueshould be recognized when the 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 determinable; and (4) collection of the resultingreceivable is reasonably assured. These criteria are satisfied upon shipment ofproduct and revenues are recognized accordingly.

Sales are reduced for anyanticipated sales returns, rebates and allowances based on historicalexperience. Since our return policy is only 90 days and our products are notgenerally susceptible to external factors such as technological obsolescence orsignificant changes in demand, we are able to make a reasonable estimate forreturns. We offer end-user product specific and sales volume rebates to selectdistributors. Our rebates are based on actual sales and accrued monthly.

Stock Based Compensation:The Company adopted Statement of Financial Accounting Standards No. 123R,Share-Based Payment (“SFAS 123R”) effective January 1, 2006, using themodified prospective application method. SFAS 123R requires companies to recordcompensation expense for the value of all outstanding and unvested share-basedpayments, including employee stock options and similar awards. As of January 1,2006, the Company had no outstanding and unvested share-based payments. TheCompany did not recognize any share-based compensation expense in itsconsolidated financial statements for the three months ended March 31,2006.

Prior to the adoption of SFAS123R, the Company accounted for its stock-based employee compensation plansusing the intrinsic value method prescribed by Accounting Principles BoardOpinion No. 25, Accounting for Stock Issued to Employees. No stock-basedemployee compensation cost was reflected in net income as all options grantedunder those stock-based employee compensation plans had exercise prices equalto the market values of the underlying common shares on the dates of grant. Thefollowing table illustrates the effect on net income and earnings per share asif the Company had applied the fair value recognition provisions of SFAS 123Rto stock-based employee compensation.

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. Our stock options have characteristicssignificantly different from those of traded options and changes in thesubjective input assumptions can materially affect their fair value.

**OVERVIEW**

Alpha Pro Tech is in thebusiness of protecting people, products and environments. We accomplish this bydeveloping, manufacturing and marketing a line of high-value disposableprotective apparel and infection control products for the cleanroom,industrial, pharmaceutical, medical and dental markets. We also manufacture anddistribute a line of medical bed pads and accessories as well as a line of petbeds. Our products are sold both under the “Alpha Pro Tech” brand name as wellas under private label.

During the first quarterof 2005, we commenced sales from a new business segment, Alpha ProTechEngineered Products, Inc. (Engineered Products), a wholly-owned subsidiaryof Alpha Pro Tech. This new segment consists of a line of construction supplyweatherization products as well as a line of paint with antimicrobials. Theconstruction supply weatherization products consists of house wrap (PermaWrapTM) and a synthetic roof underlayment (AlphaProtectorTM — SUL). 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. In addition to our paint withantimicrobials, we have also developed a line of sealants with antimicrobialsto be used for 

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mold remediation. TheEngineered Products segment is expected to contribute significantly to revenuegrowth in 2006.

This line of products isa natural extension of our core capabilities: creating proprietary productsdesigned to protect people and environments. The house wrap offers a weatherresistant barrier designed to lower energy consumption costs. The proprietarysynthetic roof underlayment is designed to resist the environment, as opposedto conventional roofing underlayment that is prone to rapid degradation andmold growth.

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 a lineof face masks and eye shields; extended care products, consisting of a line ofmedical bed pads, wheelchair covers, geriatric chair surfaces, operating roomtable surfaces and pediatric surfaces;  aline of pet beds; construction weatherization products, consisting of housewrap and synthetic roof underlayment; and a line of paint with antimicrobialsdesigned to inhibit growth of bacteria, fungi and algae on painted surfaces.

Our products asclassified above are grouped into four business segments. The Disposable ProtectiveApparel segment, consisting of disposable protective apparel; the InfectionControl segment, consisting of face masks and eye shields; the Extended Caresegment, consisting of extended care products, namely medical bed pads and petbeds; and the Engineered Products segment, consisting of constructionweatherization products such as house wrap and synthetic roof underlayment aswell as a 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 and veterinarians.Our products are distributed principally in the United States through a networkconsisting of purchasing groups, national distributors, local distributors,independent sales representatives and our own sales and marketing force.

Engineered Products segmentsales of house wrap and synthetic roof underlayment during the first quarter of2006 was $1,782,000 compared to $990,000 for the same period of 2005, anincrease of 80.0%. This segment is expected to grow significantly in 2006 ascompared to $4.7million in 2005.

Sales in our DisposableProtective Apparel segment that services the pharmaceutical, cleanroom andindustrial safety markets declined by 4.1% or $173,000 to $4,070,000 for thequarter ended March 31, 2006 compared to $4,243,000 for the quarter ended March 31,2005. Orders were down from our largest distributor throughout most of thefirst quarter as they reduced inventory levels. Their orders normalized beforethe end of the first quarter and we expect sales to improve in coming quarters.

Infection Control segmentsales increased by $467,000 or 38.4% to $1,683,000 for the first quarter ended March 31,2006 compared to $1,216,000 for the same period of 2005. This is primarily dueto strong     N-95 Respirator masksales as a result of concerns about Avian Flu.

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# **RESULTS OF OPERATIONS**

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

|                                           | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| Sales                                     |       | 100.0                                                              | %          | 100.0 | % |
|                                      |       |                                                               |       |   |   |
| Gross profit                              |       | 45.7                                                               |       | 45.3 |   |
|                                      |       |                                                               |       |   |   |
| Selling, general  and administrative      |       | 31.3                                                               |       | 33.7 |   |
|                                      |       |                                                               |       |   |   |
| Income from  operations                   |       | 13.0                                                               |       | 9.8 |   |
|                                      |       |                                                               |       |   |   |
| Income before  provision for income taxes |       | 12.9                                                               |       | 10.1 |   |
|                                      |       |                                                               |       |   |   |
| Net income                                |       | 8.1                                                                |       | 6.4 |   |

 

## **Three months ended March 31, 2006,compared to the three March 31, 2005**

**Sales.**Consolidated sales for the quarter ended March 31, 2006 increased to$7,971,000 from $6,982,000 for the quarter ended March 31, 2005,representing an increase of $989,000 or 14.2%. We attribute the increaseprimarily to increased sales of construction supply weatherization products of$792,000 and to increased infection control segment sales of $467,000,partially offset by decreased sales of disposable protective apparel productsof $173,000 and decreased sales from our Extended Care Unreal Lambskin segmentof $97,000.

Sales for the DisposableProtective Apparel segment for the quarter ended March 31, 2006 decreasedby $173,000 or 4.1% to $4,070,000 compared to $4,243,000 for the same period of2005. The Disposable Protective Apparel segment sales decrease continues to beaffected by a decline in shipments to our largest distributor that commencedduring the fourth quarter of 2005. Although our shipments declined in the firstquarter of 2006, shipments to the distributor’s end users were up slightly ascompared to the first quarter of 2005. The decline in shipments to thisdistributor can be attributed to slowdown in orders from them to reduce theirinventory levels. Orders from this distributor normalized during the latterpart of the first quarter of 2006 and we expect growth from this distributor in2006 as we launch our ComforTech® and ComforTech® CertifiedTM line of products.

Infection Control segmentsales for the quarter ended March 31, 2006 increased by $467,000 or 38.4%to $1,683,000 compared to $1,216,000 for the same period of 2005. Mask sales inthis segment, especially sales of our N-95 NIOSH approved Respiratormask, were very strong in the first quarter of 2006 as concerns about Avian Fluheightened. We expect continued strength in this segment if the Avian Flucontinues to be a worldwide concern. We have significant manufacturing capacityfor the N-95 Respirator mask in the event that demand surges.

The Engineered Productssegment consists of a line of construction supply weatherization products(house wrap, roof underlayment) as well as a line of paint with antimicrobials.Engineered Products sales for the quarter ended March 31, 2006 increasedby $792,000 or 80.0% to $1,782,000 compared to $990,000 for the same period of2005. The breakdown of the Engineered Products sales is as follows for 

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# ** **

the quarter ended March 31,2006: 74% house wrap, 25% roof underlayment and less than 1% antimicrobialpaint. Sales by quarter for Engineered Products are as follows: first quarter2005 was $1.0 million, second quarter 2005 was $1.1 million, third quarter 2005was $1.4 million, fourth quarter 2005 was $1.2 million and first quarter 2006was $1.8 million.  We, are working veryclosely with our exclusive distributor, Perma “R,” and are encouraged by theresponse to our product line. We expect significant growth from this segment in2006.

Sales from ourExtended Care Unreal Lambskin and other related products, which includes a lineof medical bed pads as well as pet beds, decreased by $97,000 or 18.2% to$436,000 for the quarter ended March 31, 2006  from $533,000 for the quarter ended March 31,2005. The decrease in sales is primarily the result of less medical bed padsales. This line of products is not expected to be a growth segment for theCompany.

**GrossProfit**   Gross profit increased by 15.2% to $3,641,000 forthe quarter ended March 31, 2006 from $3,161,000 for the same period in2005. Gross profit margin increased to 45.7% for the quarter ended March 31,2006 from 45.3% for the same period in 2005. Excluding Engineered Products,gross profit margin was 50.3% for the quarter ended March 31, 2006compared to 49.3% for the same period of 2005.

Gross profit on the Engineered Products segment was29.5% for the quarter ended March 31, 2006 as compared to 20.6% for thesame period of 2005. Gross profit by quarter for Engineered Products is asfollows: first quarter 2005 was 20.6%, second quarter 2005 was 25.2%, thirdquarter 2005 was 28.2%, fourth quarter 2005 was 25.1% and first quarter 2006was 29.5%. Gross profit on this product line is expected to increase to the lowto mid 30% range by the second half of this year as the joint ventureproduction facility in India becomes fully operational.

**Selling, General andAdministrative Expenses.**Selling, general and administrativeexpenses increased by $144,000 or 6.1% to $2,495,000 for the quarter ended March 31,2006 from $2,352,000 for the quarter ended March 31, 2005. As a percentageof net sales, selling, general and administrative expenses decreased to 31.3%for the quarter ended March 31, 2006 from 33.7% for the same period in2005. . We believe that we have built the infrastructure required tosubstantially grow our business and as our revenue grows our expenses areexpected to continue to decrease as a percentage of sales.

The increase of $144,000in selling, general and administrative expenses primarily consists of increasedemployee compensation expense of $160,000, increased expenses for EngineeredProducts of $59,000, increased expense for the executive bonus program of$36,000, increased public company expenses of $35,000, and increasedmiscellaneous expenses of $13,000, partially offset by decreased Sarbanes-OxleyCorporate Governance costs of $44,000, decreased marketing and commissionexpenses of $55,000, decreased office expenses of $35,000 and decreased USforeign exchange expense of $25,000.

The chief executiveofficer and president are each entitled to a bonus equal to 5% of the pre-taxprofits of the Company. Total bonuses of $114,000 were accrued for the quarterended March 31, 2006 as compared to $78,000 in the same period of 2005.

**Depreciation and Amortization.**Depreciationand amortization expense decreased by $12,000 or 9.8% to $111,000 for thequarter ended March 31, 2006 from $123,000 for the same period in 2005.The decrease is primarily attributable to a reduction in depreciation foroffice equipment, computers and software, partially offset by increaseddepreciation for Engineered Products.

**Income from Operations.**Incomefrom operations increased by $348,000 or 50.7%, to $1,034,000 for the quarterended March 31, 2006 as compared to income from operations of $686,000 forthe quarter ended March 31, 2005. The increase in income from operationsis due to an increase in gross profit of $480,000 and a decrease indepreciation and amortization of $12,000, partially offset by an increase inselling, general and administrative expenses of $144,000.

 **Net Interest.**Forthe quarter ended March 31, 2006, we had net interest income of $5,000compared to net interest income of $16,000 for the quarter ended March 31,2005. Interest expense remained flat at

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# ** **

$2,000 for the quarterended March 31, 2006 compared to the same period of 2005. Interest incomedecreased to $7,000 for the quarter ended March 31, 2006 as compared to$18,000 for the same period of 2005.

**Equity in income (loss) ofunconsolidated affiliates.**On June14, 2005 Alpha ProTechEngineered Products, Inc. entered into a joint venture with a manufacturerin India for the production of building products. Under terms of the jointventure agreement, a private company, Harmony Plastics Private Limited (Harmony),was created with ownership interests of 41.66% by Alpha ProTech EngineeredProducts, Inc. and 58.34% by Maple Industries and Associates. AlphaProTech Engineered Products has invested $1,450,000 in the joint venture;$508,000 for share capital and $942,000 in a long term non-interest bearingadvance. Half of this $942,000 advance is to be repaid monthly over a six yearterm commencing in July 2006 and the balance is to be paid in the seventhyear.

The Company is subject tothe provisions of FASB Interpretation (“FIN”) No. 46, “Consolidation ofVariable Interest Entities—an interpretation of ARB No. 51,” whichredefines the criteria by which the Company determines the proper accountingfor its investments in related entities. Specifically, FIN 46 requires theCompany to assess whether or not related entities are variable interestentities (“VIE”s), as defined. For those related entities that qualify asvariable interest entities, FIN 46 requires the Company to determine whether ornot the Company is the primary beneficiary of the VIE, and if so, toconsolidate the VIE. The Company has determined that Harmony is not a VIE andis therefore considered to be an unconsolidated affiliate.

Harmony commencedoperations in August of 2005. For the three months ended March 31,2006, we recorded an equity loss in unconsolidated affiliate of $9,000,consisting of our $137,000 proportional ownership of Harmony’s net incomeoffset by a $146,000 adjustment for the elimination of Harmony’s profit relatedto inventory sold from Harmony to us which we had not yet sold to thirdparties.

**Income Before Provision forIncome Taxes.**Income before provision for income taxes forthe quarter ended March 31, 2006 was $1,030,000 compared to $702,000 forthe quarter ended March 31, 2005, representing an increase of $328,000 or46.7%. The increase in income before provision for income taxes is due to anincrease in gross profit of $480,000, a decrease in depreciation andamortization of $12,000, partially offset by an increase in selling, generaland administrative expenses of $144,000, a decrease in net interest income of$11,000 and a loss of $9,000 from our unconsolidated affiliate (Harmony).

**Provision for Income Taxes**The provision for income taxes for the quarter ended March 31, 2006 was$381,000 compared to $258,000 for the quarter ended March 31, 2005.  The increase in income taxes is due to higherincome before provision for income taxes in 2006. The effective tax rate was37.0% for the quarter ended March 31, 2006 as compared to 36.8% for thesame period in 2005.

**Net Income.**Netincome for the quarter ended March 31, 2006 was $649,000 compared to netincome of $444,000 for the quarter ended March 31, 2005, an increase of$205,000 or 46.2%. The net income increase was primarily due to an increase inincome before provision for income taxes of $328,000, partially offset by anincrease in income taxes of $123,000. Net income as a percentage of sales forthe quarter ended March 31, 2006 and 2005 was 8.1% and 6.4% respectively. Basicand diluted income per share for the quarter ended March 31, 2006 and 2005were $0.03 and $0.02, respectively.

**LIQUIDITY AND CAPITAL RESOURCES**

As of March 31,2006, we had cash and cash equivalents of $882,000 and working capital of$15,184,000, an increase in working capital of 7.0% or $999,000 since December 31,2005. As of March 31, 2006, our current ratio was 7.26:1 as compared to6.51:1 as of December 30, 2005. Cash decreased by $281,000 to $882,000 asof March 31, 2006 as compared to $1,163,000 as of December 31, 2005. Thedecrease in cash is primarily due to cash used in operating activities of$515,000, the purchase of property and equipment of $86,000 and the purchasesof intangible assets of $24,000, partially offset by cash proceeds of $344,000from the exercise of stock options.

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# ** **

We have a $3,500,000 credit facility with a bank,consisting of a line of credit with interest at prime plus 0.5%. At March 31,2006, the prime interest rate was 7.75%. The line of credit was renewed in May 2005and expires in May 2007. The Company’s borrowing capacity on the line ofcredit was $3,184,000 at March 31, 2006. The available line of credit isbased on a formula of eligible accounts receivable and inventories. As of March 31,2006, we had not borrowed on this line of credit. As of March 31, 2006, wedid not have any debt.

Net cash used inoperating activities was $515,000 for the quarter ended March 31, 2006compared to $1,506,000 net cash used in operating activities for the quarterended March 31, 2005. The net cash used in operating activities of$515,000 for the quarter ended March 31, 2006 is due to an increase ininventory of $312,000, which excludes the non-cash elimination of gross profiton inventory from the unconsolidated affiliate of $146,000, an increase inaccounts receivable of $543,000, an increase in prepaid expenses of $129,000,and a decrease in accounts payable and accrued liabilities of $154,000,partially offset by net income of $649,000, equity in loss of unconsolidatedaffiliates of $9,000 and depreciation and amortization of $111,000. The netcash used in operating activities of $1,506,000 for the quarter ended March 31,2005 is due to an increase in inventory of $1,258,000, an increase in accountsreceivable of $343,000, and a decrease in accounts payable and accruedliabilities of $623,000, partially offset by net income of $444,000, a decreasein prepaid expenses of $151,000 and depreciation and amortization of $123,000.

Accounts receivableincreased by $543,000 or 13.7% to $4,497,000 for the three months ended March 31,2006 from $3,954,000 as of December 31, 2005. The majority of thisincrease is due to increased sales of 13.6% for the first quarter of 2006 ascompared to the fourth quarter of 2005. The increased sales are primarilyattributable to the Engineered Products segment. Accounts receivable due fromour distributor for Engineered Products increased by $0.5 million to $0.9million at March 31, 2006 from $0.4 million at December 31, 2005. Thenumber of day’s sales outstanding as of March 31, 2005 was 51 days ascompared to the same 51 days as of December 31, 2005.

Inventory increased by$312,000 to $10,811,000 for the quarter ended March 31, 2006 from$10,499,000 as of December 31, 2005. The increase is primarilyattributable to an increase of $0.9 million in inventory for the EngineeredProduct segment, partially offset by a decrease in Disposable Apparel inventoryof $0.6 million. Current inventory levels for the Engineered Product segmentare high based on present sales levels, which will allow us to serviceanticipated sales growth.

Prepaid expenses andother current assets increased by $129,000 to $844,000 for the quarter ended March 31,2006 from $949,000 as of December 31, 2005. The increase of $129,000 isprimarily due to a an increase in prepaid insurance of $36,000, an increase inprepaid rent of $58,000 and a increase of $29,000 in prepaid trade shows forEngineered Products.

Accounts payable andaccrued liabilities as of March 31, 2006 decreased by $154,000 to$2,422,000 from $2,576,000. The net change in 2006 was primarily due to anincrease in trade payables of $292,000, an increase in accrued commission/bonuspayable of $164,000, partially offset by a decrease in accrued rebates of$251,000, a decrease in income tax payable of $198,000, a decrease in accruedprofessional fees of $82,000 and a decrease in accrued payroll of $79,000.

Net cash used ininvesting activities was $110,000 and $269,000 for the three months ended March 31,2006 and 2005, respectively. Our investing activity in 2006 consisted primarilyof expenditures for property and equipment of $86,000 and the purchase ofintangible assets of $24,000. This compared to expenditures for property andequipment of $287,000 and purchases of intangible assets of $2,000. The expendituresfor property and equipment in 2006 and 2005 were principally for the purchaseof equipment for our Engineered Products segment.

In 2005, Alpha ProTechEngineered Products, Inc. entered into a joint venture with a manufacturerin India for the production of building products. Under terms of the jointventure agreement, a private company, Harmony Plastics Private Limited(Harmony), was created with ownership interest of 41.66% by Alpha ProTechEngineered Products, Inc. and 58.34% by Maple Industries and Associates. AlphaProTech Engineered Products, Inc. contributed $508,000 and MapleIndustries and Associates 

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contributed $708,000 forshare capital. The Company has determined that its investment in Harmony is nota variable interest entity and is considered an unconsolidated affiliate.

Alpha ProTech EngineeredProducts has invested $1,450,000 in Harmony; $508,000 for share capital and$942,000 in a long term non-interest bearing advance. Half of this $942,000advance is to be repaid monthly over a six year term commencing in July 2006and the balance is to be paid in the seventh year. Harmony commenced operationsin August of 2005. For the three months ended March 31, 2006, werecorded and equity loss in unconsolidated affiliate of $9,000, consisting ofour $137,000 proportional ownership of Harmony’s net income offset by a$146,000 elimination of Harmony’s profit related to inventory sold from Harmonyto us which we had not yet sold to third parties.

We expect to purchaseapproximately $250,000 of equipment in 2006. These expenditures will beprimarily for equipment for the Engineered Products and Infection Controlsegments.

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 sharerepurchase program is the sixth $500,000 buyback authorized by the Board ofDirectors. In all instances, we are retiring the shares. For the quarter ended March 31,2006, we did not buy back any shares of common stock. As of March 31,2006, we have bought back a total of 2,333,800 shares of common stock at a costof $2,518,000 since the end of 1999.

For the quarter ended March 31,2006, net cash provided by financing activities was $344,000 compared to cashprovided by financing activities of $268,000 for the same period of 2005. Ourfinancing activities in 2006 consisted of cash proceeds of $344,000 from theexercise of 303,000 stock options. Our financing activities in 2005 consistedprimarily of cash proceeds of $289,000 from the exercise of 232,106 stockoptions, partially offset by payments of $21,000 for the repurchase of 10,000shares of common stock.

As shown below, at March 31,2006, our contractual cash obligations totaled approximately $1,372,000.

**Contractual Obligations**
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 years** | ** ** |
|                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating leases                    |       | $                                         | 1,372,000  |   | $ | 499,000 |   | $ | 658,000 |   | $ | 215,000 |   | — |   |
|                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Line of credit                      |       | —                                    |       | — |   | — |   | — |   | — |   |
|                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Total contractual cash  obligations |       | $                                         | 1,372,000  |   | $ | 499,000 |   | $ | 658,000 |   | $ | 215,000 |   | — |   |

 

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 March 31,2006, the Company did not identify any standards requiring adoption that wouldhave a significant impact on its consolidated financial statements.

We adopted Statement ofFinancial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R)effective January 1, 2006, using the modified prospective applicationmethod. SFAS 123R requires companies to record compensation expense for thevalue of all outstanding and unvested share-based payments, including employeestock options and similar awards. As of January 1, 2006, we had nooutstanding and unvested share-based payments. As a result, we did notrecognize any compensation expense related to share-based payments in ourconsolidated financial statements for the three months ended March 31,2006.

# **ITEM 3   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

We subcontract themanufacture of products in China and Mexico and have a joint venture in India. TheCompany’s results of operations could be negatively affected by factors such aschanges in foreign currency exchange rates due to stronger economic conditionsin 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 itsinterest rate or foreign exchange risks.

# **ITEM 4.   CONTROLS AND 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 theSecurities Exchange Act of 1934), as of March 31, 2006. Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective to providereasonable assurance that material information related to the Company and itsconsolidated subsidiaries would be made known to them by others within thoseentities, particularly during the period ending March 31, 2006, the periodin which 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 fiscalquarter ended March 31, 2006, that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

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

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

 

      (a) Exhibits

31.1 Certification Pursuant to Rule 13a-14(b) andRule 15d-14(b) of the Exchange Act, Signed by Chief ExecutiveOfficer (filed herewith)

31.2 Certification Pursuant to Rule 13a-14(b) andRule 15d-14(b) of the Exchange Act, Signed by Chief FinancialOfficer (filed herewith)

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

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

      (b) Reports on Form 8-K

A Form 8-K was filed during the quarter covered by thisreport,  reporting the issuance of arelease dated March 22, announcing registrants financial results for thefourth quarter and fiscal year ended December 31, 2005.

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15 (d) of the Securities ExchangeAct of 1934, the Registrant has fully caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|            |       |              | **ALPHA PRO TECH, LTD.** |
|------------|------------|-------------------|--------------------------|
| ** ** |       |              |                     |   | ** ** |
| DATE:      | ** ** | May 10, 2006 |                     | BY: |  /s/  SHELDON HOFFMAN |
|       |       |              |                     |   |   | Sheldon Hoffman |
|       |       |              |                     |   |   | Chief Executive Officer and Director |
|       | ** ** |              |                     |   |   | ** ** |
| DATE:      | ** ** | May 10, 2006 |                     | BY: | /s/  LLOYD  HOFFMAN |
|       |       |              |                     |   | Lloyd Hoffman |
|       |       |              |                     |   | Chief Financial Officer and Senior Vice President |

 

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