**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

** **

**QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

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**ý****             ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thequarterly period ended April 3, 2004**

 

**OR**

 

**o****             ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from             to            **

 

**Commission File Number: 333-110531**

 

**NORCROSS SAFETY PRODUCTS L.L.C.**

(Exact name ofRegistrant as Specified in its Charter)

 

| **Delaware**                                                   | ** ** | **61-1283304**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer Identification No.) |
| ** **                                                     | ** ** | ** **                           |
| **2211 York Road, Suite 215 Oak Brook, Illinois 60523**        | ** ** | **60523**                            |
| (Address of Principal Executive Offices)                       |       | (Zip Code)                           |
| ** **                                                     | ** ** | ** **                           |
| Registrant’s telephone number, including  area code:      |
| **(630) 572-5715**                                             |

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes o  No ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2).   Yes o  No ý

 

On May 11, 2004 Norcross Safety Products L.L.C. had 100 units outstanding, all of which were owned by a holding company.

 

 

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NORCROSS SAFETY PRODUCTS L.L.C.FORM 10-Q QUARTERLY REPORT

**For the QuarterlyPeriod Ended April 3, 2004**

 

TABLE OFCONTENTS

 
| **PART I Financial Information**   |
|------------------------------------|
|                               |
|                               | Item 1. Financial Statements (Unaudited) | 1 |
|                               |   |
|                               |   | Consolidated Balance Sheets | 1 |
|                               |   |   |   |
|                               |   | Consolidated Statements of  Operations | 2 |
|                               |   |   |   |
|                               |   | Consolidated Statements of Cash Flows | 3 |
|                               |   |   |
|                               | Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 17 |
|                               |   |   |
|                               | Item  3. Quantitative and Qualitative Disclosures About Market Risk | 24 |
|                               |   |   |
|                               | Item  4. Controls and Procedures | 25 |
|                               |   |   |
| **PART  II Other Information**     | 26 |
|                               |   |   |
|                               | Item 1. Legal Proceedings | 26 |
|                               |   |   |
|                               | Item  6. Exhibits and Reports on Form 8-K | 27 |
|                               |   |   |
| **Signatures**                     | 28 |
|                               |   |
| **Form 10-Q Listing of  Exhibits** | 29 |

 

i

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PART IFINANCIAL INFORMATION

 

**Item 1****. Financial Statements(Unaudited)**

 

NORCROSS SAFETYPRODUCTS L.L.C.

CONSOLIDATED BALANCE SHEETS

**(Amounts in Thousands) (Unaudited)**

 
| ** **                                                                                | ** ** | **December 31,  2003(1)** | ** ** | **April 3,  2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------|------------|
| **Assets**                                                                                |       |                           |       | ** **         |       |
| Current  assets:                                                                          |       |                           |       |               |       |
| Cash and  cash equivalents                                                                |       | $                              | 16,341     |               | $          | 6,860 |   |
| Accounts  receivable, less allowance of $2,493 and $2,542 in 2003 and 2004,  respectively |       | 53,291                         |       | 62,320             |       |
| Inventories                                                                               |       | 80,828                         |       | 82,143             |       |
| Deferred  income taxes                                                                    |       | 30                             |       | 29                 |       |
| Prepaid  expenses and other current assets                                                |       | 3,833                          |       | 4,221              |       |
| Total  current assets                                                                     |       | 154,323                        |       | 155,573            |       |
| Property,  plant, and equipment, net                                                      |       | 56,213                         |       | 54,832             |       |
| Deferred  financing costs, net                                                            |       | 10,832                         |       | 10,391             |       |
| Goodwill,  net                                                                            |       | 130,032                        |       | 128,984            |       |
| Other  intangible assets, net                                                             |       | 5,641                          |       | 5,783              |       |
| Due from  NSP Holdings L.L.C.                                                             |       | 16,113                         |       | 16,291             |       |
| Other  noncurrent assets                                                                  |       | 5,535                          |       | 5,565              |       |
| Total  assets                                                                             |       | $                              | 378,689    |               | $          | 377,419 |   |
|                                                                                      |       |                           |       |               |       |
| **Liabilities  and member’s equity**                                                 |       |                           |       |               |       |
| Current  liabilities:                                                                     |       |                           |       |               |       |
| Accounts  payable                                                                         |       | $                              | 18,157     |               | $          | 18,359 |   |
| Accrued  expenses                                                                         |       | 27,837                         |       | 20,608             |       |
| Current  maturities of long-term obligations                                              |       | 3,378                          |       | 3,242              |       |
| Total  current liabilities                                                                |       | 49,372                         |       | 42,209             |       |
| Pension,  post-retirement, and deferred compensation                                      |       | 24,318                         |       | 25,105             |       |
| Long-term  obligations                                                                    |       | 253,814                        |       | 253,036            |       |
| Other  noncurrent liabilities                                                             |       | 430                            |       | 428                |       |
| Deferred  income taxes                                                                    |       | 1,937                          |       | 1,890              |       |
| Minority  interest                                                                        |       | 124                            |       | 129                |       |
|                                                                                      |       | 280,623                        |       | 280,588            |       |
| Member’s  equity:                                                                    |       |                           |       |               |       |
| Contributed  capital                                                                      |       | 116,060                        |       | 116,060            |       |
| Accumulated  deficit                                                                      |       | (64,791                        | )          | (57,464            | )          |
| Accumulated  other comprehensive loss                                                     |       | (2,575                         | )          | (3,974             | )          |
| Total  member’s equity                                                               |       | 48,694                         |       | 54,622             |       |
| Total  liabilities and member’s equity                                               |       | $                              | 378,689    |               | $          | 377,419 |   |

 

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(1)          December 31, 2003 balances wereobtained from audited financial statements.

 

*See notes to unaudited consolidated financialstatements.*

 

1

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**NORCROSSSAFETY PRODUCTS L.L.C.**

CONSOLIDATED STATEMENTS OFOPERATIONS

**(Amounts in Thousands) (Unaudited)**

 
| ** **                                        | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **March 29,  2003**    |       | **April 3,  2004** | ** ** |
| Net sales                                         |       | $                      | 85,815     |   | $ | 109,073 |   |
| Cost of  goods sold                               |       | 55,053                 |       | 68,877 |   |
| Gross  profit                                     |       | 30,762                 |       | 40,196 |   |
| Operating  expenses:                              |       |                   |       |   |   |
| Selling                                           |       | 8,525                  |       | 10,404 |   |
| Distribution                                      |       | 4,009                  |       | 5,198 |   |
| General and  administrative                       |       | 8,151                  |       | 9,968 |   |
| Amortization  of intangibles                      |       | 811                    |       | 126 |   |
| Total  operating expenses                         |       | 21,496                 |       | 25,696 |   |
| Income from  operations                           |       | 9,266                  |       | 14,500 |   |
| Other  expense (income):                          |       |                   |       |   |   |
| Interest  expense                                 |       | 6,713                  |       | 5,636 |   |
| Interest  income                                  |       | (20                    | )          | (35 | ) |
| Other, net                                        |       | (176                   | )          | 534 |   |
| Income  before income taxes and minority interest |       | 2,749                  |       | 8,365 |   |
| Income tax  expense                               |       | 448                    |       | 1,033 |   |
| Minority  interest                                |       | —                 |       | 5 |   |
| Net income                                        |       | $                      | 2,301      |   | $ | 7,327 |   |

 

*Seenotes to unaudited consolidated financial statements.*

 

2

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NORCROSS SAFETYPRODUCTS L.L.C.

CONSOLIDATED STATEMENTS OF CASH FLOWS

**(Amountsin Thousands) (Unaudited)**

 
| ** **                                                                                    | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                    | ** ** | **March 29,  2003**    | ** ** | **April 3,  2004** | ** ** |
| **Operating  activities**                                                                     |       |                   |       |   |   |
| Net income                                                                                    |       | $                      | 2,301      |   | $ | 7,327 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |                   |       |   |   |
| Depreciation                                                                                  |       | 2,540                  |       | 2,853 |   |
| Amortization  of intangibles                                                                  |       | 811                    |       | 126 |   |
| Amortization  of deferred financing costs                                                     |       | 507                    |       | 441 |   |
| Amortization  of original issue discount                                                      |       | 254                    |       | 22 |   |
| Write-off  of deferred financing costs                                                        |       | 1,270                  |       | — |   |
| Deferred  income taxes                                                                        |       | 63                     |       | (46 | ) |
| Minority  interest                                                                            |       | —                 |       | 5 |   |
| Changes in  operating assets and liabilities:                                                 |       |                   |       |   |   |
| Accounts  receivable                                                                          |       | (2,523                 | )          | (9,029 | ) |
| Inventories                                                                                   |       | (2,019                 | )          | (1,315 | ) |
| Prepaid  expenses and other current assets                                                    |       | (303                   | )          | (388 | ) |
| Other  noncurrent assets                                                                      |       | (101                   | )          | (30 | ) |
| Accounts  payable                                                                             |       | 2,206                  |       | 202 |   |
| Accrued  expenses                                                                             |       | (2,274                 | )          | (7,229 | ) |
| Pension,  postretirement, and deferred compensation                                           |       | 147                    |       | 787 |   |
| Other  noncurrent liabilities                                                                 |       | (5                     | )          | (2 | ) |
| Other                                                                                         |       | (4                     | )          | 3 |   |
| Net cash  provided by (used in) operating activities                                          |       | 2,870                  |       | (6,273 | ) |
|                                                                                          |       |                   |       |   |   |
| **Investing  activities**                                                                     |       |                   |       |   |   |
| Purchase of  businesses, net of cash acquired                                                 |       | (69                    | )          | (112 | ) |
| Purchases  of property, plant, and equipment                                                  |       | (870                   | )          | (1,507 | ) |
| Due from  NSP Holdings L.L.C.                                                                 |       | (150                   | )          | (178 | ) |
| Net cash  used in investing activities                                                        |       | (1,089                 | )          | (1,797 | ) |
|                                                                                          |       |                   |       |   |   |
| **Financing  activities**                                                                     |       |                   |       |   |   |
| Payments  for deferred financing costs                                                        |       | (6,990                 | )          | — |   |
| Proceeds  from borrowings                                                                     |       | 130,000                |       | — |   |
| Payments of  debt                                                                             |       | (86,236                | )          | (937 | ) |
| Net  repayments under revolving credit facility                                               |       | (30,960                | )          | — |   |
| Net cash  provided by (used in) financing activities                                          |       | 5,814                  |       | (937 | ) |
| Effect of  exchange rate changes on cash                                                      |       | 1,085                  |       | (474 | ) |
| Net  increase (decrease)  in cash and cash  equivalents                                  |       | 8,680                  |       | (9,481 | ) |
| Cash and  cash equivalents at beginning of period                                             |       | 1,762                  |       | 16,341 |   |
| Cash and  cash equivalents at end of period                                                   |       | $                      | 10,442     |   | $ | 6,860 |   |

* *

*See notes to unauditedconsolidated financial statements*

 

3

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**NORCROSS SAFETY PRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in Thousands) (Unaudited)**

 

# **1.     Basis of Presentation**

#  

Theaccompanying unaudited consolidated financial statements of Norcross Safety ProductsL.L.C. (the Company) have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation. Accordingly, they do not include all of the information and notesrequired by accounting principles generally accepted in the United States forcomplete financial statements.

 

In the opinionof management, all adjustments (consisting only of adjustments of a normal andrecurring nature) considered necessary for a fair presentation of the financialposition and results of operations have been included. Interim results are notnecessarily indicative of the results that might be expected for any otherinterim period or for the fiscal year ending December 31, 2004. Thefinancial statements presented should be read in conjunction with theconsolidated financial statements and footnotes thereto included in our 2003consolidated financial statements.

 

# **2.     Acquisition of KCL**

#  

OnJuly 29, 2003, the Company acquired 100% of the common stock ofKächele-Cama Latex GmbH (KCL), a German-based manufacturer and marketer ofliquid-proof and cut-resistant gloves for a variety of industries, for $20,127,including net debt assumed of $171 and acquisition costs of $1,121. The sellersof KCL will also be eligible to receive royalty payments of up to €250 per yearover the next three years based upon the achievement of certain cumulative netsales targets. The Company financed this acquisition with $9,882 of cash onhand, $5,000 of borrowings under the Senior Credit Facility and the issuance of$5,074 of junior subordinated notes. The Company believes the acquisition ofKCL will increase its penetration of the European personal protection equipmentmarket.

 

The allocationof the purchase price is summarized below:

 
| Trade  receivables                                                          |   | $      | 3,292  |   |
|-----------------------------------------------------------------------------|--------|--------|--------|--------|
| Inventory                                                                   |   | 5,842  |   |
| Property,  plant and equipment                                              |   | 10,378 |   |
| Customer  relationships (8 year life)                                       |   | 1,812  |   |
| Trade names  and trademarks (indefinite life)                               |   | 616    |   |
| Other  assets and liabilities, net                                          |   | 566    |   |
| Accounts  payable and accrued expenses                                      |   | (4,329 | )      |
| Fair value  of net assets acquired                                          |   | 18,177 |   |
| Excess of  purchase price over fair value of net assets acquired (goodwill) |   | 1,950  |   |
| Total  consideration                                                        |   | $      | 20,127 |   |

 

The following table presents thepro forma net sales and net income of the Company for the three months endedMarch 29, 2003 assuming the acquisition of KCL had occurred on January 1,2003:

 
| Pro forma  net sales  |   |   | $     | 93,170 |   |
|-----------------------|--------|--------|-------|--------|--------|
| Pro forma  net income |   |   | 2,821 |   |

 

Theacquisition of KCL was accounted for by the purchase method of accounting, andaccordingly, the results of operations of KCL have been included in theCompany’s consolidated financial statements since the date of acquisition.

 

4

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**NORCROSS SAFETYPRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 

# **3.     Inventories**

#  

Inventories consist of thefollowing:

 
| ** **               | ** ** | **December 31,  2003** | ** ** | **April 3,  2004** | ** ** |
|--------------------------|------------|------------------------|------------|--------------------|------------|
| At FIFO  cost:           | ** ** | ** **             | ** ** | ** **         | ** ** |
| Raw  materials           |       | $                      | 21,187     |               | $          | 22,334 |   |
| Work in  process         |       | 9,010                  |       | 10,275             |       |
| Finished  goods          |       | 52,512                 |       | 51,415             |       |
|                     |       | 82,709                 |       | 84,024             |       |
| Adjustment  to LIFO cost |       | (1,881                 | )          | (1,881             | )          |
|                     |       | $                      | 80,828     |               | $          | 82,143 |   |

 

5

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**NORCROSSSAFETY PRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 

# **4.     Debt**

 

The Company’s debt consistsof the following:

 
| ** **                                         | ** ** | **December 31,  2003** | ** ** | **April 3,  2004** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| Revolving  credit facilities                       |       | $                      | —     |               | $          | — |   |
| Term loan                                          |       | 99,025                 |       | 98,700             |       |
| Senior  subordinated notes                         |       | 152,500                |       | 152,500            |       |
| European term  loans                               |       | 1,215                  |       | 979                |       |
| Arbin  Seller Notes                                |       | 837                    |       | 809                |       |
| Subordinated  seller notes                         |       | 4,278                  |       | 3,962              |       |
| Capital  lease obligations                         |       | 339                    |       | 308                |       |
| Unamortized  discount on senior subordinated notes |       | (1,002                 | )          | (980               | )          |
|                                               |       | 257,192                |       | 256,278            |       |
| Less:  Current maturities of long-term obligations |       | 3,378                  |       | 3,242              |       |
|                                               |       | $                      | 253,814    |               | $          | 253,036 |   |

 

OnMarch 21, 2003, the Company entered into a new Senior Credit Facility witha group of banks and financial institutions. Under the terms of this agreement,the Company can borrow up to $160,000 in the United States and approximately$7,600 in Canada ($10,000 Canadian). The Senior Credit Facility consisted of a$30,000 revolving credit facility and a $130,000 term loan in the UnitedStates, and a Canadian $10,000 revolving credit facility. These borrowingsreplaced the existing senior credit facility of the Company. The Companyrecorded a $1,270 million charge to interest expense for the write-off ofdeferred financing fees associated with the senior credit facility financing forthe three months ended March 29, 2003.

 

OnAugust 13, 2003, the Company issued $152,500 of 9.875% Senior SubordinatedNotes due 2011 (the New Senior Subordinated Notes) and received gross proceedsof $151,465. The proceeds were primarily used to: (i) repay principal andinterest and repurchase warrants related to the existing Senior SubordinatedNotes, (ii) repay $30,000 of principal related to the term loan,(iii) repay principal on the junior subordinated notes used to finance theKCL acquisition, (iv) purchase preferred units of NSP Holdings L.L.C. fromcertain members of management and (v) pay fees and expenses.

 

Aggregatematurities of long-term debt as of April 3, 2004, are as follows:

 
| 2005       | ** ** | $       | 3,242      | ** ** |
|------------|------------|---------|------------|------------|
| 2006       | ** ** | 2,765   | ** ** |
| 2007       | ** ** | 3,338   | ** ** |
| 2008       | ** ** | 1,275   | ** ** |
| 2009       | ** ** | 93,463  | ** ** |
| Thereafter | ** ** | 152,195 | ** ** |
| ** ** | ** ** | $       | 256,278    | ** ** |

 

6

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**NORCROSS SAFETYPRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 

# **5.     Employee Benefit Plans**

 

The following table setsforth the components of net periodic benefit cost:

 
| ** **                          | ** ** | **Three months ended March 29, 2003** | ** ** | **Three months ended April 3, 2004** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **Pension  Benefits**                 | ** ** | **Post-retirement  Benefits**        | ** ** | **Pension  Benefits** | ** ** | **Post-retirement  Benefits** | ** ** |
|                                |       |                                  |       |                                 |       |   |   |   |   |
| Service cost                        |       | $                                     | 187        |                                 | $          | 7 |   | $ | 373 |   | $ | 7 |   |
| Interest  cost                      |       | 465                                   |       | 21                                   |       | 872 |   | 20 |   |
| Expected  return on plan assets     |       | (316                                  | )          | —                               |       | (668 | ) | — |   |
| Amortization  of prior service cost |       | 1                                     |       | 5                                    |       | 1 |   | 4 |   |
| Amortization  of actuarial loss     |       | 118                                   |       | 15                                   |       | 212 |   | 21 |   |
|                                |       | $                                     | 455        |                                 | $          | 48 |   | $ | 790 |   | 52 |   |
|                                     |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

# **6.     Restructuring and Other Charges**

 

During 2002,the Company initiated a restructuring plan to exit the medical productsbusiness located in Cranston, Rhode Island and close certain hand protectionplants located in Tijuana, Mexico, Tallmadge, Ohio and Charleston, SouthCarolina and move production to China. The Company decided to exit the medicalproducts business at that time, because the medical products business primarilyserved one customer, who decided to manufacture the product in-house. TheCompany closed its hand protection plants to increase profitability of certainlow margin product lines. This restructuring resulted in the termination ofapproximately 105 employees who worked at these operations. We incurredrestructuring and merger-related charges associated with the plan of $9,297,comprised of $6,345 in non-cash expense relating to accelerated depreciationcharges on long-lived assets to be abandoned; $1,242 in severance costs; and$1,710 in facility closure and other exit costs. The exit of the medicalbusiness was completed in 2002. The shut-down of the Tallmadge facility wascompleted in 2003 and the Company successfully completed the closure of theCharleston plant in the first quarter of 2004. The Company expects to successfully complete the closure of the Tijuanaplant during the second quarter of 2004. The December 31, 2003 accrued restructuring liabilityof $1,295 consists of facility closure and other exit costs of $937 andseverance costs of $358.  The April 3, 2004 accruedrestructuring liability of $758 consists of facility closure and other exitcosts of $541 and severance costs of $217.  The change in the restructuring liabilityduring the three months ended April 3, 2004 was attributable to cash paymentsbeing applied to the liability. The restructuring liability is classifiedwithin the accrued expenses caption on the consolidated balance sheets.

 

7

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**NORCROSS SAFETYPRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 

# **7.     Legal Proceedings**

 

The Company issubject to various claims arising in the ordinary course of business. Most ofthese lawsuits and claims are product liability matters that arise out of theuse of respiratory product lines manufactured by the Company’s North SafetyProducts subsidiary. In particular, the Company’s North Safety Productssubsidiary, its predecessors and/or the former owners of such business arepresently named as a defendant in approximately 711 lawsuits involvingrespirators manufactured and sold by it or its predecessors. The Company isalso monitoring an additional 12 lawsuits in which it feels that North SafetyProducts, its predecessors and/or the former owners of such businesses may benamed as defendants. Collectively, these 723 lawsuits represent a total ofapproximately 24,000 (excluding spousal claims) plaintiffs. Approximately 90%of these lawsuits involve plaintiffs alleging they suffer from silicosis, withthe remainder alleging they suffer from other or combined injuries, includingasbestosis. These lawsuits typically allege that these conditions resulted inpart from respirators that were negligently designed or manufactured. Invensysplc (“Invensys”), formerly Siebe plc, is contractually obligated to indemnifythe Company for any losses, including costs of defending claims, resulting fromrespiratory products manufactured prior to the acquisition of North SafetyProducts in October 1998.

 

In addition,our North Safety Products subsidiary is contractually entitled toindemnification from Norton Company, an affiliate of Saint-Gobain, which ownedthe North Safety Products business prior to Invensys. Pursuant to a December14, 1982 asset purchase agreement, Siebe Norton, Inc., a newly formedwholly-owned subsidiary of Norton Company, acquired the assets of Norton’sSafety Products Division and the stock of this company was in turn acquired bySiebe Gorman Holdings PLC. Under the terms of the Agreement, Siebe Norton, Inc.did not assume any liability for claims relating to products shipped by NortonCompany prior to the closing date. Moreover, Norton Company covenanted in theAgreement to indemnify Siebe Norton and its successors and assigns against anyliability resulting from or arising out of any state of facts, omissions orevents existing or occurring on or before the closing date, including, withoutlimitation, any claims arising in respect of products shipped by Norton Companyor any of its affiliates prior to the closing date. Siebe Norton, whose namewas subsequently changed to Siebe North Inc., was subsequently acquired by theCompany as part of the 1998 acquisition of the North Safety Products businessfrom Invensys.

 

Despite theseindemnification arrangements, the Company could potentially be liable for theselosses or claims relating to products manufactured prior to the October 1998acquisition date if Invensys fails to meet its obligations to indemnify theCompany and the Company could potentially be liable for these losses and claimsrelating to products sold prior to January 10, 1983 if both Invensys and Nortonfail to meet their obligations to indemnify the Company. The Company could alsobe liable if the alleged exposure involved the use of a product manufactured bythe Company after our October 1998 acquisition of the North Safety Productsbusiness. Invensys is currently handling the defense of all of the cases, andto date the Company has not incurred any material costs with respect to theselawsuits. To date, Invensys has sent us requests for reimbursement totaling$26, relating to settled cases in which Invensys claims that the period ofalleged exposure included periods after October 1998. Based on informationprovided to the Company by Invensys, the Company believes that Invensys hasmade payments with respect to settlement of these claims of $513.9 for thethree months ended April 3, 2004. The Company believes that Invensys has theability to pay these claims based on its current financial position, aspublicly disclosed by Invensys.

 

Consistentwith the current environment being experienced by companies involved in silicaand asbestos-related litigation, there has been an increase in the number ofasserted claims that could 

 

8

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**NORCROSS SAFETYPRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 

potentially involve the Company. Based upon information providedto the Company by Invensys, the Company believes activity related to theselawsuits was as follows for the three months ended April 3, 2004:

 

| Beginning lawsuits   |   | 680 |    |
|----------------------|--------|-----|---------|
| New lawsuits         |   | 70  |    |
| Settlements          |   | (13 | )  |
| Dismissals and other |   | (14 | )  |
| Ending lawsuits      |   | 723 |    |

 

Plaintiffshave asserted specific dollar claims in less than a quarter of theapproximately 711 cases pending as of April 3, 2004 in which North SafetyProducts, its predecessors and/or the former owners of such businesses havebeen named as defendants. A majority of jurisdictions prohibit specifying damagesin tort cases such as these, and most of the remaining jurisdictions do notrequire such specification. In those cases in which plaintiffs choose to assertspecific dollar amounts in their complaints, brought in states that permit suchpleading, the amounts claimed are typically not meaningful as an indicator of acompany’s potential liability. This is because (1) the amounts claimedtypically bear no relation to the level of the plaintiff’s injury, (2) thecomplaints typically assert claims against numerous defendants, and (3) manycases are brought on behalf of plaintiffs who have not suffered any medicalinjury, and, ultimately, are resolved without any payment or payment of a smallfraction of the damages initially claimed. Of the 711 complaints, 542 do notspecify the amount of damages sought, 33 generally allege damages in excess of$50, 6 allege compensatory damages in excess of $50 and an unspecified amountof punitive damages, 27 allege compensatory damages and punitive damages, eachin excess of $25, 9 generally allege damages in excess of $100, 51 allegecompensatory damages and punitive damages, each in excess of $50, 36 generallyallege damages of $15,000, 2 allege compensatory damages and punitive damages,each in the amount of $15,000, 1 alleges compensatory damages and punitivedamages, each in excess of $10, 1 alleges compensatory damages and punitivedamages, each in excess of $15, 1 generally alleges damages in excess of $25, 1generally alleges damages in excess of $4 and 1 generally alleges damages notto exceed $290,000.  The Companycurrently does not have access to the previously mentioned additional 12monitored cases, and therefore do not know whether these cases allege specificdamages, and, if so, the amount of such damages, but are in the process ofseeking to obtain such information. Due to the reasons noted above and to theindemnification arrangements benefiting the Company, it does not believe thatthe damage amounts specified in these complaints are a meaningful factor in anyassessment of the Company’s potential liability.

 

The Company isnot otherwise involved in any material lawsuits. The Company historically hasnot been required to pay any material liability claims. The Company maintainsinsurance against product liability claims (with the exception of asbestosisand silicosis cases, for which coverage is not commercially available), but itis possible that its insurance coverage will not continue to be available onterms acceptable to the Company or that such coverage will not be adequate forliabilities actually incurred. The Company has a reserve of $2,300 againstpotential uninsured product liability claims of North Safety Products forperiods prior to October 1998. The reserve was established at the date ofacquisition and relates to potential claims primarily associated with fallprotection products sold in Canada. The Company has not recorded any lossesagainst this reserve to date. This reserve is re-evaluated periodically, andadditional charges or credits to operations may result as additionalinformation becomes available. It is possible that the Company may incurliabilities in an amount in excess of amounts currently reserved. However,taking into account currently available information, historical experience, andthe Company’s indemnification from Invensys, but recognizing the inherentuncertainties in the projection of any future events, the Company believes thatthese suits or claims should not result in 

 

9

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**NORCROSS SAFETYPRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 

final judgments or settlements in excess of its reserve.The Company does not have a reserve for product liability claims for use of productsmanufactured after the 1998 acquisition of North Safety Products as it is notinvolved in any material lawsuits relating exclusively to product usage in theperiods after October 1998. In addition, the Company is not a party to anylawsuits involving asbestosis or silicosis relating exclusively to productusage in the period after October 1998.

 

# **8.      Segment Data**

#  

The followingtable presents information about the Company by segment:

 
| ** **                             | ** ** | **General  Industrial** | ** ** | **Fire  Service** | ** ** | **Utility/  High  Voltage** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-------------------|------------|-----------------------------|------------|---------------|------------|------------------|------------|-----------|------------|
| **Three  Months Ended March 29, 2003** |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net  sales—third parties          |       | $                       | 59,217     |              | $          | 16,668                      |       | $             | 9,930      |             | $          | —    |       | $ | — |   | $ | 85,815 |   |
| Net  sales—intersegment           |       | 2,418                   |       | —            |       | 1                           |       | —        |       | (2,419           | )          | —    |       |
| Income  (loss) from operations         |       | 4,970                   |       | 3,236             |       | 1,920                       |       | (860          | )          | —           |       | 9,266     |       |
| **Three  Months Ended April 3, 2004**  |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net  sales—third parties          |       | 76,464                  |       | 20,293            |       | 12,316                      |       | —        |       | —           |       | 109,073   |       |
| Net  sales—intersegment           |       | 2,722                   |       | —            |       | —                      |       | —        |       | (2,722           | )          | —    |       |
| Income  (loss) from operations         |       | 8,946                   |       | 3,941             |       | 2,717                       |       | (1,104        | )          | —           |       | 14,500    |       |
|                                        |            |                         |            |                   |            |                             |            |               |            |                  |            |           |            |  |  |  |  |  |  |

 

10

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**NORCROSSSAFETY PRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 

# **9.     Subsidiary Guarantors**

#  

All of the Company’sdirect or indirect 100% owned active domestic subsidiaries, fully,unconditionally, jointly and severally guarantee the Senior Credit Facility andthe New Senior Subordinated Notes. Separate financial statements of theguarantor subsidiaries are not separately presented because, in the opinion ofmanagement, such financial statements are not material to investors. Thenon-guarantor subsidiaries include wholly owned subsidiaries of the Companyorganized under the laws of foreign jurisdictions and inactive subsidiaries,all of which are included in the consolidated financial statements. Thefollowing is summarized combining financial information for Norcross SafetyProducts L.L.C. on a stand-alone basis (NSP), Norcross Capital Corp. (NCC), theguarantor subsidiaries of the Company and the non-guarantor subsidiaries of theCompany:

 
| ** **                                           | ** ** | **NSP**  | ** ** | **NCC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------|------------|---------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|-----------|------------|
| **April 3,  2004**                                   |       |     |       |    |       |                        |       |                            |       |             |       |      |       |
| Current  assets:                                     |       |     |       |    |       |                        |       |                            |       |             |       |      |       |
| Cash and  cash equivalents                           |       | $        | 8,576      |    | $          | —                      |       | $                               | (2,616     | )                | $          | 900       |       | $ | — |   | $ | 6,860 |   |
| Accounts  receivable, net                            |       | 9,330    |       | —  |       | 30,522                      |       | 22,468                          |       | —           |       | 62,320    |       |
| Inventories                                          |       | 10,827   |       | —  |       | 33,227                      |       | 38,089                          |       | —           |       | 82,143    |       |
| Deferred  income taxes                               |       | —   |       | —  |       | —                      |       | 29                              |       | —           |       | 29        |       |
| Prepaid  expenses and other current assets           |       | 2,080    |       | —  |       | 1,414                       |       | 727                             |       | —           |       | 4,221     |       |
| Total  current assets                                |       | 30,813   |       | —  |       | 62,547                      |       | 62,213                          |       | —           |       | 155,573   |       |
| Property,  plant, and equipment, net                 |       | 5,603    |       | —  |       | 28,845                      |       | 20,384                          |       | —           |       | 54,832    |       |
| Deferred  financing costs, net                       |       | 10,391   |       | —  |       | —                      |       | —                          |       | —           |       | 10,391    |       |
| Goodwill,  net                                       |       | 426      |       | —  |       | 104,833                     |       | 23,725                          |       | —           |       | 128,984   |       |
| Other  intangible assets, net                        |       | 3,383    |       | —  |       | —                      |       | 2,400                           |       | —           |       | 5,783     |       |
| Due from  NSP Holdings L.L.C.                        |       | 16,291   |       | —  |       | —                      |       | —                          |       | —           |       | 16,291    |       |
| Investment  in subsidiaries                          |       | 138,913  |       | —  |       | 34,605                      |       | —                          |       | (173,518         | )          | —    |       |
| Other  noncurrent assets                             |       | —   |       | —  |       | 3,638                       |       | 1,927                           |       | —           |       | 5,565     |       |
| Total  assets                                        |       | $        | 205,820    |    | $          | —                      |       | $                               | 234,468    |             | $          | 110,649   |       | $ | (173,518 | ) | $ | 377,419 |   |
| Current  liabilities:                                |       |     |       |    |       |                        |       |                            |       |             |       |      |       |
| Accounts  payable                                    |       | $        | 3,240      |    | $          | —                      |       | $                               | 9,291      |             | $          | 5,828     |       | $ | — |   | $ | 18,359 |   |
| Accrued  expenses                                    |       | 5,392    |       | —  |       | 8,449                       |       | 6,767                           |       | —           |       | 20,608    |       |
| Current  maturities of long-term obligations         |       | 1,210    |       | —  |       | 703                         |       | 1,329                           |       | —           |       | 3,242     |       |
| Total  current liabilities                           |       | 9,842    |       | —  |       | 18,443                      |       | 13,924                          |       | —           |       | 42,209    |       |
| Pension,  post-retirement, and deferred compensation |       | 338      |       | —  |       | 24,134                      |       | 633                             |       | —           |       | 25,105    |       |
| Long-term  obligations                               |       | 251,010  |       | —  |       | 312                         |       | 1,714                           |       | —           |       | 253,036   |       |
| Intercompany  balances                               |       | (109,992 | )          | —  |       | 56,317                      |       | 53,675                          |       | —           |       | —    |       |
| Other  noncurrent liabilities                        |       | —   |       | —  |       | 402                         |       | 26                              |       | —           |       | 428       |       |
| Deferred  income taxes                               |       | —   |       | —  |       | —                      |       | 1,890                           |       | —           |       | 1,890     |       |
| Minority  interest                                   |       | —   |       | —  |       | —                      |       | 129                             |       | —           |       | 129       |       |
|                                                 |       | 141,356  |       | —  |       | 81,165                      |       | 58,067                          |       | —           |       | 280,588   |       |
| Member’s  equity:                               |       |     |       |    |       |                        |       |                            |       |             |       |      |       |
| Contributed  capital                                 |       | 116,060  |       | —  |       | 148,417                     |       | 47,085                          |       | (195,502         | )          | 116,060   |       |
| Accumulated  deficit                                 |       | (57,464  | )          | —  |       | (13,557                     | )          | (8,427                          | )          | 21,984           |       | (57,464   | )          |
| Accumulated  other comprehensive loss                |       | (3,974   | )          | —  |       | —                      |       | —                          |       | —           |       | (3,974    | )          |
| Total  member’s equity                          |       | 54,622   |       | —  |       | 134,860                     |       | 38,658                          |       | (173,518         | )          | 54,622    |       |
| Total  liabilities and member’s equity          |       | $        | 205,820    |    | $          | —                      |       | $                               | 234,468    |             | $          | 110,649   |       | $ | (173,518 | ) | $ | 377,419 |   |

 

11

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**NORCROSSSAFETY PRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 
| ** **                                           | ** ** | **NSP**  | ** ** | **NCC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------|------------|---------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|-----------|------------|
| **December  31, 2003**                               |       |     |       |    |       |                        |       |                            |       |             |       |      |       |
| Current  assets:                                     |       |     |       |    |       |                        |       |                            |       |             |       |      |       |
| Cash and  cash equivalents                           |       | $        | 15,863     |    | $          | —                      |       | $                               | (1,995     | )                | $          | 2,473     |       | $ | — |   | $ | 16,341 |   |
| Accounts  receivable, net                            |       | 7,839    |       | —  |       | 25,269                      |       | 20,183                          |       | —           |       | 53,291    |       |
| Inventories                                          |       | 8,932    |       | —  |       | 32,641                      |       | 39,255                          |       | —           |       | 80,828    |       |
| Deferred  income taxes                               |       | —   |       | —  |       | —                      |       | 30                              |       | —           |       | 30        |       |
| Prepaid  expenses and other current assets           |       | 1,916    |       | —  |       | 1,149                       |       | 768                             |       | —           |       | 3,833     |       |
| Total  current assets                                |       | 34,550   |       | —  |       | 57,064                      |       | 62,709                          |       | —           |       | 154,323   |       |
| Property,  plant, and equipment, net                 |       | 5,979    |       | —  |       | 29,310                      |       | 20,924                          |       | —           |       | 56,213    |       |
| Deferred  financing costs, net                       |       | 10,832   |       | —  |       | —                      |       | —                          |       | —           |       | 10,832    |       |
| Goodwill,  net                                       |       | 426      |       | —  |       | 104,833                     |       | 24,773                          |       | —           |       | 130,032   |       |
| Other  intangible assets, net                        |       | 3,352    |       | —  |       | —                      |       | 2,289                           |       | —           |       | 5,641     |       |
| Due from  NSP Holdings L.L.C.                        |       | 16,113   |       | —  |       | —                      |       | —                          |       | —           |       | 16,113    |       |
| Investment  in subsidiaries                          |       | 132,626  |       | —  |       | 45,044                      |       | —                          |       | (177,670         | )          | —    |       |
| Other  noncurrent assets                             |       | —   |       | —  |       | 3,610                       |       | 1,925                           |       | —           |       | 5,535     |       |
| Total  assets                                        |       | $        | 203,878    |    | $          | —                      |       | $                               | 239,861    |             | $          | 112,620   |       | $ | (177,670 | ) | $ | 378,689 |   |
| Current  liabilities:                                |       |     |       |    |       |                        |       |                            |       |             |       |      |       |
| Accounts  payable                                    |       | $        | 4,082      |    | $          | —                      |       | $                               | 7,205      |             | $          | 6,870     |       | $ | — |   | $ | 18,157 |   |
| Accrued  expenses                                    |       | 11,276   |       | —  |       | 10,044                      |       | 6,517                           |       | —           |       | 27,837    |       |
| Current  maturities of long-term obligations         |       | 1,210    |       | —  |       | 701                         |       | 1,467                           |       | —           |       | 3,378     |       |
| Total  current liabilities                           |       | 16,568   |       | —  |       | 17,950                      |       | 14,854                          |       | —           |       | 49,372    |       |
| Pension,  post-retirement, and deferred compensation |       | —   |       | —  |       | 23,664                      |       | 654                             |       | —           |       | 24,318    |       |
| Long-term  obligations                               |       | 251,313  |       | —  |       | 634                         |       | 1,867                           |       | —           |       | 253,814   |       |
| Intercompany  balances                               |       | (112,697 | )          | —  |       | 57,122                      |       | 55,575                          |       | —           |       | —    |       |
| Other  noncurrent liabilities                        |       | —   |       | —  |       | 407                         |       | 23                              |       | —           |       | 430       |       |
| Deferred  income taxes                               |       | —   |       | —  |       | —                      |       | 1,937                           |       | —           |       | 1,937     |       |
| Minority  interest                                   |       | —   |       | —  |       | —                      |       | 124                             |       | —           |       | 124       |       |
|                                                 |       | 138,616  |       | —  |       | 81,827                      |       | 60,180                          |       | —           |       | 280,623   |       |
| Member’s  equity:                               |       |     |       |    |       |                        |       |                            |       |             |       |      |       |
| Contributed  capital                                 |       | 116,060  |       | —  |       | 159,509                     |       | 47,073                          |       | (206,582         | )          | 116,060   |       |
| Accumulated  deficit                                 |       | (64,791  | )          | —  |       | (19,425                     | )          | (9,487                          | )          | 28,912           |       | (64,791   | )          |
| Accumulated  other comprehensive loss                |       | (2,575   | )          | —  |       | —                      |       | —                          |       | —           |       | (2,575    | )          |
| Total  member’s equity                          |       | 48,694   |       | —  |       | 140,084                     |       | 37,586                          |       | (177,670         | )          | 48,694    |       |
| Total  liabilities and member’s equity          |       | $        | 203,878    |    | $          | —                      |       | $                               | 239,861    |             | $          | 112,620   |       | $ | (177,670 | ) | $ | 378,689 |   |

 

12

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**NORCROSSSAFETY PRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 
| ** **                                               | ** ** | **NSP** | ** ** | **NCC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------|------------|---------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|-----------|------------|
| **Three  months ended April 3, 2004**                    |       |    |       |    |       |                        |       |                            |       |             |       |      |       |
| Third party                                              |       | $       | 17,492     |    | $          | —                      |       | $                               | 55,799     |             | $          | 35,782    |       | $ | — |   | $ | 109,073 |   |
| Intercompany                                             |       | 2,318   |       | —  |       | 1,749                       |       | 2,508                           |       | (6,575           | )          | —    |       |
| Net sales                                                |       | 19,810  |       | —  |       | 57,548                      |       | 38,290                          |       | (6,575           | )          | 109,073   |       |
| Cost of  goods sold                                      |       | 12,847  |       | —  |       | 37,266                      |       | 25,339                          |       | (6,575           | )          | 68,877    |       |
| Gross  profit                                            |       | 6,963   |       | —  |       | 20,282                      |       | 12,951                          |       | —           |       | 40,196    |       |
| Operating  expenses:                                     |       |    |       |    |       |                        |       |                            |       |             |       |      |       |
| Selling                                                  |       | 931     |       | —  |       | 5,333                       |       | 4,140                           |       | —           |       | 10,404    |       |
| Distribution                                             |       | 938     |       | —  |       | 1,966                       |       | 2,294                           |       | —           |       | 5,198     |       |
| General and  administrative                              |       | 1,847   |       | —  |       | 5,119                       |       | 3,002                           |       | —           |       | 9,968     |       |
| Amortization  of intangibles                             |       | 66      |       | —  |       | —                      |       | 60                              |       | —           |       | 126       |       |
| Total  operating expenses                                |       | 3,782   |       | —  |       | 12,418                      |       | 9,496                           |       | —           |       | 25,696    |       |
| Income from  operations                                  |       | 3,181   |       | —  |       | 7,864                       |       | 3,455                           |       | —           |       | 14,500    |       |
| Other  expense (income):                                 |       |    |       |    |       |                        |       |                            |       |             |       |      |       |
| Interest  expense                                        |       | 5,560   |       | —  |       | 17                          |       | 59                              |       | —           |       | 5,636     |       |
| Interest  income                                         |       | (31     | )          | —  |       | —                      |       | (4                              | )          | —           |       | (35       | )          |
| Intercompany  charges                                    |       | (9,639  | )          | —  |       | 460                         |       | 858                             |       | 8,321            |       | —    |       |
| Other, net                                               |       | —  |       | —  |       | 9                           |       | 525                             |       | —           |       | 534       |       |
| Income  (loss) before income taxes and minority interest |       | 7,291   |       | —  |       | 7,378                       |       | 2,017                           |       | (8,321           | )          | 8,365     |       |
| Income tax  (benefit) expense                            |       | (36     | )          | —  |       | (33                         | )          | 1,102                           |       | —           |       | 1,033     |       |
| Minority  interest                                       |       | —  |       | —  |       | —                      |       | 5                               |       | —           |       | 5         |       |
| Net income  (loss)                                       |       | $       | 7,327      |    | $          | —                      |       | $                               | 7,411      |             | $          | 910       |       | $ | (8,321 | ) | $ | 7,327 |   |

 

13

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**NORCROSSSAFETY PRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 
| ** **                                               | ** ** | **NSP** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|-----------|------------|
| **Three  Months Ended March 29, 2003**                   |       |    |       |                        |       |                            |       |             |       |      |       |
| Third party                                              |       | $       | 15,379     |                        | $          | 47,890                          |       | $                | 22,546     |      | $          | — |   | $ | 85,815 |   |
| Intercompany                                             |       | 2,187   |       | 2,441                       |       | 2,622                           |       | (7,250           | )          | —    |       |
| Net sales                                                |       | 17,566  |       | 50,331                      |       | 25,168                          |       | (7,250           | )          | 85,815    |       |
| Cost of  goods sold                                      |       | 11,443  |       | 33,380                      |       | 17,480                          |       | (7,250           | )          | 55,053    |       |
| Gross  profit                                            |       | 6,123   |       | 16,951                      |       | 7,688                           |       | —           |       | 30,762    |       |
| Operating  expenses:                                     |       |    |       |                        |       |                            |       |             |       |      |       |
| Selling                                                  |       | 922     |       | 4,868                       |       | 2,735                           |       | —           |       | 8,525     |       |
| Distribution                                             |       | 862     |       | 1,858                       |       | 1,289                           |       | —           |       | 4,009     |       |
| General and  administrative                              |       | 1,577   |       | 4,682                       |       | 1,892                           |       | —           |       | 8,151     |       |
| Amortization  of intangibles                             |       | 55      |       | 756                         |       | —                          |       | —           |       | 811       |       |
| Total  operating expenses                                |       | 3,416   |       | 12,164                      |       | 5,916                           |       | —           |       | 21,496    |       |
| Income from  operations                                  |       | 2,707   |       | 4,787                       |       | 1,772                           |       | —           |       | 9,266     |       |
| Other  expense (income):                                 |       |    |       |                        |       |                            |       |             |       |      |       |
| Interest  expense                                        |       | 4,871   |       | 1,788                       |       | 54                              |       | —           |       | 6,713     |       |
| Interest  income                                         |       | (14     | )          | —                      |       | (6                              | )          | —           |       | (20       | )          |
| Intercompany  charges                                    |       | (4,377  | )          | 3,166                       |       | 515                             |       | 696              |       | —    |       |
| Other, net                                               |       | (1      | )          | 20                          |       | (195                            | )          | —           |       | (176      | )          |
| Income  (loss) before income taxes and minority interest |       | 2,228   |       | (187                        | )          | 1,404                           |       | (696             | )          | 2,749     |       |
| Income tax  expense                                      |       | (73     | )          | 52                          |       | 469                             |       | —           |       | 448       |       |
| Minority  interest                                       |       | —  |       | —                      |       | —                          |       | —           |       | —    |       |
| Net income  (loss)                                       |       | $       | 2,301      |                        | $          | (239                            | )          | $                | 935        |      | $          | (696 | ) | $ | 2,301 |   |

 

14

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**NORCROSSSAFETY PRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 
| ** **                                           | ** ** | **NSP** | ** ** | **NCC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|---------|------------|---------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|-----------|------------|
| **Three  months ended April 3, 2004**                |       |    |       |    |       |                        |       |                            |       |             |       |      |       |
| **Operating  activities**                            |       |    |       |    |       |                        |       |                            |       |             |       |      |       |
| Net cash  (used in) provided by operating activities |       | $       | (9,180     | )       | $          | —                      |       | $                               | 3,406      |             | $          | (499      | )          | $ | — |   | $ | (6,273 | ) |
| **Investing  activities**                            |       |    |       |    |       |                        |       |                            |       |             |       |      |       |
| Purchase of  businesses, net of cash acquired        |       | (97     | )          | —  |       | —                      |       | (15                             | )          | —           |       | (112      | )          |
| Purchase of  property, plant, and equipment          |       | (212    | )          | —  |       | (908                        | )          | (387                            | )          | —           |       | (1,507    | )          |
| Due from  NSP Holdings L.L.C.                        |       | (178    | )          | —  |       | —                      |       | —                          |       | —           |       | (178      | )          |
| Net cash  used in investing activities               |       | (487    | )          | —  |       | (908                        | )          | (402                            | )          | —           |       | (1,797    | )          |
| **Financing  activities**                            |       |    |       |    |       |                        |       |                            |       |             |       |      |       |
| Payments  for deferred financing costs               |       | —  |       | —  |       | —                      |       | —                          |       | —           |       | —    |       |
| Proceeds  from borrowings                            |       | —  |       | —  |       | —                      |       | —                          |       | —           |       | —    |       |
| Payments of  debt                                    |       | (325    | )          | —  |       | (320                        | )          | (292                            | )          | —           |       | (937      | )          |
| Net  repayments under revolving credit facility      |       | —  |       | —  |       | —                      |       | —                          |       | —           |       | —    |       |
| Intercompany                                         |       | 2,705   |       | —  |       | (1,889                      | )          | (816                            | )          | —           |       | —    |       |
| Net cash  provided by (used in) financing activities |       | 2,380   |       | —  |       | (2,209                      | )          | (1,108                          | )          | —           |       | (937      | )          |
| Effect of  exchange rate changes on cash             |       | —  |       | —  |       | (916                        | )          | 442                             |       | —           |       | (474      | )          |
| Net  decrease in cash and cash equivalents           |       | (7,287  | )          | —  |       | (627                        | )          | (1,567                          | )          | —           |       | (9,481    | )          |
| Cash and  cash equivalents at beginning of period    |       | 15,863  |       | —  |       | (1,989                      | )          | 2,467                           |       | —           |       | 16,341    |       |
| Cash and  cash equivalents at end of period          |       | $       | 8,576      |    | $          | —                      |       | (2,616                          | )          | $                | 900        |      | $          | — |   | $ | 6,860 |   |
|                                                      |            |         |            |         |            |                             |            |                                 |            |                  |            |           |            |  |  |  |  |  |  |

 

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**NORCROSSSAFETY PRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)(Amounts in Thousands) (Unaudited)**

 
| ** **                                                   | ** ** | **NSP** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|---------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|-----------|------------|
| **Three  months ended March 29, 2003**                       |       |    |       |                        |       |                            |       |             |       |      |       |
| **Operating  activities**                                    |       |    |       |                        |       |                            |       |             |       |      |       |
| Net cash  provided by (used in) operating activities         |       | $       | 4,094      |                        | $          | (254                            | )          | $                | (970       | )         | $          | — |   | $ | 2,870 |   |
| **Investing  activities**                                    |       |    |       |                        |       |                            |       |             |       |      |       |
| Purchase of  businesses, net of cash acquired                |       | (69     | )          | —                      |       | —                          |       | —           |       | (69       | )          |
| Purchase of  property, plant, and equipment                  |       | (87     | )          | (651                        | )          | (132                            | )          | —           |       | (870      | )          |
| Due from  NSP Holdings L.L.C.                                |       | (150    | )          | —                      |       | —                          |       | —           |       | (150      | )          |
| Other                                                        |       | —  |       | 386                         |       | (386                            | )          | —           |       | —    |       |
| Net cash  used in investing activities                       |       | (306    | )          | (265                        | )          | (518                            | )          | —           |       | (1,089    | )          |
| **Financing  activities**                                    |       |    |       |                        |       |                            |       |             |       |      |       |
| Payments  for deferred financing costs                       |       | (6,990  | )          | —                      |       | —                          |       | —           |       | (6,990    | )          |
| Proceeds  from borrowings                                    |       | 130,000 |       | —                      |       | —                          |       | —           |       | 130,000   |       |
| Payments of  debt                                            |       | (86,175 | )          | (75                         | )          | 14                              |       | —           |       | (86,236   | )          |
| Net  borrowings (repayments) under revolving credit facility |       | (29,262 | )          | —                      |       | (1,698                          | )          | —           |       | (30,960   | )          |
| Intercompany                                                 |       | (3,226  | )          | (315                        | )          | 3,541                           |       | —           |       | —    |       |
| Net cash  provided by (used in) financing activities         |       | 4,347   |       | (390                        | )          | 1,857                           |       | —           |       | 5,814     |       |
| Effect of  exchange rate changes on cash                     |       | —  |       | 1,028                       |       | 57                              |       | —           |       | 1,085     |       |
| Net  increase (decrease) in cash and cash equivalents        |       | 8,135   |       | 119                         |       | 426                             |       | —           |       | 8,680     |       |
| Cash and  cash equivalents at beginning of period            |       | 3,306   |       | (2,381                      | )          | 837                             |       | —           |       | 1,762     |       |
| Cash and  cash equivalents at end of period                  |       | $       | 11,441     |                        | $          | (2,262                          | )          | $                | 1,263      |      | $          | — |   | $ | 10,442 |   |

 

**10. Comprehensive Income(Loss)**

 

Total comprehensive income for thethree months ended March 29, 2003 and April 3, 2004 amounted to $5,245 and$5,928, respectively.

 

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**Item2****.****Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

Overview

 

We are aleading designer, manufacturer and marketer of branded products in the fragmentedpersonal protection equipment industry. We manufacture and market a full lineof personal protection equipment for workers in the general industrial, fireservice and utility/high voltage industries. We sell our products undertrusted, long-standing and well-recognized brand names, including *North*,*Morning Pride*, *Ranger*, *Servus*, *Pro-Warrington* and *Salisbury*.Our broad product offering includes, among other things, respiratoryprotection, protective footwear, hand protection, bunker gear and linemenequipment.

 

We classify our diverse productofferings into three primary operating segments:

 

GeneralIndustrial. We offer a diverse portfolio of leading products for a wide varietyof industries, including the manufacturing, agriculture, automotive, foodprocessing and pharmaceutical industries and the military, under the *North*,*Ranger* and *Servus* brand names. Our product offering is one of thebroadest in the personal protection equipment industry and includes respiratoryprotection, protective footwear, hand protection, eye, head and faceprotection, first aid, hearing protection and fall protection. We sell ourgeneral industrial products primarily through industrial distributors.

 

Fire Service. We manufacture and market one of the broadestlines of personal protection equipment for the fire service segment, offeringfirefighters head-to-toe protection. Our products include bunker gear, fireboots, helmets, gloves and other accessories. We market our products under our *TotalFire Group* umbrella, using the brand names of *Morning Pride*, *Ranger*,*Servus* and *Pro-Warrington*. We are the vendor of choice for manyof the largest fire departments in North America, including those of New YorkCity, Chicago and Toronto. We sell our fire service products primarily throughspecialized fire service distributors.

 

Utility/High Voltage. We manufacture and market one of thebroadest lines of personal protection equipment for the utility/high voltageservice segment under the *Salisbury* and *Servus* brands. Ourproducts, including linemen equipment, gloves, sleeves and footwear, aredesigned to protect workers from up to 40,000 volts of electricity. All of ourproducts either meet or exceed the applicable standards of ANSI and ASTM. Wedistribute our utility/high voltage products through specialized distributorsand direct to utilities and electrical contractors.

 

KCLAcquisition

 

In July 2003,we acquired the stock of KCL for $20.1 million, including the assumptionof $0.2 million of KCL’s net indebtedness and acquisition costs of $1.1million. The sellers of KCL will also be eligible to receive royalty paymentsof up to €0.2 million per year over the next three years based upon theachievement of certain cumulative net sales targets.

 

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Results ofOperations

 

The followingtables set forth our results of operations in dollars and as a percentage ofnet sales for the three months ended March 29, 2003 and April 3, 2004. The datafor the three months ended March 29, 2003 and April 3, 2004 have been derivedfrom our historical unaudited financial statements.

 
| ** **                                        | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **March 29,  2003**        | ** ** | **April 3,  2004** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)** | ** ** |
| Net sales:                                        |       |                       |       |   |   |
| General  industrial                               |       | $                          | 59,217     |   | $ | 76,464 |   |
| Fire  service                                     |       | 16,668                     |       | 20,293 |   |
| Utility/high  voltage                             |       | 9,930                      |       | 12,316 |   |
| Total net  sales                                  |       | 85,815                     |       | 109,073 |   |
| Cost of  goods sold                               |       | 55,053                     |       | 68,877 |   |
| Gross  profit                                     |       | 30,762                     |       | 40,196 |   |
| Operating  expenses                               |       | 21,496                     |       | 25,696 |   |
| Income from  operations:                          |       |                       |       |   |   |
| General  industrial                               |       | 4,970                      |       | 8,946 |   |
| Fire  service                                     |       | 3,236                      |       | 3,941 |   |
| Utility/high  voltage                             |       | 1,920                      |       | 2,717 |   |
| Corporate                                         |       | (860                       | )          | (1,104 | ) |
| Total  income from operations                     |       | 9,266                      |       | 14,500 |   |
| Other  expense (income):                          |       |                       |       |   |   |
| Interest  expense                                 |       | 6,713                      |       | 5,636 |   |
| Interest  income                                  |       | (20                        | )          | (35 | ) |
| Other, net                                        |       | (176                       | )          | 534 |   |
| Income  before income taxes and minority interest |       | 2,749                      |       | 8,365 |   |
| Income tax  expense                               |       | 448                        |       | 1,033 |   |
| Minority  interest                                |       | —                     |       | 5 |   |
| Net income                                        |       | $                          | 2,301      |   | $ | 7,327 |   |

 

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| ** **                                        | ** ** | **Three Months Ended**             | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | **March 29,  2003**                | ** ** | **April 3,  2004** | ** ** |
| ** **                                        | ** ** | **(as a percentage of net sales)** | ** ** |
| Net sales:                                        |       |                               |       |   |   |
| General  industrial                               |       | 69.0                               | %          | 70.1 | % |
| Fire  service                                     |       | 19.4                               | %          | 18.6 | % |
| Utility/high  voltage                             |       | 11.6                               | %          | 11.3 | % |
| Total net  sales                                  |       | 100.0                              | %          | 100.0 | % |
| Cost of  goods sold                               |       | 64.2                               | %          | 63.1 | % |
| Gross  profit                                     |       | 35.8                               | %          | 36.9 | % |
| Operating  expenses                               |       | 25.0                               | %          | 23.6 | % |
| Income from  operations:                          |       |                               |       |   |   |
| General  industrial                               |       | 5.8                                | %          | 8.2 | % |
| Fire  service                                     |       | 3.8                                | %          | 3.6 | % |
| Utility/high  voltage                             |       | 2.2                                | %          | 2.5 | % |
| Corporate                                         |       | (1.0                               | )%         | (1.0 | )% |
| Total  income from operations                     |       | 10.8                               | %          | 13.3 | % |
| Other  expense (income):                          |       |                               |       |   |   |
| Interest  expense                                 |       | 7.8                                | %          | 5.2 | % |
| Interest  income                                  |       | (0.0                               | )%         | (0.0 | )% |
| Other, net                                        |       | (0.2                               | )%         | 0.5 | % |
| Income  before income taxes and minority interest |       | 3.2                                | %          | 7.6 | % |
| Income tax  expense                               |       | 0.5                                | %          | 0.9 | % |
| Minority  interest                                |       | —                             |       | 0.0 | % |
| Net income                                        |       | 2.7                                | %          | 6.7 | % |

 

***Three Months Ended April 3, 2004 as Compared to Nine Months EndedMarch 29, 2003***

 

*Net sales.***Net sales increased by $23.3 million, or 27.1%,from $85.8 million for the three months ended March 29, 2003 to$109.1 million for the three months ended April 3, 2004. In our generalindustrial segment, net sales increased by $17.3 million, or 29.1%, from$59.2 million for the three months ended March 29, 2003 to$76.5 million for the three months ended April 3, 2004. This increase wasprimarily due to: higher overall net sales in the United States of $4.0million, reflecting higher footwear shipments of $2.5 million, increasedgovernment contract shipments of $0.7 million and strong overall market demand;favorable Canadian, European and South African exchange rates, which had animpact of $3.9 million; and the impact of the acquisition of KCL inJuly 2003, which contributed incremental net sales of $8.6 million. In ourfire service segment, net sales increased by $3.6 million, or 21.7%, from$16.7 million for the three months ended March 29, 2003 to$20.3 million for the three months ended April 3, 2004 reflecting strongmarket demand in part due to comprehensive marketing efforts. In ourutility/high voltage segment, net sales increased by $2.4 million, or24.0%, from $9.9 million for the three months ended March 29, 2003 to$12.3 million for the three months ended April 3, 2004 primarily driven bystrong overall market demand and new product introductions.

 

*Gross profit.***Gross profit increased by $9.4 million, or 30.7%,from $30.8 million for the three months ended March 29, 2003 to$40.2 million for the three months ended April 3, 2004, primarily due tothe $23.3 million, or 27.1%, increase in net sales. Our gross profitmargin of 36.9% for the three months ended April 3, 2004 was favorable to the35.8% gross profit margin for the three months ended March 29, 2003. In ourgeneral industrial segment, gross profit increased by $7.3 million, or33.6%, from $21.7 million for the three months ended March 29, 2003 to$29.0 million for the three months ended April 3, 2004. This increase wasprimarily due to: the impact of the acquisition of KCL, which contributed$3.5 million of incremental gross profit; favorable Canadian, European andSouth African exchange rates which had an impact of $1.3 million; andhigher gross profit in the United States of $2.0 million, reflecting acombination of the $4.0 million increase in net sales and favorable fixedoverhead

 

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absorption. In our fire service segment, gross profit increasedby $1.2 million, or 21.7%, from $5.3 million for the three months endedMarch 29, 2003 to $6.5 million for the three months ended April 3, 2004,primarily due to the $3.6 million, or 21.7% increase in net sales. In ourutility/high voltage segment, gross profit increased by $1.0 million, or26.6%, from $3.8 million for the three months ended March 29, 2003 to$4.8 million for the three months ended April 3, 2004, primarily due tothe $2.4 million, or 24.0% increase in net sales.

 

*Operating expenses.*Operating expenses increased by$4.2 million, or 19.5%, from $21.5 million for the three months endedMarch 29, 2003 to $25.7 million for the three months ended April 3, 2004.In our general industrial segment, operating expenses increased by$3.3 million, or 19.8%, from $16.7 million for the three months endedMarch 29, 2003 to $20.0 million for the three months ended April 3, 2004,as lower amortization of intangibles of $0.7 million was more than offset byhigher other operating expenses due to: incremental KCL operating expenses of$2.0 million; higher Canadian, European and South African exchange rates,which had an impact of $1.0 million; higher payroll and other administrativecosts; and increased variable distribution and selling expenses associated withthe $17.3 million or 29.1% increase in net sales. In our fire service segment,operating expenses increased $0.4 million, or 21.4%, from$2.1 million for the three months ended March 29, 2003 to$2.5 million for the three months ended April 3, 2004, primarily due toadditional payroll and variable selling expenses associated with the$3.6 million, or 21.7%, increase in net sales. In our utility/high voltagesegment, operating expenses increased by $0.2 million, or 11.2%, from $1.9million for the three months ended March 29, 2003 to $2.1 million for thethree months ended April 3, 2004, primarily due to higher general andadministrative and selling expenses. Our corporate expense increased$0.2 million, or 28.3%, primarily due to higher payroll and administrativeexpenses.

 

*Income from operations.***Income from operationsincreased by $5.2 million, or 56.5%, from $9.3 million for the threemonths ended March 29, 2003 to $14.5 million for the three months endedApril 3, 2004. As a percentage of net sales, income from operations increasedfrom 10.8% for the three months ended March 29, 2003 to 13.3% for the threemonths ended April 3, 2004. In our general industrial segment, income from operationsincreased by $3.9 million, or 80.0%, from $5.0 million for the threemonths ended March 29, 2003 to $8.9 million for the three months endedApril 3, 2004, primarily due to higher net sales of $17.3 million, or29.1%. In our fire service segment, income from operations increased by$0.7 million, or 21.8%, from $3.2 million for the three months endedMarch 29, 2003 to $3.9 million for the three months ended April 3, 2004,primarily due to the $3.6 million, or 21.7%, increase in net sales. In ourutility/high voltage segment, income from operations increased by$0.8 million, or 41.5%, from $1.9 million for the three months endedMarch 29, 2003 to $2.7 million for the three months ended April 3, 2004,primarily due to higher net sales of $2.4 million, or 24.0%. Our corporateexpenses increased $0.2 million, or 28.3%, primarily due to higher payrolland administrative expenses.

 

Included inincome from operations for the three months ended April 3, 2004 and March 29,2003 were depreciation and amortization expenses of $3.0 million and$3.4 million, respectively. Of these amounts, $2.4 million,$0.1 million, $0.3 million and $0.2 million were attributable tothe general industrial, fire service, utility/high voltage segments andcorporate, respectively, for the three months ended April 3, 2004 and$2.8 million, $0.1 million, $0.3 million and $0.2 millionwere attributable to these segments and corporate for the three months endedMarch 29, 2003.

 

*Interest expense.***Interest expense decreased by $1.1 million, or16.0%, from $6.7 million for the three months ended March 29, 2003 to$5.6 million for the three months ended April 3, 2004. Included ininterest expense for the three months ended March 29, 2003 is $1.3 millionattributable to the write-off of deferred financing fees associated with thesenior credit facility financing for the three months ended March 29, 2003.Excluding this write-off, interest expense increased by $0.2 million due tohigher debt levels associated with the New Subordinated Notes financing and KCLacquisition. Interest expense incurred by NSP and the subsidiary guarantorstotaled $6.7 million for the three months ended March 29, 2003 and$5.6 million for the three months ended April 3, 2004.

 

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*Other, net.***Other, net increased by $0.7 from $(0.2) million forthe three months ended March 29, 2003 to $0.5 million for the three monthsended April 3, 2004 primarily due to unrealized foreign exchange lossesrecorded as a result of the strengthening of the U.S. dollar during the threemonths ended April 3, 2004.

 

*Income tax expense.*Income tax expense increased by$0.6 million, from $0.4 million for the three months ended March 29,2003 to $1.0 million for the three months ended April 3, 2004, as a resultof higher income tax expense levels at foreign operations, primarily due toincremental KCL income tax expense of $0.4 million.

 

*Net income (loss).***Net income increased by $5.0 million, or 218.4%,from $2.3 million for the three months ended March 29, 2003 to$7.3 million for the three months ended April 3, 2004. This was the resultof the reasons discussed above.

 

Liquidityand Capital Resources

 

We havehistorically used internal cash flow from operations, commercial borrowings onour lines of credit, seller notes, investments from our equityholders andcapital markets transactions to fund our operations, acquisitions, capitalexpenditures and working capital requirements. For the three months ended April3, 2004 and March 29, 2003, cash (used in) provided by operating activities was$(6.3) million and $2.9 million, respectively. The $9.2 milliondecrease was primarily attributable to higher accounts receivable of $9.0million, due to higher net sales of $23.3 million, and lower accrued expenses,in part due to a semi-annual coupon payment on our senior subordinated notesduring the three month ended April 3, 2004. These amounts were partially offsetby a $5.0 million increase in net income.

 

Historically, our principal uses ofcash have been capital expenditures, acquisitions and working capital. Ourcapital expenditures were $1.5 million for the three months ended April 3,2004 and $0.9 million for the three months ended March 29, 2003. Duringthe three months ended April 3, 2004 and March 29, 2003, we funded cash toNSP Holdings L.L.C. of $0.2 million.

 

As of April 3, 2004, we had workingcapital of $113.4 million and cash of $6.9 million. We maintaininventory levels sufficient to satisfy customer orders on demand, withgenerally a three month supply on hand. Bunker gear is an exception and isgenerally made to order. Our accounts receivable terms are generally30 days, net.

 

For the three months ended April 3,2004, net cash used in financing activities was $1.0 million, representingpayments on long term debt obligations. For the three months ended March 29,2003, net cash provided by financing activities was $5.8 million, representingpayments of deferred financing costs of $7.0 million, retirement of ourprevious senior credit facility and other debt payments of $117.2 million,offset by borrowings under our senior credit facility of $130.0 million.

 

OnMarch 21, 2003, we entered into a senior credit facility which providesfor aggregate borrowings by us of $160.0 million and C$10.0 million,consisting of (1) a $30.0 million United States revolving creditfacility; (2) a C$10.0 million Canadian revolving credit facility;and (3) a $130.0 million term loan. As of April 3, 2004, there wasapproximately $99.0 million of outstanding indebtedness under the seniorcredit facility and approximately $36.1 million of available borrowingsunder the revolving facilities. We used the proceeds of our senior creditfacility to refinance our existing senior credit facility and for generalcorporate purposes, including working capital, refinancings, acquisitions,investments and capital expenditures.

 

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As of April 3,2004, borrowings under the senior credit facility bore interest at a weightedaverage rate of 4.89%. Prior to March 20, 2008, we may borrow, repay andre-borrow under the revolving facilities without payment of penalty or premium.The term loan is payable in quarterly installments totaling $1.3 millionper annum, with the remainder due on March 20, 2009. All of the domesticborrowers’ obligations under the senior credit facility are secured by a pledgeof all our equity securities and the equity securities of our direct andindirect domestic subsidiaries, substantially all of our tangible and intangibleassets and 65% of the equity securities of, or equity interest in, each of ourforeign subsidiaries. All of the obligations under the senior credit facilityare guaranteed by all of our present and future domestic subsidiaries, and allof the Canadian borrower’s obligations under the senior credit facility areguaranteed by all of our present and future Canadian subsidiaries.

 

Our senior credit facilitycontains, and the indenture governing the notes contains, numerous restrictivecovenants, including, among other things, covenants that limit our ability toincur indebtedness, use our assets as security in other transactions, makefundamental changes to our capital structure, dispose of assets, pay dividends,make capital expenditures, enter into transactions with affiliates and enterinto sale and leaseback transactions. In addition, our senior credit facilityrequires us to meet specified financial ratios and tests.

 

On August 13, 2003, theCompany issued $152.5 million of 9.875% senior subordinated notes due 2011and received gross proceeds of $151.5 million. The proceeds were primarilyused to: (i) repay principal and interest and repurchase warrants relatedto our previous senior subordinated notes, (ii) repay $30.0 millionof principal related to the term loan, (iii) repay principal on the juniorsubordinated notes used to finance the KCL acquisition, (iv) purchasepreferred units of NSP Holdings L.L.C. from certain members of management and(v) pay fees and expenses.

 

In connectionwith the offering, we amended our senior credit facility to provide for theincurrence of the outstanding senior subordinated notes. The amendment alsomodified certain of the covenants under our senior credit facility.

 

We believethat our internal cash flows and borrowings under the revolving portions of oursenior credit facility will provide us with sufficient liquidity and capitalresources to meet our current and future financial obligations for theforeseeable future, including funding our operations, debt service and capitalexpenditures. Our future operating performance will be subject to futureeconomic conditions and to financial, business and other factors, many of whichare beyond our control. If our future cash flow from operations and othercapital resources are insufficient to pay our obligations as they mature or tofund our liquidity needs, we may be forced to reduce or delay our businessactivities and capital expenditures, sell assets, obtain additional debt orequity capital or restructure or refinance all or a portion of our debt,including the notes, on or before maturity. We cannot assure you that we wouldbe able to accomplish any of these alternatives on a timely basis or onsatisfactory terms, if at all. In addition, the terms of our existing and futureindebtedness, including the notes and our senior credit facility, may limit ourability to pursue any of these alternatives.

 

**Forward-LookingStatements**

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward-looking information. Thesestatements reflect management’s expectations, estimates, and assumptions basedon information available at the time of the statement. Forward-lookingstatements include, but are not limited to, statements regarding future events,plans, goals, objectives, and expectations. The words ‘‘anticipate,’’‘‘believe,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘plan,’’ ‘‘intent,’’ ‘‘likely,’’‘‘will,’’ ‘‘should,’’ and similar expressions are intended to identifyforward-looking statements. Forward-looking statements are not guarantees offuture performance and involve risks, uncertainties, and other

 

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factors, including those set forth below, which may cause ouractual results, performance, or achievements to be materially different fromany future results, performance, or achievements expressed or implied by thosestatements. Important factors that could cause our actual results, performance,or achievements to be materially different from any future results,performance, or achievements expressed or implied by those statements include,but are not limited to: (i) our high degree of leverage and significant debtservice obligations; (ii) the impact of current and future laws andgovernmental regulations affecting us or our product offerings; (iii) theimpact of governmental spending; (iv) our ability to retain existing customers,maintain key supplier status with those customers with which we have achievedsuch status, and obtain new customers; (v) the highly competitive nature of thepersonal protection equipment industry; (vi) any future changes in management;(vii) acceptance by consumers of new products we develop or acquire; (viii) theimportance and costs of product innovation; (ix) unforeseen problems associatedwith international sales, including gains and losses from foreign currencyexchange and restrictions on the efficient repatriation of earnings; (x) theunpredictability of patent protection and other intellectual property issues; (xi)cancellation of current orders; (xii) the outcome of pending product liabilityclaims and the availability of indemnification for those claims; (xiii) generalrisks associated with the personal protection equipment industry; and (xiv) thesuccessful integration of acquired companies on economically acceptable terms.We undertake no obligation to publicly update or revise any forward-lookingstatements to reflect changed assumptions, the occurrence of anticipated orunanticipated events, or changes to future results over time.

 

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**Item3****.****Quantitative and Qualitative Disclosures About Market Risk**

 

There havebeen no material changes to our exposure to market risk since December 31,2003.

 

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**Item4****.****Controls and Procedures**

 

Based ontheir evaluation as of the end of the period covered by this quarterly reporton Form 10-Q, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) are effective. There was no change in our internal control over financial reporting (asdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified inconnection with the evaluation required by Rule 13a-15(d) of the Exchange Actthat occurred during the period covered by this quarterly report on Form 10-Qthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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PART IIOTHER INFORMATION

 

**Item 1.****Legal Proceedings**

 

Our NorthSafety Products subsidiary, its predecessors and/or the former owners of suchbusiness are presently named as a defendant in approximately 711 lawsuitsinvolving respirators manufactured and sold by it or its predecessors. We arealso monitoring an additional 12 lawsuits in which we feel that North Safety Products,its predecessors and/or the former owners of such businesses may be named asdefendants. Collectively, these 723 lawsuits represent approximately 24,000(excluding spousal claims) plaintiffs. Approximately 90% of these lawsuitsinvolve plaintiffs alleging that they suffer from silicosis, with the remainderalleging they suffer from other or combined injuries, including asbestosis.These lawsuits typically allege that these conditions resulted in part fromrespirators that were negligently designed or manufactured. The defendants inthese lawsuits are often numerous, and include, in addition to respiratormanufacturers, employers of the plaintiffs and manufacturers of sand (used insand blasting) and asbestos. We acquired our North Safety Products subsidiaryon October 2, 1998 from Siebe plc. In connection with the acquisition, Siebe,which was subsequently merged with BTR plc (now known as “Invensys plc”),contractually agreed to indemnify us for any losses, including costs ofdefending claims, resulting from respiratory products manufactured prior to ouracquisition of North Safety Products in October 1998.

 

In addition,our North Safety Products subsidiary is contractually entitled toindemnification from Norton Company, an affiliate of Saint-Gobain, which ownedthe North Safety Products business prior to Invensys. Pursuant to a December14, 1982 asset purchase agreement, Siebe Norton, Inc., a newly formedwholly-owned subsidiary of Norton Company, acquired the assets of Norton’sSafety Products Division and the stock of this company was in turn acquired bySiebe Gorman Holdings PLC. Under the terms of the Agreement, Siebe Norton, Inc.did not assume any liability for claims relating to products shipped by NortonCompany prior to the closing date. Moreover, Norton Company covenanted in theAgreement to indemnify Siebe Norton and its successors and assigns against anyliability resulting from or arising out of any state of facts, omissions orevents existing or occurring on or before the closing date, including, withoutlimitation, any claims arising in respect of products shipped by Norton Companyor any of its affiliates prior to the closing date. Siebe Norton, whose namewas subsequently changed to Siebe North Inc., was subsequently acquired by theCompany as part of the 1998 acquisition of the North Safety Products businessfrom Invensys.

 

Despite theseindemnification arrangements, we could potentially be liable for these lossesor claims relating to products manufactured prior to the October 1998 acquisitiondate if Invensys fails to meet its obligations to indemnify us and we couldpotentially be liable for these losses and claims relating to products soldprior to January 10, 1983 if both Invensys and Norton fail to meet theirobligations to indemnify us. We could also be liable if the alleged exposureinvolved the use of a product manufactured by us after our October 1998acquisition of the North Safety Products business. Invensys is currentlyhandling the defense of all of the cases in which North Safety Products, itspredecessors and/or the former owners of such businesses have been named asdefendants, and to date we have not incurred any material costs with respect tothese lawsuits. To date, Invensys has sent us requests for reimbursement totaling$26,000, relating to settled cases in which Invensys claims that the period ofalleged exposure included periods after October 1998. Based on informationprovided to us by Invensys, we believe that Invensys has made payments withrespect to settlement of these claims of $0.5 million for the three monthsended April 3, 2004.

 

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Consistentwith the current environment being experienced by companies involved in silicaand asbestos-related litigation, there has been an increase in the number ofasserted claims that could potentially involve us. Based upon informationprovided to us by Invensys, we believe activity related to these lawsuits wasas follows for the three months ended April 3, 2004:

 
| ** **            | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| Beginning lawsuits    | ** ** | 680        | ** ** |
| New  lawsuits         |       | 70         |       |
| Settlements           |       | (13        | )          |
| Dismissals  and other |       | (14        | )          |
| Ending  lawsuits      |       | 723        |       |

 

Plaintiffs have asserted specificdollar claims in less than a quarter of the approximately 711 casespending as of April 3, 2004 in which North Safety Products, its predecessorsand/or the former owners of such businesses have been named as defendants. Amajority of jurisdictions prohibit specifying damages in tort cases such asthese, and most of the remaining jurisdictions do not require such specification.In those cases in which plaintiffs choose to assert specific dollar amounts intheir complaints, brought in states that permit such pleading, the amountsclaimed are typically not meaningful as an indicator of a company’s potentialliability. This is because (1) the amounts claimed typically bear norelation to the level of the plaintiff’s injury, (2) the complaintstypically assert claims against numerous defendants, and (3) many casesare brought on behalf of plaintiffs who have not suffered any medical injury,and, ultimately, are resolved without any payment or payment of a smallfraction of the damages initially claimed. Of the 711 complaints, 542 do notspecify the amount of damages sought, 33 generally allege damages in excess of$50,000, 6 allege compensatory damages in excess of $50,000 and an unspecifiedamount of punitive damages, 27 allege compensatory damages and punitivedamages, each in excess of $25,000, 9 generally allege damages in excess of$100,000, 51 allege compensatory damages and punitive damages, each in excessof $50,000, 36 generally allege damages of $15.0 million, 2 allegecompensatory damages and punitive damages, each in the amount of$15.0 million, 1 alleges compensatory damages and punitive damages, each inexcess of $10,000, 1 alleges compensatory damages and punitive damages, each inexcess of $15,000, 1 generally alleges damages in excess of $25,000, 1generally alleges damages in excess of $4,000 and 1 generally alleges damagesnot to exceed $290.0 million.We currently do not have access to thepreviously mentioned additional 12 cases we are monitoring, and thereforedo not know whether these cases allege specific damages, and, if so, the amountof such damages, but are in the process of seeking to obtain such information.Due to the reasons noted above and to the indemnification arrangementsbenefiting the Company, we do not believe that the damage amounts specified inthese complaints are a meaningful factor in any assessment of the Company’spotential liability.

 

Bankruptcyfilings of companies with asbestos and silica-related litigation could increaseour cost over time. If we were found liable in these cases and either Invensysor Norton failed to meet their indemnification obligations to us or the suitinvolved products manufactured by us after our October 1998 acquisition ofNorth Safety Products, it would have a material adverse effect on our business.

 

We are nototherwise involved in any material lawsuits. We historically have not beenrequired to pay any material liability claims. We maintain insurance againstproduct liability claims (with the exception of asbestosis and silicosis cases,for which coverage is not commercially available), but it is possible that ourinsurance coverage will not continue to be available on terms acceptable to usor that such coverage will not be adequate for liabilities actually incurred.We have a reserve of $2.3 million against potential uninsured productliability claims of North Safety Products for periods prior to October 1998.This reserve was established at the date of acquisition and relates topotential claims primarily associated with fall protection products sold inCanada. We have not recorded any losses against this reserve to date. Thisreserve is re-evaluated periodically, and additional charges or credits tooperations may result as additional information becomes available. It ispossible that we may incur liabilities in an amount in excess of amountscurrently reserved. However, taking into account currently availableinformation, historical experience, and our indemnification from Invensys, butrecognizing the inherent uncertainties in the projection of any future events,we believe that these suits or claims should not result in final judgments orsettlements in excess of our reserve. We do not have a reserve for productliability claims for use of products manufactured after the 1998 acquisition ofNorth Safety Products as we are not involved in any material lawsuits relatingexclusively to product usage in the periods after October 1998. Inaddition, we are not a party to any lawsuits involving asbestosis or silicosisrelating exclusively to product usage in the period after October 1998.

 

**Item6.****Exhibits and Reports on Form 8-K**

 

(a)           Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                     |
|-----------------|------------|-----------------------------------------------------------------------------------------------------|
|            |       |                                                                                                |
| 10.1            |       | Description of Stay Bonus Program                                                                   |
|            |       |                                                                                                |
| 31.1            |       | Certification of Chief Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|            |       |                                                                                                |
| 31.2            |       | Certification of Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|            |       |                                                                                                |
| 32.1            |       | Certification of Chief Executive Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|            |       |                                                                                                |
| 32.2            |       | Certification of Chief Financial Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

(b)           Reports on Form 8-K

 

On March15, 2004 we filed a current report on Form 8-K to furnish, under Item 12 ofthat form, our press release announcing our results of operations for the yearended December 31, 2003.

 

On May 12, 2004 we filed a current report on Form 8-K to furnish,under Item 12 of that form, our press release announcing our results ofoperations for the three months ended April 3, 2004.

 

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SIGNATURES

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, Norcross SafetyProducts L.L.C. has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|          | NORCROSS SAFETY  PRODUCTS L.L.C. |
|---------------|----------------------------------|
|          |                             |
|          |                             |
| May 11,  2004 | By:                              | /s/ Robert A. Peterson |   |
|          |                             | Robert A. Peterson |
|          |                             | President, Chief Executive Officer and Manager |
|          |                             | (Principal Executive Officer) |
|          |                             |   |
|          |                             |   |
| May 11,  2004 | By:                              | /s/ David F. Myers,  Jr. |   |
|          |                             | David F. Myers,  Jr. |
|          |                             | Executive Vice  President, Chief Financial Officer, |
|          |                             | Secretary and  Manager |
|          |                             | (Principal Financial and Accounting Officer) |

 

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NORCROSSSAFETY PRODUCTS L.L.C.FORM 10-Q LISTING OF EXHIBITS

 
| **Exhibit No.** | ** ** | **Description**                                                                                     |
|-----------------|------------|-----------------------------------------------------------------------------------------------------|
|            |       |                                                                                                |
| 10.1            |       | Description of Stay Bonus Program                                                                   |
|            |       |                                                                                                |
| 31.1            |       | Certification of Chief Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|            |       |                                                                                                |
| 31.2            |       | Certification of Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|            |       |                                                                                                |
| 32.1            |       | Certification of Chief Executive Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|            |       |                                                                                                |
| 32.2            |       | Certification of Chief Financial Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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