**UNITED STATESSECURITIES AND EXCHANGE 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**                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES**                                                                                                              |
|----------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                             | **EXCHANGE ACT OF 1934**                                                                                                                                                                       |
|                                   | ** **                                                                                                                                                                                     |
|                                   | **For the quarterly period ended October 1, 2005**                                                                                                                                        |
|                                   | ** **                                                                                                                                                                                     |
| **OR**                                 |
|                                   | ** **                                                                                                                                                                                     |
| **o**                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES**                                                                                                             |
| ** **                             | **EXCHANGE ACT OF 1934**                                                                                                                                                                       |
|                                   | ** **                                                                                                                                                                                     |
|                                   | **For the transition period from                to             ** |
|                                   | ** **                                                                                                                                                                                     |
| **Commission File Number: 333-127781** |

 

**SAFETY PRODUCTS HOLDINGS, INC.**

**(Exact name of Registrant as Specified in itsCharter)**

 
| **Delaware**                                                    | ** ** | **34-2051198**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation or  Organization) |       | (I.R.S. Employer Identification No.) |
| ** **                                                      | ** ** | ** **                           |
| **2001 Spring Road, Suite 425,  Oak Brook, Illinois**      | ** ** | **60523**                            |
| (Address of Principal Executive Offices)                        |       | (Zip Code)                           |
| ** **                                                      | ** ** | ** **                           |
| Registrant’s telephone number, including area code:        |
| **(630) 572-5715**                                              |

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

 

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

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Securities Exchange Act of 1934). Yes o No ý

 

On November 14,2005 Safety Products Holdings, Inc. had 10,967,000 common sharesoutstanding.

 

 

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**SAFETY PRODUCTS HOLDINGS, INC.FORM 10-Q QUARTERLY REPORTFor the Quarterly Period Ended October 1,2005**

 

**TABLE OF CONTENTS**

 
| **PART I Financial Information**  | 1        |
|----------------------------------------|----------|
|                                   |     |   |   |
|                                   | Item 1.  | Financial Statements  (Unaudited) | 1 |
|                                   |     |   |   |
|                                   |     | Consolidated Balance Sheets | 1 |
|                                   |     |   |   |
|                                   |     | Consolidated  Statements of Operations | 2 |
|                                   |     |   |   |
|                                   |     | Consolidated Statements of  Changes in Members’ Equity/ Equity | 3 |
|                                   |     |   |   |
|                                   |     | Consolidated Statements of  Cash Flows | 4 |
|                                   |     |   |   |
|                                   | Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 15 |
|                                   |     |   |   |
|                                   | Item 3.  | Quantitative  and Qualitative Disclosures About Market Risk | 26 |
|                                   |     |   |   |
|                                   | Item 4.  | Controls and  Procedures | 27 |
|                                   |     |   |   |
| **PART II Other  Information**    | 28       |
|                                   |     |   |   |
|                                   | Item 1.  | Legal Proceedings | 28 |
|                                   |     |   |   |
|                                   | Item  6. | Exhibits | 30 |
|                                   |     |   |   |
| **Signatures**                         | 31       |
|                                   |     |   |   |
| **Form 10-Q Listing of Exhibits** | 32       |

 

i

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**PART I**FINANCIAL INFORMATION

** **

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

 

**SAFETY PRODUCTS HOLDINGS, INC.(NSP Holdings L.L.C. as predecessor)CONSOLIDATED BALANCE SHEETS(Amounts inThousands) (Unaudited)**

 
| ** **                                                                               | ** ** | **Predecessor**                 | ** ** | **Successor**             | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| ** **                                                                               | ** ** | **December 31,  2004 (1)** | ** ** | **October 1,  2005** | ** ** |
| **Assets**                                                                               |       |                            |       |                      |       |
| Current  assets:                                                                         |       |                            |       |                      |       |
| Cash and cash equivalents                                                                |       | $                               | 35,731     |                      | $          | 4,241 |   |
| Accounts receivable, less allowance of  $2,063 and $2,268 in 2004 and 2005, respectively |       | 61,167                          |       | 73,919                    |       |
| Inventories                                                                              |       | 82,532                          |       | 90,479                    |       |
| Deferred income taxes                                                                    |       | 60                              |       | 61                        |       |
| Prepaid expenses and other current assets                                                |       | 3,183                           |       | 2,494                     |       |
| Total  current assets                                                                    |       | 182,673                         |       | 171,194                   |       |
| Property,  plant, and equipment, net                                                     |       | 51,809                          |       | 63,838                    |       |
| Deferred  financing costs, net                                                           |       | 9,960                           |       | 19,212                    |       |
| Goodwill                                                                                 |       | 132,662                         |       | 116,817                   |       |
| Other  intangible assets, net                                                            |       | 6,256                           |       | 238,405                   |       |
| Other  noncurrent assets                                                                 |       | 5,831                           |       | 5,564                     |       |
| Total assets                                                                             |       | $                               | 389,191    |                      | $          | 615,030 |   |
|                                                                                     |       |                            |       |                      |       |
| **Liabilities  and members’ deficit / equity**                                      |       |                            |       |                      |       |
| Current  liabilities:                                                                    |       |                            |       |                      |       |
| Accounts payable                                                                         |       | $                               | 17,871     |                      | $          | 20,667 |   |
| Accrued expenses                                                                         |       | 29,024                          |       | 26,809                    |       |
| Current maturities of long-term obligations                                              |       | 15,252                          |       | 938                       |       |
| Total  current liabilities                                                               |       | 62,147                          |       | 48,414                    |       |
| Pension,  post-retirement, and deferred compensation                                     |       | 22,923                          |       | 32,571                    |       |
| Long-term  obligations                                                                   |       | 238,314                         |       | 373,981                   |       |
| Mandatorily  redeemable preferred units                                                  |       | 134,310                         |       | —                    |       |
| Other noncurrent  liabilities                                                            |       | 1,653                           |       | 1,620                     |       |
| Deferred  income taxes                                                                   |       | 4,799                           |       | 50,861                    |       |
| Minority  interest                                                                       |       | 142                             |       | 175                       |       |
|                                                                                     |       | 402,141                         |       | 459,208                   |       |
| Members’  deficit / equity:                                                         |       |                            |       |                      |       |
| Class E units                                                                       |       | 1                               |       | —                    |       |
| Common units:                                                                            |       |                            |       |                      |       |
| Class A units                                                                       |       | 38,676                          |       | —                    |       |
| Class C units                                                                       |       | 188                             |       | —                    |       |
| Class D units                                                                       |       | 1,248                           |       | —                    |       |
| Common shares                                                                            |       | —                          |       | 110                       |       |
| Contributed capital                                                                      |       | —                          |       | 109,560                   |       |
| Accumulated deficit                                                                      |       | (118,739                        | )          | (5,023                    | )          |
| Accumulated other comprehensive income                                                   |       | 3,529                           |       | 2,761                     |       |
| Total  members’ deficit / equity                                                    |       | (75,097                         | )          | 107,408                   |       |
| Total  liabilities and members’ deficit / equity                                    |       | $                               | 389,191    |                      | $          | 615,030 |   |

 

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(1)   December 31,2004 balances were obtained from audited financial statements.

 

*See notes to unaudited consolidated financialstatements.*

 

1

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**SAFETY PRODUCTS HOLDINGS, INC.(NSP Holdings L.L.C. as predecessor)CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts inThousands) (Unaudited)**

 
| ** **                                               | ** ** | **Predecessor**                                 | ** ** | **Successor**                                        | ** ** | **Predecessor**                                         | ** ** | **Successor**                                  | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                               | ** ** | **Three  months  ended  October 2,  2004** | ** ** | **July 3,  2005  through  July 19,  2005** | ** ** | **July 20,  2005  through  October 1,  2005** | ** ** | **Nine  months  ended  October 2,  2004** | ** ** | **January 1, 2005  through  July 19,  2005** | ** ** | **July 20,  2005  through  October 1,  2005** | ** ** |
| Net sales                                                |       | $                                               | 114,508    |                                                 | $          | 33,806                                                  |       | $                                              | 85,738     |   | $ | 330,586 |   | $ | 273,074 |   | $ | 85,738 |   |
| Cost of  goods sold                                      |       | 74,797                                          |       | 22,586                                               |       | 58,271                                                  |       | 212,129                                        |       | 171,645 |   | 58,271 |   |
| Gross profit                                             |       | 39,711                                          |       | 11,220                                               |       | 27,467                                                  |       | 118,457                                        |       | 101,429 |   | 27,467 |   |
| Operating  expenses:                                     |       |                                            |       |                                                 |       |                                                    |       |                                           |       |   |   |   |   |
| Selling                                                  |       | 10,688                                          |       | 3,338                                                |       | 8,413                                                   |       | 31,514                                         |       | 26,892 |   | 8,413 |   |
| Distribution                                             |       | 5,712                                           |       | 2,014                                                |       | 4,427                                                   |       | 16,607                                         |       | 14,634 |   | 4,427 |   |
| General and administrative                               |       | 10,171                                          |       | 2,528                                                |       | 7,834                                                   |       | 29,988                                         |       | 24,956 |   | 7,834 |   |
| Amortization of intangibles                              |       | 130                                             |       | 46                                                   |       | 4,732                                                   |       | 380                                            |       | 329 |   | 4,732 |   |
| Strategic alternatives                                   |       | 3                                               |       | —                                               |       | —                                                  |       | 616                                            |       | — |   | — |   |
| Management incentive compensation                        |       | —                                          |       | 16,388                                               |       | —                                                  |       | —                                         |       | 16,388 |   | — |   |
| Total  operating expenses                                |       | 26,704                                          |       | 24,314                                               |       | 25,406                                                  |       | 79,105                                         |       | 83,199 |   | 25,406 |   |
| Income  (loss) from operations                           |       | 13,007                                          |       | (13,094                                              | )          | 2,061                                                   |       | 39,352                                         |       | 18,230 |   | 2,061 |   |
| Other  expense (income):                                 |       |                                            |       |                                                 |       |                                                    |       |                                           |       |   |   |   |   |
| Interest expense                                         |       | 9,037                                           |       | 2,927                                                |       | 7,151                                                   |       | 26,942                                         |       | 24,584 |   | 7,151 |   |
| Interest income                                          |       | (64                                             | )          | (85                                                  | )          | (39                                                     | )          | (128                                           | )          | (914 | ) | (39 | ) |
| Seller transaction expenses                              |       | —                                          |       | 4,646                                                |       | —                                                  |       | —                                         |       | 4,646 |   | — |   |
| Other, net                                               |       | 613                                             |       | (77                                                  | )          | (110                                                    | )          | 1,206                                          |       | 745 |   | (110 | ) |
| Income (loss) before income taxes and  minority interest |       | 3,421                                           |       | (20,505                                              | )          | (4,941                                                  | )          | 11,332                                         |       | (10,831 | ) | (4,941 | ) |
| Income tax  expense (benefit)                            |       | 556                                             |       | (138                                                 | )          | 84                                                      |       | 2,915                                          |       | 3,619 |   | 84 |   |
| Minority  interest                                       |       | 6                                               |       | 2                                                    |       | (2                                                      | )          | 22                                             |       | 13 |   | (2 | ) |
| Net income  (loss)                                       |       | $                                               | 2,859      |                                                 | $          | (20,369                                                 | )          | $                                              | (5,023     | ) | $ | 8,395 |   | $ | (14,463 | ) | $ | (5,023 | ) |

 

*Seenotes to unaudited consolidated financial statements.*

 

2

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**S****AFETY PRODUCTS HOLDINGS, INC.(NSP Holdings L.L.C. as predecessor)CONSOLIDATED STATEMENTSOF CHANGES IN MEMBERS’ EQUITY/ EQUITY(Amounts in Thousands, Except Units)**

 
| ** **                                | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | **Accumulated**    | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------------|------------|-------------------|------------|------------|------------|------------|------------|-------------|------------|--------------------|------------|------------|------------|
| ** **                                | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | **Other**          | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Class E** | ** ** | **Class A** | ** ** | **Class C** | ** ** | **Class D** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Units**        | ** ** | **Amount**       | ** ** | **Units**        | ** ** | **Amount**       | ** ** | **Units**       | ** ** | **Amount**        | ** ** | **Units**  | ** ** | **Amount** | ** ** | **Deficit** | ** ** | **(Loss)  Income** | ** ** | **Total**  | ** ** |
| **Predecessor  Company**                  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** |
| **Balance  at January 1, 2005**      |       | 986              |       | $                | 1          |             | 7,265,804  |             | $          | 38,676          |       | 184,523           |       | $          | 188        |       | 212,018    |        | $          | 1,248              |       | $          | (118,739   | ) | $ | 3,529 |   | $ | (75,097 | ) |
| Foreign currency  translation adjustments |       | —           |       | —           |       | —           |       | —           |       | —          |       | —            |       | —     |       | —     |       | —      |       | (5,651             | )          | (5,651     | )          |
| Net loss                                  |       | —           |       | —           |       | —           |       | —           |       | —          |       | —            |       | —     |       | —     |       | (14,463     | )          | —             |       | (14,463    | )          |
| Comprehensive loss                        |       |             |       |             |       |             |       |             |       |            |       |              |       |       |       |       |       |        |       |               |       | (20,114    | )          |
| Distributions to  members                 |       | —           |       | —           |       | —           |       | —           |       | —          |       | —            |       | —     |       | —     |       | (2,509      | )          | —             |       | (2,509     | )          |
| Balance at  July 19, 2005            |       | 986              |       | $                | 1          |             | 7,265,804  |             | $          | 38,676          |       | 184,523           |       | $          | 188        |       | 212,018    |        | $          | 1,248              |       | $          | (135,711   | ) | $ | (2,122 | ) | $ | (97,720 | ) |

 
| ** **                               | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Contributed  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  (Loss) Income** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|--------------------------|------------|--------------------------|------------|------------------------------------------------------|------------|-----------|------------|
| **Successor Company**                    |       |       |       |       |       |                     |       |                     |       |                                                 |       |      |       |
| Capital  contribution                    |       | 10,967,000 |       | $          | 110        |                     | $          | 109,560                  |       | $                                                    | —     |      | $          | — |   | $ | 109,670 |   |
| Foreign currency translation adjustments |       | —     |       | —     |       | —                   |       | —                   |       | 2,761                                                |       | 2,761     |       |
| Net loss                                 |       | —     |       | —     |       | —                   |       | (5,023                   | )          | —                                               |       | (5,023    | )          |
| Comprehensive  loss                      |       |       |       |       |       |                     |       |                     |       |                                                 |       | (2,262    | )          |
| Balance at October 1, 2005          |       | 10,967,000 |       | $          | 110        |                     | $          | 109,560                  |       | $                                                    | (5,023     | )         | $          | 2,761 |   | $ | 107,408 |   |

 

*See notes to consolidated financialstatements.*

 

3

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**SAFETY PRODUCTS HOLDINGS, INC.**

**(NSP Holdings L.L.C. as predecessor)**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Amountsin Thousands) (Unaudited)**

 
| ** **                                                                                          | ** ** | **Predecessor**                                | ** ** | **Successor**                                           | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **Nine  months  ended  October 2,  2004** | ** ** | **January 1,  2005  through  July 19,  2005** | ** ** | **July 20,  2005  through October 1,  2005** | ** ** |
| **Operating  activities**                                                                           |       |                                           |       |                                                    |       |   |   |
| Net income  (loss)                                                                                  |       | $                                              | 8,395      |                                                    | $          | (14,463 | ) | $ | (5,023 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |                                           |       |                                                    |       |   |   |
| Depreciation                                                                                        |       | 8,527                                          |       | 6,177                                                   |       | 2,417 |   |
| Amortization of intangibles                                                                         |       | 380                                            |       | 329                                                     |       | 4,732 |   |
| Amortization of deferred financing costs                                                            |       | 1,324                                          |       | 1,311                                                   |       | 623 |   |
| Amortization of net original issue discount  (premium)                                              |       | 68                                             |       | 58                                                      |       | (32 | ) |
| Loss on sale of property, plant and  equipment                                                      |       | 384                                            |       | —                                                  |       | — |   |
| Deferred income taxes                                                                               |       | 731                                            |       | (86                                                     | )          | (651 | ) |
| Minority interest                                                                                   |       | 15                                             |       | 13                                                      |       | (2 | ) |
| Noncash interest                                                                                    |       | 10,041                                         |       | 11,167                                                  |       | 3,075 |   |
| Changes in operating assets and  liabilities:                                                       |       |                                           |       |                                                    |       |   |   |
| Accounts receivable                                                                                 |       | (16,700                                        | )          | (2,607                                                  | )          | (10,145 | ) |
| Inventories                                                                                         |       | (2,170                                         | )          | (1,515                                                  | )          | 3,024 |   |
| Prepaid expenses and other current assets                                                           |       | 789                                            |       | 467                                                     |       | 312 |   |
| Other noncurrent assets                                                                             |       | 15                                             |       | (477                                                    | )          | 115 |   |
| Accounts payable                                                                                    |       | 348                                            |       | (492                                                    | )          | 3,288 |   |
| Accrued expenses                                                                                    |       | (4,377                                         | )          | 20,902                                                  |       | (1,329 | ) |
| Pension, postretirement, and deferred compensation                                                  |       | 706                                            |       | (1,210                                                  | )          | 135 |   |
| Other noncurrent liabilities                                                                        |       | (31                                            | )          | (30                                                     | )          | (3 | ) |
| Other                                                                                               |       | 2                                              |       | 20                                                      |       | 4 |   |
| Net cash  provided by operating activities                                                          |       | 8,447                                          |       | 19,564                                                  |       | 540 |   |
|                                                                                                |       |                                           |       |                                                    |       |   |   |
| **Investing  activities**                                                                           |       |                                           |       |                                                    |       |   |   |
| Purchase of  businesses, net of cash acquired                                                       |       | (490                                           | )          | (653                                                    | )          | (204,707 | ) |
| Purchases of  property, plant, and equipment                                                        |       | (4,284                                         | )          | (4,250                                                  | )          | (1,471 | ) |
| Proceeds  from sale of property, plant and equipment                                                |       | 480                                            |       | —                                                  |       | — |   |
| Net cash  used in investing activities                                                              |       | (4,294                                         | )          | (4,903                                                  | )          | (206,178 | ) |
|                                                                                                |       |                                           |       |                                                    |       |   |   |
| **Financing  activities**                                                                           |       |                                           |       |                                                    |       |   |   |
| Payments for  deferred financing costs                                                              |       | —                                         |       | (3,246                                                  | )          | (19,835 | ) |
| Proceeds  from borrowings                                                                           |       | —                                         |       | 100,000                                                 |       | 111,646 |   |
| Payments of  debt                                                                                   |       | (3,284                                         | )          | (13,623                                                 | )          | (293 | ) |
| Proceeds  from capital contributions                                                                |       | 1                                              |       | —                                                  |       | 109,670 |   |
| Distributions  on preferred units                                                                   |       | —                                         |       | (60,000                                                 | )          | — |   |
| Distributions  on common units                                                                      |       | (1,927                                         | )          | (2,509                                                  | )          | — |   |
| Net cash  (used in) provided by financing activities                                                |       | (5,210                                         | )          | 20,622                                                  |       | 201,188 |   |
| Effect of  exchange rate changes on cash                                                            |       | 1,079                                          |       | (2,725                                                  | )          | 1,547 |   |
| Net increase  (decrease) in cash and cash equivalents                                               |       | 22                                             |       | 32,558                                                  |       | (2,903 | ) |
| Cash and  cash equivalents at beginning of period                                                   |       | 16,341                                         |       | 35,731                                                  |       | 7,144 |   |
| Cash and  cash equivalents at end of period                                                         |       | $                                              | 16,363     |                                                    | $          | 68,289 |   | $ | 4,241 |   |

 

*See notes to unaudited consolidated financialstatements*

 

4

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**SAFETY PRODUCTS HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in Thousands) (Unaudited)**

 

# **1.****     TheAcquisition**

#  

On July 19, 2005, NSP Holdings L.L.C. (“Holdings”or“Predecessor”) announced the closing of the transaction under which NorcrossSafety Products L.L.C. (“Norcross”) was acquired by Safety Products Holdings, Inc.(the “Company” or “Successor”), a new holding company formed by OdysseyInvestment Partners, LLC (“Odyssey”), for the purpose of completing the acquisition(the “Acquisition”).  The Companywas capitalized by equity investments of $82,600 from Odyssey, $25,000 fromGeneral Electric Pension Trust and $2,070 from management.

 

Pursuant to the terms of the Acquisition, theCompany purchased  all of the outstandingmembership units of Norcross and all of outstanding common stock of  NSP Holdings Capital Corp., a wholly-ownedsubsidiary of Holdings, and pursuant to which the Company assumed all of theoutstanding indebtedness of Norcross and Holdings, in exchange for a basepurchase price to Holdings of $472,000, plus the cash in Norcross and itssubsidiaries as of April 2, 2005 in the amount of approximately $16,900,less (1) the indebtedness of Norcross and its subsidiaries as of April 2, 2005 and (2) certaintransaction fees and expenses.  Uponclosing of the Acquisition, the Company became the successor issuer to Holdingspursuant to Rule 15d-5 promulgated under the Securities Exchange Act, asamended.  The cash purchase pricewas $204,488 including direct costs of acquisition of $2,346, and excludingassumed debt of $260,523.

 

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

 

The accompanying unaudited consolidated financial statements of theCompany have been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information. Accordingly,they do not include all of the information and notes required by accountingprinciples generally accepted in the United States for complete financialstatements.

 

5

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In the opinion ofmanagement, 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, 2005. Thefinancial statements presented should be read in conjunction with theconsolidated financial statements and footnotes thereto included in our 2004consolidated financial statements, included in Holdings’ Form S-4, asfiled on March 28, 2005.

 

Predecessor – Theconsolidated financial statements of the Predecessor represent the consolidatedresults of operations of NSP Holdings L.L.C. prior to the Acquisition.

 

Successor – Theconsolidated financial statements of the Successor represent the consolidatedresults of operations of Safety Products Holdings, Inc. subsequent to theAcquisition.

 

The consolidatedfinancial statements of the Successor as of and for the period from July 20,2005 through October 1, 2005 reflect the Acquisition under the purchasemethod of accounting, in accordance with the Financial Accounting StandardsBoard (FASB) Statement of Accounting Standards (SFAS) No. 141, *Business Combinations*.

 

The Company has not finalized the allocationof the purchase price related to the Acquisition as of October 1,2005.  The Company has preliminarilyallocated the purchase price on the basis of its current estimate of fair valueof the underlying assets acquired and liabilities assumed as follows:

 
| ** **                                           | ** ** | **As of**              | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **July 20, 2005** | ** ** |
| Cash and  cash equivalents                           |       | $                      | 7,144      |   |
| Accounts  receivable                                 |       | 63,774                 |       |
| Inventories                                          |       | 93,503                 |       |
| Deferred  taxes                                      |       | 61                     |       |
| Prepaid  expenses and other current assets           |       | 2,806                  |       |
| Property,  plant, and equipment                      |       | 64,379                 |       |
| Goodwill                                             |       | 116,293                |       |
| Other  intangible assets                             |       | 242,459                |       |
| Other  noncurrent assets                             |       | 5,828                  |       |
| Total assets  acquired                               |       | $                      | 596,247    |   |
|                                                 |       |                   |       |
| Accounts  payable                                    |       | 17,379                 |       |
| Accrued  expenses                                    |       | 28,136                 |       |
| Pension,  post-retirement, and deferred compensation |       | 32,436                 |       |
| Other  noncurrent liabilities                        |       | 1,623                  |       |
| Deferred  income taxes                               |       | 51,512                 |       |
| Minority  interest                                   |       | 148                    |       |
| Total  liabilities assumed                           |       | 131,234                |       |
| Net assets  acquired                                 |       | $                      | 465,013    |   |

 

Cash and cash equivalents, trade accounts receivable, prepaid expensesand other current assets, accounts payable, accrued expenses and other currentliabilities were stated at historical carrying values, given the short termnature of these assets and liabilities.

 

Other noncurrent assets, long-term debt, and other noncurrentliabilities outstanding as of the effective date of the Acquisition have beenallocated based on management’s judgments and estimates.

 

Deferred income taxes have been provided in the consolidated balancesheet based on the Company’s preliminary estimates of the tax versus book basisof the assets acquired and liabilities assumed, as adjusted to estimated fairvalues.  The Company has establishedpreliminary valuation allowances against those assets for which realization isuncertain.

 

The Company’s projected pension and other postretirement benefitobligations and assets have been reflected in the allocation of purchase priceat the projected benefit obligation less plan assets at fair market value,based on management’s computations which included valuations performed byindependent actuaries engaged by the Company.

 

6

----

 

The Company has engaged independent appraisers to assist in determiningthe fair values of property, plant, and equipment, inventories, and otherintangible assets, including customer relationships, brand names, developedtechnology, and backlog.  The Company hasreceived preliminary values from the appraisers, which have been included inthe above table; however the final appraisals are not yet complete.

 

The Company has not yet completed its allocation of purchase price andmay make further adjustment to the preliminary allocations in subsequentperiods.

 

Thefair value of inventory was estimated at net realizable value equal to totalretail prices less direct operating expenses and reasonable profit allowance.

 

Thefair value of customer relationships were estimated utilizing a variation ofthe income approach known as the excess earnings method. As part of the excessearnings method, projections of cash flows are summarized and discounted backto their net present value at an appropriate intangible asset rate of return inorder to estimate the fair value of the customer relationships.  

 

Indetermining the fair value of brand names, a relief from royalty method wasused.  This method is a specificdiscounted cash flow approach to analyze cash flows attributable to the brand names.  This method is based on the assumption that,in lieu of ownership, a firm would be willing to pay a royalty in order toexploit the related benefits of the trade name and that the inherent economicvalue of each trade name is directly related to the cash flows (royaltiessaved) in the future.  

 

Indetermining the fair value of developed technology, the relief from royaltymethod was also utilized in the valuation. This method is based on theassumption that, in lieu of ownership, a firm would be willing to pay a royaltyin order to exploit the related benefits of the developed technology and thatthe inherent economic value of the developed technology is directly related tothe cash flows (royalties saved) in the future. 

 

Backlog fair value was estimated as the after-tax net cash flowsattributable to outstanding orders at the date of the Acquisition.  Adjustments were made to marketing andselling expenses which were considered to have been incurred by the time ordersare received.

 

Based on preliminary estimates, approximately $116,293 of goodwill wasrecorded related to the Acquisition.  Theprimary reasons for the Acquisition and the primary factors that contributed toa purchase price that resulted in recognition of goodwill include:

 

•      The Company’s leading marketposition as a designer, manufacturer and marketer of branded products in thefragmented personal protection equipment industry offers a competitiveadvantage in competing for new customers.

 

•      The Company, being one of only a small number of companies that canprovide complete head-to-toe protection, provides a competitive advantage whenselling to new and existing customers.

 

•      The diverse customer base and industries served minimizes the potentialimpact of volatility from any one customer or industry.

 

Otherconsiderations affecting the value of goodwill include:

 

•      The ability of the assembled workforce to develop future innovativetechnologies and products.

 

•      The application of purchase accounting, particularly for such items aspension and deferred tax liabilities for which significant liability balanceswere recorded with no corresponding significant short-term cash outflows.

 

7

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The following table presents the pro formanet sales, income from operations, and net income of the Company (based on thepreliminary allocation of purchase price) assuming the Acquisition had occurredon January 1, 2004:

 
| ** **              | ** ** | **Nine months  ended  October 2,  2004** | ** ** | **Nine months  ended  October 1,  2005** | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| Net sales               |       | $                                             | 330,586    |                                          | $          | 358,812 |   |
| Income from  operations |       | 30,847                                        |       | 16,933                                        |       |
| Net loss                |       | (2,706                                        | )          | (17,214                                       | )          |
|                         |            |                                               |            |                                               |            |  |  |

#  

# **3.****     Inventories**

#  

Inventories consist of the following:

 
| ** **              | ** ** | **Predecessor**             | ** ** | **Successor**             | ** ** |
|-------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **              | ** ** | **December 31,  2004** | ** ** | **October 1,  2005** | ** ** |
| At FIFO  cost:          | ** ** | ** **                  | ** ** | ** **                | ** ** |
| Raw materials           |       | $                           | 21,726     |                      | $          | 22,978 |   |
| Work in process         |       | 10,419                      |       | 11,803                    |       |
| Finished goods          |       | 52,045                      |       | 55,698                    |       |
|                    |       | 84,190                      |       | 90,479                    |       |
| Adjustment to LIFO cost |       | (1,658                      | )          | —                    |       |
|                    |       | $                           | 82,532     |                      | $          | 90,479 |   |

#  

# As a result of using a new basis of accounting for the Company due to theAcquisition, the LIFO value of inventories approximated the FIFO value ofinventories as of October 1, 2005.

#  

# **4.****     Debt**

#  

The Company’s debt consists of the following:

 
| ** **                                                   | ** ** | **Predecessor**             | ** ** | **Successor**             | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                                   | ** ** | **December 31,  2004** | ** ** | **October 1,  2005** | ** ** |
| Revolving  credit facilities                                 |       | $                           | —     |                      | $          | — |   |
| Term loan                                                    |       | 97,725                      |       | 87,780                    |       |
| Senior pay  in kind notes                                    |       | —                      |       | 134,555                   |       |
| Senior  subordinated notes                                   |       | 152,500                     |       | 152,500                   |       |
| European  term loans                                         |       | 469                         |       | 261                       |       |
| Arbin seller  notes                                          |       | 454                         |       | —                    |       |
| Subordinated  seller notes                                   |       | 3,121                       |       | —                    |       |
| Capital  lease obligations                                   |       | 207                         |       | 110                       |       |
| Unamortized  (discount) on senior pay in kind notes          |       | —                      |       | (7,719                    | )          |
| Unamortized  (discount) premium on senior subordinated notes |       | (910                        | )          | 7,432                     |       |
|                                                         |       | 253,566                     |       | 374,919                   |       |
| Less:  Current maturities of long-term obligations           |       | 15,252                      |       | 938                       |       |
|                                                         |       | $                           | 238,314    |                      | $          | 373,981 |   |

 

8

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Aggregatematurities of long-term debt as of October 1, 2005, are as follows:

 
| 2006       |       | $       | 938     |       |
|------------|------------|---------|---------|------------|
| 2007       |       | 1,066   |    |
| 2008       |       | 1,025   |    |
| 2009       |       | 1,009   |    |
| 2010       |       | 989     |    |
| Thereafter |       | 369,892 |    |
|       | ** ** | $       | 374,919 | ** ** |

 

On July 19, 2005, Norcross entered intoa new Senior Credit Facility (the “New Credit Facility”) which provides foraggregate borrowings of $138,000, consisting of (a) a term loan in theamount of $88,000, payable in twenty-eight consecutive quarterly installmentswhich commenced on September 30, 2005 and (b) a revolving creditfacility in an aggregate principal amount of $50,000.  The revolving credit facility is comprised ofa U.S. revolving facility and a Canadian subfacility.  The amount of the total U.S. revolvingfacility is an amount equal to $50,000 less the amount at such time outstandingunder the Canadian subfacility.  Theamount of the total Canadian subfacility is an amount denominated in Canadian dollarshaving a U.S. dollar equivalent of $25,000 less the amount at such timeoutstanding under the U.S. revolving facility. At any time upon the request of Norcross or the U.S. SubsidiaryBorrowers (as defined in the New Credit Facility), one or more new term loanfacilities may be added in any aggregate amount of up to $100,000 (and not lessthan $10,000 for any such additional term loan), subject to certain conditions,the proceeds of which shall be used to finance permitted acquisitions, pay feesand related expenses thereto and to refinance indebtedness of the entity orassociated with the assets to be so acquired. The New Credit Facility is subject to certain mandatory prepayments uponthe occurrence of certain events, subject to certain exceptions set forth inthe credit agreement.  The proceeds ofthe New Credit Facility were used primarily to refinance Norcross’ existingsenior credit facility.

 

On January 7, 2005, Holdings and NSP HoldingsCapital Corp. (“Capital”) issued $100,000 of 113/4%senior pay in kind notes due 2012 the “Senior Notes”. The proceeds were usedto: (i) make a payment in respect of preferred units of $60,000, $58,000of which were payments in respect of accrued preferred yield and $2,000 ofwhich was the return of a portion of the original capital contribution made byholders of Holdings preferred units, (ii) make distributions in respect ofthe common units of certain members of management of $2,000, and (iii) payfees and expenses. The remainder of the net proceeds were used for generalcorporate purposes, including potential acquisitions and/or distributions toHoldings’ unit holders.

 

In connection with the closing of the Acquisition,the Company entered into a second supplemental indenture dated as of July 19,2005 (the “Second Supplemental Indenture”) among Holdings, Capital, the Companyand Wilmington Trust Company, as trustee (the “Trustee”) under the indenturedated as of January 7, 2005 (the “Indenture”) by and among Holdings,Capital and the Trustee providing for the issuance of the Senior Notes.Pursuant to the terms of the Second Supplemental Indenture, the Company assumedall of the rights, powers, commitments, obligations and liabilities of Holdingsunder the Indenture and the Senior Notes.

 

On July 19, 2005,  the Company sold $25,000 in principal amountof 113/4% senior pay in kind notes due 2012 (the “NewNotes”). The New Notes were sold pursuant to a purchase agreement, dated June 28,2005 (the “Purchase Agreement”), by and between the Company and Credit SuisseFirst Boston, LLC (the “Initial Purchaser”). The New Notes were issued pursuantto the Indenture. Pursuant to the term of the Purchase Agreement, the New Noteswere sold to the Initial Purchaser and were resold to qualified institutionalbuyers in compliance with the exemption from registration.

 

In connection with the closing of the Acquisition,Norcross entered into a supplemental indenture dated as of July 19, 2005(the “Norcross Supplemental Indenture”) by and among Norcross, Norcross CapitalCorp. (“Norcross Capital”), the guarantors listed on the signature pages theretoand Wilmington Trust Company, as trustee (the “Trustee”) under the indenturedated as of August 13, 2003 (the “Norcross Indenture”) providing for theissuance by Norcross and Norcross Capital of $152,500 aggregate principal amountof 9 7/8% senior subordinated notes due 2011. Pursuant to the terms of theNorcross Supplemental Indenture, the definition of Permitted Holders wasamended and the parties confirmed that the Requisite Consents (as defined inthe Norcross Supplemental Indenture) had been delivered in order to waive ourobligations under the Change in Control covenant of the Norcross Indenture inconnection with the Acquisition.

 

9

----

 

# **5.****     EmployeeBenefit Plans**

#  

The following table sets forth the components of netperiodic benefit cost:

 
| ** **                         | ** ** | **Predecessor**                              | ** ** | **Successor**                                         | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | **Nine  months ended October 2,  2004** | ** ** | **January 1,  2005 through  July 19, 2005** | ** ** | **July 20,  2005 though  October 1, 2005** | ** ** |
| ** **                         | ** ** | **Pension  Benefits**                        | ** ** | **Post-retirement  Benefits**                         | ** ** | **Pension  Benefits** | ** ** | **Post-retirement  Benefits** | ** ** | **Pension  Benefits** | ** ** | **Post-retirement  Benefits** | ** ** |
|                               |       |                                         |       |                                                  |       |   |   |   |   |   |   |   |   |
| Service cost                       |       | $                                            | 1,175      |                                                  | $          | 19 |   | $ | 903 |   | $ | 14 |   | $ | 384 |   | $ | 5 |   |
| Interest cost                      |       | 2,633                                        |       | 62                                                    |       | 1,960 |   | 43 |   | 756 |   | 15 |   |
| Expected return on plan assets     |       | (2,012                                       | )          | —                                                |       | (1,780 | ) | — |   | (724 | ) | — |   |
| Amortization of prior service cost |       | 4                                            |       | 13                                                    |       | 3 |   | 10 |   | — |   | — |   |
| Amortization of actuarial loss     |       | 664                                          |       | 64                                                    |       | 527 |   | 48 |   | — |   | — |   |
|                               |       | $                                            | 2,464      |                                                  | $          | 158 |   | $ | 1,613 |   | $ | 115 |   | $ | 416 |   | $ | 20 |   |

 

# **6.     IncomeTaxes**

 

The income taxexpense (benefit) for the Predecessor differs from the amount of income taxexpense (benefit) computed by applying the U.S. federal income tax rate toincome (loss) before income tax and minority interest primarily due to: 1) thetax structure of certain U.S. subsidiaries which requires income taxes to bedistributed to and paid by the unitholders, 2) net operating loss carryforwardsin the United States and 3) the settlement of income tax audits in Canada andthe Netherlands.

 

The income taxexpense for the Successor differs from the amount of income tax expensecomputed by applying the U.S. federal income tax rate to income (loss) beforeincome taxes and minority interest, primarily due to net operating losscarryforwards in the United States and the impact of purchase accountingadjustments related to the Acquisition.

 

10

----

 

# **7.****     LegalProceedings**

#  

The Company is subject to various claimsarising in the ordinary course of business. Most of these lawsuits and claimsare product liability matters that arise out of the use of respiratory productlines manufactured by the Company’s North Safety Products subsidiary. As of October 1,2005, the Company’s North Safety Products subsidiary, along with itspredecessors and/or the former owners of such business were named as defendantsin approximately 1,182 lawsuits involving respirators manufactured andsold by it or its predecessors. The Company is also monitoring an additional 11lawsuits in which it feels that North Safety Products, its predecessors and/orthe former owners of such businesses may be named as defendants. Collectively,these 1,193 lawsuits represent a total of approximately 23,938 plaintiffs.Approximately 92% of these lawsuits involve plaintiffs alleging injury resultingfrom exposure to silica dust, with the remainder alleging injury resulting fromexposure to other particles, including asbestos. These lawsuits typicallyallege that the purported injuries resulted in part from respirators that werenegligently designed or manufactured. Invensys plc (“Invensys”), formerly Siebeplc, is contractually obligated to indemnify the Company for any losses,including costs of defending claims, resulting from respiratory productsmanufactured or sold prior to the acquisition of North Safety Products in October 1998.

 

In addition, the Company’s North SafetyProducts subsidiary is contractually entitled to indemnification from NortonCompany, an affiliate of Saint-Gobain, which owned the North Safety Productsbusiness prior to Invensys. Pursuant to a December 14, 1982 asset purchaseagreement, Siebe Norton, Inc., a newly formed wholly-owned subsidiary ofNorton Company, acquired the assets of Norton’s Safety Products Division andthe stock of this company was in turn acquired by Siebe GormanHoldings 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 from products shipped by Norton Company or anyof its affiliates prior to the closing date. Siebe Norton, whose name wassubsequently changed to Siebe North Inc., was subsequently acquired by theCompany as part of the 1998 acquisition of the North Safety Products businessfrom Invensys.

 

Despite these indemnification arrangements,the Company could potentially be liable for losses or claims relating toproducts manufactured prior to the October 1998 acquisition date ifInvensys fails to meet its obligations to indemnify the Company and the Companycould potentially be liable for losses and claims relating to products soldprior to January 10, 1983 if both Invensys and Norton fail to meet theirobligations to indemnify the Company. The Company could also be liable if thealleged exposure involved the use of a product manufactured by the Companyafter its October 1998 acquisition of the North Safety Products business.Invensys is currently handling the defense of all of the cases prior to October 1998in which North Safety Products, its predecessors and/or former owners of suchbusiness have been named as defendants. The Company is jointly with Invensyshandling the defense of all of the cases which allege exposure, includingperiods pre and post October 1998. The Company will individually handle the defense of all cases withexclusive post October 1998 exposure, however, it has not been involved ina case with exclusive post October 1998 exposure to date.  As of October 1, 2005, Invensys has sentus requests for reimbursement totaling $215, relating to settled cases in whichInvensys claims that the period of alleged exposure included periods after October 1998.Based on information provided to the Company by Invensys, the Company believesthat Invensys has made payments with respect to settlement of these claims of$60 for the nine months ended October 1, 2005 . The Company believes thatInvensys has the ability to pay these claims based on its current financialposition, as publicly disclosed by Invensys.

 

11

----

 

Consistent withthe current environment being experienced by companies involved in silica andasbestos-related litigation, there has been an increase in the number ofasserted claims that could potentially involve the Company. Based uponinformation provided to the Company by Invensys, the Company believes activityrelated to these lawsuits was as follows for the nine months ended October 1,2005:

 
| ** **            | ** ** | **Plaintiffs** | ** ** | **Cases** | ** ** |
|-----------------------|------------|----------------|------------|-----------|------------|
| Beginning  lawsuits   |       | 25,944         |       | 858       |       |
| New lawsuits          |       | 2,051          |       | 505       |       |
| Settlements           |       | (45            | )          | (23       | )          |
| Dismissals  and other |       | (4,012         | )          | (147      | )          |
| Ending  lawsuits      |       | 23,938         |       | 1,193     |       |

 

Plaintiffs have asserted specific dollarclaims in approximately a quarter of the approximately 1,182 cases pendingas of October 1, 2005 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 suchspecification. In those cases in which plaintiffs choose to assert specificdollar 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 1,182 complaints maintainedin the Company’s records, 909 do not specify the amount of damages sought, 26generally allege damages in excess of $50, two allege compensatory damagesin excess of $50 and an unspecified amount of punitive damages, 90 allegecompensatory damages and punitive damages, each in excess of $25, two generallyallege damages in excess of $100, 18 allege compensatory damages and punitivedamages, each in excess of $50, 26 generally allege damages of $15,000, onegenerally alleges damages not to exceed $290,000, one alleges compensatorydamages and punitive damages, each in excess of $10, two allege compensatoryand punitive damages, each in excess of $15, seven allege punitive damages inexcess of $25, one alleges punitive damages in excess of $50, 88 generallyallege damages in excess of $15, six generally allege damages in excess of $25,one alleges compensatory damages in excess of $25, and two allege compensatoryand punitive damages, each in excess of $15,000. The Company currently does nothave access to the complaints with respect to the previously mentionedadditional 11 monitored cases, and therefore does know whether these casesallege specific damages, or if so, the amount of such damages, but is in theprocess of seeking to obtain such information. Due to the reasons noted above and to the indemnification arrangementsbenefiting the Company, it does not believe that the damage amounts specifiedin these complaints are a meaningful factor in any assessment of the Company’spotential liability.

 

The Predecessor recorded a $1,250 liabilityand charge to operating expenses to establish a reserve for respiratory claimsduring the year ended December 31, 2004, which remains outstanding as of October 1,2005.  The Company believes that thisreserve represents a reasonable estimate of the Company’s probable andestimable liabilities for claims alleging injury resulting from exposure tosilica dust and other particles, including asbestos, as determined by theCompany in consultation with an independent consultant.  The Company believes that a five-yearprojection of claims and defense costs is the most reasonable approach.  However, it is possible that the Company mayincur liabilities in excess of the amounts currently reserved.  This reserve will be re-evaluatedperiodically and additional charges or credits will be recorded to operatingexpenses as additional information becomes available.

 

12

----

 

The Company is not otherwise involved in anymaterial lawsuits. The Company historically has not been required to pay anymaterial liability claims. The Company maintains insurance against productliability claims (with the exception of asbestosis and silicosis cases, forwhich coverage is not commercially available), but it is possible thatinsurance coverage will not continue to be available on terms acceptable to theCompany or that such coverage will not be adequate for liabilities actuallyincurred.  In connection with the NorthSafety Products acquisition, the Predecessor recorded a $2,500 reserve forpotential 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. Through December 31, 2003, thePredecessor incurred charges of $200 against this reserve, which reduced thebalance to $2,300.  During 2004, thePredecessor reduced this reserve to $1,000 to reflect its current expectationsof the liability based on information available and recorded a $1,300 credit tooperating expenses. The $1,000 reserve remains outstanding as of October 1,2005. This reserve is re-evaluated periodically, and additional charges orcredits will be recorded to operating expenses as additional informationbecomes 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 final judgments or settlements inexcess of its reserve.

 

# **8.****     SegmentData**

#  

The followingtable presents information about the Company by segment:

 
| ** **                                           | ** ** | **General  Industrial** | ** ** | **Fire  Service** | ** ** | **Utility/  High  Voltage** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|-----------------------------|------------|---------------|------------|------------------|------------|-----------|------------|
| **Predecessor**                                      |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| **Three  Months Ended October 2, 2004**         |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net  sales—third parties                        |       | $                       | 80,432     |              | $          | 20,267                      |       | $             | 13,809     |             | $          | —    |       | $ | — |   | $ | 114,508 |   |
| Net  sales—intersegment                         |       | 2,378                   |       | —            |       | —                      |       | —        |       | (2,378           | )          | —    |       |
| Income  (loss) from operations                       |       | 6,968                   |       | 4,114             |       | 3,191                       |       | (1,266        | )          | —           |       | 13,007    |       |
|                                                 |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| **July 3,  2005 through July 19, 2005**    |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net  sales—third parties                        |       | 22,735                  |       | 6,616             |       | 4,455                       |       | —        |       | —           |       | 33,806    |       |
| Net  sales—intersegment                         |       | 693                     |       | —            |       | —                      |       | —        |       | (693             | )          | —    |       |
| Income  (loss) from operations                       |       | 1,834                   |       | 1,188             |       | 615                         |       | (16,731       | )          | —           |       | (13,094   | )          |
|                                                 |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| **Successor**                                        |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| **July 20,  2005 through October 1, 2005** |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net  sales—third parties                        |       | 59,788                  |       | 14,770            |       | 11,180                      |       | —        |       | —           |       | 85,738    |       |
| Net  sales—intersegment                         |       | 1,571                   |       | —            |       | —                      |       | —        |       | (1,571           | )          | —    |       |
| Income  (loss) from operations                       |       | 2,029                   |       | (400              | )          | 1,576                       |       | (1,144        | )          | —           |       | 2,061     |       |
|                                                 |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| **Predecessor**                                      |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| **Nine  Months Ended October 2, 2004**          |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net  sales—third parties                        |       | 232,324                 |       | 59,905            |       | 38,357                      |       | —        |       | —           |       | 330,586   |       |
| Net  sales—intersegment                         |       | 7,267                   |       | —            |       | —                      |       | —        |       | (7,267           | )          | —    |       |
| Income  (loss) from operations                       |       | 24,040                  |       | 11,360            |       | 8,335                       |       | (4,383        | )          | —           |       | 39,352    |       |
|                                                 |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| **January 1,  2005 through July 19, 2005** |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net  sales—third parties                        |       | 187,814                 |       | 51,702            |       | 33,558                      |       | —        |       | —           |       | 273,074   |       |
| Net  sales—intersegment                         |       | 5,548                   |       | —            |       | —                      |       | —        |       | (5,548           | )          | —    |       |
| Income  (loss) from operations                       |       | 19,937                  |       | 9,332             |       | 8,442                       |       | (19,481       | )          | —           |       | 18,230    |       |
|                                                 |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| **Successor**                                        |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| **July 20,  2005 through October 1, 2005** |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net  sales—third parties                        |       | 59,788                  |       | 14,770            |       | 11,180                      |       | —        |       | —           |       | 85,738    |       |
| Net  sales—intersegment                         |       | 1,571                   |       | —            |       | —                      |       | —        |       | (1,571           | )          | —    |       |
| Income  (loss) from operations                       |       | 2,029                   |       | (400              | )          | 1,576                       |       | (1,144        | )          | —           |       | 2,061     |       |
|                                                      |            |                         |            |                   |            |                             |            |               |            |                  |            |           |            |  |  |  |  |  |  |

 

13

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# **9.****     SubsidiaryGuarantors**

#  

NSP HoldingsCapital Corp. is a 100% owned finance subsidiary of the Company with no assetsor operations.  None of the Company’sother subsidiaries guarantee the 113/4% senior pay in kind notes due 2012.  The terms of the New Credit Facilitysignificantly restrict Norcross from paying dividends and otherwisetransferring assets to the Company. Further, the terms of the indenture governing its 97/8% seniorsubordinated notes due 2011 significantly restrict Norcross and the Company’sother subsidiaries from paying dividends and otherwise transferring assets tothe Company, except for taxes and ordinary course operating expenses.

 

**10. Comprehensive Income (Loss)**

 

Total Predecessor comprehensive income (loss)(which includes the impact of foreign currency translation) amounted to $5,096,$9,282, $(20,114), and $(18,956) for the three and nine months ended October 2,2004, the period from January 1, 2005 through July 19, 2005, and theperiod from July 3, 2005 through July 19, 2005, respectively.  Total Successor comprehensive loss amountedto $(2,262) for the period from July 20, 2005 through October 1,2005.

 

**11. Strategic Alternatives**

 

The Predecessor had previously announced thatit was in the process of exploring strategic alternatives, including its possiblesale.  A decision was made by thePredecessor in the second quarter of 2004 to terminate this process andtherefore it has expensed $3 and $616 in associated costs (primarily consistingof professional service fees) for the three and nine months ended October 2,2004.  These costs are reflected in operatingexpenses as strategic alternatives.

 

**12. Management Incentive Compensation**

 

As a result of the Acquisition, the Predecessorrecognized $16,388 in management incentive compensation expense during the July 3,2005 through July 19, 2005 predecessor period.  The expenses were funded by the predecessorcompany from proceeds realized upon the consummation of the Acquisition.  These costs are reflected in operatingexpenses as management incentive compensation.

 

**13. Seller Transaction Expenses**

 

Holdings incurred $4,646 in transactionexpenses related to professional services during the July 3, 2005 through July 19,2005 predecessor period.  The expenseswere funded by the Predecessor from proceeds realized upon the consummation ofthe Acquisition.  These costs arereflected below operating expenses as seller transaction expenses.

 

**14. Subsequent Events**

 

On November 1, 2005, Norcross completedthe acquisition of all of the issued and outstanding capital stock of TheFibre-Metal Products Company (“Fibre-Metal”). The purchase price consisted of $68,000 in cash which may be increasedby the amount that the post-closing working capital adjustment exceeds $9,300or reduced by the amount that the post-closing working capital adjustment fallsbelow $8,900. Norcross financed the acquisition through additional termborrowings under the New Credit Facility.

 

On November 1, 2005, Norcross enteredinto the Incremental Facility Amendment to its Credit Agreement dated July 19,2005 (the “Amendment”).  Under the termsof the Amendment, Norcross, the U.S. Borrowers and the Lenders agreed to atotal incremental term commitment from the Increasing Lenders of $65,000.  Additionally, the Amendment required, amongother things, that the proceeds of the incremental term loans be used forpermitted acquisitions and the consolidated senior leverage ratio, after givingeffect to the use of the proceeds, not exceed 3.25 to 1.00.

 

14

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**Overview**

** **

We are a leadingdesigner, 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*, *MorningPride*, *Ranger*, *Servus*, *Pro-Warrington*and *Salisbury*. Our broad productoffering includes, among other things, respiratory protection, protectivefootwear, hand protection, bunker gear and linemen equipment.

 

We classify our diverse product offeringsinto three primary operating segments:

 

General Industrial. We offer a diverseportfolio of leading products for a wide variety of industries, including themanufacturing, agriculture, automotive, construction, food processing andpharmaceutical industries and the military, under the *North*, *Ranger*and *Servus* brand names. Ourproduct offering is one of the broadest in the personal protection equipmentindustry and includes respiratory protection, protective footwear, handprotection, eye, head and face protection, first aid, hearing protection andfall protection. We sell our general industrial products primarily throughindustrial distributors.

 

Fire Service. We manufacture and market oneof the broadest lines of personal protection equipment for the fire servicesegment, offering firefighters head-to-toe protection. Our products includebunker gear, fire boots, helmets, gloves and other accessories. We market ourproducts under our *Total Fire Group*umbrella, using the brand names of *MorningPride*, *Ranger*, *Servus* and *Pro-Warrington*. We are the vendor of choice for many of thelargest fire departments in North America. We sell our fire service productsprimarily through specialized fire service distributors.

 

Utility/High Voltage. We manufacture andmarket one of the broadest lines of personal protection equipment for theutility/high voltage service segment under the *Salisbury*and *Servus* brands. Our products,including linemen equipment, gloves, sleeves and footwear, are designed toprotect workers from up to 40,000 volts of electricity. All of our productseither meet or exceed the applicable standards of ANSI and ASTM. We distributeour utility/high voltage products through specialized distributors and directto utilities and electrical contractors.

 

15

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**Results of Operations**

** **

The followingtables set forth our results of operations in dollars and as a percentage ofnet sales for the three and nine months ended October 2, 2004 and October 1,2005 and have been derived from the unaudited statements of operations. Althoughthe Predecessor and Successor results are not comparable by definition incertain respects due to the Acquisition and the resulting revaluation, the 2005information is presented on a combined basis for comparative purposes .  For the three months ended October 1,2005, the Predecessor (July 3, 2005 through July 19, 2005) andSuccessor (July 20, 2005 through October 1, 2005) results ofoperations are combined.  For the ninemonths ended October 1, 2005, the Predecessor (January 1, 2005through July 19, 2005) and Successor (July 20, 2005 through October 1,2005) results of operations are combined.

 
| ** **                                               | ** ** | **Predecessor**                                 | ** ** | **Successor**                                        | ** ** | **Combined**                                            | ** ** | **Predecessor**                                 | ** ** | **Successor**                                  | ** ** | **Combined**                                            | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                               | ** ** | **Three  months  ended  October 2,  2004** | ** ** | **July 3,  2005  through  July 19,  2005** | ** ** | **July 20,  2005  through  October 1,  2005** | ** ** | **Three  months  ended  October 1,  2005** | ** ** | **Nine  months  ended  October 2,  2004** | ** ** | **January 1,  2005  through  July 19,  2005** | ** ** | **July 20,  2005  through  October 1,  2005** | ** ** | **Nine  months  ended  October 1,  2005** | ** ** |
| Net sales:                                               |       |                                            |       |                                                 |       |                                                    |       |                                            |       |                                           |       |                                                    |       |   |   |   |   |
| General industrial                                       |       | $                                               | 80,432     |                                                 | $          | 22,735                                                  |       | $                                               | 59,788     |                                           | $          | 82,523                                                  |       | $ | 232,324 |   | $ | 187,814 |   | $ | 59,788 |   | $ | 247,602 |   |
| Fire service                                             |       | 20,267                                          |       | 6,616                                                |       | 14,770                                                  |       | 21,386                                          |       | 59,905                                         |       | 51,702                                                  |       | 14,770 |   | 66,472 |   |
| Utility/high voltage                                     |       | 13,809                                          |       | 4,455                                                |       | 11,180                                                  |       | 15,635                                          |       | 38,357                                         |       | 33,558                                                  |       | 11,180 |   | 44,738 |   |
| Total net sales                                          |       | 114,508                                         |       | 33,806                                               |       | 85,738                                                  |       | 119,544                                         |       | 330,586                                        |       | 273,074                                                 |       | 85,738 |   | 358,812 |   |
| Cost of goods  sold                                      |       | 74,797                                          |       | 22,586                                               |       | 58,271                                                  |       | 80,857                                          |       | 212,129                                        |       | 171,645                                                 |       | 58,271 |   | 229,916 |   |
| Gross profit                                             |       | 39,711                                          |       | 11,220                                               |       | 27,467                                                  |       | 38,687                                          |       | 118,457                                        |       | 101,429                                                 |       | 27,467 |   | 128,896 |   |
| Operating  expenses                                      |       | 26,704                                          |       | 24,314                                               |       | 25,406                                                  |       | 49,720                                          |       | 79,105                                         |       | 83,199                                                  |       | 25,406 |   | 108,605 |   |
| Income from  operations:                                 |       |                                            |       |                                                 |       |                                                    |       |                                            |       |                                           |       |                                                    |       |   |   |   |   |
| General industrial                                       |       | 6,968                                           |       | 1,834                                                |       | 2,029                                                   |       | 3,863                                           |       | 24,040                                         |       | 19,937                                                  |       | 2,029 |   | 21,966 |   |
| Fire service                                             |       | 4,114                                           |       | 1,188                                                |       | (400                                                    | )          | 788                                             |       | 11,360                                         |       | 9,332                                                   |       | (400 | ) | 8,932 |   |
| Utility/high voltage                                     |       | 3,191                                           |       | 615                                                  |       | 1,576                                                   |       | 2,191                                           |       | 8,335                                          |       | 8,442                                                   |       | 1,576 |   | 10,018 |   |
| Corporate                                                |       | (1,266                                          | )          | (16,731                                              | )          | (1,144                                                  | )          | (17,875                                         | )          | (4,383                                         | )          | (19,481                                                 | )          | (1,144 | ) | (20,625 | ) |
| Total income (loss) from operations                      |       | 13,007                                          |       | (13,094                                              | )          | 2,061                                                   |       | (11,033                                         | )          | 39,352                                         |       | 18,230                                                  |       | 2,061 |   | 20,291 |   |
| Other expense  (income):                                 |       |                                            |       |                                                 |       |                                                    |       |                                            |       |                                           |       |                                                    |       |   |   |   |   |
| Interest expense                                         |       | 9,037                                           |       | 2,927                                                |       | 7,151                                                   |       | 10,078                                          |       | 26,942                                         |       | 24,584                                                  |       | 7,151 |   | 31,735 |   |
| Interest income                                          |       | (64                                             | )          | (85                                                  | )          | (39                                                     | )          | (124                                            | )          | (128                                           | )          | (914                                                    | )          | (39 | ) | (953 | ) |
| Seller transaction expenses                              |       | —                                          |       | 4,646                                                |       | —                                                  |       | 4,646                                           |       | —                                         |       | 4,646                                                   |       | — |   | 4,646 |   |
| Other, net                                               |       | 613                                             |       | (77                                                  | )          | (110                                                    | )          | (187                                            | )          | 1,206                                          |       | 745                                                     |       | (110 | ) | 635 |   |
| Income (loss) before income taxes and minority  interest |       | 3,421                                           |       | (20,505                                              | )          | (4,941                                                  | )          | (25,446                                         | )          | 11,332                                         |       | (10,831                                                 | )          | (4,941 | ) | (15,772 | ) |
| Income tax expense (benefit)                             |       | 556                                             |       | (138                                                 | )          | 84                                                      |       | (54                                             | )          | 2,915                                          |       | 3,619                                                   |       | 84 |   | 3,703 |   |
| Minority interest                                        |       | 6                                               |       | 2                                                    |       | (2                                                      | )          | —                                          |       | 22                                             |       | 13                                                      |       | (2 | ) | 11 |   |
| Net income (loss)                                        |       | $                                               | 2,859      |                                                 | $          | (20,369                                                 | )          | $                                               | (5,023     | )                                              | $          | (25,392                                                 | )          | $ | 8,395 |   | $ | (14,463 | ) | $ | (5,023 | ) | $ | (19,486 | ) |

 

16

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| ** **                                               | ** ** | **Predecessor**                                 | ** ** | **Successor**                                        | ** ** | **Combined**                                            | ** ** | **Predecessor**                                 | ** ** | **Successor**                                  | ** ** | **Combined**                                       | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                               | ** ** | **Three  months  ended  October 2,  2004** | ** ** | **July 3,  2005  through  July 19,  2005** | ** ** | **July 20,  2005  through  October 1,  2005** | ** ** | **Three  months  ended  October 1,  2005** | ** ** | **Nine  months  ended  October 2,  2004** | ** ** | **January  1, 2005  through  July 19,  2005** | ** ** | **July 20,  2005  through  October 1,  2005** | ** ** | **Nine  months  ended  October 1,  2005** | ** ** |
| ** **                                               | ** ** | ** **                                      | ** ** | ** **                                           | ** ** | ** **                                              | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales:                                               | ** ** | ** **                                      | ** ** | ** **                                           | ** ** | ** **                                              | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| General industrial                                       |       | 70.2                                            | %          | 67.3                                                 | %          | 69.7                                                    | %          | 69.0                                            | %          | 70.3                                           | %          | 68.8                                               | %          | 69.7 | % | 69.0 | % |
| Fire service                                             |       | 17.7                                            | %          | 19.6                                                 | %          | 17.2                                                    | %          | 17.9                                            | %          | 18.1                                           | %          | 18.9                                               | %          | 17.2 | % | 18.5 | % |
| Utility/high voltage                                     |       | 12.1                                            | %          | 13.1                                                 | %          | 13.1                                                    | %          | 13.1                                            | %          | 11.6                                           | %          | 12.3                                               | %          | 13.1 | % | 12.5 | % |
| Total net sales                                          |       | 100.0                                           | %          | 100.0                                                | %          | 100.0                                                   | %          | 100.0                                           | %          | 100.0                                          | %          | 100.0                                              | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                                      |       | 65.3                                            | %          | 66.8                                                 | %          | 68.0                                                    | %          | 67.6                                            | %          | 64.2                                           | %          | 62.9                                               | %          | 68.0 | % | 64.1 | % |
| Gross profit                                             |       | 34.7                                            | %          | 33.2                                                 | %          | 32.0                                                    | %          | 32.4                                            | %          | 35.8                                           | %          | 37.1                                               | %          | 32.0 | % | 35.9 | % |
| Operating  expenses                                      |       | 23.3                                            | %          | 71.9                                                 | %          | 29.6                                                    | %          | 41.6                                            | %          | 23.9                                           | %          | 30.4                                               | %          | 29.6 | % | 30.3 | % |
| Income from  operations:                                 |       |                                            |       |                                                 |       |                                                    |       |                                            |       |                                           |       |                                               |       |   |   |   |   |
| General industrial                                       |       | 6.1                                             | %          | 5.4                                                  | %          | 2.4                                                     | %          | 3.2                                             | %          | 7.3                                            | %          | 7.3                                                | %          | 2.4 | % | 6.1 | % |
| Fire service                                             |       | 3.6                                             | %          | 3.5                                                  | %          | (0.5                                                    | )%         | 0.7                                             | %          | 3.4                                            | %          | 3.4                                                | %          | (0.5 | )% | 2.5 | % |
| Utility/high voltage                                     |       | 2.8                                             | %          | 1.8                                                  | %          | 1.8                                                     | %          | 1.8                                             | %          | 2.5                                            | %          | 3.1                                                | %          | 1.8 | % | 2.8 | % |
| Corporate                                                |       | (1.1                                            | )%         | (49.4                                                | )%         | (1.3                                                    | )%         | (14.9                                           | )%         | (1.3                                           | )%         | (7.1                                               | )%         | (1.3 | )% | (5.8 | )% |
| Total income (loss) from operations                      |       | 11.4                                            | %          | (38.7                                                | )%         | 2.4                                                     | %          | (9.2                                            | )%         | 11.9                                           | %          | 6.7                                                | %          | 2.4 | % | 5.6 | % |
| Other expense  (income):                                 |       |                                            |       |                                                 |       |                                                    |       |                                            |       |                                           |       |                                               |       |   |   |   |   |
| Interest expense                                         |       | 7.9                                             | %          | 8.7                                                  | %          | 8.3                                                     | %          | 8.4                                             | %          | 8.1                                            | %          | 9.0                                                | %          | 8.3 | % | 8.8 | % |
| Interest income                                          |       | (0.1                                            | )%         | (0.3                                                 | )%         | (0.0                                                    | )%         | (0.1                                            | )%         | (0.0                                           | )%         | (0.3                                               | )%         | (0.0 | )% | (0.3 | )% |
| Seller transaction expenses                              |       | 0.0                                             | %          | 13.7                                                 | %          | 0.0                                                     | %          | 3.9                                             | %          | 0.0                                            | %          | 1.7                                                | %          | 0.0 | % | 1.3 | % |
| Other, net                                               |       | 0.5                                             | %          | (0.2                                                 | )%         | (0.1                                                    | )%         | (0.2                                            | )%         | 0.4                                            | %          | 0.3                                                | %          | (0.1 | )% | 0.2 | % |
| Income (loss) before income taxes and minority  interest |       | 3.1                                             | %          | (60.6                                                | )%         | (5.8                                                    | )%         | (21.2                                           | )%         | 3.4                                            | %          | (4.0                                               | )%         | (5.8 | )% | (4.4 | )% |
| Income tax expense (benefit)                             |       | 0.6                                             | %          | (0.4                                                 | )%         | 0.1                                                     | %          | (0.0                                            | )%         | 0.9                                            | %          | 1.3                                                | %          | 0.1 | % | 1.0 | % |
| Minority interest                                        |       | 0.0                                             | %          | 0.0                                                  | %          | (0.0                                                    | )%         | 0.0                                             | %          | 0.0                                            | %          | 0.0                                                | %          | (0.0 | )% | (0.0 | )% |
| Net income (loss)                                        |       | 2.5                                             | %          | (60.2                                                | )%         | (5.9                                                    | )%         | (21.2                                           | )%         | 2.5                                            | %          | (5.3                                               | )%         | (5.9 | )% | (5.4 | )% |

 

***Combined Three Months Ended October 1,2005 as Compared to Three Months Ended October 2, 2004***

 

*Netsales.*Net salesincreased by $5.0 million, or 4.4%, from $114.5 million for the threemonths ended October 2, 2004 to $119.5 million for the three monthsended October 1, 2005. In our general industrial segment, net salesincreased by $2.1 million, or 2.6%, from $80.4 million for the threemonths ended October 2, 2004 to $82.5 million for the three monthsended October 1, 2005. This increase reflects a combination of thefollowing: overall organic growth in our Canadian, European and South Africanoperations of $3.7 million; favorable exchange rates, which had an impact of$1.3 million; and lower overall net sales in the United States of $2.9 million,as strong overall market demand, in part due to the recent hurricane activityin the southeastern United States, was offset by a decrease in governmentcontract shipments of $3.4 million. In our fire service segment, net salesincreased by $1.1 million, or 5.5%, from $20.3 million for the threemonths ended October 2, 2004 to $21.4 million for the three monthsended October 1, 2005 reflecting strong market demand. In our utility/highvoltage segment, net sales increased by $1.8 million, or 13.2%, from $13.8 millionfor the three months ended October 2, 2004 to $15.6 million for thethree months ended October 1, 2005 in part due to the recent hurricane activityin the southeastern United States, strong market demand and new productpenetration.

 

*Gross profit.*Grossprofit decreased by $1.0 million, or 2.6%, from $39.7 million for thethree months ended October 2, 2004 to $38.7 million for the threemonths ended October 1, 2005. Excluding the impact of inventory purchase accounting adjustments in ourgeneral industrial and fire service segments of $2.0 million and $1.3 million,respectively, gross profit increased by $2.3 million, or 5.6%.  This increase was primarily attributable tothe $5.0 million, or 4.4% increase in net sales. After adjusting for theinventory purchase accounting adjustments, our overall gross profit margin of35.1% for the three months ended October 1, 2005 was favorable to the34.7% gross profit margin for the three months ended October 2, 2004.  In our general industrial segment (afteradjusting for expenses related to purchase accounting of $2.0 million), grossprofit increased by $2.0 million, or 7.1%, from $27.4 million for thethree months ended October 2, 2004 to $29.4 million for the threemonths ended October 1, 2005. This increase was primarily due to theoverall net sales increase of $2.1 million, or 2.6%, favorable exchange rateswhich has an impact of $0.5 million, and improved margin realization. In ourfire service segment (after adjusting for expenses related to purchaseaccounting of $1.3 million), gross profit decreased by $0.1 million, or1.0%, from $6.9 million for the three months ended October 2, 2004 to$6.8 million for the three months ended October 1, 2005, as highernet sales of $1.1 million, or 5.5%, were offset by lower marginrealization. In our utility/high voltage segment, gross profit increased $0.4million, or 6.4%, from $5.4 million for the three months ended October 2,2004 to $5.8 million for the three months ended October 1, 2005, primarilydue to the $1.8 million, or 13.2%, increase in net sales and improvedmanufacturing performance.

 

17

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*Operatingexpenses.*Operatingexpenses increased by $23.0 million, or 86.2%, from $26.7 million forthe three months ended October 2, 2004 to $49.7 million for the threemonths ended October 1, 2005. In our general industrial segment, operatingexpenses increased by $3.1 million, or 15.2%, from $20.5 million for thethree months ended October 2, 2004 to $23.6 million for the threemonths ended October 1, 2005, primarily due to incremental amortizationexpense of $2.1 million associated with intangible assets recorded as part ofpurchase accounting; higher exchange rates, which had an impact of$0.4 million; and increased variable distribution and selling expensesassociated with the $2.1 million, or 2.6% increase in net sales. In our fireservice segment, operating expenses increased $2.0 million, or 70.9%, from$2.7 million for the three months ended October 2, 2004 to $4.7 millionfor the three months ended October 1, 2005, primarily due to higheramortization expense of $1.6 million associated with intangible assets recordedas part of purchase accounting and higher general and administrative expenses.In our utility/high voltage segment, operating expenses increased by$1.4 million, or 60.5%, from $2.2 million for the three months ended October 2,2004 to $3.6 million for the three months ended October 1, 2005,primarily due to higher amortization expense of $1.0 million associated with intangibleassets recorded as part of purchase accounting and higher selling expenses. Corporateexpenses for the three months ended October 2, 2004 consisted of $1.3million of general and administrative expenses. Corporate expenses for the three months ended October 1, 2005consisted of $1.5 million of general and administrative expenses and $16.4million of management incentive compensation expense related to the Acquisition.  The increase in corporate general andadministrative expenses of $0.2 million was primarily due to higherpayroll and administrative expenses including costs associated with publicreporting and Sarbanes-Oxley Act related compliance requirements.

 

*Income(loss) from operations.*Income (loss) from operations decreased by $24.0 million, from$13.0 million for the three months ended October 2, 2004 to $(11.0) millionfor the three months ended October 1, 2005.  Excluding inventory purchase accountingcharges of $3.3 million, incremental amortization expense of $4.7 million, andmanagement incentive compensation charges of $16.4 million, income fromoperations increased by $0.4 million, or 3.1%. Excluding these same charges, as a percentage of net sales, income from operationsdecreased from 11.4% for the three months ended October 2, 2004 to 11.2%for the three months ended October 1, 2005. In our general industrialsegment (after adjusting for expenses related to purchase accounting of $4.1million), income from operations increased by $0.9 million, or 12.7%, from$7.0 million for the three months ended October 2, 2004 to $7.9 millionfor the three months ended October 1, 2005, primarily due to higher netsales of $2.1 million, or 2.6%, and improved margin performance. In ourfire service segment (after adjusting for expenses related to purchaseaccounting of $2.9 million), income from operations decreased by $0.4 million,or 11.3%, from $4.1 million for the three months ended October 2,2004 to $3.7 million for the three months ended October 1, 2005, ashigher net sales of $1.1 million, or 5.5%, were offset by lower marginrealization and higher general and administrative expenses. In our utility/highvoltage segment (after adjusting for expenses related to purchase accounting of$1.0 million), income from operations was consistent at $3.2 million forthe three months ended October 1, 2005 and October 2, 2004. Corporateexpenses for the three months ended October 2, 2004 consisted of $1.3million of general and administrative expenses. Corporate expenses for the three months ended October 1, 2005consisted of $1.5 million of general and administrative expenses and $16.4million of management incentive compensation expense related to the Acquisition.  The increase in corporate general andadministrative expenses of $0.2 million was primarily due to higherpayroll and administrative expenses including costs associated with publicreporting and Sarbanes-Oxley Act related compliance requirements.

 

18

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Included in incomefrom operations for the three months ended October 1, 2005 and October 2,2004 were depreciation and amortization expenses of $8.1 million and$3.0 million, respectively. Of these amounts, $4.7 million,$1.7 million, $1.7 million and $0.0 million were attributable tothe general industrial, fire service, utility/high voltage segments andcorporate, respectively, for the three months ended October 1, 2005 and$2.4 million, $0.1 million, $0.3 million and $0.2 millionwere attributable to these segments and corporate for the three months ended October 2,2004.

 

*Interestexpense.*Interestexpense increased $1.1 million from $9.0 million for the three months ended October 2,2004 to $10.1 million for the three months ended October 1, 2005,primarily due to the net impact of an increase in interest expense associated withthe senior pay in kind notes and a decrease in preferred unit dividendsincluded in interest expense associated with the redemption of $60 million ofmandatorily redeemable preferred units of Holdings.  Included in interest expense were non-cashinterest charges associated with the senior pay in kind notes and preferredunit dividends of $3.5 million for the three months ended October 2, 2004and $4.1 million for the three months ended October 1, 2005.

 

*Seller transaction expenses*. Holdings incurred $4.6 million in transaction expenses (primarily relatedto professional services) for the three months ended October 1, 2005.  The expenses were funded by the Predecessorfrom proceeds realized upon the consummation of the Acquisition.

 

*Other,net.*Other, netdecreased by $0.8 million from $0.6 million for the three months ended October 2,2004 to $(0.2) million for the three months ended October 1, 2005,primarily due to lower unrealized foreign exchange losses.

 

*Incometax expense.*Incometax expense decreased $0.6 million from the three months ended October 2,2004 to the three months ended October 1, 2005 primarily due to lowerforeign income tax charges.

 

*Netincome (loss).*Netincome (loss) decreased by $28.3 million, from $2.9 million for thethree months ended October 2, 2004 to $(25.4) million for the three monthsended October 1, 2005. This was the result of the reasons discussed above.

 

***Combined Nine Months Ended October 1,2005 as Compared to Nine Months Ended October 2, 2004***

 

*Netsales.*Net salesincreased by $28.2 million, or 8.5%, from $330.6 million for the ninemonths ended October 2, 2004 to $358.8 million for the nine monthsended October 1, 2005. In our general industrial segment, net salesincreased by $15.3 million, or 6.6%, from $232.3 million for the ninemonths ended October 2, 2004 to $247.6 million for the nine monthsended October 1, 2005. This increase reflects a combination of thefollowing: overall organic growth in our Canadian, European and South Africanoperations of $12.1 million; favorable exchange rates, which had an impact of$6.5 million; and lower overall net sales in the United States of $3.3 millionas strong overall market demand, in part due to the recent hurricane activityin the southeastern United States, was offset by a decrease in governmentcontract shipments of $7.3 million. In our fire service segment, net salesincreased by $6.6 million, or 11.0%, from $59.9 million for the ninemonths ended October 2, 2004 to $66.5 million for the nine monthsended October 1, 2005 reflecting strong market demand. In our utility/highvoltage segment, net sales increased by $6.3 million, or 16.6%, from $38.4 millionfor the nine months ended October 2, 2004 to $44.7 million for the ninemonths ended October 1, 2005, driven by the recent hurricane activity inthe southeastern United States, strong overall market demand and new productpenetration.

 

*Grossprofit.*Grossprofit increased by $10.4 million, or 8.8%, from $118.5 million forthe nine months ended October 2, 2004 to $128.9 million for the ninemonths ended October 1, 2005.   Excluding the impact of inventory purchaseaccounting adjustments in our general industrial and fire service segments of$2.0 million and $1.3 million, respectively, gross profit increased by $13.7million, or 11.6%.  This increase wasprimarily attributable to the $28.2 million, or 8.5% increase in net sales.After adjusting for the inventory purchase accounting adjustments, our overallgross profit margin of 36.8% for the nine months ended October 1, 2005 wasfavorable to the 35.8% gross profit margin for the nine months ended October 2,2004. In our general industrial segment (after adjusting for expenses relatedto purchase accounting of $2.0 million), gross profit increased by$8.9 million, or 10.7%, from $84.0 million for the nine months ended October 2,2004 to $92.9 million for the nine months ended October 1, 2005. Thisincrease was primarily due to the overall net sales increase of $15.3 million,or 6.6%, favorable exchange rates which has an impact of $2.4 million, andimproved margin realization. 

 

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In our fire servicesegment (after adjusting for expenses related to purchase accounting of $1.3),gross profit increased by $1.3 million, or 6.4%, from $19.7 million forthe nine months ended October 2, 2004 to $21.0 million for the ninemonths ended October 1, 2005, as the $6.6 million, or 11.0% increasein net sales was partially offset by lower margin realization. In ourutility/high voltage segment, gross profit increased by $3.5 million, or23.6%, from $14.7 million for the nine months ended October 2, 2004to $18.2 million for the nine months ended October 1, 2005, primarilydue to the $6.3 million, or 16.6% increase in net sales and improvedmanufacturing performance. 

 

*Operatingexpenses.*Operatingexpenses increased by $29.5 million, or 37.3%, from $79.1 million forthe nine months ended October 2, 2004 to $108.6 million for the ninemonths ended October 1, 2005. In our general industrial segment, operatingexpenses increased by $9.1 million, or 15.1%, from $59.9 million forthe nine months ended October 2, 2004 to $69.0 million for the ninemonths ended October 1, 2005, primarily due to incremental amortizationexpense of $2.1 million associated with intangible assets recorded as part ofpurchase accounting; higher exchange rates, which had an impact of $1.7 million;higher payroll and other administrative costs; and increased variabledistribution and selling expenses associated with the $15.3 million, or 6.6%increase in net sales. In our fire service segment, operating expensesincreased $2.4 million, or 28.5%, from $8.4 million for the ninemonths ended October 2, 2004 to $10.8 million for the nine monthsended October 1, 2005, primarily due to higher amortization expense of $1.6million associated with intangible assets recorded as part of purchaseaccounting and additional general and administrative expenses. In ourutility/high voltage segment, operating expenses increased by $1.8 million,or 28.0%, from $6.4 million for the nine months ended October 2, 2004 to$8.2 million for the nine months ended October 1, 2005, primarily dueto higher amortization expense of $1.0 million associated with intangibleassets recorded as part of purchase accounting and higher selling expenses.Corporate expenses for the nine months ended October 2, 2004 consisted of$3.8 million of general and administrative expenses and $0.6 million ofexpenses associated with exploring strategic alternatives.  Corporate expenses for the nine months ended October 1,2005 consisted of $4.2 million of general and administrative expenses and $16.4million of management incentive compensation expense related to the Acquisition.  The increase in corporate general andadministrative expenses of $0.4 million was primarily due to higherpayroll and administrative expenses including costs associated with publicreporting and Sarbanes-Oxley Act related compliance requirements.

 

*Incomefrom operations.*Incomefrom operations decreased by $19.1 million, or 48.4%, from $39.4 millionfor the nine months ended October 2, 2004 to $20.3 million for the ninemonths ended October 1, 2005.  Includedin income from operations for the nine months ended October 1, 2005 were: (1) inventorypurchase accounting charges of $3.3 million; (2) incremental amortizationexpenses of $4.7 million related to purchase accounting; and (3) $16.4million of management incentive compensation expense.  Included in income from operations for thenine months ended October 2, 2004 were $0.6 million of expenses related toexploring strategic alternatives. Excluding these charges, income from operations increased by $4.7million, or 11.7%.  Excluding these samecharges, as a percentage of net sales, income from operations increased from12.1% for the nine months ended October 2, 2004 to 12.5% for the ninemonths ended October 1, 2005. In our general industrial segment (afteradjusting for expenses related to purchase accounting of $4.1 million), incomefrom operations increased by $2.0 million, or 8.1%, from $24.0 millionfor the nine months ended October 2, 2004 to $26.0 million for the ninemonths ended October 1, 2005, primarily due to higher net sales of$15.3 million, or 6.6%. In our fire service segment (after adjusting forexpenses related to purchase accounting of $2.9 million), income fromoperations increased by $0.4 million, or 3.8%, from $11.4 million forthe nine months ended October 2, 2004 to $11.8 million for the ninemonths ended October 1, 2005, as the $6.6 million, or 11.0%, increasein net sales was partially offset by lower margin realization. In ourutility/high voltage segment (after adjusting for expenses related to purchaseaccounting of $1.0 million), income from operations increased by $2.8 million,or 32.8%, from $8.3 million for the nine months ended October 2, 2004to $11.1 million for the nine months ended October 1, 2005, primarilydue to higher net sales of $6.3 million, or 16.6%, and improved manufacturingperformance. Corporate expenses for the nine months ended October 2, 2004consisted of $3.8 million of general and administrative expenses and $0.6million of expenses associated with exploring strategic alternatives.  Corporate expenses for the nine months ended October 1,2005 consisted of $4.2 million of general and administrative expenses and $16.4million of management incentive compensation expense related to the Acquisition.  The increase in corporate general andadministrative expenses of $0.5 million was primarily due to higherpayroll and administrative expenses including costs associated with publicreporting and Sarbanes-Oxley Act related compliance requirements.

 

Included in incomefrom operations for the nine months ended October 1, 2005 and October 2,2004 were depreciation and amortization expenses of $13.7 million and $8.9 million,respectively. Of these amounts, $9.3 million, $1.9 million, $2.5 millionand $0.0 million were attributable to the general industrial, fireservice, utility/high voltage segments and corporate, respectively, for the ninemonths ended October 1, 2005 and $7.2 million, $0.3 million,$0.9 million and $0.5 million were attributable to these segments andcorporate for the nine months ended October 2, 2004.

 

*Interestexpense.*Interestexpense increased by $4.8 million, or 17.8%, from $26.9 million for the ninemonths ended October 2, 2004 to $31.7 for the nine months ended October 1,2005 primarily due to the net impact of an increase in interest expenseassociated with the senior pay in kind notes and a decrease in preferred unit dividendsincluded in interest expense associated with the redemption of $60 million ofmandatorily redeemable preferred units of Holdings.  Included in interest expense were non-cashinterest charges associated with the senior pay in kind notes and preferredunit dividends of $10.0 million for the nine months ended October

 

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2, 2004 and $14.2 millionfor the nine months ended October 1, 2005.

 

*Seller transaction expenses*.Holdings incurred $4.6 million in transaction expenses (primarily related toprofessional services) for the nine months ended October 1, 2005.  The expenses were funded by the Predecessorfrom proceeds realized upon the consummation of the Acquisition.

 

*Other,net.*Other, netdecreased by $0.6 from $1.2 million for the nine months ended October 2,2004 to $0.6 million for the nine months ended October 1, 2005 due to lowerunrealized foreign exchange losses recorded during the nine months ended October 1,2005 and the $0.4 million loss recorded on the sale of property, plant andequipment for the nine months ended October 2, 2004.

 

*Incometax expense.*Incometax expense increased by $0.8 million, from $2.9 million for the ninemonths ended October 2, 2004 to $3.7 million for the nine monthsended October 1, 2005, as a result of higher income tax expense levels atforeign operations.

 

*Netincome (loss).*Netincome (loss) decreased by $27.9 million, from $8.4 million for the ninemonths ended October 2, 2004 to $(18.5) million for the nine monthsended October 1, 2005. This was the result of the reasons discussed above.

 

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**Liquidity and 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 nine months ended October 1,2005 and October 2, 2004, cash provided by operating activities was $20.1 millionand $8.4 million, respectively. The $11.7 million improvement wasprimarily attributable to the $4.7 million increase in operating income (afteradjusting for expenses related to purchase accounting, management incentivecompensation, and strategic alternatives expense) and favorable working capitalactivity.

 

Historically, our principal uses of cash havebeen capital expenditures, acquisitions and working capital. Our capitalexpenditures were $5.7 million for the nine months ended October 1, 2005and $4.3 million for the nine months ended October 2, 2004.  The successor period investing activitiesfrom July 20, 2005 through October 1, 2005 include $204.5 million ofcash purchase price related to the Acquisition recorded as part of purchaseaccounting.  

 

As of October 1, 2005, we had workingcapital of $122.8 million and cash of $4.2 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 predecessor period from January 1,2005 through July 19, 2005, net cash provided by financing activities was$20.6 million, representing payments for deferred financing fees of $3.2million; proceeds from the issuance of 113⁄4% senior pay in kind notes of $100.0million; payments on long-term obligations of $13.6 million, including anexcess cash flow sweep payment under the terms of our former senior creditfacility of $12.2 million; payment in respect of preferred units of $60.0million; and distributions in respect of the common units of certain members ofmanagement of $2.5 million.  For thesuccessor period from July 20, 2005 through October 1, 2005, net cashprovided by financing activities was $201.2 million, including $88.0 million ofborrowings under the New Credit Facility, $23.6 million of proceeds from theissuance of senior pay in kind notes, and $109.7 million of capitalcontributions.  Additionally, we paid$19.8 million in deferred financing costs consisting of expenses associatedwith the New Credit Facility, the $152.5 million senior subordinated notes, andthe senior pay in kind notes which are further discussed below.   Forthe Predecessor nine months ended October 2, 2004, net cash used infinancing activities was $5.2 million, representing payments on long-termobligations of $3.3 million and distributions to members of $1.9 million.

 

On July 19, 2005, by operation of law uponconsummation of the merger of SPH Acquisition LLC (“SPH Acquisition”) andNorcross (the “Merger”), and pursuant to an assumption agreement entered intoamong SPH Acquisition, Norcross, North Safety Products Inc. (“North Safety”),and Morning Pride Manufacturing L.L.C. (“Morning Pride”, and together withNorth Safety, the “U.S. Subsidiary Borrowers”), all of the rights andobligations of SPH Acquisition, as borrower, under the credit agreement amongSPH Acquisition, the Company, as a guarantor, North Safety Products Ltd. (the “CanadianBorrower,” which became a party to the credit agreement upon consummation ofthe Merger), Credit Suisse, as Administrative Agent, Bank of America, NA, asSyndication Agent, GMAC Commercial Financing LLC, La Salle Bank NationalAssociation and US Bank NA, as Documentation Agents, Credit Suisse, TorontoBranch, as Canadian Agent, and certain other lenders (the “New Credit Facility”)were assigned by SPH Acquisition to Norcross and the U.S. Subsidiary Borrowers,and assumed by Norcross and the U.S. Subsidiary Borrowers from SPH Acquisition,and whereby Norcross became Parent Borrower (as defined in the New CreditFacility).

 

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The New Credit Facility provides for aggregateborrowings of $138.0 million, consisting of (a) a term loan in the amountof $88.0 million, payable in twenty-eight consecutive quarterly installmentscommencing on September 30, 2005 and (b) a revolving credit facilityin an aggregate principal amount of $50.0 million.  The revolving creditfacility is comprised of a U.S. revolving facility and a Canadian sub facility. The amount of the total U.S. revolving facility is an amount equal to $50.0 millionless the amount at such time outstanding under the Canadian subfacility. The amount of the total Canadian subfacility is an amount denominated inCanadian dollars having a U.S. dollar equivalent of $25.0 million less theamount at such time outstanding under the U.S. revolving facility.  At anytime upon the request of Norcross or the U.S. Subsidiary Borrowers (asdefined), one or more new term loan facilities may be added in any aggregateamount of up to $100.0 million (and not less than $10.0 million for any suchadditional term loan), subject to certain conditions, the proceeds of whichshall be used to finance permitted acquisitions, pay fees and related expensesthereto and to refinance indebtedness of the entity or associated with theassets to be so acquired.  The New Credit Facility is subject to certainmandatory prepayments upon the occurrence of certain events, subject to certainexceptions set forth in the credit agreement. The proceeds of the New Credit Facility were used primarily to refinanceour existing senior credit facility.

 

As of October 1,2005, borrowings under the New Credit Facility bore interest at a weightedaverage rate of 6.0%. Prior to June 30, 2010, 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 $0.9 millionper annum, with the remainder due on September 30, 2012. 

 

On November 1, 2005, Norcross enteredinto the Incremental Facility Amendment to the credit agreement dated July 19,2005 (the “Amendment”).  Under the termsof the Amendment, Norcross, the U.S. Borrowers and the Lenders agreed to atotal incremental term commitment from the Increasing Lenders of $65.0million.  Additionally, the Amendmentrequired, among other things, that the proceeds of the incremental term loans beused for permitted acquisitions and the consolidated senior leverage ratio,after giving effect to the use of the proceeds, not exceed 3.25 to 1.00.

 

Borrowings under the U.S. revolving facility andterm loan will bear interest at a rate per annum equal to our choice of (a) analternate base rate (which is equal to the higher of (i) the rate ofinterest announced by Credit Suisse as its prime rate in effect and (ii) thefederal funds rate plus 0.50%) or (b) the Eurodollar rate, plus anapplicable margin.  Borrowings under the Canadian subfacility will bearinterest at a rate per annum equal to the Canadian prime rate (which is thehigher of (i) the rate of interest announced by Credit Suisse, TorontoBranch, as its reference rate then in effect for determining interest rates onCanadian dollar denominated commercial loans in Canada and (ii) the CDORrate plus 0.50% per annum), plus an applicable margin, or with respect tobanker’s acceptances or their equivalents, the discount rate (as defined in thecredit agreement) plus an applicable margin.

 

Initially, the applicable margin with respect to therevolving credit facility is (a) 1.25% in the case of alternate base rateloans and Canadian dollar prime loans and (b) 2.25% in the case ofEurodollar rate loans and bankers’ acceptance rate loans.  With respect tothe term loan, the applicable margin will be (a) 1.00% in the case ofalternate base rate loans and (b) 2.00% in the case of Eurodollar rateloans.  After our fiscal quarter ending December 31, 2005, themargins applicable to the revolving credit facility and the U.S. swing lineloans will adjust on a sliding scale based on the total leverage ratio of Norcrossand its subsidiaries.  In addition, we will be required to pay to thelenders under the revolving credit facility an initial commitment fee inrespect of the unused commitments thereunder at a per annum rate of0.50%.  After our fiscal quarter ending December 31, 2005, the commitmentfee rate will adjust on a sliding scale based on the total leverage ratio of Norcrossand its subsidiaries.

 

Norcross’ domestic subsidiaries (including anyfuture or indirect subsidiaries that may be created or acquired by us) and theCompany guarantee the U.S. Subsidiary Borrowers’ and Norcross’ obligationsunder the New Credit Facility. The guarantees in respect of the New CreditFacility are secured by a perfected first priority security interest in all of theCompany’s equity securities, the equity securities of its direct and indirectdomestic subsidiaries, substantially all of the guarantors’ tangible andintangible assets and 65% of the equity securities of, or equity interest in,certain of its foreign first-tier subsidiaries, subject to certainexceptions.  All of the Canadian Borrower’s obligations under the NewCredit Facility are be secured by all of the assets of our present and futureCanadian subsidiaries, and are guaranteed by all of our present and futureCanadian subsidiaries.

 

The New Credit Facility contains certain customarycovenants, including among other things:

 

•      affirmative covenants requiring us to providecertain financial statements to the Administrative Agent for distribution toits lenders and to pay material obligations when due, maintain its legalexistence, keep its material properties in good working order and condition,provide certain notices to the Administrative Agent for distribution to itslenders, comply in all material respects with environmental laws and maintainat all times ratings for the New Credit Facility;

 

•      restrictive covenants including limitationson other indebtedness, liens, fundamental changes, asset sales, restrictedpayments, capital expenditures, investments, prepayments, transactions withaffiliates, sales and leasebacks, negative pledges, lines of business; and

 

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•      financial covenants requiring us to maintaina maximum total leverage ratio of total debt over EBITDA for the period, aminimum fixed charge coverage ratio of EBITDA less capital expenditures overfixed charges for the period and a minimum interest coverage ratio of EBITDAover interest expense for the period.

 

The New Credit Facility contains certain customaryrepresentations and warranties and events of default, including failure to payinterest, principal or fees, any material inaccuracy of any representation andwarranty, failure to comply with covenants, material cross-defaults, bankruptcyand insolvency events, ERISA events, change of control, failure to maintainfirst priority perfected security interest, material judgments, invalidity ofguarantee and loss of subordination. Certain of the events of defaults are subject to exceptions, materialityqualifiers and baskets.

 

On January 7, 2005, Holdings and NSP HoldingsCapital Corp. (“Capital”) issued $100.0 million of 113/4%senior pay in kind notes due 2012 the “Senior Notes”. The proceeds were usedto: (i) make a payment in respect of preferred units of $60.0 million,$58.0 million of which were payments in respect of accrued preferred yield and$2.0 million of which was the return of a portion of the original capitalcontribution made by holders of Holdings preferred units, (ii) makedistributions in respect of the common units of certain members of managementof $2.5 million, and (iii) pay fees and expenses. The remainder of the netproceeds were used for general corporate purposes, including potential acquisitionsand/or distributions to Holdings’ unit holders.

 

In connection with the closing of the Acquisition, theCompany entered into a second supplemental indenture dated as of July 19,2005 (the “Second Supplemental Indenture”) among Holdings, Capital, the Companyand Wilmington Trust Company, as trustee (the “Trustee”) under the indenturedated as of January 7, 2005 (the “Indenture”) by and among Holdings, Capitaland the Trustee providing for the issuance of the Senior Notes. Pursuant to theterms of the Second Supplemental Indenture, the Company assumed all of therights, powers, commitments, obligations and liabilities of Holdings under theIndenture and the Senior Notes.

 

On July 19, 2005,  the Company sold $25.0 million inprincipal amount of 113/4% senior pay in kind notes due2012 (the “New Notes”). The New Notes were sold pursuant to a purchaseagreement, dated June 28, 2005 (the “Purchase Agreement”), by and between theCompany and Credit Suisse First Boston, LLC (the “Initial Purchaser”). The NewNotes were issued pursuant to the Indenture. Pursuant to the term of the PurchaseAgreement, the New Notes were sold to the Initial Purchaser and were resold toqualified institutional buyers in compliance with the exemption fromregistration.

 

In connection with the closing of the Acquisition,Norcross entered into a supplemental indenture dated as of July 19, 2005(the “Norcross Supplemental Indenture”) by and among Norcross, Norcross CapitalCorp. (“Norcross Capital”), the guarantors listed on the signature pages theretoand Wilmington Trust Company, as trustee (the “Trustee”) under the indenturedated as of August 13, 2003 (the “Norcross Indenture”) providing for theissuance by Norcross and Norcross Capital of $152.5 million aggregateprincipal amount of 9 7/8% senior subordinated notes due 2011. Pursuant to theterms of the Norcross Supplemental Indenture, the definition of PermittedHolders was amended and the parties confirmed that the Requisite Consents (asdefined in the Norcross Supplemental Indenture) had been delivered in order towaive our obligations under the Change in Control covenant of the NorcrossIndenture in connection with the Acquisition.

 

We believe thatour internal cash flows and borrowings under the revolving portions of the NewCredit Facility will provide us with sufficient liquidity and capital resourcesto meet our current and future financial obligations for the foreseeablefuture, 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, on orbefore maturity. We cannot assure you that we would be able to accomplish anyof these alternatives on a timely basis or on satisfactory terms, if at all. Inaddition, the terms of our existing and future indebtedness, including oursenior subordinated notes and the New Credit Facility, may limit our ability topursue any of these alternatives.

 

**Forward-Looking Statements**

 

This Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains forward-looking information. These statements reflect management’sexpectations, estimates, and assumptions based on information available at thetime of the statement. Forward-looking statements include, but are not limitedto, statements regarding future events, plans, goals, objectives, andexpectations. 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 factors,including those set forth below, which may cause our actual results,performance, or achievements to be materially different from any futureresults, performance, or achievements expressed or implied

 

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by those statements.Important factors that could cause our actual results, performance, orachievements to be materially different from any future results, performance,or achievements expressed or implied by those statements include, but are notlimited to: (i) our high degree of leverage and significant debt serviceobligations; (ii) the impact of current and future laws and governmentalregulations affecting us or our product offerings; (iii) the impact ofgovernmental 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 natureof the personal protection equipment industry; (vi) any future changes inmanagement; (vii) acceptance by consumers of new products we develop oracquire; (viii) the importance and costs of product innovation; (ix) unforeseenproblems associated with international sales, including gains and losses fromforeign currency exchange and restrictions on the efficient repatriation ofearnings; (x) the unpredictability of patent protection and other intellectualproperty issues; (xi) cancellation of current orders; (xii) the outcome ofpending product liability claims and the availability of indemnification forthose claims; (xiii) general risks associated with the personal protectionequipment industry; and (xiv) the successful integration of acquired companieson economically acceptable terms. We undertake no obligation to publicly updateor revise any forward-looking statements to reflect changed assumptions, theoccurrence of anticipated or unanticipated events, or changes to future resultsover time.

 

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**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

There have been nomaterial changes to Holdings’ and the Company’s exposure to market risk since December 31,2004, as applicable.

 

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**Item 4.Controls and Procedures**

 

Based on their evaluationas of the end of the period covered by this quarterly report on Form 10-Q,our Chief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) are effective.  There was nochange in our internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) identified in connection with theevaluation required by Rule 13a-15(d) of the Exchange Act thatoccurred 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**

 

As of October 1, 2005, our North SafetyProducts subsidiary, along with its predecessors and/or the former owners ofsuch business were named as defendants in approximately 1,182 lawsuitsinvolving respirators manufactured and sold by it or its predecessors. We arealso monitoring an additional 11 lawsuits in which we feel that North SafetyProducts, its predecessors and/or the former owners of such businesses may benamed as defendants. Collectively, these 1,193 lawsuits represent approximately23,938 (excluding spousal claims) plaintiffs. Approximately 92% of theselawsuits involve plaintiffs alleging injury resulting from exposure to silicadust, with the remainder alleging injury from exposure to other particles,including asbestos. These lawsuits typically allege that the purported injuriesresulted in part from respirators that were negligently designed and/ormanufactured. The defendants in these lawsuits are often numerous, and include,in addition to respirator manufacturers, employers of the plaintiffs andmanufacturers of sand (used in sand blasting) and asbestos.  We acquired our North Safety Productssubsidiary on 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 or soldprior to our acquisition of North Safety Products in October 1998.

 

In addition, ourNorth Safety Products subsidiary is contractually entitled to indemnificationfrom Norton Company, an affiliate of Saint-Gobain, which owned the North SafetyProducts business prior to Invensys. Pursuant to a December 14, 1982 assetpurchase agreement, Siebe Norton, Inc., a newly formed wholly-ownedsubsidiary of Norton Company, acquired the assets of Norton’s Safety ProductsDivision and the stock of this company was in turn acquired by Siebe GormanHoldings PLC. Under the terms of the Agreement, Siebe Norton, Inc. did notassume any liability for claims relating to products shipped by Norton Companyprior to the closing date. Moreover, Norton Company covenanted in the Agreementto indemnify Siebe Norton and its successors and assigns against any liabilityresulting from or arising out of any state of facts, omissions or eventsexisting or occurring on or before the closing date, including, withoutlimitation, any claims arising from products shipped by Norton Company or anyof its affiliates prior to the closing date. Siebe Norton, whose name wassubsequently changed to Siebe North Inc., was subsequently acquired by us aspart of the 1998 acquisition of the North Safety Products business fromInvensys.

 

Despite theseindemnification arrangements, we could potentially be liable for losses orclaims relating to products manufactured prior to the October 1998acquisition date if Invensys fails to meet its obligations to indemnify us andwe could potentially be liable for 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 prior to October 1998 in whichNorth Safety Products, its predecessors and/or the former owners of suchbusinesses have been named as defendants. We are jointly with Invensys handlingthe defense of all of the cases which allege exposure including periods pre andpost October 1998. We will individually handle the defense of all caseswith exclusive post October 1998 exposure, however, we have not beeninvolved in a case with exclusive post October 1998 exposure to date. Asof October 1, 2005, Invensys has sent us requests for reimbursementtotaling $214,900, relating to settled cases in which Invensys claims that theperiod of alleged exposure included periods after October 1998. To date,we have not reimbursed Invensys for these claims, as we are currently pursuingnegotiations regarding the allocation of costs and the determination of thealleged exposure periods. Based on information provided to us by Invensys, webelieve that Invensys has made payments with respect to settlement of theseclaims of $59,500 for the nine months ended October 1, 2005.

 

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Consistent with the current environment beingexperienced by companies involved in silica and asbestos-related litigation,there has been an increase in the number of asserted claims that couldpotentially involve us. Based upon information provided to us by Invensys, webelieve activity related to these lawsuits was as follows for the nine monthsended October 1, 2005:

 
| ** **           | ** ** | **Plaintiffs** | ** ** | **Cases** | ** ** |
|----------------------|------------|----------------|------------|-----------|------------|
| Beginning lawsuits   |       | 25,944         |       | 858       |       |
| New lawsuits         |       | 2,051          |       | 505       |       |
| Settlements          |       | (45            | )          | (23       | )          |
| Dismissals and other |       | (4,012         | )          | (147      | )          |
| Ending lawsuits      |       | 23,938         |       | 1,193     |       |

 

Plaintiffs have asserted specific dollar claims inapproximately a quarter of the approximately 928 cases pending as of October 1,2005, in which North Safety Products, its predecessors and/or the former ownersof such businesses have been named as defendants. A majority of jurisdictionsprohibit specifying damages in tort cases such as these, and most of theremaining jurisdictions do not require such specification. In those cases inwhich plaintiffs choose to assert specific dollar amounts in their complaints,brought in states that permit such pleading, the amounts claimed are typicallynot meaningful as an indicator of a company’s potential liability. This isbecause (1) the amounts claimed typically bear no relation to the level ofthe plaintiff’s injury, (2) the complaints typically assert claims againstnumerous defendants, and (3) many cases are brought on behalf ofplaintiffs who have not suffered any medical injury, and, ultimately,are resolved without any payment or payment of a small fraction of the damagesinitially claimed. Of the 1,182 complaints maintained in our records, 909 donot specify the amount of damages sought, 26 generally allege damages in excessof $50,000, two allege compensatory damages in excess of $50,000 and anunspecified amount of punitive damages, 90 allege compensatory damages andpunitive damages, each in excess of $25,000, two generally allege damages inexcess of $100,000, 18 allege compensatory damages and punitive damages, eachin excess of $50,000, 26 generally allege damages of $15.0 million, onegenerally alleges damages not to exceed $290.0 million, one allegescompensatory damages and punitive damages, each in excess of $10,000, twoallege compensatory and punitive damages, each in excess of $15,000, sevenallege punitive damages in excess of $25,000, one alleges punitive damages inexcess of $50,000, 88 generally allege damages in excess of $15,000, sixgenerally allege damages in excess of $25,000, one alleges compensatory damagesin excess of $25,000 and two allege compensatory and punitive damages each inexcess of $15.0 million. We currently do not have access to the complaints withrespect to the previously mentioned additional 11 monitored cases, andtherefore do not know whether these cases allege specific damages, and if so,the amount of such damages, but are in the process of seeking to obtain suchinformation. Due to the reasons noted above and to the indemnificationarrangements benefiting us, we do not believe that the damage amounts specifiedin these complaints are a meaningful factor in any assessment of our potentialliability.

 

Bankruptcy filingsof companies with asbestos and silica-related litigation could increase ourcost over time. If we were found liable in these cases and either Invensys orNorton failed to meet its 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.

 

During the yearended December 31, 2004, the Predecessor recorded a $1.25 millionliability and charge to operating expenses to establish a reserve forrespiratory claims, which remains outstanding as of October 1, 2005. Webelieve that this reserve represents a reasonable estimate of our probable andestimable liabilities for product claims alleging injury resulting fromexposure to silica dust and other particles, including asbestos, as determinedby us in consultation with an independent consultant. We believe that afive-year projection of claims and defense costs is the most reasonableapproach.  However, it is possible thatwe may incur liabilities in excess of the amounts currently reserved. Thisreserve will be re-evaluated periodically and additional charges or creditswill be recorded to operating expenses as additional information becomesavailable.

 

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We are nototherwise involved in any material lawsuits. We historically have not been required to pay any material liabilityclaims.  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 thatinsurance coverage will not continue to be available on terms acceptable to usor that such coverage will not be adequate for liabilities actually incurred.In connection with the North Safety Products acquisition, the Predecessorrecorded a $2.5 million reserve for potential uninsured product liabilityclaims of North Safety Products for periods prior to October 1998. Thisreserve was established at the date of acquisition and relates to potentialclaims primarily associated with fall protection products sold in Canada. ThroughDecember 2003, the Predecessor incurred charges of approximately $0.2million against this reserve, which reduced the reserve balance to $2.3million. During 2004, the Predecessor reduced this reserve to $1.0 million toreflect our current expectations of the liability based on informationavailable and recorded a $1.3 million credit to operating expenses. The $1.0million reserve remains outstanding as of October 1, 2005. This reserve isre-evaluated periodically, and additional charges or credits will be recordedto operating expenses as additional information becomes available.

 

It is possiblethat we may incur liabilities in an amount in excess of amounts currentlyreserved. However, taking into account currently available information,historical experience, and our indemnification from Invensys, but recognizingthe inherent uncertainties in the projection of any future events, we believethat these suits or claims should not result in final judgments or settlementsin excess of our reserve.

 

**Item 6. Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                 |       | Incremental Facility Amendment dated as of November 1,  2005 among Norcross Safety Products L.L.C., North Safety Products Inc.,  Morning Pride Manufacturing L.L.C., the Several Lenders from Time to Time  Parties thereto, and Credit Suisse, as Administrative Agent.                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2                 |       | Stock Purchase Agreement dated as of October 3,  2005 by and among Norcross Safety Products L.L.C., The Fibre-Metal Products  Company, Residuary Trust under the Will of Charles E. Bowers, Jr., Trust  under the Will of Charles E. Bowers, Jr. for the benefit of Judith L.  Bowers, Charles E. Bowers, Jr. Irrevocable Trust dated December 17,  1990 and Charles J. Grandi. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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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**SIGNATURES**

** **

Pursuant to the requirements of the Securities Exchange Act of 1934, SafetyProducts Holdings, Inc. has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
|                   |       | SAFETY PRODUCTS  HOLDINGS, INC. |
|------------------------|------------|---------------------------------|
|                   |       |                            |
|                   |       |                            |
| November 15, 2005 |       | By:                             | /s/ ROBERT  A. PETERSON |   |
| ** **             | ** ** | ** **                      | Robert A. Peterson |
| ** **             | ** ** | ** **                      | President, Chief Executive Officer and  Director |
|                   |       |                            | (Principal Executive Officer) |
|                   |       |                            |
|                   |       |                            |
| November 15, 2005 |       | By:                             | /s/ DAVID F. MYERS, JR. |   |
| ** **             | ** ** | ** **                      | David F. Myers, Jr. |
|                   |       |                            | Executive Vice President, Chief  Financial Officer, |
| ** **             | ** ** | ** **                      | Secretary and Director |
|                   |       |                            | (Principal Financial and Accounting  Officer) |

 

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**SAFETY PRODUCTS HOLDINGS,INC.FORM 10-Q LISTING OFEXHIBITS**

** **
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1                 |       | Incremental  Facility Amendment dated as of November 1, 2005 among Norcross Safety  Products L.L.C., North Safety Products Inc., Morning Pride Manufacturing  L.L.C., the Several Lenders from Time to Time Parties thereto, and Credit Suisse,  as Administrative Agent.                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2                 |       | Stock Purchase  Agreement dated as of October 3, 2005 by and among Norcross Safety  Products L.L.C., The Fibre-Metal Products Company, Residuary Trust under the  Will of Charles E. Bowers, Jr., Trust under the Will of Charles E.  Bowers, Jr. for the benefit of Judith L. Bowers, Charles E. Bowers, Jr.  Irrevocable Trust dated December 17, 1990 and Charles J. Grandi. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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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