Table of Contents

 

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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

**of the Securities ExchangeAct of 1934**

 

**For theQuarter Ended March 31, 2009**

 

**CommissionFile No. 01-15725**

 

**Alpha Pro Tech, Ltd.**

(exact name of registrant as specified in its charter)

 

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

 

Registrant’s telephone number, including areacode:  **(905)479-0654**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.     Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).    Yes o No o

 

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

 

| Large accelerated filer o |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer x   |   | Smaller Reporting Company o |

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of  May 4, 2009.

 

23,850,853 shares ofcommon stock,  $.01 par value

 

 

 

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Table of Contents

 

**Alpha Pro Tech, Ltd.**

 

Table of Contents

 
| ** **                         | **Page No.**                                                                           |
|------------------------------------|---------------------------------------------------------------------------------------------|
| PART I. FINANCIAL INFORMATION |                                                                                        |
|                               |                                                                                        |   |
| ITEM 1                             | Consolidated Financial Statements  (Unaudited)                                              |   |
|                               |                                                                                        |   |   |
|                               |  a)                                                                                    | Consolidated Balance Sheets | 2 |
|                               |                                                                                        |   |   |
|                               |  b)                                                                                    | Consolidated Income  Statements | 3 |
|                               |                                                                                        |   |   |
|                               |  c)                                                                                    | Consolidated Statement of  Shareholders’ Equity | 4 |
|                               |                                                                                        |   |   |
|                               |  d)                                                                                    | Consolidated Statements of  Cash Flows | 5 |
|                               |                                                                                        |   |   |
|                               |  e)                                                                                    | Notes to  Consolidated Financial Statements (unaudited) | 6 |
|                               |                                                                                        |   |   |
| ITEM 2                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 13 |
|                               |                                                                                        |   |   |
|                               | Cautionary  Statements Regarding Forward-Looking Information                                | 13 |
|                               |                                                                                        |   |   |
|                               | New Accounting Standards                                                                    | 19 |
|                               |                                                                                        |   |   |
| ITEM 3                             | Quantitative  and Qualitative Disclosures About Market Risk                                 | 20 |
|                               |                                                                                        |   |   |
| ITEM 4                             | Controls and  Procedures                                                                    | 21 |
|                               |                                                                                        |   |   |
| PART II.                      | OTHER INFORMATION                                                                           |   |
|                               |                                                                                        |   |   |
| ITEM 1                             | Legal Proceedings                                                                           | 21 |
|                               |                                                                                        |   |   |
| ITEM 1A.                           | Risk Factors                                                                                | 21 |
|                               |                                                                                        |   |   |
| ITEM 2                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 22 |
|                               |                                                                                        |   |   |
| ITEM 3                             | Defaults upon  senior securities                                                            | 22 |
|                               |                                                                                        |   |   |
| ITEM 4                        | Submission of  Matters to a Vote Security Holders                                           | 22 |
|                               |                                                                                        |   |   |
| ITEM 5                             | Other Information                                                                           | 22 |
|                               |                                                                                        |   |   |
| ITEM 6                             | Exhibits and  Reports on Form 8-K                                                      |   |
|                               |                                                                                        |   |   |
| SIGNATURES                         |                                                                                        | 23 |
|                               |                                                                                        |   |   |
| 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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Tableof Contents

** **

**Alpha Pro Tech, Ltd.**

 

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

##### *** ***

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

#### ** **

Alpha Pro Tech, Ltd. (“Alpha Pro Tech”, “the Company”)prepared the following unaudited interim consolidated financial statements pursuantto the rules and regulations of the Securities and Exchange Commission.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant tothese rules and regulations.

 

You should read the following unaudited interimconsolidated financial statements and the accompanying notes together with theCompany’s current year 10-Q’s and 8-K’s as well as the Annual Report on Form 10-Kfor the year ended December 31, 2008. The Company’s 2008 Annual Report contains information that may behelpful in analyzing the financial information contained in this report and incomparing its results of operations for the three ended months March 31,2009 with the same period in 2008.

 

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**Alpha Pro Tech, Ltd.**

 

**Consolidated Balance Sheets (Unaudited)**

 
| ** **                                                                                                                                                                     | ** ** | **March 31,  2009** | ** ** | **December 31,  2008 (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------------|------------|
|                                                                                                                                                                           |       |                     |       |                            |       |
| **Assets**                                                                                                                                                                     |       |                     |       |                            |       |
| Current assets:                                                                                                                                                                |       |                     |       |                            |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                        | 4,631,000  |                            | $          | 4,578,000 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $83,000 at March 31, 2009 and $71,000 at December 31,  2008                                          |       | 6,100,000                |       | 5,091,000                       |       |
| Inventories, net                                                                                                                                                               |       | 10,944,000               |       | 12,057,000                      |       |
| Prepaid expenses and other current assets                                                                                                                                      |       | 1,422,000                |       | 1,340,000                       |       |
| Deferred income taxes                                                                                                                                                          |       | 531,000                  |       | 510,000                         |       |
| Total current assets                                                                                                                                                           |       | 23,628,000               |       | 23,576,000                      |       |
|                                                                                                                                                                           |       |                     |       |                            |       |
| Property and equipment, net                                                                                                                                                    |       | 3,874,000                |       | 3,942,000                       |       |
| Goodwill, net                                                                                                                                                                  |       | 55,000                   |       | 55,000                          |       |
| Intangible assets, net                                                                                                                                                         |       | 199,000                  |       | 202,000                         |       |
| Equity investments in and advances to unconsolidated  affiliates                                                                                                               |       | 1,491,000                |       | 1,393,000                       |       |
| Total assets                                                                                                                                                                   |       | $                        | 29,247,000 |                            | $          | 29,168,000 |   |
|                                                                                                                                                                           |       |                     |       |                            |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                                  |       |                     |       |                            |       |
| Current liabilities:                                                                                                                                                           |       |                     |       |                            |       |
| Accounts payable                                                                                                                                                               |       | $                        | 808,000    |                            | $          | 620,000 |   |
| Accrued liabilities                                                                                                                                                            |       | 846,000                  |       | 1,263,000                       |       |
| Total current liabilities                                                                                                                                                      |       | 1,654,000                |       | 1,883,000                       |       |
|                                                                                                                                                                           |       |                     |       |                            |       |
| Deferred income taxes                                                                                                                                                          |       | 840,000                  |       | 819,000                         |       |
| Total liabilities                                                                                                                                                              |       | 2,494,000                |       | 2,702,000                       |       |
|                                                                                                                                                                           |       |                     |       |                            |       |
| Shareholders’ equity                                                                                                                                                      |       |                     |       |                            |       |
| Common stock, $.01 par value, 50,000,000 shares  authorized, 23,541,055 and 23,850,855 issued and outstanding at  March 31, 2009 and December 31, 2008, respectively |       | 236,000                  |       | 239,000                         |       |
| Additional paid-in capital                                                                                                                                                     |       | 24,561,000               |       | 24,785,000                      |       |
| Retained earnings                                                                                                                                                              |       | 1,956,000                |       | 1,442,000                       |       |
| Total shareholders’ equity                                                                                                                                                |       | 26,753,000               |       | 26,466,000                      |       |
| Total liabilities and shareholders’ equity                                                                                                                                |       | $                        | 29,247,000 |                            | $          | 29,168,000 |   |

 

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(1)                                  The condensed consolidated balance sheetas of December 31, 2008 has been prepared using information from theaudited financial statements at that date.

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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### **Table of Contents**

 

**Alpha Pro Tech, Ltd.**

 

### **Consolidated Income Statements (Unaudited)**

 
| ** **                                                   | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| Net sales                                                    |       | $                                              | 9,326,000  |   | $ | 7,524,000 |   |
|                                                         |       |                                           |       |   |   |
| Cost of goods sold, excluding depreciation and  amortization |       | 5,207,000                                      |       | 4,074,000 |   |
|                                                         |       |                                           |       |   |   |
| Gross margin                                                 |       | 4,119,000                                      |       | 3,450,000 |   |
|                                                         |       |                                           |       |   |   |
| Expenses:                                                    |       |                                           |       |   |   |
| Selling, general and administrative                          |       | 3,240,000                                      |       | 3,141,000 |   |
| Depreciation and amortization                                |       | 161,000                                        |       | 141,000 |   |
|                                                         |       |                                           |       |   |   |
| Income from operations                                       |       | 718,000                                        |       | 168,000 |   |
|                                                         |       |                                           |       |   |   |
| Other income                                                 |       |                                           |       |   |   |
| Equity in income of unconsolidated affiliates                |       | 98,000                                         |       | 21,000 |   |
| Interest, net                                                |       | 1,000                                          |       | 34,000 |   |
|                                                         |       |                                           |       |   |   |
| Income before provision for income taxes                     |       | 817,000                                        |       | 223,000 |   |
|                                                         |       |                                           |       |   |   |
| Provision for income taxes                                   |       | 303,000                                        |       | 84,000 |   |
|                                                         |       |                                           |       |   |   |
| Net income                                                   |       | $                                              | 514,000    |   | $ | 139,000 |   |
|                                                         |       |                                           |       |   |   |
| Basic net income per share                                   |       | $                                              | 0.02       |   | $ | 0.01 |   |
|                                                         |       |                                           |       |   |   |
| Diluted net income per share                                 |       | $                                              | 0.02       |   | $ | 0.01 |   |
|                                                         |       |                                           |       |   |   |
| Basic weighted average shares outstanding                    |       | 23,700,601                                     |       | 25,210,691 |   |
|                                                         |       |                                           |       |   |   |
| Diluted weighted average shares outstanding                  |       | 23,700,601                                     |       | 25,210,691 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**Alpha Pro Tech, Ltd.**

 

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

 
| ** **                                  | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
|                                        |       | **Shares**       |       | **Amount**              |       | **Capital**  |       | **Earnings** |       | **Total** |   |
| Balance at December 31, 2008           |       | 23,850,855       |       | $                       | 239,000    |         | $          | 24,785,000   |       | $ | 1,442,000 |   | $ | 26,466,000 |   |
| Share- based compensation expense           |       | —           |       | —                  |       | 58,000       |       | —       |       | 58,000 |   |
| Common Stock repurchased & retired |       | (309,800         | )          | (3,000                  | )          | (282,000     | )          | —       |       | (285,000 | ) |
| Net income                                  |       | —           |       | —                  |       | —       |       | 514,000      |       | 514,000 |   |
| Balance at March 31, 2009              |       | 23,541,055       |       | $                       | 236,000    |         | $          | 24,561,000   |       | $ | 1,956,000 |   | $ | 26,753,000 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**Alpha Pro Tech, Ltd.**

 

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

 
| ** **                                                                     | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| **Cash Flows From Operating Activities:**                                      |       |                                           |       |   |   |
| Net income                                                                     |       | $                                              | 514,000    |   | $ | 139,000 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                           |       |   |   |
| Share-based compensation expense                                               |       | 58,000                                         |       | 47,000 |   |
| Depreciation and amortization                                                  |       | 161,000                                        |       | 141,000 |   |
| Deferred income taxes                                                          |       | -                                              |       | 19,000 |   |
| Equity in income of unconsolidated affiliates                                  |       | (98,000                                        | )          | (21,000 | ) |
| Changes in assets and liabilities:                                             |       |                                           |       |   |   |
| Accounts receivable, net                                                       |       | (1,009,000                                     | )          | 277,000 |   |
| Inventories, net                                                               |       | 1,113,000                                      |       | (273,000 | ) |
| Prepaid expenses and other current assets                                      |       | (82,000                                        | )          | (103,000 | ) |
| Accounts payable and accrued liabilities                                       |       | (229,000                                       | )          | (762,000 | ) |
|                                                                           |       |                                           |       |   |   |
| Net cash provided by (used in) operating activities:                           |       | 428,000                                        |       | (536,000 | ) |
|                                                                           |       |                                           |       |   |   |
| **Cash Flows From Investing Activities:**                                      |       |                                           |       |   |   |
| Purchase of property and equipment                                             |       | (86,000                                        | )          | (10,000 | ) |
| Purchase of intangible assets                                                  |       | (4,000                                         | )          | (4,000 | ) |
|                                                                           |       |                                           |       |   |   |
| Net cash used in investing activities                                          |       | (90,000                                        | )          | (14,000 | ) |
|                                                                           |       |                                           |       |   |   |
| **Cash Flows From Financing Activities:**                                      |       |                                           |       |   |   |
| Payments for the repurchase of common stock                                    |       | (285,000                                       | )          | (708,000 | ) |
|                                                                           |       |                                           |       |   |   |
| Net cash used in financing activities                                          |       | (285,000                                       | )          | (708,000 | ) |
|                                                                           |       |                                           |       |   |   |
| Increase in cash during the period                                             |       | 53,000                                         |       | (1,258,000 | ) |
|                                                                           |       |                                           |       |   |   |
| Cash and cash equivalents, beginning of period                                 |       | 4,578,000                                      |       | 4,064,000 |   |
| Cash and cash equivalents, end of period                                       |       | $                                              | 4,631,000  |   | $ | 2,806,000 |   |

 

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

 

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**Alpha Pro Tech, Ltd.**

** **

**Notes toConsolidated Financial Statements (Unaudited)**

** **

**1.****                                     ****The Company**

 

Alpha Pro Tech,Ltd. (“Alpha Pro Tech”, “the Company”) is in the business of protecting people,products and environments.  The Companyaccomplishes this by developing, manufacturing and marketing a line ofdisposable protective apparel for the cleanroom, industrial and pharmaceuticalmarkets, a line of building supply products for the new home and re-roofingmarkets and a line of infection control products for the medical and dentalmarkets.

 

The disposableprotective apparel consists of a complete line of shoecovers, bouffant caps,coveralls, gowns, frocks and lab coats. The line of building supply products(formerly known as Engineered Products) consists of construction weatherizationproducts such as house wrap and synthetic roof underlayment.   The infection control line of productsincludes a line of face masks, eye shields and medical bed pads as well as aline of pet beds. Previously the line of medical bed pads and pet beds werereported as a separate segment under the name of Extended Care. Becausemanagement is now looking at the Extended Care segment in conjunction with theInfection Control segment, and since the majority of the extended care revenueis now generated from the medical bed pads, it is now appropriate that thesesegments to be consolidated in the infection control segment.  All numbers have been updated to reflect theupdated segmentation.

 

The Company’sproducts are sold both under the “Alpha Pro Tech” brand name as well as underprivate label and are predominantly sold in the United States of America.

 

**2.****                                     ****Basis of Presentation**

 

The interim financial information included herein isunaudited; however, the information reflects all adjustments (consisting ofnormal recurring adjustments) that are, in the opinion of management, necessaryfor the fair presentation of the consolidated financial position, results ofoperations and cash flows for the interim periods. The consolidated financialstatements should be read in conjunction with the current year 10-Q’s and 8-K’s,as well as the consolidated financial statements for the year ended December 31,2008, which are included in the Company’s Annual Report on Form 10-K (“200810-K”). The results of operations for the three months ended March 31,2009 are not necessarily indicative of the results to be expected for the fullyear. The consolidated balance sheet at December 31, 2008 was extractedfrom the audited consolidated financial statements contained in the 2008 10-Kand does not include all disclosures required by accounting principlesgenerally accepted in the United States of America for annual consolidatedfinancial statements.

 

**3.****                                     ****Stock Based Compensation**

** **

The Companymaintains a stock option plan under which the Company may grant incentive stockoptions and non-qualified stock options to employees and non-employeedirectors.  Stock options have been grantedwith exercise prices at or above the fair market value of the underlying sharesof common stock on the date of grant. Options vest and expire according to terms established at the grantdate.

 

The Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 123R, “Share-Based Payment (“SFAS 123R”)” effectiveJanuary 1, 2006, using the modified prospective application method. SFAS123R requires companies to record compensation expense for the value of alloutstanding and unvested share-based payments, including employee stock optionsand similar awards.  During the firstquarter of 2009 and 2008 there were no stock options granted under the optionplan.  The Company recognized $58,000 and$47,000 in share-based compensation expense in its consolidated financialstatements for the three months ended March 31, 2009  and 2008, respectively related to previouslyissued options.

 

Stock options topurchase 1,794,995 and 1,320,000 shares of common stock were outstanding at 

 

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**Alpha Pro Tech, Ltd.**

** **

**Notes toConsolidated Financial Statements (Unaudited)**

 

March 31,2009 and 2008, respectively.  As of March 31,2009 none of the outstanding stock options were included in the computation ofdiluted earnings per share because the exercise prices of all stock optionswere greater than the average share price of the Company’s common stock and,therefore, there was no dilutive effect.

 

The Company usedthe Black-Scholes-Merton option pricing model to value the options.  Prior to 2008, The Company used thesimplified method as discussed in Staff Accounting Bulletin (“SAB”) No.107, “Share-Based Payment (“SAB 107”)” for estimating the expected life of theoptions.  For options granted during aquarter, of which there were none in the first quarter of 2009, the Companywould use historical data to estimate the expected life of the options.  The risk-free interest rate for periodswithin the contractual life of the award is based on the US Treasury yieldcurve in effect at the time of grant. The expected volatility is based onhistorical volatility of the expected life in years.  The Company uses an estimated dividend payoutratio of zero as the Company has not paid dividends in the past and does notexpect to in the future.

 

As of March 31,2009, $326,000 of total unrecognized compensation cost related to stock optionsis expected to be recognized over a weighted average period of 2.0 years.

 

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

** **

In February 2007,the FASB issued SFAS No 159 “The Fair Value Option for Financial Assets andFinancial Liabilities (“SFAS 159”).” Under SFAS 159, companies may elect tomeasure certain financial instruments and certain other items at fair value.The standard requires that unrealized gains and losses on items for which thefair value option has been elected be reported in earnings. SFAS 159 iseffective for fiscal years beginning after November 15, 2007. SFAS 159 wasadopted for fiscal 2008; however, the Company did not elect to apply the fairvalue option to any financial instruments or other items upon adoption of SFAS159 or during the twelve months ended December 31, 2008. Therefore, theadoption of SFAS 159 did not impact the Company’s consolidated financialposition, results of operations or cash flows.

 

In September 2006, FASB issued SFAS No. 157,“Fair Value Measurements (“SFAS 157”)”. SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS 157 does not require any new fair value measurements but rather eliminatesinconsistencies in guidance found in prior accounting pronouncements. In February 2008,the FASB decided to postpone for one year the effective date of SFAS 157 forassets and liabilities measured at fair value on a non-recurring basis. TheCompany adopted SFAS 157 as of January 1, 2008 for assets and liabilitiesmeasured at fair value on a recurring basis and as of January 1, 2009 forassets and liabilities measured at fair value on a non-recurring basis. Theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations, (“SFAS141R”),” which changes how business combinations are accounted for and willimpact financial statements both on the acquisition date and in subsequentperiods. SFAS 141R was effective January 1, 2009 and did not have animpact on the Company’s consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements (“SFAS 160”),” which changes the accounting and reportingstandards for the noncontrolling interests in a subsidiary in consolidatedfinancial statements.  SFAS 160 recharacterizes minority interests asnoncontrolling interests and requires noncontrolling interests to be classifiedas a component of shareholders’ equity.  SFAS 160 was effective January 1,2009 and required retroactive adoption of the presentation and disclosurerequirements for existing minority interests. The Company does not consolidate its partially owned affiliate andtherefore does not expect the adoption of SFAS 160 did not have a materialimpact on its 

 

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**Alpha Pro Tech, Ltd.**

** **

**Notes toConsolidated Financial Statements (Unaudited)**

 

consolidatedfinancial statements.

 

In April 2009,the FASB issued FASB Staff Position (“FSP”) FAS No. 107-1 and AccountingPrinciples Board (“APB”) Opinion No. 28-1, “Interim Disclosures about FairValue of Financial Instruments (“FSP FAS No. 107-1 and APB Opinion No. 28-1”)”,which amends the disclosure requirements of SFAS No. 107 and APB Opinion No. 28and requires disclosure about the fair value of the Company’s financialinstruments whenever it issues summarized financial information for interimreporting periods. FSP FAS No. 107-1 and APB Opinion No. 28-1 areeffective for financial statements issued for interim reporting periods endingafter June 15, 2009. The Company does not expect the adoption of FSP FAS No. 107-1and APB Opinion No. 28-1 to have a material impact on its consolidatedfinancial statements.

 

In April 2009,the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments  (“FSP FAS No. 115-2 and FAS No. 124-2”)”,which amends SFAS No. 115 and FSP FAS No. 115-1 and FSP FAS No. 124-1and conforms changes to other standards including EITF Issue No. 99-20 andAICPA Statement of Position (“SOP”) No. 03-3,  “Accounting for Certain Loans or DebtSecurities Acquired in a Transfer”,  andimproves the presentation and disclosure of other-than-temporary impairments ondebt and equity securities in the financial statements. FSP FAS No. 115-2and FAS No. 124-2 are effective for interim and annual reporting periodsending after June 15, 2009. The Company does not expect the adoption ofFSP FAS No. 115-2 and FAS No. 124-2 to have a material impact on itsconsolidated financial statements.

 

In April 2009,the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volumeand Level of Activity for the Asset or Liability Have Significantly Decreasedand Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”)”,which provides additional guidance for estimating fair value in accordance withSFAS No. 157, “Fair Value Measurements”, when the volume and level ofactivity for the asset or liability have significantly decreased. This FSP alsoincludes guidance on identifying circumstances that indicate a transaction isnot orderly and applies to all assets and liabilities within the scope ofaccounting pronouncements that require or permit fair value measurements,except in paragraphs 2 and 3 of SFAS No. 157. FSP FAS No. 157-4 iseffective for interim and annual reporting periods ending after June 15,2009. The Company does not expect the adoption of FSP FAS No. 157-4 tohave a material impact on its consolidated financial statements.

 

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

** **

Inventories consist ofthe following:

 
| ** **                                                    | ** ** | **March 31,  2008** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials                                                 |       | $                        | 6,867,000  |                        | $          | 7,760,000 |   |
| Work in process                                               |       | 661,000                  |       | 797,000                     |       |
| Finished goods                                                |       | 3,831,000                |       | 3,915,000                   |       |
|                                                          |       | 11,359,000               |       | 12,472,000                  |       |
|                                                          |       |                     |       |                        |       |
| Less reserve for slow-moving, obsolete or unusable  inventory |       | (415,000                 | )          | (415,000                    | )          |
|                                                          |       | $                        | 10,944,000 |                        | $          | 12,057,000 |   |

** **

**6.****            ****Investment in and Advances toUnconsolidated Affiliates**

** **

On June 14,2005, Alpha ProTech Engineered Products, Inc. entered into a joint venturewith a manufacturer in India for the production of building products.  Under terms of the joint venture 

 

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**Alpha Pro Tech, Ltd.**

** **

**Notes toConsolidated Financial Statements (Unaudited)**

 

agreement, aprivate company, Harmony Plastics Private Limited (“Harmony”), was created withownership interests of 41.66% by Alpha ProTech Engineered Products, Inc.and 58.34% by Maple Industries and Associates. Alpha ProTech Engineered Products, Inc. contributed $508,000 forshare capital and Maple Industries and Associates contributed $708,000.

 

This joint venture positions Alpha ProTech EngineeredProducts to respond to current and expected increased product demand for housewrap and synthetic roofing underlayment, and future capacity for sales ofspecialty roofing component products and custom products for industrialapplications requiring high quality extrusion coated fabrics.

 

The capital from the initial funding along with a bankloan, which is guaranteed exclusively by Maple Industries and Associates andthe assets of Harmony Plastics Private Limited, was utilized to purchase anexisting 33,000 square-foot manufacturing facility in India; this facilityincludes manufacturing equipment necessary to produce synthetic roof underlayment.  Harmony has also built a 60,000 square-footfacility for the manufacturing of house wrap and other building products.

 

The Company is subject to the provisions of FASBInterpretation (“FIN”) No. 46R, “Consolidation of Variable InterestEntities an Interpretation of ARB No. 51 (“FIN 46R”),” which defines thecriteria by which the Company determines the proper accounting for itsinvestments in related entities. Specifically, FIN 46R requires the Company to assess whether or notrelated entities are variable interest entities (VIEs), as defined.  For those related entities that qualify asvariable interest entities, FIN 46R requires the Company to determine whetheror not the Company is the primary beneficiary of the VIE, and if so, toconsolidate the VIE.

 

The Company has determined that Harmony is not a VIEand is therefore considered to be an unconsolidated affiliate.

 

The Company records its investment in Harmony as “Equityinvestments in and advances to unconsolidated affiliates” on the accompanyingConsolidated Balance Sheets (unaudited). The Company records its equity interest in Harmony’s results ofoperations as “Equity in income of unconsolidated affiliates” on theaccompanying Consolidated Income Statements (unaudited).

 

The Company reviews its investment in Harmony forimpairment in accordance with APB No. 18, “The Equity Method of Accountingfor Investments in Common Stock (“APB 18”).” APB 18 requires recognition of aloss when the decline in an investment is other-than-temporary.  In determining whether the decline isother-than-temporary, the Company considers the nature of the industry in whichHarmony operates, their historical performance, their performance in relationto their peers and the current economic environment.  The Company has concluded that no impairmentwas identified.

 

Alpha ProTech Engineered Products initially invested$1,450,000 in the joint venture; $508,000 for share capital and $942,000 as along term advance.  Fifty percent of the$942,000 long term advance for materials was to be repaid over a six year termcommencing in July 2006 and the balance is to be paid in the seventhyear.  During 2006, Harmony repaid$39,000 in scheduled payments and $461,000 in additional payments for a totalof $500,000, leaving a balance of $442,000. Harmony has not made any further payments to date.  Effective April 2006, interest of 3.5%is to be paid annually on this advance. The Company has an interest receivable of $35,000 as of March 31,2009 related to this agreement.

 

For the three months ended March 31, 2009 and2008, Alpha Pro Tech purchased $224,000 and $801,000, respectively fromHarmony.  For the three months ended March 31,2009 and 2008, the Company recorded equity income in unconsolidated affiliatesof $98,000 and $21,000, respectively.  Asof March 31, 2009, the Company’s investment in Harmony is $1,491,000 whichcomprises its original $1,450,000 investment and cumulative equity in income ofunconsolidated affiliates of $541,000 less $500,000 in repayments of theadvance.

 

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**Alpha Pro Tech, Ltd.**

** **

**Notes toConsolidated Financial Statements (Unaudited)**

 

**7.****            ****Accrued Liabilities**

 

Accrued liabilitiesconsist of the following:

 
| ** **                   | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Payroll                      |       | $                       | 141,000    |                       | $          | 280,000 |   |
| Commission and bonus accrual |       | 199,000                 |       | 545,000                    |       |
| Accrued professional fees    |       | 190,000                 |       | 240,000                    |       |
| Accrued rebates and other    |       | 316,000                 |       | 198,000                    |       |
|                         |       | $                       | 846,000    |                       | $          | 1,263,000 |   |

 

**8.****            ****Basic and Diluted Net Income PerShare**

 

The following table provides a reconciliation of bothnet income and the number of shares used in the computation of “basic” earningsper share (EPS), which utilizes the weighted average number of sharesoutstanding without regard to potential shares, and “diluted” EPS, whichincludes all such dilutive shares:

 
| ** **                                  | ** ** | **For the Three Months  Ended   March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Net income   (Numerator)               |       | $                                                | 514,000    |   | $ | 139,000 |   |
| Shares (Denominator):                       |       |                                             |       |   |   |
| Basic weighted average shares outstanding   |       | 23,700,601                                       |       | 25,210,691 |   |
| Add: Dilutive effect of stock options       |       | —                                           |       | — |   |
| Diluted weighted average shares outstanding |       | 23,700,601                                       |       | 25,210,691 |   |
| Net income   per share:                |       |                                             |       |   |   |
| Basic                                       |       | $                                                |  0.02 |   | $ |  0.01 |   |
| Diluted                                     |       | $                                                |  0.02 |   | $ |  0.01 |   |

** **

**9.****                                     ****Activity of Business Segments**

** **

The Companyoperates through three segments:

 

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

 

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**Alpha Pro Tech, Ltd.**

** **

**Notes toConsolidated Financial Statements (Unaudited)**

 

markets.

 

Building Supply Products (formerly known as EngineeredProducts): consisting of a line of construction weatherization products such ashouse wrap and synthetic roof underlayment for the building and re-roofingmarkets.  The Company’s equity in incomeof unconsolidated affiliates (Harmony) is included in the total segment incomefor Building Supply Products in the table below.

 

Infection ControlProducts: consisting of a line of face masks and eye shields principally forthe medical, dental and industrial markets. It also consists of a line of medical bed pads as well as a line of petbeds. Previously the line of medical bed pads and pet beds were reported as aseparate segment under the name of Extended Care. Because management is nowlooking at the Extended Care segment in conjunction with the Infection Controlsegment, and since the majority of the extended care revenue is now generatedfrom the medical bed pads, it is now appropriate that these segments to beconsolidated in the infection control segment. All numbers reflect the updated segmentation.

 

The accountingpolicies of the segments excludes charges allocated to corporate officeexpenses, professional fees, public company expenses, executive and managementbonuses and income taxes.  The Companyevaluates the performance of its segments and allocates resources to them basedprimarily on net sales.

 

The following table shows net sales for each segmentfor the three ended March 31, 2009 and 2008:

 
| ** **                    | ** ** | **For the Three Months  Ended  March 31,** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|
| ** **                    | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| ** **                    | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Disposable Protective Apparel |       | $                                               | 4,834,000  |   | $ | 4,454,000 |   |
| Building Supply               |       | 2,255,000                                       |       | 1,360,000 |   |
| Infection Control             |       | 2,237,000                                       |       | 1,710,000 |   |
|                          |       |                                            |       |   |   |
| Consolidated total net sales  |       | $                                               | 9,326,000  |   | $ | 7,524,000 |   |

 

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**Alpha Pro Tech, Ltd.**

** **

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

 

The following table shows the reconciliation of totalsegment income to total consolidated net income for the three months ended March 31,2009 and 2008:

 
| ** **                     | ** ** | **For the Three Months Ended   March 31,** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Disposable Protective Apparel  |       | $                                               | 1,250,000  |   | $ | 1,064,000 |   |
| Building Supply                |       | 91,000                                          |       | (308,000 | ) |
| Infection Control              |       | 804,000                                         |       | 522,000 |   |
|                           |       |                                            |       |   |   |
| Total segment income           |       | 2,145,000                                       |       | 1,278,000 |   |
| Unallocated corporate expenses |       | (1,328,000                                      | )          | (1,055,000 | ) |
| Provision for income taxes     |       | (303,000                                        | )          | (84,000 | ) |
|                           |       |                                            |       |   |   |
| Consolidated net income        |       | $                                               | 514,000    |   | $ | 139,000 |   |

 

**10.****                              ****Subsequent Events**

** **

On April 8, 2009, the Company announced the Boardof Directors authorization of an additional share repurchase program of theCompany’s common stock for up to $2.0 million beyond the current sharerepurchase program already in place.

 

During the period of April 1, 2009 through April 27,2009, the Company purchased 483,400 shares of its own common stock at a cost of$513,000.  These shares will be retired.

 

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**AlphaPro Tech, Ltd.**

 

**ITEM 2****      ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL****  ****CONDITION AND RESULTS OFOPERATIONS**

** **

You should read the following discussion and analysistogether with our consolidated financial statements (unaudited) and the notesto our consolidated financial statements (unaudited), which appear elsewhere inthis report.

 

**CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGINFORMATION**

** **

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 publicly updateor revise forward-looking statements which may be made to reflect events orcircumstances after the date made or to reflect the occurrence of unanticipatedevents.

 

**Where to find moreinformation about us.**We make available free of charge on our Internetwebsite (http://www.alphaprotech.com) our most recent Annual Report on Form 10-K,our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-Kfurnished or filed since our most recent Annual Report on Form 10-K andany amendments to such reports as soon as reasonably practicable following theelectronic filing of such report with the SEC. In addition, we provideelectronic or paper copies of our filings free of charge upon request.

 

**Critical Accounting Policies**

** **

The preparation of our financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the dates of the financial statements and the reportedamounts of net sales and expenses during the reported periods.  We base estimates on past experience and onvarious other assumptions that are believed to be reasonable under the circumstances.  The application of these accounting policieson a consistent basis enables us to provide timely and reliable financialinformation.  Our critical accountingpolices include the following:

 

Inventories:Inventories include freight-in, materials, labor and overhead costs and arestated at the lower of cost (computed on a standard cost basis, whichapproximates average cost) or market. Provision is made for slow-moving, obsolete or unusable inventory. Weassess our inventory for estimated obsolescence or unmarketable inventory and,if necessary, write down the difference between the cost of inventory and theestimated market value less cost to sell based upon assumptions about futuresales and supply on-hand. If actual market conditions are less favorable thanthose projected by management, additional inventory write-downs may berequired.

 

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Revenue Recognition: For sales transactions, we complywith the provisions of the SEC’s Staff Accounting Bulletin (“SAB”) No. 104,“Revenue Recognition,” which states that revenue should be recognized when thefollowing revenue recognition criteria are met: (1) persuasive evidence ofan arrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured. These criteria are satisfied upon shipment of product andrevenues are recognized accordingly.

 

Sales are reduced for any anticipated sales returns,rebates and allowances based on historical experience.  Since our return policy is only 90 days andour products are not generally susceptible to external factors such astechnological obsolescence or significant changes in demand, we are able tomake a reasonable estimate for returns. We offer end-user product specific andsales volume rebates to select distributors. Our rebates are based on actual sales and accrued monthly.

 

Stock BasedCompensation:  The Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment (“SFAS 123R”) effective January 1,2006, using the modified prospective application method. SFAS 123R requirescompanies to record compensation expense for the value of all outstanding andunvested share-based payments, including employee stock options and similarawards.

 

The fair values of stock option grants are determinedusing the Black-Scholes option pricing model and the following assumptions:expected stock price volatility based on historical and management’sexpectations of future volatility, risk-free interest rates from publishedsources, years to maturity based on historical data and no dividend yield, asmanagement currently does not intend to pay dividends in the near future. TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and that arefully transferable. In addition, the option valuation model requires the inputof highly subjective assumptions including expected stock pricevolatility.  Our stock options havecharacteristics significantly different from those of traded options andchanges in the subjective input assumptions can materially affect their fairvalue.

 

**OVERVIEW**

** **

Alpha Pro Tech is in the business of protectingpeople, products and environments. We accomplish this by developing,manufacturing and marketing a line of high-value, disposable protective appareland infection control products for the cleanroom, industrial, pharmaceutical,medical and dental markets. We also manufacture a line of building supplyconstruction weatherization products. Our products are sold both under the “Alpha Pro Tech” brand name as wellas under private label.

 

Our products are grouped into three businesssegments.  The Disposable ProtectiveApparel segment, consisting of disposable protective apparel; the BuildingSupply segment (formerly known as Engineered Products), consisting ofconstruction weatherization products such as house wrap and synthetic roofunderlayment; and the Infection Control segment, consisting of face masks, eyeshields and medical bed pads as well as a line of pet beds.  Previously the line of medical bed pads andpet beds were reported as a separate segment under the name of Extended Care.Because management is now looking at the Extended Care segment in conjunctionwith the Infection Control segment, and since the majority of the extended carerevenue is now generated from the medical bed pads, it is now appropriate thatthese segments to be grouped in the infection control segment.  All numbers have been updated to reflect theupdated segmentation.

 

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Our target markets are pharmaceutical manufacturing,bio-pharmaceutical manufacturing and medical device manufacturing, lab animalresearch, high technology electronics manufacturing which includes thesemi-conductor market, medical and dental distributors, pet distributors andconstruction, building supply and roofing distributors.

 

Our products are used primarily in cleanrooms,industrial safety manufacturing environments, health care facilities such ashospitals, laboratories and dental offices, as well as building and re-roofingsites.  Our products are distributedprincipally in the United States through a network consisting of purchasinggroups, national distributors, local distributors, independent salesrepresentatives and our own sales and marketing force.

 

# **RESULTS OF OPERATIONS**

# ** **

The following table sets forth certain operationaldata as a percentage of sales for the periods indicated:

 
| ** **                               | ** ** | **For the Three Months Ended   March 31,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Sales                                    |       | 100.0                                           | %          | 100.0 | % |
| Gross profit                             |       | 44.2                                            | %          | 45.9 | % |
| Selling, general and administrative      |       | 34.7                                            | %          | 41.8 | % |
| Income from operations                   |       | 7.7                                             | %          | 2.2 | % |
| Income before provision for income taxes |       | 8.8                                             | %          | 3.0 | % |
| Net income                               |       | 5.5                                             | %          | 1.9 | % |

## ** **

## **Three months ended March 31, 2009,compared to the three months ended March 31, 2008**

## ** **

**Sales.**  Consolidated sales for the three months endedMarch 31, 2009 increased to $9,326,000 from $7,524,000 for the threemonths ended March 31, 2008, representing an increase of $1,802,000 or24.0%.  This increase consists ofincreased sales of Building Supply segment of $895,000, increased InfectionControl segment sales of $527,000 and increased Disposable Protective Apparelsegment sales of $380,000.

 

Sales for the Disposable Protective Apparel segmentfor the three months ended March 31, 2009 increased by $380,000 or 8.5% to$4,834,000 compared to $4,454,000 for the same period of 2008.  The increase is related to a slight increasein sales for our largest distributor as well as a major national distributorwith which we received preferred vendor status in 2008 but, it was primarilydue to increased sales to other cleanroom and industrial distributors.  We expect sales for 2009 to be improved ascompared to 2008.

 

Building Supply segment (formerly known as EngineeredProducts) sales for the three months ended March 31, 2009 increased by$895,000 or 65.8% to $2,255,000 as compared to $1,360,000 for the same periodof 2008.  The segment increase isprimarily due to a 90.0% increase in sales of REXTM Synfelt synthetic roofunderlayment and a 30.0% increase in sales of REXTM Wrap house wrap.  The sales mix

 

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of theBuilding Supply sales for the first quarter of 2009 was: 64% synthetic roofunderlayment and 36% house wrap.  This iscompared to 54% synthetic roof underlayment and 46% house wrap in 2008.

 

Our Building Supply Products distribution channelstrategy is continuing to gain momentum. Our REXTM synthetic roof underlayment is being positively received as asuperior product in the industry and we believe is a cost effective and betteralternative to felt paper.  As well, ourhigh-quality, multi-color printed house wrap gives us a distinct competitiveadvantage in the marketplace.

 

We continue to be optimistic that our distributionchannel strategy will broaden our ability to take advantage of marketopportunities for synthetic roof underlayment and house wrap throughout thisyear and into the future. Although our sales are growing and are expected tocontinue to grow, the downturn in the economy and in particular the housingmarket will affect our sales. We continue to work on opportunities withexisting and new distributors and we are optimistic about the future of thissegment.

 

Infection Control segment sales for the three monthsended March 31, 2009 increased by $527,000 or 30.8% to $2,237,000 comparedto $1,710,000 for the same period of 2008. Shield sales were up by 192.6% or $699,000, mask sales were down by 3.5%or $38,000 and medical bed pad and pet beds were down 50.5% or $134,000 whencompared to the quarter ended March 31, 2008.  Shield sales improved in 2009 due to the $1.7million shield order received in the fourth quarter of 2008, from the samecustomer from which we received the non-recurring order from in the firstquarter of 2007.  This order is beingshipped out over a period of three quarters and commenced shipping in thefourth quarter of 2008.  As of March 31,2009 we have shipped approximately $1.3 million of the order, the balance of$400,000 will ship in the second quarter of 2009.  Shield sales should improve in 2009 due tothe above mentioned order and mask sales are expected to improve significantlyamidst concerns regarding the global H1NI Influenza A (commonly known as “SwineFlu”) outbreak.

 

**Gross Profit.**   Gross profitincreased by 19.4% to $4,119,000 for the three months ended March 31, 2009from $3,450,000 for the same period in 2008. The gross profit margin was 44.2% for the three months ended March 31,2009 compared to 45.9% for the three months ended March 31, 2008.

 

Gross profit margin for the first quarter of 2009 hasbeen affected by the change in product mix in which Building Supply sales,which have lower margins, increased to 24.2% as a percentage of total sales for2009 as compared to 18.1% for the same period of 2008.  In addition, gross profit margin for theDisposable Protective Apparel segment for the quarter was lower than the sameperiod of 2008.  Although it was lowerthan the same period of 2008, it was improved from the fourth quarter of 2008as we passed on a price increase to our distributors due to cost increases inthe second half of 2008.

 

**Selling, General and Administrative Expenses.** Selling, general and administrative expenses increased by $99,000 or3.2% to $3,240,000 for the three months ended March 31, 2009 from$3,141,000 for the three months ended March 31, 2008.  As a percentage of net sales, selling,general and administrative expenses decreased to 34.7% for the three monthended March 31, 2009 from 41.8% for the same period in 2008.  The $99,000 increase is primarily due to a$225,000 severance agreement for our previous Senior Vice President of Marketingexpensed during the first quarter of 2009 and an increased executive bonus of$66,000.  The increase was partiallyoffset by decreased travel expenses of $78,000, and decreased industrial salesand marketing expenses of $79,000.

 

We believe that we have built the infrastructurerequired to substantially grow our business and if our revenues grow asexpected in the coming year our expenses are expected to decrease as apercentage of sales.

 

Included in this filing are references to certainfinancial performance measures excluding the effect of the aforementionedseverance agreement.   These are noted tobe non-GAAP measures which are provided in order to represent how the Board ofDirectors and management analyze the operating results for the period whencomparing it to prior periods.  Thesemeasures are not intended to be a substitute for the corresponding GAAPmeasures in determining our operating performance in accordance with generally 

 

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accepted accounting principles.  The only reconciling item noted between thesemeasures and those calculated under GAAP is the exclusion of the aforementionedseverance transaction.

 

Excluding the severance agreement, selling, generaland administrative expenses in the first quarter of 2009 were $3,015,000, adecrease of $126,000 or 4.0% compared to $3,141,000 the same quarter of2008.  Excluding the severance agreement,selling, general and administrative expenses decreased to 32.3% of sales forthe quarter ended March 31, 2009 from 41.8% of sales for the same periodin 2008.

 

The chief executive officer and president are eachentitled to a bonus equal to 5% of the pre-tax profits of the Company.  Bonuses of $91,000 were accrued for the threemonths ended March 31, 2009 as compared to $25,000 in the same period of2008.

 

**Depreciation and Amortization.** Depreciation and amortization expense increased to $161,000 for the threemonths ended March 31, 2009 from $141,000 for the same period in2008.  The increase is primarilyattributable to increased depreciation for the Building Supply segment.

 

**Income from Operations****.**  Income from operations increased by $550,000 or327.4%, to $718,000 for the three months ended March 31, 2009 as comparedto income from operations of $168,000 for the three months ended March 31,2008.  The increase in income fromoperations is due to an increase in gross profit of $669,000, partially offset byan increase in selling, general and administrative expenses of $99,000 and anincrease in depreciation and amortization of $20,000.

 

**Equity in income of unconsolidated affiliates**.  For the three months ended March 31, 2009, we recorded equity inincome of unconsolidated affiliates of $98,000 as compared to $21,000 for thesame period of 2008.

 

**Net Interest.**  For the threemonths ended March 31, 2009, net interest income was $1,000 compared tonet interest income of $34,000 for the same period of 2008.  Interest income decreased to $3,000 for thethree months ended March 31, 2009 as compared to $36,000 for the sameperiod of 2008, due to lower interest rates. Interest expense was constant at $2,000 for the three months ended March 31,2009 and March 31, 2008, respectively.

 

**Income before Provision for Income Taxes.** Income before provision for income taxes for the three months ended March 31,2009 was $817,000 compared to $223,000 for the three months ended March 31,2008, representing an increase of $594,000 or 266.4%.  The increase in income before provision forincome taxes is due primarily to an increase in income from operations of$550,000, an increase of $77,000 in equity in income of unconsolidatedaffiliates (Harmony) and a decrease in net interest income of $33,000.

 

**Provision for Income Taxes.** The provision for income taxes for the three months ended March 31,2009 was $303,000 compared to $84,000 for the same period of 2008.  The effective tax rate was 37.1% for thethree months ended March 31, 2009 as compared to 37.7% for the same periodin 2008.  Management expects theeffective tax rate to be in the 38% range going forward.

 

**Net Income.**  Net income forthe three months ended March 31, 2009 was $514,000 compared to net incomeof $139,000 for the three months ended March 31, 2008, an increase of$375,000 or 270.0%.  The net incomeincrease was primarily due to an increase in income before provision for incometaxes of $594,000, partially offset by an increase in income taxes of $219,000.  Net income as a percentage of sales for thethree months ended March 31, 2009 and 2008 was 5.5% and 1.9%respectively.  Basic and diluted incomeper share for the three months ended March 31, 2009 and 2008 was $0.02 and$0.01, respectively.

 

Income prior to the severance agreement and adjustedfor related income tax and executive bonus effects for the quarter ended March 31,2009 would be $639,000 compared to net income of $139,000 

 

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for the quarter ended March 31, 2008, an increaseof $500,000 or 360.0%.  Basic and dilutedincome per share for the quarters ended March 31, 2009 and 2008 would be$0.03 and $0.01, respectively.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

As of March 31, 2009, we had cash and cashequivalents of $4,631,000 and working capital of $21,974,000, an increase inworking capital of 1.3% or $281,000 since December 31, 2008.  As of March 31, 2009, our current ratiowas 14.3:1 as compared to 12.5:1 as of December 31, 2008.  Cash increased by $53,000 to $4,631,000 as ofMarch 31, 2009 as compared to $4,578,000 as of December 31,2008.  The increase in cash is due tocash provided by operating activities of $428,000 offset by cash paid for therepurchase of common stock of $285,000 and cash used in investing activities of$90,000.

 

We have a $3,500,000 credit facility with a bank,consisting of a line of credit with interest at prime plus 0.5%.  At March 31, 2009, the prime interestrate was 3.25%.  This credit line expiresin May 2009 and we plan to renew it upon expiration.  Our borrowing capacity on the line of creditwas $3,500,000 at March 31, 2009. The available line of credit is based on a formula of eligible accountsreceivable and inventories.  As of March 31,2009, we did not have any borrowings under this credit facility.

 

Net cash provided by operating activities was $428,000for the three months ended March 31, 2009 compared to $536,000 net cashused in operating activities for the three months ended March 31,2008.  The net cash provided by operatingactivities of $428,000 for the three months ended March 31, 2009 is due tonet income of $514,000, adjusted by the following: an increase in accountsreceivable of $1,009,000,a decrease in accounts payable and accrued liabilitiesof $229,000, equity in income of unconsolidated affiliates of $98,000, adecrease in inventory of $1,113,000, an increase in prepaid expenses of$82,000, amortization of share-based compensation expense of $58,000 and  depreciation and amortization of $161,000.

 

The net cash used in operating activities of $536,000for the three months ended March 31, 2008 is due to net income of$139,000, adjusted by the following: an increase in inventory of $273,000, adecrease in accounts receivable of $277,000, an increase in prepaid expenses of$103,000, an increase in accounts payable and accrued liabilities of $762,000,equity in income of unconsolidated affiliates of $21,000, amortization of share-basedcompensation of $47,000, depreciation and amortization of $141,000 and anincrease in net deferred tax asset of $19,000.

 

Accounts receivable increased by $1,009,000 or 19.8%to $6,100,000 as of March 31, 2009 from $5,091,000 as of December 31,2008.  The increase in accountsreceivable primarily related to an increase in sales in March 2009 ascompared to December 2008.  Thenumber of days of sales outstanding as of March 31, 2009 was 54 days ascompared to 51 days as of December 31, 2008.

 

Inventory decreased by $1,113,000 or 9.2% to$10,944,000 as of March 31, 2009 from $12,057,000 as of December 31,2008.  The decrease is primarily due to adecrease in inventory for the Building Supply Segment (formerly the EngineeredProducts segment) of approximately $1,000,000 to $4,999,000 as of March 31,2009.  We expect our inventory turns forthis segment to continue to improve in the coming quarters.

 

Prepaid expenses and other current assets increased by$82,000 to $1,422,000 as of March 31, 2009 from $1,340,000 as of December 31,2008.  The increase is primarily due toan increase in prepaid insurance and an increase in prepaid inventory fromAsia, partially offset by decreased prepaid taxes.

 

Accounts payable and accrued liabilities as of March 31,2009 decreased by $229,000 to $1,654,000 from $1,883,000 as of December 31,2008.  The net change was primarily due adecrease in accrued liabilities of $417,000 and an increase in trade payablesof $188,000.  Accrued liabilities aredown as follows: commission and bonus accrual $346,000, accrued payrollexpenses $139,000 and accrued 

 

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professional fees $50,000.  This is partially offset by an increase inaccrued rebates and other of $118,000.

 

Net cash used in investing activities was $90,000 forthe three months ended March 31, 2009 compared to net cash used ininvesting activities of $14,000 for the same period of 2008.  Our investing activity for the three monthsin 2009 consisted of expenditures for property and equipment of $86,000 and thepurchase of intangible assets of $4,000, compared to $10,000 and $4,000,respectively, for the same period of 2008. The expenditures for property and equipment in 2009 are primarily forthe Building Supply segment.

 

For the three months ended March 31, 2009, netcash used in financing activities was $285,000 compared to net cash used infinancing activities of $708,000 for the same period of 2008.  Our financing activities for both periodswere solely due to the repurchase of common stock.

 

As of March 31, 2009 we had $686,000 available onour repurchase program.  During the threemonths ended March 31, 2009, we repurchased and retired 309,800 shares ofcommon stock at a cost of $285,000.   Asof March 31, 2009, we have repurchased and retired a total of 4,948,700shares of common stock at a cost of $5,835,000 through our repurchase program.Future repurchases are expected to be funded from cash on hand and cash-flowfrom operations.

 

As shown below, at March 31, 2009, ourcontractual cash obligations totaled approximately $872,000.

 

Contractual Obligations

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** |
|                               |       |                       |       |   |   |   |   |   |   |
| Operating leases                   |       | $                          | 872,000    |   | $ | 504,000 |   | $ | 360,000 |   | $ | 8,000 |   |
|                               |       |                       |       |   |   |   |   |   |   |
| Total contractual cash obligations |       | $                          | 872,000    |   | $ | 504,000 |   | $ | 360,000 |   | $ | 8,000 |   |

 

We believe that cash generated from operations, 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**

 

In September 2006, FASB issued SFAS No. 157,“Fair Value Measurements (“SFAS 157”)”. SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS 157 does not require any new fair value measurements but rather eliminatesinconsistencies in guidance found in prior accounting pronouncements. In February 2008,the FASB decided to postpone for one year the effective date of SFAS 157 forassets and liabilities measured at fair value on a non-recurring basis. Weadopted SFAS 157 as of January 1, 2008 for assets and liabilities measuredat fair value on a recurring basis and as of 

 

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January 1, 2009 for assets and liabilitiesmeasured at fair value on a non-recurring basis. The adoption of this standarddid not have a material impact on our consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations, (“SFAS141R”),” which changes how business combinations are accounted for and willimpact financial statements both on the acquisition date and in subsequentperiods. SFAS 141R was effective January 1, 2009 and did not have an impacton our consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements (“SFAS 160”),” which changes the accounting and reportingstandards for the noncontrolling interests in a subsidiary in consolidatedfinancial statements.  SFAS 160 recharacterizes minority interests asnoncontrolling interests and requires noncontrolling interests to be classifiedas a component of shareholders’ equity.  SFAS 160 was effective January 1,2009 and required retroactive adoption of the presentation and disclosurerequirements for existing minority interests. We do not consolidate our partially owned affiliate and therefore theadoption of SFAS 160 did not have a material impact on our consolidatedfinancial statements.

 

In April 2009,the FASB issued FASB Staff Position (“FSP”) FAS No. 107-1 and AccountingPrinciples Board (“APB”) Opinion No. 28-1, “Interim Disclosures about FairValue of Financial Instruments (“FSP FAS No. 107-1 and APB Opinion No. 28-1”)”,which amends the disclosure requirements of SFAS No. 107 and APB Opinion No. 28and requires disclosure about the fair value of our financial instrumentswhenever we issue summarized financial information for interim reportingperiods. FSP FAS No. 107-1 and APB Opinion No. 28-1 are effective forfinancial statements issued for interim reporting periods ending after June 15,2009. We do not expect the adoption of FSP FAS No. 107-1 and APB Opinion No. 28-1to have a material impact on our consolidated financial statements.

 

In April 2009,the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments  (“FSP FAS No. 115-2 and FAS No. 124-2”)”,which amends SFAS No. 115 and FSP FAS No. 115-1 and FSP FAS No. 124-1and conforms changes to other standards including EITF Issue No. 99-20 andAICPA Statement of Position (“SOP”) No. 03-3,  “Accounting for Certain Loans or DebtSecurities Acquired in a Transfer”,  andimproves the presentation and disclosure of other-than-temporary impairments ondebt and equity securities in the financial statements. FSP FAS No. 115-2and FAS No. 124-2 are effective for interim and annual reporting periodsending after June 15, 2009. We do not expect the adoption of FSP FAS No. 115-2and FAS No. 124-2 to have a material impact on our consolidated financialstatements.

 

In April 2009,the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volumeand Level of Activity for the Asset or Liability Have Significantly Decreasedand Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”)”,which provides additional guidance for estimating fair value in accordance withSFAS No. 157, “Fair Value Measurements”, when the volume and level ofactivity for the asset or liability have significantly decreased. This FSP alsoincludes guidance on identifying circumstances that indicate a transaction isnot orderly and applies to all assets and liabilities within the scope ofaccounting pronouncements that require or permit fair value measurements,except in paragraphs 2 and 3 of SFAS No. 157. FSP FAS No. 157-4 iseffective for interim and annual reporting periods ending after June 15,2009. We do not expect the adoption of FSP FAS No. 157-4 to have amaterial impact on our consolidated financial statements.

 

# **ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

# ** **

We subcontract the manufacture of products in Chinaand Mexico and have a joint venture in India. Our results of operations could be negatively affected by factors suchas changes in foreign currency exchange rates due to stronger economicconditions in those countries.

 

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Changes in interest rates may result in changes in thefair market value of our cash and cash equivalents and interest income. Due tothe short duration and conservative nature of the cash equivalent investmentportfolio, we do not expect any material loss with respect to our cashequivalents. The book value for cash equivalents is considered to berepresentative of its fair value.

 

As of March 31, 2009 we have no debt.

 

We do not expect any significant effect on our resultsof operations from inflationary or interest and currency ratefluctuations.  We do not hedge ourinterest rate or foreign exchange risks.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Evaluation of Disclosure Controls and Procedures.

 

Under the supervision and with the participation ofour management, including our Chief Executive Officer (principal executiveofficer) and Chief Financial Officer (principal financial officer), weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as such term is defined in Rule 13a-15(e) and15d- 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Disclosure controls and procedures are thecontrols and other procedures that we designed to ensure that we record,process, summarize and report in a timely manner the information we mustdisclose in reports that we file with or submit to the Securities and ExchangeCommission under the Exchange Act.

 

In designing and evaluating our disclosure controlsand procedures, we recognize that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired control objectives, and we are required to apply our judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

Based on the evaluation, our principal executive andfinancial officers concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this report.

 

Changes in Internal Controls.

 

During the first quarter of the current fiscal yearend, there was no change in our internal control over financial reporting (assuch term is defined in Rule 13a-15(d) and 15d-15(d) under theExchange Act) that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1. LEGAL PROCEEDINGS**

 

None.

 

**Item 1A. RISK FACTORS**

 

There have been no material changes in our riskfactors from those disclosed in our 2008 Annual report on Form 10-K.

 

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**Item 2. UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 
| **Period**                      | ** ** | **Total Number   of Shares   Purchased** | ** ** | **Average Price   Paid per   Share** | ** ** | **Total Number of   Shares Purchased as   Part of Publicly   Announced Plan** | ** ** | **Approximate Dollar   Value of Shares that   May yet be Purchased   Under the Plan****(1)** | ** ** |
|---------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| January 1 — 31, 2008  |       | 117,600                                  |       | $                                    | 0.96       |                                                                               | 4,756,500  |                                                                                              | $          | 855,000 |   |
|                            |       |                                     |       |                                 |       |                                                                               |       |                                                                                              |       |
| February 1 — 29, 2008 |       | 61,900                                   |       | $                                    | 0.97       |                                                                               | 4,818,400  |                                                                                              | $          | 793,000 |   |
|                            |       |                                     |       |                                 |       |                                                                               |       |                                                                                              |       |
| March 1- 31, 2008          |       | 130,300                                  |       | $                                    | 0.81       |                                                                               | 4,948,700  |                                                                                              | $          | 686,000 |   |

 

We did not sell anyunregistered equity securities during the period covered by this Form 10-Q.

 

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(1) On April 8, 2009, the Company announcedthe Board of Directors authorization of the repurchase of up to an additional$2,000,000 of our outstanding common stock.

 

**Item 3. DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

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

 

      (a) Exhibits

 

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

 

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

 

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

 

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

 

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(b) Reports on Form 8-K

 

A Form 8-K was filed during the quarter covered by this report,reporting the issuance of a release dated February 24, 2009 announcing theregistrants’ termination of the Senior Vice President of Marketing with aseverance package of $225,000.

 

A Form 8-K was filed during the quarter covered by this report,reporting the issuance of a release dated March 4, 2009 announcing that itwill be reporting its financial results for the fourth quarter and year end of2008 after the close of the market on Tuesday March 10, 2009 and that itwill have a conference call regarding its 2008 fourth quarter and year end at4:30pm Eastern time on Tuesday March 10, 2009

 

A Form 8-K was filed during the quarter covered by this report,reporting the issuance of a release dated March 10, announcing registrants’financial results for the fourth quarter and fiscal year ended December 31,2008.

 

A Form 8-K was filed during the quarter covered by this report,reporting the issuance of a release dated March 26, 2009 announcing thathad signed a three—year, renewable contract with a Fortune 1000 Company.

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15 (d) ofthe Securities Exchange Act of 1934, the Registrant has fully caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| ** ** | **ALPHA PRO TECH, LTD**. | ** ** | ** ** |                                 |
|------------|--------------------------|------------|------------|--------------------------------------|
|       |                     |       |       |                                 |
| DATE:      | **May 6, 2009**     | ** ** | BY:        | /s/ **Sheldon Hoffman**              |
|       |                     |       |       |                                 |
|       |                     |       |       | Sheldon Hoffman                      |
|       |                     |       |       | Chief Executive Officer and Director |
|       | ** **               | ** ** |       |                                 |
| DATE:      | **May 6, 2009**     | ** ** | BY:        | /s/  **Lloyd Hoffman**               |
|       |                     |       |       |                                 |
|       |                     |       |       | Lloyd Hoffman                        |
|       |                     |       |       | Chief Financial Officer              |

 

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