**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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

**of the Securities Exchange Act of 1934**

 

**For the Quarter Ended June 30, 2005**

 

**Commission File No. 01-15725**

 

**Alpha Pro Tech, Ltd.**

(exact name of registrant as specified in its charter)

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

 

Registrant’s telephonenumber, including area code:  **(905) 479-0654**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes ý  No  o

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of August 5,2005.

 

23,678,953 shares of commonstock, $.01 par value

 

 

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**Alpha Pro Tech, Ltd.**

 

Table of Contents

 
| PART I.  FINANCIAL INFORMATION |                                                                                                                                                   |
|-------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                                   |   |
| ITEM 1                              | Consolidated Financial  Statements (Unaudited)                                                                                                         |   |
|                                |                                                                                                                                                   |   |
|                                | a)                                                                                                                                                     | Consolidated  Balance Sheets   - June 30, 2005 and December 31, 2004 |   |
|                                |                                                                                                                                                   |   |   |
|                                | b)                                                                                                                                                     | Consolidated  Statements of Operations   for the three and six months ended June 30, 2005 and June 30, 2004 |   |
|                                |                                                                                                                                                   |   |   |
|                                | c)                                                                                                                                                     | Consolidated  Statement of Shareholders’ Equity   for the three and six months ended June 30, 2005 |   |
|                                |                                                                                                                                                   |   |   |
|                                | d)                                                                                                                                                     | Consolidated  Statements of Cash Flows   for the three and six months ended June 30, 2005 and June 30, 2004 |   |
|                                |                                                                                                                                                   |   |   |
|                                | e)                                                                                                                                                     | Notes to  Consolidated Financial Statements |   |
|                                |                                                                                                                                                   |   |
| ITEM 2                              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                            |   |
|                                |                                                                                                                                                   |   |
|                                | Cautionary  Statements Regarding Forward-Looking Information                                                                                           |   |
|                                |                                                                                                                                                   |   |
|                                | New Accounting Standards                                                                                                                               |   |
|                                |                                                                                                                                                   |   |
| ITEM 3                              | Quantitative and  Qualitative Disclosures About Market Risk                                                                                            |   |
|                                |                                                                                                                                                   |   |
| ITEM 4                              | Controls and Procedures                                                                                                                                |   |
|                                |                                                                                                                                                   |   |
| PART II.                       | OTHER INFORMATION                                                                                                                                      |   |
|                                |                                                                                                                                                   |   |
| ITEM 5                              | Submission of  Matters to a Vote Security Holders                                                                                                      |   |
|                                |                                                                                                                                                   |   |
| ITEM 6                              | Exhibits and Reports  on Form 8-K                                                                                                                 |   |
|                                |                                                                                                                                                   |   |
| SIGNATURES                          |                                                                                                                                                   |
|                                |                                                                                                                                                   |
| EXHIBITS                            |                                                                                                                                                   |
|                                |                                                                                                                                                   |   |
|                                | Exhibit 31.1:  Certification  by CEO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of  the Exchange Act (filed herewith) |   |
|                                |                                                                                                                                                   |   |   |
|                                | Exhibit 31.2: Certification by CFO pursuant to Rule 13a-14(b) and  Rule 15d-14(b) of the Exchange Act (filed herewith)        |   |
|                                |                                                                                                                                                   |   |   |
|                                | Exhibit 32.1:  Certification  by CEO pursuant to Section 906 of the Sarbanes-Oxley Act (filed  herewith)                                |   |
|                                |                                                                                                                                                   |   |   |
|                                | Exhibit 32.2:  Certification  by CFO pursuant to Section 906 of the Sarbanes-Oxley Act (filed  herewith)                                |   |
|                                     |                                                                                                                                                        |  |  |  |

 

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

##### *** ***

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

#### ** **

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

 

You should read thefollowing unaudited interim consolidated financial statements and theaccompanying notes together with our Annual Report on Form 10-K for the yearended December 31, 2004. Our 2004 Annual Report contains information thatmay be helpful in analyzing the financial information contained in this reportand in comparing our results of operations for the three months ended June 30,2005 with the same period in 2004.

 

1

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**Alpha ProTech, Ltd.**

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

 
| ** **                                                                                                                                                                    | ** ** | **June 30,  2005** | ** ** | **December 31,  2004 (1)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
|                                                                                                                                                                          |       |                    |       |                            |       |
| **Assets**                                                                                                                                                                    |       |                    |       |                            |       |
| Current assets:                                                                                                                                                               |       |                    |       |                            |       |
| Cash and cash equivalents                                                                                                                                                     |       | $                       | 1,123,000  |                            | $          | 4,875,000 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $83,000 at June 30, 2005 and $75,000 at December 31,  2004                                          |       | 5,830,000               |       | 4,261,000                       |       |
| Inventories, net                                                                                                                                                              |       | 8,354,000               |       | 4,802,000                       |       |
| Prepaid expenses and other current assets                                                                                                                                     |       | 767,000                 |       | 949,000                         |       |
| Deferred income taxes                                                                                                                                                         |       | 461,000                 |       | 461,000                         |       |
| Total current assets                                                                                                                                                          |       | 16,535,000              |       | 15,348,000                      |       |
|                                                                                                                                                                          |       |                    |       |                            |       |
| Property and equipment, net                                                                                                                                                   |       | 3,479,000               |       | 3,256,000                       |       |
| Goodwill, net                                                                                                                                                                 |       | 55,000                  |       | 55,000                          |       |
| Intangible assets, net                                                                                                                                                        |       | 122,000                 |       | 130,000                         |       |
| Other assets                                                                                                                                                                  |       | 550,000                 |       | —                          |       |
| Total assets                                                                                                                                                                  |       | $                       | 20,741,000 |                            | $          | 18,789,000 |   |
|                                                                                                                                                                          |       |                    |       |                            |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                                 |       |                    |       |                            |       |
| Current liabilities:                                                                                                                                                          |       |                    |       |                            |       |
| Accounts payable                                                                                                                                                              |       | $                       | 1,616,000  |                            | $          | 1,363,000 |   |
| Accrued liabilities                                                                                                                                                           |       | 1,058,000               |       | 1,074,000                       |       |
| Total current liabilities                                                                                                                                                     |       | 2,674,000               |       | 2,437,000                       |       |
|                                                                                                                                                                          |       |                    |       |                            |       |
| Deferred income taxes                                                                                                                                                         |       | 652,000                 |       | 652,000                         |       |
| Total liabilities                                                                                                                                                             |       | 3,326,000               |       | 3,089,000                       |       |
|                                                                                                                                                                          |       |                    |       |                            |       |
| Shareholders’ equity                                                                                                                                                     |       |                    |       |                            |       |
| Common stock, $.01 par value, 50,000,000 shares  authorized, 23,678,955 and 23,456,849 issued and outstanding at June 30,  2005 and December 31, 2004, respectively |       | 237,000                 |       | 235,000                         |       |
| Additional paid-in capital                                                                                                                                                    |       | 24,459,000              |       | 24,193,000                      |       |
| Accumulated deficit                                                                                                                                                           |       | (7,281,000              | )          | (8,728,000                      | )          |
| Total shareholders’ equity                                                                                                                                               |       | 17,415,000              |       | 15,700,000                      |       |
| Total liabilities and shareholders’ equity                                                                                                                               |       | $                       | 20,741,000 |                            | $          | 18,789,000 |   |

 

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

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

2

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**Alpha ProTech, Ltd.**

 

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

 
| ** **                                                   | ** ** | **For the Three Months Ended   June 30,** | ** ** | **For the Six Months Ended   June 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                       | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Sales                                                    |       | $                                              | 9,040,000  |                                         | $          | 6,748,000 |   | $ | 16,022,000 |   | $ | 12,601,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Cost of goods sold, excluding depreciation and  amortization |       | 4,813,000                                      |       | 3,508,000                                    |       | 8,634,000 |   | 6,371,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Gross margin                                                 |       | 4,227,000                                      |       | 3,240,000                                    |       | 7,388,000 |   | 6,230,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Expenses:                                                    |       |                                           |       |                                         |       |   |   |   |   |
| Selling, general and administrative                          |       | 2,516,000                                      |       | 2,398,000                                    |       | 4,868,000 |   | 4,513,000 |   |
| Depreciation and amortization                                |       | 123,000                                        |       | 135,000                                      |       | 246,000 |   | 267,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Income from operations                                       |       | 1,588,000                                      |       | 707,000                                      |       | 2,274,000 |   | 1,450,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Other income (expense)                                       |       |                                           |       |                                         |       |   |   |   |   |
| Gain on sale of assets                                       |       | —                                         |       | 7,000                                        |       | — |   | 7,000 |   |
| Interest, net                                                |       | 7,000                                          |       | (2,000                                       | )          | 23,000 |   | (3,000 | ) |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Income before provision for income taxes                     |       | 1,595,000                                      |       | 712,000                                      |       | 2,297,000 |   | 1,454,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Provision for income taxes                                   |       | 592,000                                        |       | 262,000                                      |       | 850,000 |   | 537,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Net income                                                   |       | $                                              | 1,003,000  |                                         | $          | 450,000 |   | $ | 1,447,000 |   | $ | 917,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Basic net income per share                                   |       | $                                              | 0.04       |                                         | $          | 0.02 |   | $ | 0.06 |   | $ | 0.04 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Diluted net income per share                                 |       | $                                              | 0.04       |                                         | $          | 0.02 |   | $ | 0.06 |   | $ | 0.04 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Basic weighted average shares outstanding                    |       | 23,678,955                                     |       | 23,087,599                                   |       | 23,662,572 |   | 23,278,768 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Diluted weighted average shares outstanding                  |       | 25,075,759                                     |       | 24,567,552                                   |       | 25,059,376 |   | 24,911,324 |   |

 

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

 

3

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**Alpha Pro Tech, Ltd.**

 

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

 
| ** **                        | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-----------------------------------|------------|------------------|------------|-------------------------|------------|-----------------|------------|-------------|------------|
| ** **                        | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at December 31, 2004 |       | 23,456,849       |       | $                       | 235,000    |            | $          | 24,193,000  |       | ($8,728,000 | ) | $ | 15,700,000 |   |
| Options exercised                 |       | 232,106          |       | 2,000                   |       | 287,000         |       | —      |       | 289,000 |   |
| Common stock repurchased          |       | (10,000          | )          | —                  |       | (21,000         | )          | —      |       | (21,000 | ) |
| Net income                        |       | —           |       | —                  |       | —          |       | 1,447,000   |       | 1,447,000 |   |
| Balance at June 30, 2005     |       | 23,678,955       |       | $                       | 237,000    |            | $          | 24,459,000  |       | $ | (7,281,000 | ) | $ | 17,415,000 |   |
|                                   |            |                  |            |                         |            |                 |            |             |            |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated financial statements

 

4

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**Alpha Pro Tech, Ltd.**

 

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

 
| ** **                                                                     | ** ** | **For the Six months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| **Cash Flows From Operating Activities:**                                      |       |                                        |       |   |   |
| Net income                                                                     |       | $                                           | 1,447,000  |   | $ | 917,000 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                        |       |   |   |
| Depreciation and amortization                                                  |       | 246,000                                     |       | 267,000 |   |
| Gain on sale of asset                                                          |       | —                                      |       | (7,000 | ) |
| Changes in assets and liabilities:                                             |       |                                        |       |   |   |
| Accounts receivable, net                                                       |       | (1,569,000                                  | )          | (603,000 | ) |
| Inventories, net                                                               |       | (3,552,000                                  | )          | 292,000 |   |
| Prepaid expenses and other current assets                                      |       | 182,000                                     |       | (591,000 | ) |
| Accounts payable and accrued liabilities                                       |       | 237,000                                     |       | (628,000 | ) |
|                                                                           |       |                                        |       |   |   |
| Net cash used in operating activities:                                         |       | (3,009,000                                  | )          | (353,000 | ) |
|                                                                           |       |                                        |       |   |   |
| **Cash Flows From Investing Activities:**                                      |       |                                        |       |   |   |
| Purchase of property and equipment                                             |       | (451,000                                    | )          | (105,000 | ) |
| Purchase of intangible assets                                                  |       | (10,000                                     | )          | (34,000 | ) |
| Proceeds from sale of assets                                                   |       | —                                      |       | 16,000 |   |
| Investment in Joint Venture                                                    |       | (550,000                                    | )          | — |   |
|                                                                           |       |                                        |       |   |   |
| Net cash used in investing activities                                          |       | (1,011,000                                  | )          | (123,000 | ) |
|                                                                           |       |                                        |       |   |   |
| **Cash Flows From Financing Activities:**                                      |       |                                        |       |   |   |
| Proceeds from the exercise of stock options                                    |       | 289,000                                     |       | 251,000 |   |
| Payments for the repurchase of common stock                                    |       | (21,000                                     | )          | (194,000 | ) |
| Net cash provided by financing activities                                      |       | 268,000                                     |       | 57,000 |   |
|                                                                           |       |                                        |       |   |   |
| Decrease in cash during the period                                             |       | (3,752,000                                  | )          | (419,000 | ) |
|                                                                           |       |                                        |       |   |   |
| Cash and cash equivalents, beginning of period                                 |       | 4,875,000                                   |       | 3,427,000 |   |
| Cash and cash equivalents, end of period                                       |       | $                                           | 1,123,000  |   | $ | 3,008,000 |   |

 

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

 

5

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**Alpha Pro Tech, Ltd.**

 

**Notes toConsolidated Financial Statements (Unaudited)**

 

**1.****                                      TheCompany**

 

AlphaPro Tech, Ltd. (Alpha ProTech, the Company, we, our, us) manufactures anddistributes a line of disposable protective apparel and a line of infectioncontrol products for the cleanroom, industrial, pharmaceutical, medical anddental markets. The disposable protective apparel consists of a complete lineof shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats. The infectioncontrol line of products includes a line of face masks and eye shields. TheCompany also manufactures and distributes a line of medical bed pads andaccessories as well as a line of pet beds. The Company’s products are sold both under the “Alpha Pro Tech” brandname as well as under private label and are predominantly sold in the UnitedStates of America.

 

Duringthe second quarter 2004, the Company announced the formation of a new businesssegment, Alpha ProTech Engineered Products, Inc., a wholly-ownedsubsidiary of Alpha Pro Tech. This segment consists of a line of constructionsupply weatherization products as well as a line of paint with antimicrobials.The construction supply weatherization products consist of building wrap and asynthetic roof underlayment. The line of paint with antimicrobials is designedto inhibit growth of bacteria, fungi and algae on the painted surfaces inhospitals, surgical rooms and cleanrooms and associated controlledenvironments.

 

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

 

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

 

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

 

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

 

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

 

6

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| ** **                                                                                                                                   | ** ** | **For the Three Months**  | ** ** | **For the Six Months**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                   | ** ** | **Ended   June 30,** | ** ** | **Ended   June 30,** | ** ** |
| ** **                                                                                                                                   | ** ** | **2005**                  | ** ** | **2004**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income, as reported                                                                                                                      |       | $                         | 1,003,000  |                      | $          | 450,000 |   | $ | 1,447,000 |   | $ | 917,000 |   |
| 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 |       | (93,000                   | )          | —                    |       | (183,000 | ) | — |   |
|                                                                                                                                         |       |                      |       |                      |       |   |   |   |   |
| Pro forma net income                                                                                                                         |       | $                         | 910,000    |                      | $          | 450,000 |   | $ | 1,264,000 |   | $ | 917,000 |   |
|                                                                                                                                         |       |                      |       |                      |       |   |   |   |   |
| Net income per share:                                                                                                                        |       |                      |       |                      |       |   |   |   |   |
| Basic - as reported                                                                                                                          |       | $                         | 0.04       |                      | $          | 0.02 |   | $ | 0.06 |   | $ | 0.04 |   |
| Basic - pro forma                                                                                                                            |       | 0.04                      |       | 0.02                      |       | 0.05 |   | 0.04 |   |
| Diluted – as reported                                                                                                                   |       | 0.04                      |       | 0.02                      |       | 0.06 |   | 0.04 |   |
| Diluted - pro forma                                                                                                                          |       | 0.04                      |       | 0.02                      |       | 0.05 |   | 0.04 |   |

 

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

 

Basedon the Company’s review of new accounting standards released during the quarterended June 30, 2005 the Company did not identify any standards requiringadoption that would have a significant impact on its consolidated financialstatements.

 

**5.****                                      Inventories**

 

Inventoriesconsist of the following:

 
| ** **                                                    | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials                                                 |       | $                       | 4,964,000  |                        | $          | 2,719,000 |   |
| Work in process                                               |       | 248,000                 |       | 57,000                      |       |
| Finished goods                                                |       | 3,517,000               |       | 2,452,000                   |       |
|                                                          |       | 8,729,000               |       | 5,228,000                   |       |
| Less reserve for slow-moving, obsolete or unusable  inventory |       | (375,000                | )          | (426,000                    | )          |
|                                                          |       | $                       | 8,354,000  |                        | $          | 4,802,000 |   |

 

7

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**6.****             OtherAssets**

 

On June 14,2005, Alpha ProTech Engineered Products, Inc. entered into a 50/50 jointventure agreement with Maple Industries and Associates (Maple), a manufacturerin India, for the production of building products. The name of the joint ventureis Harmony Plastics Private Limited (Harmony).  As of June 30, 2005, Alpha ProTech Engineered Products has invested$550,000 in the joint venture; $350,000 for share capital and $200,000 in theform of a long term advance.

 

Inorder to fund the joint venture, the agreement calls for Alpha ProTechEngineered Products, Inc. and Maple to each contribute $350,000 for sharecapital, and for Alpha ProTech Engineered Products, Inc. to make a longterm, non interest bearing advance of $1 million for materials. $500,000 of thisadvance is to be repaid monthly over a six year term and the balance is to bepaid in the seventh year.  The agreementalso calls for Harmony to arrange a bank loan of $1.65 million, guaranteedexclusively by Maple and the assets of Harmony Plastics Private Limited. As aresult, the total initial funding will be $3.35 million, of which Alpha ProTechEngineered Products, Inc. will contribute approximately $1.35 million.

 

The jointventure is currently not operational, and is still in the start up and fundingphase.  Additionally, at this time nooperation agreement has been entered into. The actual design and anticipated operations could change whenoperations are to begin.

 

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

 

**7. AccruedLiabilities**

 

Accruedliabilities consist of the following:

 
| ** **                | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Bonuses payable           |       | $                       | 359,000    |                        | $          | 516,000 |   |
| Income tax                |       | 277,000                 |       | —                      |       |
| Accrued payroll           |       | 155,000                 |       | 163,000                     |       |
| Accrued rebates and other |       | 267,000                 |       | 395,000                     |       |
|                      |       | $                       | 1,058,000  |                        | $          | 1,074,000 |   |

 

8

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

 

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

 
| ** **                                         | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended   June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                      | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (Numerator)                             |       | $                                             | 1,003,000  |                                         | $          | 450,000 |   | $ | 1,447,000 |   | $ | 917,000 |   |
| Shares (Denominator):                              |       |                                          |       |                                         |       |   |   |   |   |
| Basic weighted average shares outstanding          |       | 23,678,955                                    |       | 23,087,599                                   |       | 23,662,572 |   | 23,278,768 |   |
| Add: Dilutive effect of stock options and warrants |       | 1,396,804                                     |       | 1,479,953                                    |       | 1,396,804 |   | 1,632,556 |   |
| Diluted weighted average shares outstanding        |       | 25,075,759                                    |       | 24,567,552                                   |       | 25,059,376 |   | 24,911,324 |   |
| Net income per share:                              |       |                                          |       |                                         |       |   |   |   |   |
| Basic                                              |       | $                                             | 0.04       |                                         | $          | 0.02 |   | $ | 0.06 |   | $ | 0.04 |   |
| Diluted                                            |       | $                                             | 0.04       |                                         | $          | 0.02 |   | $ | 0.06 |   | $ | 0.04 |   |
|                                                    |            |                                               |            |                                              |            |  |  |  |  |  |  |  |  |  |  |

 

**9.  Activity of Business Segments**

 

TheCompany operates through four segments:

 

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

 

InfectionControl Products: consisting of a line of face masks and eye shieldsprincipally for the medical, dental and industrial markets.

 

ExtendedCare Products: consisting of a line of medical bed pads using Unreal Lambskin ®(synthetic lambskin) The Unreal Lambskin ® is used to produce medical bed pads,which prevent decubitus ulcers or bedsores on long term care patients.  The Unreal Lambskin ® is also used 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.

 

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EngineeredProducts: this new fourth segment was announced during the second quarter 2004with the formation of Alpha ProTech Engineered Products, Inc., awholly-owned subsidiary. This segment consists of a line of construction supplyweatherization products as well as a line of paint with antimicrobials. Theconstruction supply weatherization products consist of building wrap and asynthetic roof underlayment. The line of paint with antimicrobials is designedto inhibit growth of bacteria, fungi and algae on the painted surfaces inhospitals, surgical rooms and cleanrooms and associated controlledenvironments.

 

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

 

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

 
| ** **                    | ** ** | **For the Three Months Ended   June 30,** | ** ** | **For the Six Months Ended   June 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                       | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Disposable protective apparel |       | $                                              | 6,419,000  |                                         | $          | 4,737,000 |   | $ | 10,662,000 |   | $ | 8,830,000 |   |
| Infection control             |       | 1,165,000                                      |       | 1,620,000                                    |       | 2,381,000 |   | 2,836,000 |   |
| Engineered products           |       | 1,115,000                                      |       | —                                       |       | 2,105,000 |   | — |   |
| Extended care                 |       | 341,000                                        |       | 391,000                                      |       | 874,000 |   | 935,000 |   |
|                          |       |                                           |       |                                         |       |   |   |   |   |
| Consolidated total net sales  |       | $                                              | 9,040,000  |                                         | $          | 6,748,000 |   | $ | 16,022,000 |   | $ | 12,601,000 |   |

 

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

 
| ** **                              | ** ** | **For the Three Months Ended   June 30,** | ** ** | **For the Six Months Ended   June 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                       | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Disposable protective apparel           |       | $                                              | 2,574,000  |                                         | $          | 1,538,000 |   | $ | 4,057,000 |   | $ | 3,097,000 |   |
| Infection control                       |       | 482,000                                        |       | 632,000                                      |       | 959,000 |   | 1,032,000 |   |
| Engineered products                     |       | 34,000                                         |       | —                                       |       | (81,000 | ) |   |   |
| Extended care                           |       | 17,000                                         |       | 41,000                                       |       | 105,000 |   | 137,000 |   |
|                                    |       |                                           |       |                                         |       |   |   |   |   |
| Total segment income                    |       | 3,107,000                                      |       | 2,211,000                                    |       | 5,040,000 |   | 4,266,000 |   |
| Unallocated corporate overhead expenses |       | (1,512,000                                     | )          | (1,499,000                                   | )          | (2,743,000 | ) | (2,812,000 | ) |
| Provision for income taxes              |       | (592,000                                       | )          | (262,000                                     | )          | (850,000 | ) | (537,000 | ) |
|                                    |       |                                           |       |                                         |       |   |   |   |   |
| Consolidated net income                 |       | $                                              | 1,003,000  |                                         | $          | 450,000 |   | $ | 1,447,000 |   | $ | 917,000 |   |
|                                         |            |                                                |            |                                              |            |  |  |  |  |  |  |  |  |  |

 

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

 

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

 

**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

 

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

 

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

 

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

 

**CriticalAccounting Policies**

 

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

 

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

 

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

 

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

 

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

 

Stock BasedCompensation:  We account for stockoptions granted to employees and directors under the recognition andmeasurement principles of APB opinion No. 25 instead of the fair valuerecognition provisions of SFAS No. 123, “Accounting for Stock BasedCompensation,” as amended by SFAS No. 148. Under APB opinion No. 25, no stock-based employee compensation isreflected in net income, as all options granted under the Company’s plan havean exercise price equal to the market value of the stock on the date of thegrant.  The effect on net income if wehad applied the fair value recognition provisions of SFAS No. 123 wouldhave been a decrease of $90,000 for the quarter ended June 30, 2005 and$180,000 for the six months ended June 30, 2005..

 

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

 

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

 

**OVERVIEW**

 

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

 

Our products areclassified into six groups:  Disposableprotective apparel, consisting of a complete line of shoecovers, bouffant caps,gowns, coveralls and lab coats; infection control products, consisting of aline of face masks and eye shields; extended care products, consisting of aline of medical bed pads, wheelchair covers, geriatric chair surfaces,operating room table surfaces and pediatric surfaces;  a line of pet beds; constructionweatherization products, consisting of house wrap and synthetic roof 

 

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

 

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

 

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

 

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

 

During 2004, we announcedthe formation of a new business segment, Alpha ProTech Engineered Products, Inc.(Engineered Products), a wholly-owned subsidiary of Alpha Pro Tech. This newsegment consists of a line of construction supply weatherization products aswell as a line of paint with antimicrobials. The construction supply weatherization products consist of house wrapand a synthetic roof underlayment.  Theline of paint with antimicrobials is designed to inhibit growth of bacteria,fungi and algae on the painted surfaces in hospitals, surgical rooms andcleanrooms and associated controlled environments. Our paint has been tested atNelson Laboratories, Inc., a privately owned testing lab specializing inmicrobiology, and confirmed by a leading university for its containment abilityto inhibit micro-organisms.  We have anexclusive licensing agreement for the proprietary antimicrobial formulation tobe used in the paint.  In addition to ourpaint with antimicrobials, we are currently developing a line of sealants withantimicrobials to be used for mold remediation.

 

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

 

Engineered Products beganproduction of house wrap and synthetic roof underlayment during the firstquarter of 2005 and revenue for this segment for the quarter ended June 30,2005 and the six months ended June 30, 2005 was $1,115,000 and $2,105,000,respectively.  This segment is expectedto grow in the coming quarters and contribute significantly to revenue growthin 2005.

 

We are also focused on appreciablyimproving sales in the pharmaceutical, cleanroom and industrial safetymarkets.  We expect substantial growth in2005 from our largest distributor as they implement their strategy, introducedin late 2004, to focus more on private label suppliers.  Our key sales growth strategies for thesemarkets are based on a strategy of communicating directly with end users anddeveloping innovative products to suit individual end users’ specific needs.  Our Disposable Protective Apparel segmentthat services these markets has grown by 20.7% for the six months ended June 30,2005.  We expect sales in this segment tocontinue to grow in 2005.

 

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# **RESULTSOF OPERATIONS**

 

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

 
| ** **                               | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales                                    |       | 100.0                                         | %          | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Gross profit                             |       | 46.7                                          |       | 48.0                                        |       | 46.1 |   | 49.4 |   |
| Selling, general and administrative      |       | 27.8                                          |       | 35.5                                        |       | 30.4 |   | 35.8 |   |
| Income from operations                   |       | 17.5                                          |       | 10.5                                        |       | 14.2 |   | 11.5 |   |
| Income before provision for income taxes |       | 17.6                                          |       | 10.6                                        |       | 14.3 |   | 11.5 |   |
| Net income                               |       | 11.1                                          |       | 6.7                                         |       | 9.0 |   | 7.3 |   |

 

## **Three months ended June 30, 2005, compared to the three monthsended June 30, 2004**

##  

**Sales.**  Consolidatedsales for the quarter ended June 30, 2005 increased to $9,040,000 from $6,748,000for the quarter ended June 30, 2004, representing an increase of $2,292,000or 34.0%.  We attribute the increaseprimarily to increased sales of disposable protective apparel of $1,682,000, tonew sales of construction supply weatherization products of $1,115,000,partially offset by decreased infection control segment sales of $455,000relating to one international sale in the second quarter of 2004, as well asdecreased sales from our Extended Care Unreal Lambskin segment of$50,000.

 

Sales in the second quarter of 2005 were favorably affectedby a back-order situation that occurred in the first quarter. During the firstquarter of 2005, due to an issue with one of our raw materials, as well asdown-time with one of our sub-contractors in China, we received fewercontainers from China than ordered and therefore could not fulfill these orderswithin the first quarter.  These orders,primarily for disposable protective apparel product, which amounted toapproximately $1 million, were fulfilled in the second quarter.

 

Sales for the DisposableProtective Apparel segment for the quarter ended June 30, 2005 were $6,419,000compared to $4,737,000 for the same period of 2004.  The Disposable Protective Apparel segmentsales increase of $1,682,000 or 35.5% was primarily due to increased sales of $1,250,000to our largest distributor, and approximately a $400,000 increase due to otherdistributors that concentrate on the industrial safety and cleanroom industry.  As discussed above, approximately $1 millionin sales were attributable to fulfilling back-orders from the first quarter of 2005.  We expect growth in 2005 from our largestdistributor as they continue to implement their strategy, introduced in late2004, to focus more on private label suppliers. We also expect growth with other distributors as we continue to gain astronger presence into the pharmaceutical, industrial safety and cleanroommarkets.

 

Infection Control segmentsales for the quarter ended June 30, 2005 decreased by $455,000 or 28.1%to $1,165,000 compared to $1,620,000 for the same period of 2004.  The decrease is primarily due to a $600,000 internationalsale for N-95 respirator masks in the second quarter of 2004 that did not occurin the second quarter of 2005, partially offset by increased medical, dentaland industry mask sales as well as increased shield sales in the second quarterof 2005.  Excluding this internationalsale, the infection control segment was up $145,000 or 14.2% for the quarterended June 30, 2005.    From time totime, large orders could periodically occur that will influence this segmentsrevenue on a quarterly basis.

 

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The Engineered Productssegment consists of a line of construction supply weatherization products(house wrap and roof underlayment) as well as a line of paint withantimicrobials.  Engineered Productssales for the quarter ended June 30, 2005 was $1,115,000 as compared to $0for the same period of 2004.  Thebreakdown of the construction supply weatherization products is as follows forthe second quarter of 2005: 77% house wrap and 23% roof underlayment.  The construction supply weatherizationproducts account for almost all of the sales for the second quarter of2005.  Due to the industry’s traditional seasonalsoftness in the second quarter, we remained basically flat to the first quarterof 2005, however; we continue to expect growth in the second half of 2005.

 

Sales from our ExtendedCare Unreal Lambskin and other related products, which includes a line ofmedical bed pads as well as pet beds, decreased by $50,000 or 12.8% to $341,000for the quarter ended June 30, 2005 from $391,000 for the quarter ended June 30,2004.  The decrease of $50,000 in salesis primarily the result of lower medical bed pad sales.

 

Consolidated sales for the six months ended June 30,2005 increased to $16,022,000 from $12,601,000 for the six months ended June 30,2004, representing a increase of $3,421,000 or 27.1%.  Weattribute the increase primarily to increased sales of disposable protectiveapparel of $1,832,000, to new sales of construction supply weatherizationproducts of $2,105,000, partially offset by decreased infection control segmentsales of $455,000 relating to one international sale in 2004, as well asdecreased sales from our Extended Care Unreal Lambskin segment of$61,000.

 

Sales for the DisposableProtective Apparel segment for the six months ended June 30, 2005 were $10,662,000compared to $8,830,000 for the same period of 2004, an increase of $1,832,000or 20.7%.   The Apparel segment salesincrease was due to higher sales to the pharmaceutical and cleanroom industryand to lesser extent sales to the industrial safety industry.  Seventy percent of the sales increase is fromour largest distributor and the balance from distributors that concentrate onthe cleanroom industry and the industrial safety industry.  We expect sales in this segment to continueto grow in 2005.  We anticipate continuedlong-term growth in this segment.

 

Infection Control segmentsales for the six months ended June 30, 2005 decreased by $455,000 or 16.0%to $2,381,000 from $2,836,000 in the same period of 2004.  The decrease is primarily due to a $600,000international sale for N-95 respirator masks in the second quarter of 2004,partially offset by increased medical, dental and industry mask sales as wellas increased shield sales for the six months ended June 30, 2005.  Excluding this international sale, theinfection control segment was up $145,000 or 6.5% for the six months ended June 30,2005.

 

The Engineered Productssegment consists of a line of construction supply weatherization products(house wrap and roof underlayment) as well as a line of paint withantimicrobials.  Engineered Productssales for the six months ended June 30, 2005 was $2,105,000 as compared to$0 for the same period of 2004.  Thebreakdown of the construction supply weatherization products is as follows forthe second quarter of 2005: 77% house wrap and 23% roof underlayment.  The construction supply weatherizationproducts account for almost all of the sales for the six months ended June 30,2005.  Management expects this segment tocontribute significantly to revenues in 2005.

 

Sales of the Company’sExtended Care Unreal Lambskin and other related products, which includes a lineof medical bed pads as well as pet beds, decreased by $61,000 or 6.5% to $874,000for the six months ended June 30, 2005 from $935,000 for the six months endedJune 30, 2004.  This decrease of $61,000in sales is primarily the result of a decrease in medical bed pad sales.

 

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**Gross Profit  **Grossprofit increased by 30.5% to $4,227,000 for the quarter ended June 30,2005 from $3,240,000 for the same period in 2004.  Gross profit margin decreased to 46.7% forthe quarter ended June 30, 2005 from 48.0% for the same period in 2004.  Gross profit margin decreased to 46.1% forthe six months ended June 30, 2005 from 49.4% for the same period in 2004.

 

Gross profit margin isprimarily down due to lower margins on the Engineered Products segment.

 

Excluding Engineered Products,gross profit margin was 49.8% for the quarter ended June 30, 2005 and49.6% for the six months ended June 30, 2005.  This gross profit margin is in line with thegross profit margin of 49.5% for fiscal 2004.

 

Gross profit on the EngineeredProducts segment improved to 25.2% for the second quarter ended June 30,2005 from 20.6% for the first quarter ended March 31, 2005.  Gross profit on this segment for the sixmonths ended June 30, 2005 was 23.0%. Gross profit on this product line is expected to increase to the mid 30%range by the second quarter of 2006 as our production facility in India becomesfully operational.

 

Although improving, our EngineeredProducts gross profit margin continues to be affected by start-up issues.  As is common with all new equipment, itrequired debugging and during this process the machine did not run as efficientlyresulting in low productivity and high scrap.  Furthermore, the machine operators had to betrained to run this new machine, again resulting in high scrap and lowproductivity.  In addition gross profitwas affected due to the fact that we had to outsource the printing andconverting of roof underlayment.  We anticipatedthe printing and converting to be in house by the end of the second quarterbut, that has been slightly delayed by a month.

 

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

 

**Selling, General and Administrative Expenses.**  Selling,general and administrative expenses increased by $118,000 or 4.9% to $2,516,000for the quarter ended June 30, 2005 from $2,398,000 for the quarter ended June 30,2004.  As a percentage of net sales,selling, general and administrative expenses decreased to 27.8% for the quarterended June 30, 2005 from 35.5% for the same period in 2004.  The increase in selling, general andadministrative expenses primarily consists of increased payroll costs of $30,000,increased expense for the executive bonus program of $98,000, increased rentand utilities expense of $21,000, increased insurance expense of $76,000, increasedprofessional fees and public company expenses of $22,000, Sarbanes-OxleyCorporate Governance costs of $45,000, increased factory indirect expenses of$23,000, partially offset by decreased travel expense of $93,000, decreasedmarketing and commission expenses of $77,000, decreased office expenses of$23,000 and decreased telecommunications expense of $4,000.

 

Selling, general andadministrative expenses for the quarter ended June 30, 2005 for theEngineered Products segment was $240,000 as compared to $0 for the same periodof 2004. We believe that we have built the infrastructure required to substantiallygrow Engineered Products and do not anticipate expenses to change substantiallyfrom current year to date levels for at least the next twelve months if salesincrease as expected.  Expenses areexpected to decrease significantly as a percentage of sales as EngineeredProducts sales grow.

 

Excluding the EngineeredProducts segment expenses, selling, general and administrative expenses in the secondquarter of 2005 decreased by $122,000 or 5.1% to $2,276,000 as compared to $2,398,000for the same period of 2004.

 

Selling, general andadministrative expenses increased by $355,000 or 7.9% to $4,868,000 for the sixmonth ended June 30, 2005 from $4,513,000 for the six months ended June 30,2004.  As a percentage of net sales,selling, general and administrative expenses decreased to 30.4% for the sixmonths ended June 30, 2005 from 35.8% for the same period in 2004.  The increase in selling, general andadministrative expenses primarily consists of increased payroll costs of $42,000,increased expense for the executive bonus program of $94,000, increased rentand utilities expense of $50,000, increased 

 

16

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insurance expense of $116,000,increased professional fees and public company expenses of $69,000,Sarbanes-Oxley Corporate Governance costs of $91,000, increased factoryindirect expenses of $45,000, partially offset by decreased travel expense of $81,000,decreased marketing and commission expenses of $59,000, decreased officeexpenses and miscellaneous expenses of $23,000 and decreased telecommunicationsexpense of $9,000.

 

Excluding the year todate Engineered Products segment expenses of $556,000, selling, general andadministrative expenses for the six months ended June 30, 2005 decreasedby $201,000 or 4.5% to $4,312,000 as compared to $4,513,000 for the same periodof 2004.

 

The chief executiveofficer and president are each entitled to a bonus equal to 5% of the pre-taxprofits of the Company.  A total bonus of$255,000 was accrued for the six months ended June 30, 2005 as compared to$161,000 in the same period of 2004.

 

**Depreciation and Amortization.**  Depreciation andamortization expense decreased by $12,000 to $123,000 for the quarter ended June 30,2005 from $135,000 for the same period in 2004 and decreased by $21,000 to$246,000 for the six months ended June 30, 2005 compared to $267,000 forthe same period in 2004.  The decrease isprimarily attributable to the closure of our facility located in Mexico.

 

**Income from Operations**.  Income from operations increasedby $881,000 or 124.6%, to $1,588,000 for the quarter ended June 30, 2005as compared to income from operations of $707,000 for the quarter ended June 30,2004.  The increase in income fromoperations is due to an increase in gross profit of $987,000 and a decrease indepreciation and amortization of $12,000, partially offset by an increase inselling, general and administrative expenses of $118,000.

 

Income from operationsincreased by $824,000 or 56.8%, to $2,274,000 for the six months ended June 30,2005 as compared to income from operations of $1,450,000 for the six monthsended June 30, 2004. The increase in income from operations is primarilydue to an increase in gross profit of $1,158,000 and a decrease in depreciationand amortization of $21,000, partially offset by an increase in selling,general and administrative expenses of $355,000

 

The Engineered Productssegment had income from operations for the second quarter ended June 30,2005 of $34,000 and a loss from operations of $115,000 for the first quarterended March 31, 2005 for a $81,000 loss from operations for the six monthsended June 30, 2005.

 

Excluding the EngineeredProducts segment, income from operations would be up $905,000 or 62.4% for thesix months ended June 30, 2005.

 

**Net Interest.**  For the quarter ended June 30,2005, we had net interest income of $7,000 compared to net interest expense of$2,000 for the quarter ended June 30, 2004.  Interest expense decreased to $2,000 for thequarter ended June 30, 2005 compared to $3,000 for the same period of 2004.  Interest income increased by $8,000 to $9,000for the quarter ended June 30, 2005 as compared to $1,000 for the sameperiod of 2004.

 

For the six months ended June 30,2005, we had net interest income of $23,000 compared to net interest expense of$3,000 for the quarter ended June 30, 2004.  Interest expense decreased to $4,000 for the sixmonths ended June 30, 2005 compared to $5,000 for the same period of2004.  Interest income increased by $25,000to $27,000 for the six months ended June 30, 2005 as compared to $2,000for the same period of 2004.

 

**Income Before Provision for Income Taxes**.  Incomebefore provision for income taxes for the quarter ended June 30, 2005 was$1,595,000 compared to $712,000 for the quarter ended June 30, 2004,representing a increase of $883,000 or 124.0%. This increase is attributable to an increase in gross profit of $987,000,a decrease in depreciation and amortization of $12,000 and a change in net 

 

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interest of $9,000,partially offset by an increase in selling, general and administrative expensesof $118,000 and a decrease in gain on sale of assets of $7,000.

 

Income before provisionfor income taxes for the six months ended June 30, 2005 was $2,297,000compared to $1,454,000 for the six months ended June 30, 2004,representing an increase of $843,000 or 58.0%. This increase is attributable to an increase in gross profit of $1,158,000,a decrease in depreciation and amortization of $21,000 and a change in netinterest of $26,000, partially offset by an increase in selling, general andadministrative expenses of $355,000 and a decrease in gain on sale of assets of$7,000.

 

For the EngineeredProducts segment, income before provision for income taxes for the secondquarter ended June 30, 2005 was $34,000 as compared to a loss of $115,000for the first quarter of 2005.  We expectprofitability on this segment to continue to improve in the coming quarters asour sales grow.

 

**Provision for Income Taxes**  The provision for incometaxes for the quarter ended June 30, 2005 was $592,000 compared to $262,000for the quarter ended June 30, 2004.  The increase in income taxes is due to higher income before provisionfor income taxes in 2005.  The effectivetax rate was 37.1% for the three months ended June 30, 2005 as compared to36.8% for the same period in 2004.

 

The provision for incometaxes for the six months ended June 30, 2005 was $850,000, as compared to$537,000 for the six months ended June 30, 2004.  The increase in income taxes is due to higherincome before provision for income taxes in 2005.  The effective tax rate was approximately 37.0%for the six months ended June 30, 2005 as compared to 36.9% for the sameperiod of 2004.

 

**Net Income.**  Net income for the quarter ended June 30,2005 was $1,003,000 compared to net income of $450,000 for the quarter ended June 30,2004, an increase of $553,000 or 122.9%. The net income increase was primarily due to an increase in incomebefore provision for income taxes of $883,000, partially offset by an increasein income taxes of $330,000.  Basic andDiluted income per share for the quarter ended June 30, 2005 and 2004 was$0.04 and $0.02, respectively.

 

Net income for the sixmonths ended June 30, 2005 was $1,447,000 compared to net income of$917,000 for the same period of 2004, an increase of $530,000 or 57.8%.  The net income increase was primarily due toan increase in income before provision for income taxes of $843,000, partiallyoffset by an increase in income taxes of $313,000.  Basic and Diluted income per share for the sixmonths ended June 30, 2005 and 2004 was $0.06 and $0.04, respectively.

 

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### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

As of June 30, 2005,we had cash and cash equivalents of $1,123,000 and working capital of $13,861,000,an increase in working capital of $950,000 since December 31, 2004.  As of June 30, 2005, our current ratiowas 6.18:1 as compared to 6.30:1 as of December 30, 2004.  Cash decreased $3,752,000 for the quarterended June 30, 2005. The decrease in cash is primarily due to cash used inoperating activities of $3,009,000, the purchase of property and equipment of $461,000,the investment in the India joint venture of $550,000 and the repurchase of$21,000 of common stock, partially offset by cash proceeds of $289,000 from theexercise of stock options.

 

We have a $3,500,000 creditfacility with a bank, consisting of a line of credit with interest at primeplus 0.5%.  At June 30, 2005, theprime interest rate was 6.25%.  The lineof credit was renewed in May 2005 and expires in May 2007.  The Company’s borrowing capacity on the lineof credit was $3,170,000 at June 30, 2005. The available line of credit is based on a formula of eligible accountsreceivable and inventories. During the quarter ended June 30, 2005, we hadnot borrowed on this line of credit and have not borrowed on it since2002.  As of June 30, 2005, we donot have any debt.

 

Net cash used in operatingactivities was $3,009,000 for the six months ended June 30, 2005 comparedto $353,000 for the six months ended June 30, 2004.  The net cash used in operating activities of $3,009,000for the six months ended June 30, 2005 is due to an increase in accountsreceivable of $1,569,000, an increase in inventory of $3,552,000, partiallyoffset by net income of $1,447,000, an increase in accounts payable and accruedliabilities of $237,000, a decrease in prepaid expenses and other currentassets of $182,000 and depreciation and amortization of $246,000.  The net cash used in operating activities of $353,000for the six months ended June 30, 2004 was due to an increase in accountsreceivable of $603,000 and a decrease in accounts payable and accruedliabilities of $628,000, a increase in prepaid expenses and other currentassets of $591,000 and a gain on the sale of assets of $7,000, partially offsetby net income of $917,000, depreciation and amortization of $267,000 and adecrease in inventory of $292,000.

 

Accounts receivableincreased by $1,569,000 or 36.8% to $5,830,000 for the six months ended June 30,2005 from $4,261,000  as of December 31,2004. The majority of this increase is due to increased sales of 34.0% for thesecond quarter of 2005, primarily attributable to higher sales to our largestdistributor as well as the new Engineered Products segment sales.  The number of days sales were outstanding asof June 30, 2005 was 59 days as compared to 62 days for the year ending December 31,2004.

 

Inventory increased by $3,552,000or 74.0% to $8,354,000 for the six months ended June 30, 2005 from $4,802,000as of December 31, 2004.  Theincrease is primarily attributable to a build up of $2.8 million in inventoryfor the Engineered Product segment.  Currentinventory levels for the Engineered Product segment are high, which will allowus to service anticipated sales growth.  Inaddition, inventory for the Disposable Protective Apparel segment increased by$0.7 million or 20.5%, primarily as a result of increased sales of 35.5% forthe second quarter of 2005.

 

Prepaid expenses andother current assets decreased by $182,000 or 19.2% to $767,000 for the sixmonths ended June 30, 2005 from $949,000 as of December 31,2004.  The decrease of $182,000 isprimarily due to a $400,000 decrease in prepaid tax installment payments and adecrease of $21,000 in prepaid trade shows, partially offset by an increase of$101,000 in prepaid insurance for Alpha Pro Tech, Inc., an increase of$100,000 in prepaid insurance for Engineered Products and an increase in annualmaintenance supports contracts of $38,000.

 

Accounts payable andaccrued liabilities in the six months ended June 30, 2005 increased by $237,000to $2,674,000 from $2,437,000.  The increaseis primarily attributable to an increase in accounts payable trade due toincreased sales and an increase in federal taxes payable, partially offset bypayments of the 2004 chief executive officer and president bonus, payments of a2004 corporate rebate to our largest distributor and a reduction in accruedaudit.

 

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Net cash used ininvesting activities was $1,011,000 and $123,000 for the six months June 30,2005 and 2004, respectively.  Ourinvesting activities for the six months ended June 30, 2005 consistedprimarily of expenditures for property and equipment of $451,000 and thepurchase of intangible assets of $10,000 and an investment in an India joint ventureof $550,000, compared to expenditures for property and equipment of $105,000,the purchases of intangible assets of $34,000 and the proceeds from the salesof assets of $16,000 for the six months ended June 30, 2004. The expendituresfor property and equipment of $451,000 in 2005 were principally for thepurchase of equipment for our Engineered Products segment.

 

Alpha ProTech EngineeredProducts, Inc. on June 14, 2005 entered into a joint venture with amanufacturer in India for the production of building products.  As of June 30, 2005, Alpha ProTechEngineered Products has invested $550,000 in the joint venture; $350,000 forshare capital and $200,000 of a $1,000,000 long term advance.

 

Under terms of the jointventure agreement, a private company, Harmony Plastics Private Limited(Harmony), will be owned on a 50/50 basis by Alpha ProTech Engineered Products, Inc.and Maple Industries and Associates the India shareholders. Alpha ProTechEngineered Products, Inc. and Maple Industries and Associates will eachcontribute $350,000 for share capital, and Alpha ProTech Engineered Products, Inc.will make a long term advance of $1 million for materials. This advance is noninterest bearing and $500,000 is to be repaid in monthly installments over asix year term and the balance of $500,000 is to be paid in the seventh year.  The India shareholders will arrange a bankloan of $1.65 million, guaranteed exclusively by the India shareholders and theassets of Harmony Plastics Private Limited. As a result, the total initialfunding will be $3.35 million, of which Alpha ProTech Engineered Products, Inc.will contribute approximately $1.35 million.

 

The capital will beutilized to purchase an existing 33,000 square-foot manufacturing facility inIndia; this facility includes manufacturing equipment necessary to produce roofunderlayment.  Harmony will also build anew 60,000 square-foot facility for the additional manufacturing of roofunderlayment and other building products.

 

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

 

We expect to purchaseapproximately an additional $300,000 of equipment in 2005. These expenditureswill be primarily for equipment for our new Engineered Products segment.

 

In August 2004, weannounced that our Board of Directors had approved the buy-back of up to anadditional $500,000 of the Company’s outstanding common stock.  This new share repurchase program is thesixth $500,000 buyback authorized by the Board of Directors.  In allinstances, we are retiring the shares.  Forthe six months ended June 30, 2005, we bought back a total of 10,000shares of common stock at a cost of $21,000. As of June 30, 2005, we have bought back a total of 2,333,800shares of common stock at a cost of $2,518,000 since the end of 1999.

 

For the six months ended June 30,2005, net cash provided by financing activities was $268,000 compared to $57,000for the same period of 2004.  Ourfinancing activities in 2005 consisted primarily of cash proceeds of $289,000from the exercise of 232,106 stock options, partially offset by payments of $21,000for the repurchase of 10,000 shares of common stock.  Our financing activities for the six monthsended June 30, 2004 consisted primarily of cash proceeds of $251,000 fromthe exercise of 422,000 stock options, partially offset by payments of $194,000for the repurchase of 105,000 shares of common stock

 

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As shown below, at June 30,2005, our contractual cash obligations totaled approximately $1,841,000.

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5   years** | ** ** |
| Operating leases (1)               |       | $                          | 1,041,000  |   | $ | 267,000 |   | $ | 499,000 |   | $ | 247,000 |   | $ | 28,000 |   |
| Investment in Joint Venture (1)    |       | 800,000                    |       | 800,000 |   | — |   | — |   | — |   |
| Line of credit                     |       | —                     |       | — |   | — |   | — |   | — |   |
| Total contractual cash obligations |       | $                          | 1,841,000  |   | $ | 1,067,000 |   | $ | 499,000 |   | $ | 247,000 |   | $ | 28,000 |   |

 

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

 

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

 

**New Accounting Standards**

 

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

 

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

# ** **

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

 

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

 

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

 

Disclosure Controls andProcedures

 

Our management evaluated,with the participation of our Chief Executive Officer and Chief Financial Officer,the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934), as of June 30,2005. Based on this evaluation, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that material information related tothe Company and its consolidated subsidiaries would be made known to them byothers within those entities, particularly during the period ending June 30,2005, the period in 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 fiscal quarterended June 30, 2005, that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item5   Submission of Matters to a Vote ofSecurity Holders**

 

(a)           Registrantheld its Annual Meeting of Shareholders June 14, 2005.

 

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

 
| **Name**                 | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------------------|------------|------------|------------|--------------|------------|
|                     |       |       |       |         |       |
| Sheldon Hoffman          |       | 21,219,572 |       | 547,921      |       |
|                     |       |       |       |         |       |
| Alexander Millar         |       | 21,218,772 |       | 548,721      |       |
|                     |       |       |       |         |       |
| Donald Bennett, Jr. |       | 21,583,596 |       | 183,897      |       |
|                     |       |       |       |         |       |
| Robert Isaly             |       | 21,440,921 |       | 326,572      |       |
|                     |       |       |       |         |       |
| John Ritota              |       | 21,063,198 |       | 704,295      |       |
|                     |       |       |       |         |       |
| Russell Manock           |       | 21,584,896 |       | 182,597      |       |
|                     |       |       |       |         |       |
| David Anderson           |       | 21,579,596 |       | 187,897      |       |

 

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

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** |
|------------|------------|-------------|------------|-------------|
|       |       |        |       |        |
| 21,511,848 |       | 244,845     |       | 10,800      |

 

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

 

(a) Exhibits

 

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

 

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

 

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

 

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

 

(b) Reportson Form 8-K

 

16.         OnJune 16, 2005 registrant filed a report on Form 8-K with respect toItem 2.02 reporting that on June 14, 2005 registrant issued a releaseannouncing the formation of a Joint Venture in India.

 

**SIGNATURES**

 

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

 

 
|   | **ALPHA  PRO TECH, LTD**.            |
|--------|--------------------------------------|
|   |                                 |   |
|   | ** **                           |   |
| DATE:  | **  August 9,  2005** |   |   | BY: | /s/ **Sheldon Hoffman** |   |
|   |                                 |   | Sheldon Hoffman |
|   |                                 |   | Chief Executive Officer and Director |
|   |                                 |   |   |
|   | ** **                           | ** ** |   |
|   |                                 |   |   |
| DATE:  | **  August 9,  2005** |   |   | BY: | /s/ **Lloyd Hoffman** |   |
|   |                                 |   | Lloyd Hoffman |
|   |                                 | Chief Financial Officer and Senior Vice President |

 

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