** **

**UNITEDSTATES**

**SECURITIESAND 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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| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                    |
| ** ** | ** ** | **For the quarterly period ended September  29, 2007**                                                  |
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **OR**                                                                                                  |
| ** ** | ** ** | ** **                                                                                              |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from             to            **

 

**Commission File Number: 333-127781**

 

**SAFETYPRODUCTS HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 
| **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**

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x   No o

 

Indicate by check mark whether the Registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o  Accelerated filer  o  Non-accelerated filer  x

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o     No x

 

On November 8, 2007Safety Products Holdings, Inc. had 11,030,884 common shares outstanding.

 

 

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**SAFETY PRODUCTS HOLDINGS, INC.FORM 10-Q QUARTERLY REPORT**

**For the Quarterly Period Ended September 29, 2007**

 

**TABLE OF CONTENTS**

** **
| **PART  I Financial Information**                                                                    | ** ** |
|------------------------------------------------------------------------------------------------------|------------|
|                                                                                                 |       |
| Item 1.  Financial Statements (Unaudited)                                                            | 1          |
|                                                                                                 |       |
| Consolidated  Balance Sheets                                                                         | 1          |
|                                                                                                 |       |
| Consolidated  Statements of Operations                                                               | 2          |
|                                                                                                 |       |
| Consolidated  Statements of Cash Flows                                                               | 3          |
|                                                                                                 |       |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 12         |
|                                                                                                 |       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                  | 20         |
|                                                                                                 |       |
| Item 4. Controls and Procedures                                                                      | 21         |
|                                                                                                 |       |
| **PART  II Other Information**                                                                       | 22         |
|                                                                                                 |       |
| Item  1. Legal Proceedings                                                                           | 22         |
|                                                                                                 |       |
| Item 1A. Risk Factors                                                                                | 25         |
|                                                                                                 |       |
| Item 6. Exhibits                                                                                     | 26         |
|                                                                                                 |       |
| **Signatures**                                                                                       | 27         |
|                                                                                                 |       |
| **Form 10-Q Listing of Exhibits**                                                                    | 28         |

 

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**PART IFINANCIAL INFORMATION**

** **

**Item 1. Financial Statements**

** **

**SAFETYPRODUCTS HOLDINGS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Amounts in Thousands)**

** **
| ** **                                                                               | ** ** | **December 31,   2006 (1)** | ** ** | **September 29,   2007** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                               | ** ** | ** **                                 | ** ** | **(Unaudited)**                    | ** ** |
| **Assets**                                                                               | ** ** | ** **                                 | ** ** | ** **                         | ** ** |
| Current assets:                                                                          |       |                                       |       |                               |       |
| Cash and cash equivalents                                                                |       | $                                          | 26,796     |                               | $          | 40,558 |   |
| Accounts receivable, less allowance of  $2,323 and $2,484 in 2006 and 2007, respectively |       | 73,306                                     |       | 92,762                             |       |
| Inventories                                                                              |       | 108,270                                    |       | 111,316                            |       |
| Deferred income taxes                                                                    |       | 2,143                                      |       | 1,946                              |       |
| Prepaid expenses and other current assets                                                |       | 3,624                                      |       | 3,880                              |       |
| Total current assets                                                                     |       | 214,139                                    |       | 250,462                            |       |
| Property, plant and equipment, net                                                       |       | 69,627                                     |       | 68,414                             |       |
| Deferred financing costs, net                                                            |       | 16,517                                     |       | 13,991                             |       |
| Goodwill                                                                                 |       | 157,242                                    |       | 163,073                            |       |
| Other intangible assets, net                                                             |       | 281,438                                    |       | 276,998                            |       |
| Other noncurrent assets                                                                  |       | 5,119                                      |       | 6,224                              |       |
| Total assets                                                                             |       | $                                          | 744,082    |                               | $          | 779,162 |   |
|                                                                                     |       |                                       |       |                               |       |
| **Liabilities and shareholders’ equity**                                            | ** ** | ** **                                 | ** ** | ** **                         | ** ** |
| Current liabilities:                                                                     |       |                                       |       |                               |       |
| Accounts payable                                                                         |       | $                                          | 21,891     |                               | $          | 22,215 |   |
| Accrued expenses                                                                         |       | 40,596                                     |       | 37,205                             |       |
| Current maturities of long-term obligations                                              |       | 4,820                                      |       | 2,301                              |       |
| Total current liabilities                                                                |       | 67,307                                     |       | 61,721                             |       |
| Long-term liabilities:                                                                   |       |                                       |       |                               |       |
| Pension, post-retirement and deferred  compensation                                      |       | 17,082                                     |       | 13,553                             |       |
| Long-term obligations                                                                    |       | 470,140                                    |       | 482,046                            |       |
| Other noncurrent liabilities                                                             |       | 7,008                                      |       | 11,717                             |       |
| Deferred income taxes                                                                    |       | 55,460                                     |       | 53,103                             |       |
| Total long-term liabilities                                                              |       | 549,690                                    |       | 560,419                            |       |
|                                                                                     |       |                                       |       |                               |       |
| Minority interest                                                                        |       | 199                                        |       | 222                                |       |
|                                                                                     |       |                                       |       |                               |       |
| Shareholders’ equity:                                                               |       |                                       |       |                               |       |
| Common shares                                                                            |       | 110                                        |       | 110                                |       |
| Contributed capital                                                                      |       | 111,883                                    |       | 113,007                            |       |
| Retained earnings                                                                        |       | 4,098                                      |       | 14,408                             |       |
| Accumulated other comprehensive income                                                   |       | 10,795                                     |       | 29,275                             |       |
| Total shareholders’ equity                                                          |       | 126,886                                    |       | 156,800                            |       |
| Total liabilities and shareholders’ equity                                          |       | $                                          | 744,082    |                               | $          | 779,162 |   |

 

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(1)          December 31, 2006 balances were obtainedfrom audited financial statements.

 

*See notesto unaudited consolidated financial statements.*

 

1

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**SAFETY PRODUCTS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                                                                                                                                 | ** ** | **Three months ended**   | ** ** | **Nine months ended**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** |
| Net sales                                                                                                                                                                  |       | $                                  | 136,777    |                               | $          | 151,406 |   | $ | 404,411 |   | $ | 455,963 |   |
| Cost of goods sold                                                                                                                                                         |       | 87,161                             |       | 93,161                             |       | 250,420 |   | 278,249 |   |
| Gross profit                                                                                                                                                               |       | 49,616                             |       | 58,245                             |       | 153,991 |   | 177,714 |   |
| Operating expenses:                                                                                                                                                        |       |                               |       |                               |       |   |   |   |   |
| Selling                                                                                                                                                                    |       | 12,342                             |       | 13,790                             |       | 37,470 |   | 40,944 |   |
| Distribution                                                                                                                                                               |       | 8,028                              |       | 9,491                              |       | 23,428 |   | 28,173 |   |
| General and administrative (1)                                                                                                                                             |       | 12,727                             |       | 15,325                             |       | 38,757 |   | 43,179 |   |
| Amortization of intangibles                                                                                                                                                |       | 3,073                              |       | 2,869                              |       | 8,540 |   | 8,746 |   |
| Total operating expenses                                                                                                                                                   |       | 36,170                             |       | 41,475                             |       | 108,195 |   | 121,042 |   |
| Income from operations                                                                                                                                                     |       | 13,446                             |       | 16,770                             |       | 45,796 |   | 56,672 |   |
| Other expense (income):                                                                                                                                                    |       |                               |       |                               |       |   |   |   |   |
| Interest expense                                                                                                                                                           |       | 12,050                             |       | 12,510                             |       | 34,690 |   | 37,089 |   |
| Interest income                                                                                                                                                            |       | (105                               | )          | (445                               | )          | (419 | ) | (898 | ) |
| Other, net                                                                                                                                                                 |       | (85                                | )          | 115                                |       | (610 | ) | 514 |   |
| Income from continuing operations before  income taxes and minority interest                                                                                               |       | 1,586                              |       | 4,590                              |       | 12,135 |   | 19,967 |   |
| Income tax expense                                                                                                                                                         |       | 663                                |       | 66                                 |       | 4,134 |   | 6,444 |   |
| Minority interest                                                                                                                                                          |       | 8                                  |       | 10                                 |       | 23 |   | 24 |   |
| Income from continuing operations                                                                                                                                          |       | 915                                |       | 4,514                              |       | 7,978 |   | 13,499 |   |
| Loss (income) from discontinued operations  (including loss on disposal of subsidiary of $3,022 for the nine months ended  September 29, 2007), net of income tax (Note 2) |       | 26                                 |       | —                             |       | (67 | ) | 2,813 |   |
| Net income                                                                                                                                                                 |       | $                                  | 889        |                               | $          | 4,514 |   | $ | 8,045 |   | $ | 10,686 |   |

 

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 (1)   Generaland administrative expenses exclude amortization of intangibles and include$265 and $459 of management incentive compensation for the three months endedSeptember 30, 2006 and September 29, 2007, respectively and $1,345 and $1,159of management incentive compensation for the nine months ended September 30,2006 and September 29, 2007, respectively.

 

*See notes to unaudited consolidatedfinancial statements.*

 

2

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**SAFETYPRODUCTS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

 
| ** **                                                                         | ** ** | **Nine months ended**    | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** |
| **Operating activities**                                                           |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 8,045      |   | $ | 10,686 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                               |       |   |   |
| Depreciation (1)                                                                   |       | 10,008                             |       | 11,008 |   |
| Amortization of intangibles                                                        |       | 8,540                              |       | 8,746 |   |
| Amortization of deferred financing costs                                           |       | 2,513                              |       | 2,526 |   |
| Amortization of original issue premium                                             |       | (109                               | )          | (89 | ) |
| Deferred income taxes                                                              |       | (246                               | )          | (400 | ) |
| Minority interest                                                                  |       | 23                                 |       | 24 |   |
| Noncash interest                                                                   |       | 12,431                             |       | 13,936 |   |
| Management incentive compensation                                                  |       | 1,345                              |       | 1,124 |   |
| Loss on sale of property, plant and  equipment                                     |       | 54                                 |       | 153 |   |
| Loss on sale of subsidiary                                                         |       | —                             |       | 3,022 |   |
| Changes in operating assets and  liabilities:                                      |       |                               |       |   |   |
| Accounts receivable                                                                |       | (10,433                            | )          | (19,064 | ) |
| Inventories                                                                        |       | (16,055                            | )          | (1,535 | ) |
| Prepaid expenses and other current assets                                          |       | 408                                |       | 352 |   |
| Other noncurrent assets                                                            |       | (265                               | )          | (644 | ) |
| Accounts payable                                                                   |       | 2,409                              |       | 1,534 |   |
| Accrued expenses                                                                   |       | (3,119                             | )          | (4,761 | ) |
| Pension, postretirement and deferred  compensation                                 |       | (1,466                             | )          | (3,549 | ) |
| Other noncurrent liabilities                                                       |       | (227                               | )          | (84 | ) |
| Net cash provided by operating activities                                          |       | 13,856                             |       | 22,985 |   |
|                                                                               |       |                               |       |   |   |
| **Investing activities**                                                           |       |                               |       |   |   |
| Purchase of businesses, net of cash  acquired                                      |       | (30,952                            | )          | (1,247 | ) |
| Proceeds from sale of subsidiary, net of  cash disposed                            |       | —                             |       | 3,223 |   |
| Purchases of property, plant and equipment                                         |       | (7,681                             | )          | (8,130 | ) |
| Proceeds from sale of property, plant and  equipment                               |       | 113                                |       | 377 |   |
| Net cash used in investing activities                                              |       | (38,520                            | )          | (5,777 | ) |
|                                                                               |       |                               |       |   |   |
| **Financing activities**                                                           |       |                               |       |   |   |
| Payments for deferred financing costs                                              |       | (201                               | )          | — |   |
| Proceeds from borrowings                                                           |       | 15,000                             |       | — |   |
| Payments of debt                                                                   |       | (1,399                             | )          | (4,286 | ) |
| Net borrowings under revolving credit  facility                                    |       | 2,000                              |       | — |   |
| Proceeds from the issuance of shares                                               |       | 563                                |       | — |   |
| Net cash provided by (used in) financing  activities                               |       | 15,963                             |       | (4,286 | ) |
| Effect of exchange rate changes on cash and  cash equivalents                      |       | 356                                |       | 840 |   |
| Net (decrease) increase in cash and cash  equivalents                              |       | (8,345                             | )          | 13,762 |   |
| Cash and cash equivalents at beginning of  period                                  |       | 20,819                             |       | 26,796 |   |
| Cash and cash equivalents at end of period                                         |       | $                                  | 12,474     |   | $ | 40,558 |   |

 

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 (1)   Depreciationincludes depreciation expense of $86 and $71 for the nine months endedSeptember 30, 2006 and September 29, 2007, respectively, related todiscontinued operations (Note 2).

 

*See notes to unaudited consolidated financialstatements*

 

3

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

 

**1.**                 Transactions

** **

On February 2, 2006, Safety Products Holdings, Inc. (the “Company”)completed the acquisition of all of the issued and outstanding capital stock ofAmerican Firewear, Inc. (“American Firewear”). The purchase price consisted of$4,453 in cash (including acquisition costs of $203 and net of cash acquired of$183) and a $1,000 subordinated seller note. In addition, the purchase price maybe increased by $750 over a four year period based on American Firewearachieving certain financial and operating objectives. The Company financed theacquisition through cash on the balance sheet and the issuance of the $1,000subordinated seller note. The Company believes the acquisition of AmericanFirewear will strengthen its hand protection product line in the fire servicesegment. The results of operations of American Firewear are included in theCompany’s consolidated statement of operations from the date of acquisition.

 

On June 9, 2006, the Company completed the acquisition of all of theissued and outstanding capital stock of The White Rubber Corporation (“WhiteRubber”). The purchase price was $22,182 (including acquisition costs of $636and gross of outstanding checks of $773). The Company financed the acquisitionthrough additional term borrowings under the senior credit facility and cash onthe balance sheet. The Company believes the acquisition of White Rubber willstrengthen its hand protection product line in the electrical safety segment.The results of operations of White Rubber are included in the Company’sconsolidated statement of operations from the date of acquisition.

 

On September 19, 2006, the Company completed the acquisition of all ofthe issued and outstanding capital stock of The New England Overshoe Company,Inc. (“NEOS”). The purchase price consisted of $3,639 in cash (includingacquisition costs of $139 and net of cash acquired of $6) and a $750subordinated seller note. In addition, the purchase price may be increased overa five year period based on NEOS achieving certain net sales targets. TheCompany financed the acquisition through cash on the balance sheet and theissuance of the $750 subordinated seller note. The Company believes theacquisition of NEOS will broaden its footwear product portfolio in the generalsafety and preparedness segment. The results of operations of NEOS are includedin the Company’s consolidated statement of operations from the date ofacquisition.

 

Assumingall acquisitions had occurred on January 1, 2006, the pro forma net sales,income from operations and net income for the Company would have been $414,277,$46,742 and $7,379, respectively, for the nine months ended September 30, 2006.

 

**2.**                 Discontinued Operations

** **

On June 29, 2007, the Company completed the sale of all of the issuedand outstanding capital stock of North Safety Products (Africa) (Proprietary)Limited (“South Africa”), a subsidiary of the Company. The Company received netcash proceeds of $3,223 and recorded a net loss on disposal related to thetransaction of $3,022 ($3,022 net of income tax). In accordance with FinancialAccounting Standards Board (“FASB”) Statement of Accounting Standards (“SFAS”)No. 144, *Accounting for the Impairment or Disposal ofLong-Lived**Assets*, theCompany has reflected South Africa’s results of operations through the date ofthe sale and transaction loss as discontinued operations for all periodspresented. Assets and liabilities of South Africa were not material and as aresult have not been reclassified as discontinued operations in the Company’sconsolidated statement of financial position as of December 31, 2006. The cashflows from discontinued operations have been combined with cash flows from continuingoperations within each cash flow statement category as the cash flows fromdiscontinued operations are not material to the Company’s consolidated results.

 

The following table sets forth the net sales, net (loss) income fromdiscontinued operations and net loss on disposal of subsidiary for South Africafor the periods presented:

 
| ** **                                      | ** ** | **Three months ended**   | ** ** | **Nine months ended**    | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** |
| Net sales                                       |       | $                                  | 5,101      |                               | $          | — |   | $ | 15,589 |   | $ | 8,152 |   |
| Net (loss) income from discontinued  operations |       | (26                                | )          | —                             |       | 67 |   | 209 |   |
| Net loss on disposal of subsidiary              |       | —                             |       | —                             |       | — |   | (3,022 | ) |
|                                                 |            |                                    |            |                                    |            |  |  |  |  |  |  |  |  |

 

4

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**3.**                 Basis of Presentation

** **

Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information. Accordingly, they do notinclude all of the information and notes required by accounting principlesgenerally accepted in the United States for complete financial statements.

 

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, 2007. The financialstatements presented should be read in conjunction with the consolidatedfinancial statements and footnotes thereto included in our 2006 consolidatedfinancial statements, included in the Company’s annual report on Form 10-K.

 

**4.**                 Recent Accounting Pronouncements

** **

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*, which definesfair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. The provisions of SFAS No. 157 areeffective for the Company as of the beginning of its fiscal year endingDecember 31, 2008. The Company is in the process of determining the effects, ifany, that adoption of SFAS No. 157 will have on its financial statements.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115.*Thisstatement is intended to improve financial reporting by providing entities withthe opportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. It also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choose differentmeasurement attributes for similar types of assets and liabilities. Thestatement does not affect any existing accounting literature that requirescertain assets and liabilities to be carried at fair value and it does notestablish requirements for recognizing dividend income, interest income orinterest expense. It also does not eliminate disclosure requirements includedin other accounting standards. The provisions of SFAS No. 159 are effective forthe Company as of the beginning of its fiscal year ending December 31, 2008.The Company is in the process of determining the effects, if any, that adoptionof SFAS No. 159 will have on its financial statements.

 

**5.**                 Management Incentive Compensation

** **

Managementincentive compensation related to stock based compensation was $265 and $459for the three months ended September 30, 2006 and September 29, 2007,respectively and $1,345 and $1,159 for the nine months ended September 30, 2006and September 29, 2007, respectively.

 

**6.**                 Inventories

** **

Inventories consist of the following:

 
| ** **              | ** ** | **December 31,   2006** | ** ** | **September 29,   2007** | ** ** |
|-------------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| At FIFO cost:           |       |                              |       |                               |       |
| Raw materials           |       | $                                 | 24,823     |                               | $          | 30,148 |   |
| Work in process         |       | 13,756                            |       | 11,965                             |       |
| Finished goods          |       | 70,799                            |       | 70,311                             |       |
|                    |       | 109,378                           |       | 112,424                            |       |
| Adjustment to LIFO cost |       | (1,108                            | )          | (1,108                             | )          |
| Total inventory         |       | $                                 | 108,270    |                               | $          | 111,316 |   |

 

5

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# **7.****              Long-Term Obligations**

#  

The Company’s long-term obligations consist of thefollowing:

 
| ** **                                         | ** ** | **December 31,   2006** | ** ** | **September 29,   2007** | ** ** |
|----------------------------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| Revolving credit facilities                        |       | $                                 | —     |                               | $          | — |   |
| Term loan                                          |       | 165,720                           |       | 162,138                            |       |
| Senior pay in kind notes                           |       | 155,090                           |       | 169,026                            |       |
| Senior subordinated notes                          |       | 152,500                           |       | 152,500                            |       |
| European term loans                                |       | 173                               |       | —                             |       |
| Subordinated seller notes                          |       | 1,750                             |       | 1,250                              |       |
| Capital lease obligations                          |       | 205                               |       | —                             |       |
| Unamortized discount on senior pay in kind  notes  |       | (6,626                            | )          | (5,877                             | )          |
| Unamortized premium on senior subordinated  notes  |       | 6,148                             |       | 5,310                              |       |
|                                               |       | 474,960                           |       | 484,347                            |       |
| Less: Current maturities of long-term  obligations |       | 4,820                             |       | 2,301                              |       |
|                                               |       | $                                 | 470,140    |                               | $          | 482,046 |   |

 

Aggregate maturities oflong-term obligations as of September 29, 2007, are as follows:

 
| 2008       |   | $       | 2,301   |   |
|------------|--------|---------|---------|--------|
| 2009       |   | 2,509   |    |
| 2010       |   | 45,732  |    |
| 2011       |   | 193,015 |    |
| 2012       |   | 240,790 |    |
| Thereafter |   | —  |    |
|       |   | $       | 484,347 |   |

 

**8.**                 Income Taxes

** **

EffectiveJanuary 1, 2007, the Company adopted FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*  ("FIN 48"), which  requires that the Company recognize in thefinancial statements, the impact of a tax position, if that position is morelikely than not of being sustained on audit, based on the technical merits ofthe position. In addition, FIN 48 provides guidance on the derecognition,classification, accounting in interim periods and disclosure requirements foruncertain tax positions.

 

As aresult of the implementation of FIN 48, the Company recorded at the date ofadoption an additional liability of $5,961 for unrecognized tax benefitsrelating to uncertain tax positions. Of this amount, approximately $376 wasaccounted for as a reduction to the January 1, 2007 balance of retainedearnings. During the three and nine months ended September 29, 2007, theunrecognized tax benefits decreased by $404 due to a foreign income tax auditsettlement.

 

AtJanuary 1, 2007, the Company had $7,024 in unrecognized tax benefits, the recognitionof which would have an effect of $776 on the effective tax rate. In addition,$4,261 of unrecognized tax benefits would, if realized, reduce goodwill.

 

Includedin the balance of unrecognized tax benefits at January 1, 2007, is $1,525related to tax positions for which it is reasonably possible that the totalamounts could significantly change during the next twelve months. This amountrepresents the maximum potential decrease in unrecognized tax benefitscomprised of items related to foreign income tax filings and audit settlementnegotiations. During the three and nine months ended September 29, 2007, thisamount has decreased by $404 due to a foreign income tax audit settlement.

 

TheCompany recognizes interest and penalties related to unrecognized tax benefitsas a component of income tax expense. At January 1, 2007, the Company hadaccrued $219 and $279 for the potential payment of interest and penaltiesrelated to unrecognized tax benefits, respectively. There have been nosignificant changes to these amounts during the three and nine months endedSeptember 29, 2007.

 

TheCompany and its subsidiaries are subject to U.S. federal income tax as well asincome tax of multiple state and international jurisdictions. As of September29, 2007, the Company is subject to U.S. Federal income tax examinations forthe tax years 1998 through 2000 and 2002 through 2006 and to non-U.S. incometax examinations for the tax years of 2003 

 

6

----

 

through 2006. In addition, the Company is subject tostate and local income tax examinations for the tax years 1998 through 2006.

 

Theincome tax expense for the Company differs from the amount of income taxexpense computed by applying the U.S. federal income tax rate to income beforeincome taxes primarily due to: 1) state taxes and 2) the impact of variedforeign statutory rates on the Company’s foreign earnings. In addition, theincome tax expense for the three and nine months ended September 29, 2007 wasimpacted by a reduction in the German statutory tax rate. Further, the ninemonths ended September 29, 2007 was impacted by the recording of a valuationallowance against capital losses associated with the sale of South Africa.

 

**9.**                 Employee Benefit Plans

** **

The following table setsforth the components of net periodic benefit expense (income) for the Company’spension benefits:

 
| ** **                     | ** ** | **Three months ended**   | ** ** | **Nine months ended**    | ** ** |
|--------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                     | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** |
| Service cost                   |       | $                                  | 594        |                               | $          | 24 |   | $ | 1,576 |   | $ | 78 |   |
| Interest cost                  |       | 998                                |       | 1,014                              |       | 2,886 |   | 2,976 |   |
| Expected return on plan assets |       | (755                               | )          | (1,069                             | )          | (2,567 | ) | (3,206 | ) |
|                           |       | $                                  | 837        |                               | $          | (31 | ) | $ | 1,895 |   | $ | (152 | ) |

 

The following table setsforth the components of net periodic benefit expense for the Company’spost-retirement benefits:

 
| ** **    | ** ** | **Three months ended**   | ** ** | **Nine months ended**    | ** ** |
|---------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **    | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** |
| Service cost  |       | $                                  | 7          |                               | $          | 3 |   | $ | 19 |   | $ | 8 |   |
| Interest cost |       | 18                                 |       | 13                                 |       | 54 |   | 45 |   |
|          |       | $                                  | 25         |                               | $          | 16 |   | $ | 73 |   | $ | 53 |   |

 

**10.**   Restructuring and Merger-Related Charges

** **

Inconjunction with the Fibre-Metal Transaction, the Company initiated arestructuring plan to close the Fibre-Metal manufacturing facility located inConcordville, Pennsylvania and move production to its Cranston, Rhode Islandand Mexicali, Mexico facilities. In addition, the Company closed certainFibre-Metal distribution centers and integrated Fibre-Metal distribution intoits existing distribution facilities. The Company implemented this plan inorder to increase profitability through utilizing excess capacity at itsexisting plants and moving manufacturing to locations with favorable laborcosts. The restructuring was substantially completed in the second quarter of2007. As of the date of the Fibre-Metal Transaction, the Company recorded anaccrual for costs associated with the plan of $1,716, comprised of $1,383 inseverance costs and $333 in facility closure and other exit costs. Therestructuring liability was classified within the accrued expenses caption onthe consolidated balance sheet.

 

In conjunction with the White Rubber Transaction, the Company initiateda restructuring plan to move certain production and distribution functionslocated in Ohio and Washington to its Charleston, South Carolina, Skokie,Illinois and Chicago, Illinois facilities. The Company initiated this plan inorder to increase profitability by utilizing excess capacity and consolidatingdistribution functions. The restructuring was substantially completed in thesecond quarter of 2007. As of the date of the White Rubber Transaction, theCompany recorded an accrual for costs associated with the plan of $1,018,comprised of severance and severance related costs. The restructuring liabilityis classified within the accrued expenses caption on the consolidated balancesheet.

 

A rollforward of the restructuring liability is as follows:

 

7

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| ** **                             | ** ** | **Severance   and   severance   related   costs** | ** ** | **Facility   closure and   other exit   costs** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-----------|------------|
| Balance as of January 1, 2007          |       | $                                                                     | 1,880      |                                                                     | $          | 173       |       | $ | 2,053 |   |
| Payments                               |       | (1,753                                                                | )          | (174                                                                     | )          | (1,927    | )          |
| Effect of foreign currency translation |       | —                                                                |       | 1                                                                        |       | 1         |       |
| Balance as of September 29, 2007       |       | $                                                                     | 127        |                                                                     | $          | —    |       | $ | 127 |   |

** **

**11.**   Legal Proceedings

** **

TheCompany is subject to various claims arising in the ordinary course ofbusiness. Most of these lawsuits and claims are product liability matters thatarise out of the use of respiratory product lines manufactured by the Company’sNorth Safety Products subsidiary. As of September 29, 2007, the Company’s NorthSafety Products subsidiary, along with its predecessors and/or the formerowners of such business were named as defendants in approximately 649 lawsuitsinvolving respirators allegedly manufactured and sold by it or itspredecessors. The Company is also monitoring an additional two lawsuits inwhich it feels that North Safety Products, its predecessors and/or the formerowners of such businesses may be named as defendants. Collectively, these 651lawsuits represent a total of approximately 8,451 plaintiffs. Approximately 85%of these lawsuits involve plaintiffs alleging injury resulting from exposure tosilica dust, with the remainder alleging injury resulting from exposure toother dust particles, including asbestos. These lawsuits typically allege thatthe purported injuries resulted in part from respirators that were negligentlydesigned or manufactured. Invensys plc (“Invensys”), formerly Siebe plc, iscontractually obligated to indemnify the Company for any losses, includingcosts of defending claims, resulting from respiratory products manufactured orsold prior to the acquisition of North Safety Products in October 1998.

 

Inaddition, the Company’s North Safety Products subsidiary is contractuallyentitled to indemnification from Norton Company, an affiliate of Saint-Gobain,which owned the North Safety Products business prior to Invensys. Pursuant to aDecember 14, 1982 asset purchase agreement, Siebe Norton, Inc., a newly formedwholly-owned subsidiary of Norton Company, acquired the assets of Norton’sSafety Products Division and the stock of this company was in turn acquired bySiebe Gorman Holdings plc. Under the terms of the agreement, Siebe Norton, Inc.did not assume any liability for claims relating to products shipped by NortonCompany prior to the closing date. Moreover, Norton Company covenanted in theagreement to indemnify Siebe Norton, Inc. and its successors and assignsagainst any liability resulting from or arising out of any state of facts, omissionsor events existing or occurring on or before the closing date, including,without limitation, any claims arising from products shipped by Norton Companyor any of its affiliates prior to the closing date. Siebe Norton, Inc., whosename was subsequently changed to Siebe North Inc., was subsequently acquired bythe Company as part of the 1998 acquisition of the North Safety Productsbusiness from Invensys.

 

Despitethese indemnification arrangements, the Company could potentially be liable forlosses or claims relating to products manufactured prior to the October 1998acquisition date if Invensys fails to meet its obligations to indemnify theCompany and the Company could potentially be liable for losses and claimsrelating to products sold prior to January 10, 1983 if both Invensys and Nortonfail to meet their obligations to indemnify the Company. The Company believesthat Invensys has the ability to pay these claims based on its currentfinancial position, as publicly disclosed by Invensys. The Company could alsobe liable if the alleged exposure involved the use of a product manufactured bythe Company after the October 1998 acquisition of the North Safety Productsbusiness.

 

EffectiveJuly 1, 2006, the Company entered into a joint defense agreement throughDecember 31, 2008 with the former owners of the North Safety Products business(the “Joint Defense Agreement” or “JDA”). Under the terms of the Joint DefenseAgreement, the Company agreed to pay a weighted average percentage of defensecosts (including legal fees, expert witnesses and out of pocket expenses)associated with defending the Company and the prior owners of the North SafetyProducts business subject to a cap of $525, $960 and $1,000 for the period fromJuly 1, 2006 through December 31, 2006, the year ended December 31, 2007 andthe year ended December 31, 2008, respectively. The cap excludes settlementcosts and other costs incurred exclusively by the Company (including trialcosts and special requests of counsel), which it will be required to pay underthe JDA. Separately, the Company agreed to pay Invensys $200 related to settledcases through June 30, 2006 in which Invensys claimed that the period ofalleged exposure included periods after October 1998.

 

Although the JDA expires on December 31, 2008, the Company expects toincur additional defense and settlement costs beyond this date. The Companywill consider its alternatives for defending the claims as the JDA nearsexpiration and determine the appropriate course of action, which could includean extension of the JDA.

 

8

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Basedupon information provided to the Company by Invensys, the Company believesactivity related to these lawsuits was as follows for the nine months endedSeptember 29, 2007:

 
| ** **                               | ** ** | **Plaintiffs** | ** ** | **Cases** | ** ** |
|------------------------------------------|------------|----------------|------------|-----------|------------|
| Beginning lawsuits as of January 1, 2007 |       | 8,746          |       | 644       |       |
| New lawsuits                             |       | 19             |       | 16        |       |
| Settlements                              |       | —         |       | —    |       |
| Dismissals and other                     |       | (314           | )          | (9        | )          |
| Ending lawsuits as of September 29, 2007 |       | 8,451          |       | 651       |       |

 

Boththe rate of new filings and the number of existing claimants have declineddramatically since 2003 as courts and legislatures have tightened the rules onwhen and where the silica claims can be pursued in an effort to reduce thelarge number of unmeritorious claims. The new rules make bringing silica caseson a mass level much less attractive to the plaintiffs’ bar. Plaintiffs’attorneys in many jurisdictions can no longer (1) find a worker with somestated exposure to silica, (2) take an X-ray of his chest, (3) have it interpretedas demonstrating lung shadows by a radiologist, (4) then file a single lawsuitin a dangerous venue with hundreds of other plaintiffs against hundreds ofdefendants with the pleading containing little more than the parties’ names andsome standard pleading language. More specifically, the legislatures of atleast seven states — including former hotbeds of silica litigation such asTexas, Florida and Ohio — passed impairment-criteria legislation that redefinedinjury. These acts force plaintiffs to prove impairment as a result of theirexposure to qualify for judicial treatment. The same legislation requires thateach silica claimant be tried individually, and not in the multiple plaintiffformat in which the potential for large verdicts resulted from increasedplaintiffs and where a few meritorious claims could increase the value ofunmeritorious ones. Further tort reform in Texas created a state-widemulti-district litigation (“MDL”) wherein one judge presides over the pretrialof all Texas-silica cases. In Mississippi, the Supreme Court changed the venuerules making it much more difficult to file out-of-state plaintiffs there. TheMississippi court also changed the pleading requirements making the plaintiffs’attorneys include plaintiff-specific allegations against each defendant sued,instead of the vague allegations against hundreds of defendants.

 

Plaintiffs have asserted specific dollar claims in approximately 30% ofthe approximately 649 cases pending as of September 29, 2007 in which NorthSafety Products, its predecessors and/or the former owners of such businesseshave been named as defendants. A majority of jurisdictions prohibit specifyingdamages in tort cases such as these, and most of the remaining jurisdictions donot require such specification. In those cases in which plaintiffs choose toassert specific dollar amounts in their complaints, the amounts claimed aretypically not meaningful as an indicator of a company’s potential liability.This is because (1) the amounts claimed typically bear no relation to the levelof the plaintiff’s injury, (2) the complaints typically assert claims againstnumerous defendants and (3) many cases are brought on behalf of plaintiffs whohave not suffered any medical injury, and ultimately are resolved without anypayment or payment of a small fraction of the damages initially claimed. Of the649 complaints maintained in the Company’s records, 459 do not specify theamount of damages sought, 25 generally allege damages in excess of $50, onealleges compensatory damages in excess of $50 and an unspecified amount ofpunitive damages, 103 allege compensatory damages and punitive damages, each inexcess of $25, two generally allege damages in excess of $100, two allegecompensatory damages and punitive damages, each in excess of $50, 20 generallyallege damages in excess of $15,000, one generally alleges damages of $23,000,one alleges compensatory damages and punitive damages, each in excess of $10,four allege general damages of $18,000 and punitive damages of $10,000, twoallege general damages of $13,000 and punitive damages of $10,000, one allegescompensatory and punitive damages, each in excess of $15, one alleges punitivedamages in excess of $50, one generally alleges damages in excess of $15, 12generally allege damages in excess of $25, one alleges compensatory damages of$18,000 and punitive damages of $10,000, one alleges punitive damages of$13,500 and compensatory damages of $10,000, one alleges punitive damages of$13,000 and compensatory damages of $10,000, eight allege compensatory damagesof $13,000 and punitive damages of $10,000, one alleges compensatory andpunitive damages, each of $15 and two allege compensatory and punitive damages,each in excess of $15,000. The Company currently does not have access to thecomplaints with respect to the previously mentioned additional two monitoredcases, and therefore it does not know whether these cases allege specificdamages, or if so, the amount of such damages, but is in the process of seekingto obtain such information. Due to the reasons noted above and to theindemnification arrangements benefiting the Company, it does not believe thatthe damage amounts specified in these complaints are a meaningful factor in anyassessment of the Company’s potential liability.

 

Norcross Safety Products L.L.C., the Company’s wholly owned subsidiary(“Norcross”), recorded a $1,250 reserve for respiratory claims during the yearended December 31, 2004. Norcross re-evaluated this reserve in its first andsecond quarter 2005 financial statements and concluded the $1,250 recordedreserve continued to be its best estimate of the probable loss for therespiratory contingency.

 

In the July 2005 acquisition purchase accounting (as first reported inthe Form 10-Q for the third quarter of 2005), 

 

9

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the Company carried forward the $1,250 liability for thispre-acquisition contingency. Although management concluded that it was likelytheir estimate of this pre-acquisition contingent liability would be increasedduring the purchase accounting allocation period as the new ownership finalizedtheir strategy for addressing the liability and gathered information (primarilyrelated to case information and the working relationship among the prior ownersof North), it was unlikely the amount would be lower than the $1,250. Thus, the$1,250 amount represented the low end of a probable loss range, subject tofurther adjustment during the allocation period.

 

In December 2005, the Company began negotiations with the former ownersof the North business to enter into the JDA. The Company determined that theliability should be increased to $5,000 as of December 31, 2005 as part of thepurchase price allocation process. The $5,000 reserve as of December 31, 2005represented management’s best estimate of the liability based on the currentstatus of negotiations. As of December 31, 2005, the estimate was stillpreliminary as the Company was awaiting finalization of the JDA negotiationprocess.

 

As discussed above, the Company entered into the JDA effective July 1,2006 and completed its evaluation of the reserve. After all information wasobtained, the Company adjusted the reserve to $7,000 as part of the purchaseprice allocation process during the permitted allocation period. As ofSeptember 29, 2007, the reserve balance was $6,800.

 

The final estimated amount recorded in purchase accounting relatedentirely to losses incurred before the July 2005 acquisition. The Company’sfinal estimate of the probable loss for the respiratory contingencyincorporated the new ownerships’ decision to enter into the JDA. The decisionrepresented a significantly different plan as new ownership agreed to assumelosses related to claims with unknown years of exposure. In addition, thedecision to enter into the JDA was being considered from the date of theacquisition and the ultimate decision was made during the allocation period.

 

The Company believes that this reserve represents a reasonable estimateof its probable and estimable liabilities for product claims alleging injuryresulting from exposure to silica dust and other particles, including asbestos.The Company believes that a five-year projection of claims and related defensecosts is the most reasonable approach. This reserve will be re-evaluatedperiodically and additional charges or credits will be recorded to operatingexpenses as additional information becomes available.

 

It ispossible that the Company may incur liabilities in an amount in excess ofamounts currently reserved. However, taking into account currently availableinformation, historical experience, and the Company’s indemnification fromInvensys, but recognizing the inherent uncertainties in the projection of anyfuture events, the Company believes that these suits or claims should notresult in final judgments or settlements in excess of its reserve.

 

TheCompany historically has not been required to pay any material liabilityclaims. The Company maintains insurance against product liability claims (withthe exception of asbestosis and silicosis cases, for which coverage is notcommercially available), but it is possible that its insurance coverage willnot continue to be available on terms acceptable to the Company or that suchcoverage will not be adequate for liabilities actually incurred.

 

10

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**12.**          Segment Data

** **

The following tablepresents information about the Company by segment:

 
| ** **                                | ** ** | **General   Safety &   Preparedness** | ** ** | **Fire   Service** | ** ** | **Electrical   Safety** | ** ** | **Corporate   (1)** | ** ** | **Eliminations   (2)** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|--------------------------|------------|-----------------------------|------------|-----------|------------|
| **Three Months Ended September 30, 2006** |       |                                                     |       |                    |       |                         |       |                     |       |                        |       |      |       |
| Net sales—third parties              |       | $                                                        | 93,624     |                    | $          | 21,817                       |       | $                        | 21,336     |                        | $          | —    |       | $ | — |   | $ | 136,777 |   |
| Net sales—intersegment               |       | 2,243                                                    |       | —                  |       | —                       |       | —                   |       | (2,243                      | )          | —    |       |
| Income (loss) from operations             |       | 10,487                                                   |       | 1,430                   |       | 3,597                        |       | (2,068                   | )          | —                      |       | 13,446    |       |
|                                      |       |                                                     |       |                    |       |                         |       |                     |       |                        |       |      |       |
| **Three Months Ended September 29, 2007** |       |                                                     |       |                    |       |                         |       |                     |       |                        |       |      |       |
| Net sales—third parties              |       | 102,310                                                  |       | 25,674                  |       | 23,422                       |       | —                   |       | —                      |       | 151,406   |       |
| Net sales—intersegment               |       | 1,823                                                    |       | —                  |       | 90                           |       | —                   |       | (1,913                      | )          | —    |       |
| Income (loss) from operations             |       | 12,423                                                   |       | 3,238                   |       | 4,486                        |       | (3,377                   | )          | —                      |       | 16,770    |       |
|                                      |       |                                                     |       |                    |       |                         |       |                     |       |                        |       |      |       |
| **Nine Months Ended September 30, 2006**  |       |                                                     |       |                    |       |                         |       |                     |       |                        |       |      |       |
| Net sales—third parties              |       | 277,531                                                  |       | 68,073                  |       | 58,807                       |       | —                   |       | —                      |       | 404,411   |       |
| Net sales—intersegment               |       | 7,146                                                    |       | —                  |       | —                       |       | —                   |       | (7,146                      | )          | —    |       |
| Income (loss) from operations             |       | 33,220                                                   |       | 6,118                   |       | 12,745                       |       | (6,287                   | )          | —                      |       | 45,796    |       |
|                                      |       |                                                     |       |                    |       |                         |       |                     |       |                        |       |      |       |
| **Nine Months Ended September 29, 2007**  |       |                                                     |       |                    |       |                         |       |                     |       |                        |       |      |       |
| Net sales—third parties              |       | 307,918                                                  |       | 75,213                  |       | 72,832                       |       | —                   |       | —                      |       | 455,963   |       |
| Net sales—intersegment               |       | 6,508                                                    |       | —                  |       | 305                          |       | —                   |       | (6,813                      | )          | —    |       |
| Income (loss) from operations             |       | 40,181                                                   |       | 9,612                   |       | 15,190                       |       | (8,311                   | )          | —                      |       | 56,672    |       |
|                                           |            |                                                          |            |                         |            |                              |            |                          |            |                             |            |           |            |  |  |  |  |  |  |

 

----

(1)   Corporateexpenses include general and administrative expenses such as administrative, finance,human resources and legal, which are not directly associated with one of the reportingsegments. In addition, the interest expense associated with the 113⁄4% senior payin kind notes due 2012 is included within corporate expenses.

 

(2)          The eliminations column includes theelimination of intersegment net sales among the three reporting segments.

 

**13.**          SubsidiaryGuarantors

** **

Safety Products Holdings,Inc. (“Safety Products”) and NSP Holdings Capital Corp. (“NSP Capital”) areco-issuers of the 113⁄4% senior pay in kind notes due 2012. Both Safety Productsand NSP Capital have no independent assets or operations. NSP Capital is a 100%owned finance subsidiary of Safety Products. The 113⁄4% senior pay in kind notesdue 2012 are not guaranteed by any subsidiary of the Company. The terms of thesenior credit facility significantly restrict Norcross from paying dividendsand otherwise transferring assets to the Company. Further, the terms of theindenture governing its 97⁄8% senior subordinated notes due 2011significantly restrict Norcross and the Company’s other subsidiaries frompaying dividends and otherwise transferring assets to the Company, except forordinary course operating expenses.

 

**14.**    Comprehensive Income

 

Total comprehensive income (which includes the impact of foreigncurrency translation) was $0 and $13,536 for the three months ended September30, 2006 and September 29, 2007, respectively. Total comprehensive income was$14,096 and $29,166 for the nine months ended September 30, 2006 and September29, 2007, respectively.

 

11

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** **

**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

** **

**Overview**

 

We are a leading designer, manufacturer andmarketer of branded products in the fragmented personal protection equipmentindustry. We manufacture and market a full line of personal protectionequipment for workers in the general safety and preparedness, fire service andelectrical safety industries. We sell our products under trusted, long-standingand well-recognized brand names, including *North*, *KCL**, Fibre-Metal,NEOS, *Morning Pride**,*Ranger*, *Servus*, *Pro-Warrington, AmericanFirewear, Salisbury**and*SafetyLine. Our broad product offering includes, among other things,respiratory protection, protective footwear, hand protection, turnout gear andlinemen equipment.

 

We classify our diverse product offeringsinto three reporting segments:

 

*General Safety and Preparedness*. We offer a diverse portfolio of leadingproducts for a wide variety of industries, including manufacturing,agriculture, automotive, construction, food processing and pharmaceuticalindustries and the military, under the *North*, *KCL, Fibre-Metal, NEOS, Ranger*and*Servus*brand names. Our product offering is one of the broadest in the personalprotection equipment industry and includes respiratory protection, protectivefootwear, hand protection, eye, head and face protection, first aid, hearingprotection and fall protection. We sell our general safety and preparednessproducts primarily through industrial distributors.

 

*Fire Service*. We manufacture and market one of the broadestlines of personal protection equipment for the fire service market, offeringfirefighters head-to-toe protection. Our products include turnout gear,fireboots, helmets, gloves and other accessories. We market our products underour Total Fire Group umbrella, using the brand names of *Morning Pride*, *Ranger*, *Servus*, *Pro-Warrington*and*American Firewear*.We are the vendor of choice for many of the largest fire departments in NorthAmerica. We sell our fire service products primarily through specialized fireservice distributors.

 

*Electrical Safety*. We manufacture and market a broad line ofpersonal protection equipment for the utility market under the *Salisbury, SafetyLine*and *Servus*brands. Our products include linemen equipment, gloves, sleeves and footwear.All our products either meet or exceed the applicable standards of the AmericanNational Standards Institute (“ANSI”) and the American Society for Testing ofMaterials (“ASTM”). We distribute our electrical safety products throughspecialized distributors, test labs, utilities and electrical contractors.

 

**Acquisitions**

 

In February 2006, we completed theacquisition of all of the issued and outstanding capital stock of AmericanFirewear. The purchase price consisted of $4.5 million in cash (includingacquisition costs of $0.2 million and net of cash acquired of $0.2 million) anda $1.0 million subordinated seller note. In addition, the purchase price may beincreased by $0.8 million over a four year period based on American Firewearachieving certain financial and operating objectives. We financed theacquisition through cash on the balance sheet and the issuance of the $1.0million subordinated seller note.

 

In June 2006, we completed the acquisition ofall of the issued and outstanding capital stock of White Rubber. The purchaseprice of $22.2 million (including $0.6 million of acquisition costs and grossof outstanding checks of $0.8 million) was financed through $15.0 million ofadditional term borrowings under the senior credit facility and cash on thebalance sheet.

 

In September 2006, we completed theacquisition of all of the issued and outstanding capital stock of NEOS. Thepurchase price consisted of $3.6 million in cash (including acquisition costsof $0.1 million and net of cash acquired) and a $0.8 million subordinatedseller note. In addition, the purchase price may be increased over a five yearperiod based on NEOS achieving certain net sales targets. We financed theacquisition through cash on the balance sheet and the issuance of the $0.8million subordinated seller note.

 

**Discontinued Operations**

 

In June 2007, we completed the sale of all ofthe issued and outstanding capital stock of South Africa. We received net cashproceeds of $3.2 million and recorded a net loss related to the transaction of$3.0 million. In accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived**Assets*,we have reflected South Africa’s results of operations through the date of thesale and transaction loss as discontinued operations for all periods presented.Assets and

 

12

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liabilitiesof South Africa were not material and as a result have not been reclassified asdiscontinued operations in our consolidated statement of financial position asof December 31, 2006. We have combined cash flows from discontinued operationswith cash flows from continuing operations within each cash flow statementcategory as the cash flows from discontinued operations are not material to ourconsolidated results.

 

**Gross Profit**

 

We calculate gross profit as the difference between ournet sales and cost of goods sold. We do not include certain purchasing anddistribution costs as a component of cost of goods sold. As a result, our grossprofit may not be comparable to other entities who may present all ofpurchasing and distribution costs as a component of cost of goods sold.

 

**Expense Classifications**

 

We include the following in each of the majorexpense categories:

 

*Cost of Goods Sold*. Primarily includes all direct and indirectcosts related to our products including the following: raw materials, directand indirect labor, including related benefits, overhead costs, inbound freightcharges, receiving costs, inspection costs, purchasing costs, other internaltransfer costs and cost of resale products.

 

*Selling.* Primarily includesall payroll and related benefits associated with sales and marketing employees,internal and external sales commission payments, marketing costs, advertising expensesand other miscellaneous selling expenses.

 

*Distribution.*Primarily includes alldirect and indirect labor associated with distribution and related benefits,warehousing and freight-out costs and other miscellaneous distributionexpenses.

 

*General and Administrative.*Primarily includes thefollowing: finance and accounting, certain purchasing costs, informationsystems, human resources, legal, corporate overhead expenses and othermiscellaneous administrative expenses.

 

**Results of Operations**

** **

Thefollowing tables set forth our results of operations in dollars and as apercentage of net sales for the three and nine months ended September 30, 2006and the three and nine months ended September 29, 2007 and have been derivedfrom the unaudited statements of operations.

 

13

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| ** **                                                                   | ** ** | **Three months ended**     | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,  2006**         | ** ** | **September 29,  2007**    | ** ** | **September 30,  2006** | ** ** | **September 29,  2007** | ** ** |
| ** **                                                                   | ** ** | **(dollars in thousands)** | ** ** |
| Net sales:                                                                   |       |                                 |       |                            |       |   |   |   |   |
| General Safety &  Preparedness                                           |       | $                                    | 93,624     |                            | $          | 102,310 |   | $ | 277,531 |   | $ | 307,918 |   |
| Fire Service                                                                 |       | 21,817                               |       | 25,674                          |       | 68,073 |   | 75,213 |   |
| Electrical Safety                                                            |       | 21,336                               |       | 23,422                          |       | 58,807 |   | 72,832 |   |
| Total net sales                                                              |       | 136,777                              |       | 151,406                         |       | 404,411 |   | 455,963 |   |
| Cost of goods sold                                                           |       | 87,161                               |       | 93,161                          |       | 250,420 |   | 278,249 |   |
| Gross profit                                                                 |       | 49,616                               |       | 58,245                          |       | 153,991 |   | 177,714 |   |
| Operating expenses                                                           |       | 36,170                               |       | 41,475                          |       | 108,195 |   | 121,042 |   |
| Income from operations:                                                      |       |                                 |       |                            |       |   |   |   |   |
| General Safety &  Preparedness                                           |       | 10,487                               |       | 12,423                          |       | 33,220 |   | 40,181 |   |
| Fire Service                                                                 |       | 1,430                                |       | 3,238                           |       | 6,118 |   | 9,612 |   |
| Electrical Safety                                                            |       | 3,597                                |       | 4,486                           |       | 12,745 |   | 15,190 |   |
| Corporate                                                                    |       | (2,068                               | )          | (3,377                          | )          | (6,287 | ) | (8,311 | ) |
| Total income from operations                                                 |       | 13,446                               |       | 16,770                          |       | 45,796 |   | 56,672 |   |
| Other expense (income):                                                      |       |                                 |       |                            |       |   |   |   |   |
| Interest expense                                                             |       | 12,050                               |       | 12,510                          |       | 34,690 |   | 37,089 |   |
| Interest income                                                              |       | (105                                 | )          | (445                            | )          | (419 | ) | (898 | ) |
| Other, net                                                                   |       | (85                                  | )          | 115                             |       | (610 | ) | 514 |   |
| Income from continuing  operations before income taxes and minority interest |       | 1,586                                |       | 4,590                           |       | 12,135 |   | 19,967 |   |
| Income tax expense                                                           |       | 663                                  |       | 66                              |       | 4,134 |   | 6,444 |   |
| Minority interest                                                            |       | 8                                    |       | 10                              |       | 23 |   | 24 |   |
| Income from continuing  operations                                           |       | 915                                  |       | 4,514                           |       | 7,978 |   | 13,499 |   |
| Loss (income) from  discontinued operations, net of income tax               |       | 26                                   |       | —                          |       | (67 | ) | 2,813 |   |
| Net income                                                                   |       | $                                    | 889        |                            | $          | 4,514 |   | $ | 8,045 |   | $ | 10,686 |   |

 

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| ** **                                                                   | ** ** | **Three months ended**                            | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,  2006**                                | ** ** | **September 29,  2007**    | ** ** | **September 30,  2006** | ** ** | **September 29,  2007** | ** ** |
| ** **                                                                   | ** ** | **(as a percentage of net sales)** | ** ** |
| Net sales:                                                                   |       |                                                        |       |                            |       |   |   |   |   |
| General Safety &  Preparedness                                           |       | 68.5                                                        | %          | 67.6                            | %          | 68.6 | % | 67.5 | % |
| Fire Service                                                                 |       | 16.0                                                        | %          | 17.0                            | %          | 16.8 | % | 16.5 | % |
| Electrical Safety                                                            |       | 15.5                                                        | %          | 15.4                            | %          | 14.6 | % | 16.0 | % |
| Total net sales                                                              |       | 100.0                                                       | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                                                           |       | 63.7                                                        | %          | 61.5                            | %          | 61.9 | % | 61.0 | % |
| Gross profit                                                                 |       | 36.3                                                        | %          | 38.5                            | %          | 38.1 | % | 39.0 | % |
| Operating expenses                                                           |       | 26.5                                                        | %          | 27.4                            | %          | 26.8 | % | 26.6 | % |
| Income from operations:                                                      |       |                                                        |       |                            |       |   |   |   |   |
| General Safety &  Preparedness                                           |       | 7.7                                                         | %          | 8.2                             | %          | 8.2 | % | 8.8 | % |
| Fire Service                                                                 |       | 1.0                                                         | %          | 2.1                             | %          | 1.5 | % | 2.1 | % |
| Electrical Safety                                                            |       | 2.6                                                         | %          | 3.0                             | %          | 3.2 | % | 3.3 | % |
| Corporate                                                                    |       | (1.5                                                        | )%         | (2.2                            | )%         | (1.6 | )% | (1.8 | )% |
| Total income from operations                                                 |       | 9.8                                                         | %          | 11.1                            | %          | 11.3 | % | 12.4 | % |
| Other expense (income):                                                      |       |                                                        |       |                            |       |   |   |   |   |
| Interest expense                                                             |       | 8.8                                                         | %          | 8.3                             | %          | 8.6 | % | 8.1 | % |
| Interest income                                                              |       | (0.1                                                        | )%         | (0.3                            | )%         | (0.1 | )% | (0.2 | )% |
| Other, net                                                                   |       | (0.0                                                        | )%         | 0.1                             | %          | (0.2 | )% | 0.1 | % |
| Income from continuing  operations before income taxes and minority interest |       | 1.1                                                         | %          | 3.0                             | %          | 3.0 | % | 4.4 | % |
| Income tax expense                                                           |       | 0.5                                                         | %          | 0.0                             | %          | 1.0 | % | 1.5 | % |
| Minority interest                                                            |       | 0.0                                                         | %          | 0.0                             | %          | 0.0 | % | 0.0 | % |
| Income from continuing operations                                            |       | 0.6                                                         | %          | 3.0                             | %          | 2.0 | % | 2.9 | % |
| Loss (income) from  discontinued operations, net of income tax               |       | 0.0                                                         | %          | 0.0                             | %          | (0.0 | )% | 0.6 | % |
| Net income                                                                   |       | 0.6                                                         | %          | 3.0                             | %          | 2.0 | % | 2.3 | % |

 

***Three Months Ended September 29, 2007 asCompared to Three Months Ended September 30, 2006***

 

*Net sales.*Net sales increased by $14.6million, or 10.7%, from $136.8 million for the three months ended September 30,2006 to $151.4 million for the three months ended September 29, 2007. In ourgeneral safety and preparedness segment, net sales increased by $8.7 million,or 9.3%, from $93.6 million for the three months ended September 30, 2006 to$102.3 million for the three months ended September 29, 2007. The increasereflects a combination of the following: combined organic growth in ourinternational operations of $2.7 million, favorable exchange rates, which hadan impact of $3.5 million and overall organic growth in our North Americannon-government business of $3.6 million, partially offset by a decrease ingovernment contract shipments of $1.1 million. In our fire service segment, netsales increased by $3.9 million, or 17.7%, from $21.8 million for the threemonths ended September 30, 2006 to $25.7 million for the three months endedSeptember 29, 2007, due in part to a more normalized pattern of fire act grantswhen compared to 2006. In addition, the issuance of the new National FireProtection Association (“NFPA”) standard is creating increase demand for ourpatented products. In our electrical safety segment, net sales increased by$2.0 million, or 9.8%, from $21.4 million for the three months ended September30, 2006 to $23.4 million for the three months ended September 29, 2007,primarily driven by strong market demand and new product penetration.

 

*Gross profit.*Gross profit increased by $8.6million, or 17.4%, from $49.6 million for the three months ended September 30,2006 to $58.2 million for the three months ended September 29, 2007, primarilydue to the $14.6 million, or 10.7%, increase in net sales. Our gross profitmargin increased from 36.3% for the three months ended September 30, 2006 to38.5% for the three months ended September 29, 2007. In our general safety andpreparedness segment, gross profit increased by $4.9 million, or 13.5%, from$36.0 million for the three months ended September 30, 2006 to $40.9 millionfor the three months ended September 29, 2007. This increase was primarily dueto the overall net sales increase of $8.7 million, or 9.3%, and improved marginperformance. In our fire service segment, gross profit increased by $2.5 million,or 45.5%, from $5.7 million for the three months ended September 30, 2006 to$8.2 million for the three months ended September 29, 2007, primarily due tothe increase in net sales of $3.9 million, or 17.7%, and favorable marginrealization. In our electrical safety segment, gross profit increased by $1.2million, or 15.2%, from $7.9 million for the three months ended September 30,2006 to $9.1 million for the three months ended September 29, 2007, primarilydue to the increase in net sales of $2.0

 

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million, or 9.8%, and the favorable impact of$0.3 million of lower inventory purchase accounting adjustments in the threemonths ended September 29, 2007 relative to the three months ended September30, 2006.

* *

*Operating expenses.*Operating expenses increased by$5.2 million, or 14.7%, from $36.3 million for the three months ended September30, 2006 to $41.5 million for the three months ended September 29, 2007. In ourgeneral safety and preparedness segment, operating expenses increased by $2.9million, or 11.4%, from $25.5 million for the three months ended September 30,2006 to $28.4 million for the three months ended September 29, 2007, driven byincreased variable selling and distribution expenses associated with the $8.7million, or 9.3%, increase in net sales and higher payroll expenses. In ourfire service segment, operating expenses increased by $0.7 million, or 18.1%,from $4.3 million for the three months ended September 30, 2006 to $5.0 millionfor the three months ended September 29, 2007, primarily due to increasedvariable selling and distribution expenses related to the $3.9 million, or17.7%, increase in net sales and higher administrative expenses. In ourelectrical safety segment, operating expenses increased by $0.4 million, or7.3%, from $4.3 million for the three months ended September 30, 2006 to $4.7million for the three months ended September 29, 2007, primarily due toincremental administrative expenses. Corporate expenses for the three monthsended September 30, 2006 consisted of $1.9 million of general andadministrative expenses and $0.3 million of management incentive compensationexpense. Corporate expenses for the three months ended September 29, 2007consisted of $2.9 million of general and administrative expenses and $0.5million of management incentive compensation expense. The increase in corporategeneral and administrative expenses of $1.0 million was primarily due tohigher payroll, administrative expenses and professional fees. The increase inprofessional fees was partially due to $0.7 million of fees associated with theengagement of a supply-chain improvement consulting firm.

 

*Income from operations.*Income from operationsincreased by $3.3 million, or 24.7%, from $13.5 million for the three monthsended September 30, 2006 to $16.8 million for the three months ended September29, 2007. In our general safety and preparedness segment, income fromoperations increased by $1.9 million, or 18.5%, from $10.5 million for the threemonths ended September 30, 2006 to $12.4 million for the three months endedSeptember 29, 2007. In our fire service segment, income from operationsincreased by $1.8 million, or 126.4%, from $1.4 million for the three monthsended September 30, 2006 to $3.2 million for the three months ended September29, 2007. In our electrical safety segment, income from operations increased by$0.8 million, or 24.7%, from $3.7 million for the three months ended September30, 2006 to $4.5 million for the three months ended September 29, 2007.Corporate expenses for the three months ended September 30, 2006 consisted of$1.9 million of general and administrative expenses and $0.3 million ofmanagement incentive compensation expense. Corporate expenses for the three monthsended September 29, 2007 consisted of $2.9 million of general andadministrative expenses and $0.5 million of management incentive compensationexpense. These segment variances were the result of the reasons discussedabove.

 

Includedin income from operations for the three months ended September 30, 2006 andSeptember 29, 2007 were depreciation and amortization expenses of $6.6 millionand $6.5 million, respectively. Of these amounts, $4.0 million, $1.2 million,and $1.4 million were attributable to the general safety and preparedness, fireservice, and electrical safety segments, respectively, for the three monthsended September 30, 2006 and $4.1 million, $1.1 million, and $1.3 million wereattributable to these segments for the three months ended September 29, 2007.

 

*Interestexpense.*Interestexpense increased by $0.4 million, or 3.8%, from $12.1 million for the threemonths ended September 30, 2006 to $12.5 million for the three months endedSeptember 29, 2007, primarily due to higher non-cash interest chargesassociated with the senior pay in kind notes. Included in interest expense werenon-cash interest charges associated with the senior pay in kind notes of $4.3million and $4.8 million for the three months ended September 30, 2006 andSeptember 29, 2007, respectively.

 

*Other, net.*Other, net increased by $0.2 million from $(0.1)million for the three months ended September 30, 2006 to $0.1 million for thethree months ended September 29, 2007.

 

*Income tax expense.*Income tax expense decreased by$0.6 million, from $0.7 million for the three months ended September 30, 2006to $0.1 million for the three months ended September 29, 2007, as the benefitfrom a reduction in the German statutory tax rate was partially offset byhigher income taxes associated with improved operating performance.

 

*Net income.*Net income increased by $3.6million, from $0.9 million for the three months ended September 30, 2006 to$4.5 million for the three months ended September 29, 2007 as a result of thereasons discussed above.

 

16

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***Nine Months Ended September 29, 2007 asCompared to Nine Months Ended September 30, 2006***

 

*Net sales.*Net sales increased by $51.6million, or 12.7%, from $404.4 million for the nine months ended September 30,2006 to $456.0 million for the nine months ended September 29, 2007. In ourgeneral safety and preparedness segment, net sales increased by $30.4 million,or 10.9%, from $277.5 million for the nine months ended September 30, 2006 to$307.9 million for the nine months ended September 29, 2007. The increasereflects a combination of the following: combined organic growth in ourinternational operations of $9.2 million, favorable exchange rates, which hadan impact of $7.9 million, and overall organic growth in our North Americannon-government business of $17.7 million, which offset a decrease in governmentcontract shipments of $4.4 million. In our fire service segment, net salesincreased by $7.1 million, or 10.5%, from $68.1 million for the nine monthsended September 30, 2006 to $75.2 million for the nine months ended September29, 2007, due in part to a more normalized pattern of fire act grants whencompared to 2006. In addition, the issuance of the new NFPA standard iscreating increase demand for our patented products. In our electrical safetysegment, net sales increased by $14.1 million, or 23.8%, from $58.7 million forthe nine months ended September 30, 2006 to $72.8 million for the nine monthsended September 29, 2007, primarily driven by strong market demand, new productpenetration and incremental White Rubber net sales.

 

*Gross profit.*Gross profit increased by $23.7million, or 15.4%, from $154.0 million for the nine months ended September 30,2006 to $177.7 million for the nine months ended September 29, 2007, primarilydue to the $51.6 million, or 12.7%, increase in net sales. Our gross profitmargin was 39.0% for the nine months ended September 29, 2007 as compared to38.1% for the nine months ended September 30, 2006. In our general safety andpreparedness segment, gross profit increased by $15.4 million, or 14.0%, from$110.4 million for the nine months ended September 30, 2006 to $125.8 millionfor the nine months ended September 29, 2007. This increase was primarily dueto the overall net sales increase of $30.4 million, or 10.9%, improved marginrealization and the favorable impact of $0.8 million of lower inventorypurchase accounting adjustments in the nine months ended September 29, 2007relative to the nine months ended September 30, 2006. In our fire servicesegment, gross profit increased by $4.1 million, or 20.9%, from $19.9 millionfor the nine months ended September 30, 2006 to $24.0 million for the ninemonths ended September 29, 2007, primarily due to the increase in net sales of$7.1 million, or 10.5%, and favorable margin realization. In our electricalsafety segment, gross profit increased by $4.2 million, or 17.5%, from $23.7million for the nine months ended September 30, 2006 to $27.9 million for thenine months ended September 29, 2007, as result of the increase in net sales of$14.1 million, or 23.8%, and the favorable impact of $0.3 million of lowerinventory purchase accounting adjustments in the three months ended September29, 2007 relative to the three months ended September 30, 2006, partiallyoffset by lower margin realization primarily due to White Rubber product lineintegration costs and the impact of product mix.

 

*Operating expenses.*Operating expenses increased by$12.8 million, or 11.9%, from $108.2 million for the nine months endedSeptember 30, 2006 to $121.0 million for the nine months ended September 29,2007. In our general safety and preparedness segment, operating expensesincreased by $8.5 million, or 11.0%, from $77.1 million for the nine monthsended September 30, 2006 to $85.6 million for the nine months ended September29, 2007, driven by increased variable selling and distribution expensesassociated with the $30.4 million, or 10.9%, increase in net sales, unfavorableexchange rates, which had an impact of $1.8 million, and higher payrollexpenses. In our fire service segment, operating expenses increased by $0.6million, or 4.8%, from $13.8 million for the nine months ended September 30,2006 to $14.4 million for the nine months ended September 29, 2007, primarilydue to increased variable selling and distribution expenses related to the $7.1million, or 10.5%, increase in net sales and higher administrative expenses. Inour electrical safety segment, operating expenses increased by $1.7 million, or15.5%, from $11.0 million for the nine months ended September 30, 2006 to $12.7million for the nine months ended September 29, 2007, due to increased variableselling and distribution expenses related to the $14.1 million, or 23.8%,increase in net sales, higher amortization expense of $0.3 million associatedwith intangible assets recorded as part of purchase accounting and incrementalWhite Rubber operating expenses. Corporate expenses for the nine months endedSeptember 30, 2006 consisted of $5.0 million of general and administrativeexpenses and $1.3 million of management incentive compensation expense.Corporate expenses for the nine months ended September 29, 2007 consisted of$7.1 million of general and administrative expenses and $1.2 million ofmanagement incentive compensation expense. The increase in corporate generaland administrative expenses of $2.1 million was primarily due to higherpayroll, administrative expenses and professional fees. The increase inprofessional fees was partially due to $0.7 million of fees associated with theengagement of a supply-chain improvement consulting firm.

 

*Income from operations.*Income from operationsincreased by $10.9 million, or 23.7%, from $45.8 million for the nine monthsended September 30, 2006 to $56.7 million for the nine months ended September29, 2007. In our general safety and preparedness segment, income fromoperations increased by $6.9 million, or 21.0%, from $33.3 million for the ninemonths ended September 30, 2006 to $40.2 million for the nine months endedSeptember 29, 2007. In our fire service segment, income from operationsincreased by $3.5 million, or 57.1%, from $6.1 million for the nine monthsended September 30, 2006 to $9.6 million for the nine months ended September29, 2007. In our electrical safety segment, income

 

17

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from operations increased by $2.5 million, or19.2%, from $12.7 million for the nine months ended September 30, 2006 to $15.2million for the nine months ended September 29, 2007. Corporate expenses forthe nine months ended September 30, 2006 consisted of $5.0 million of generaland administrative expenses and $1.3 million of management incentivecompensation expense. Corporate expenses for the nine months ended September29, 2007 consisted of $7.1 million of general and administrative expenses and$1.2 million of management incentive compensation expense. These segmentvariances were the result of the reasons discussed above.

 

Includedin income from operations for the nine months ended September 30, 2006 andSeptember 29, 2007 were depreciation and amortization expenses of $18.5 millionand $19.7 million, respectively. Of these amounts, $12.0 million, $3.4 million,and $3.1 million were attributable to the general safety and preparedness, fireservice, and electrical safety segments, respectively, for the nine monthsended September 30, 2006 and $12.3 million, $3.5 million, and $3.9 million wereattributable to these segments for the nine months ended September 29, 2007.

 

*Interestexpense.*Interestexpense increased by $2.4 million, or 6.9%, from $34.7 million for the ninemonths ended September 30, 2006 to $37.1 million for the nine months endedSeptember 29, 2007, primarily due to higher outstanding debt balances relatedto the White Rubber Transaction and higher non-cash interest charges associatedwith the senior pay in kind notes. Included in interest expense were non-cashinterest charges associated with the senior pay in kind notes of $12.4 millionand $13.9 million for the three months ended September 30, 2006 and September29, 2007, respectively.

 

*Other, net.*Other, net increased by $1.1 million from $(0.6)million for the nine months ended September 30, 2006 to $0.5 million for thenine months ended September 29, 2007, primarily due to unrealized foreignexchange rate losses.

 

*Income tax expense.*Income tax expense increased by$2.3 million, from $4.1 million for the nine months ended September 30, 2006 to$6.4 million for the nine months ended September 29, 2007, as higher incometaxes associated with improved operating performance were partially offset bythe benefit from a reduction in the German statutory tax rate.

 

*Loss(income) from discontinued operations.*Loss from discontinuedoperations for the nine months ended September 29, 2007 included a $3.0 millionloss related to the sale of South Africa and $(0.2) million of incomeassociated with South Africa discontinued operations. Income from discontinuedoperations for the nine months ended September 30, 2006 included $(0.1) millionof income associated with South Africa discontinued operations.

 

*Net income.*Net income increased by $2.7million, from $8.0 million for the nine months ended September 30, 2006 to$10.7 million for the nine months ended September 29, 2007 as a result of thereasons discussed above.

 

**Liquidity and Capital Resources**

** **

Wehave historically used internal cash flow from operations, commercialborrowings on our lines of credit, seller notes, investments from ourequityholders and capital markets transactions to fund our operations,acquisitions, capital expenditures and working capital requirements. For thenine months ended September 29, 2007, net cash provided by operating activitieswas $23.0 million, as income from operations of $56.7 million was partiallyoffset by an increase in accounts receivable due to higher net sales. For thenine months ended September 30, 2006, net cash provided by operating activitieswas $13.9 million, as income from operations of $45.8 million was partiallyoffset by an increase in accounts receivables due to higher net sales andhigher inventory in part due to pending plant consolidations.

 

Historically, our principal uses of cash havebeen capital expenditures, acquisitions and working capital. Our capitalexpenditures were $7.7 million for the nine months ended September 30, 2006 and$8.1 million for the nine months ended September 29, 2007. Investing activitiesfor the nine months ended September 29, 2007 included $0.7 million of royaltypayments made to the sellers of Arbin, $0.5 million for the purchase of Hungaryand $3.2 million of cash proceeds from the sale of South Africa. For the ninemonths ended September 30, 2006, investing activities included $22.2 millionfor the acquisition of White Rubber, $4.5 million for the acquisition ofAmerican Firewear, $3.6 million for the acquisition of NEOS and $0.7 million ofroyalty payments made to the sellers of Muck Boot and Arbin. We received cashproceeds of $0.4 million and $0.1 million related to the sale of property,plant and equipment during the nine months ended September 29, 2007 andSeptember 30, 2006, respectively.

 

As of September 29, 2007, we had workingcapital of $188.7 million and cash of $40.6 million. We maintain inventorylevels sufficient to satisfy customer orders on demand, with generally a threemonth supply on hand. Turnout gear is an exception and is generally made toorder. Our accounts receivable terms are generally 30 days, net.

 

For the nine months ended September 29, 2007,net cash used in financing activities was $4.3 million, consisting of

 

18

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$4.3million of payments on long-term obligations (including an excess cash flowsweep payment of $2.3 million under the terms of our senior credit facility).For the nine months ended September 30, 2006, net cash provided by financingactivities was $16.0 million, consisting of the following: proceeds fromadditional term borrowings of $15.0 million under the senior credit facilityrelated to the White Rubber transaction, proceeds from borrowings under therevolving credit facility of $2.0 million, $1.4 million of payments onlong-term obligations, $0.6 million of proceeds from the issuance of shares and$0.2 million of payments for deferred financing costs.

 

As of September 29, 2007, borrowings underthe new senior credit facility bore interest at a weighted average rate of7.3%. As of September 29, 2007, there was approximately $162.1 million ofoutstanding indebtedness under the senior credit facility and approximately$47.5 million of available borrowings under the revolving credit facility.

 

We believe that our internal cash flows andborrowings under our new senior credit facility will provide us with sufficientliquidity and capital resources to meet our current and future financialobligations for the foreseeable future, including funding our operations, debtservice and capital expenditures. Our future operating performance will besubject to future economic conditions and to financial, business and otherfactors, many of which are beyond our control. If our future cash flow fromoperations and other capital resources are insufficient to pay our obligationsas they mature or to fund our liquidity needs, we may be forced to reduce or delayour business activities and capital expenditures, sell assets, obtainadditional debt or equity capital or restructure or refinance all or a portionof our debt, including the senior subordinated notes, on or before maturity. Wecannot assure you that we would be able to accomplish any of these alternativeson a timely basis or on satisfactory terms, if at all. In addition, the termsof our existing and future indebtedness, including our senior subordinatednotes and our senior credit facility, may limit our ability to pursue any ofthese alternatives.

 

**Forward-Looking Statements**

 

This Management’s Discussion and Analysis of FinancialCondition and Results of Operations contains forward-looking information. Thesestatements reflect management’s expectations, estimates, and assumptions basedon information available at the time of the statement. Forward-lookingstatements include, but are not limited to, statements regarding future events,plans, goals, objectives, and expectations. The words “anticipate,” “believe,” “estimate,”“expect,” “plan,” “intent,” “likely,” “will,” “should,” and similar expressionsare intended to identify forward-looking statements. Forward-looking statementsare not guarantees of future performance and involve risks, uncertainties, andother factors, including those set forth below, which may cause our actualresults, performance, or achievements to be materially different from anyfuture results, performance, or achievements expressed or implied by thosestatements. Important factors that could cause our actual results, performance,or achievements to be materially different from any future results,performance, or achievements expressed or implied by those statements include,but are not limited to: (i) our high degree of leverage and significant debtservice obligations; (ii) the impact of current and future laws andgovernmental regulations affecting us or our product offerings; (iii) theimpact of governmental spending; (iv) our ability to retain existing customers,maintain key supplier status with those customers with which we have achievedsuch status, and obtain new customers; (v) the highly competitive nature of thepersonal protection equipment industry; (vi) any future changes in management;(vii) acceptance by consumers of new products we develop or acquire; (viii) theimportance and costs of product innovation; (ix) unforeseen problems associatedwith international sales, including gains and losses from foreign currencyexchange and restrictions on the efficient repatriation of earnings; (x) theunpredictability of patent protection and other intellectual property issues;(xi) cancellation of current orders; (xii) the outcome of pending productliability claims and the availability of indemnification for those claims; (xiii)general risks associated with the personal protection equipment industry; and(xiv) the successful integration of acquired companies on economicallyacceptable terms. We undertake no obligation to publicly update or revise anyforward-looking statements to reflect changed assumptions, the occurrence ofanticipated or unanticipated events, or changes to future results over time.

 

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

 

There have been no materialchanges to our exposure to market risk since December 31, 2006.

 

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**Item 4. Controls and Procedures**

 

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

 

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**PART IIOTHER INFORMATION**

** **

**Item 1. Legal Proceedings**

** **

We are subject to various claims arising inthe ordinary course of business. Most of these lawsuits and claims are productliability matters that arise out of the use of respiratory product linesmanufactured by our North Safety Products subsidiary. As of September 29, 2007,our North Safety Products subsidiary, along with its predecessors and/or theformer owners of such business were named as defendants in approximately 649lawsuits involving respirators allegedly manufactured and sold by it or itspredecessors. We are also monitoring an additional two lawsuits in which wefeel that North Safety Products, its predecessors and /or the former owners ofsuch businesses may be named as defendants. Collectively, these 651 lawsuitsrepresent approximately 8,451 (excluding spousal claims) plaintiffs.Approximately 85% of these lawsuits involve plaintiffs alleging injuryresulting from exposure to silica dust, with the remainder alleging injury fromexposure to other particles, including asbestos. These lawsuits typicallyallege that the purported injuries resulted in part from respirators thatwere negligently designed and/or manufactured. The defendants in these lawsuitsare often numerous, and include, in addition to respirator manufacturers,employers of the plaintiffs and manufacturers of sand (used in sand blasting)and asbestos. We acquired our North Safety Products subsidiary onOctober 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, our North Safety Productssubsidiary is contractually entitled to indemnification from Norton Company, anaffiliate of Saint-Gobain, which owned the North Safety Products business priorto Invensys. Pursuant to a December 14, 1982 asset purchase agreement,Siebe Norton, Inc., a newly formed wholly-owned subsidiary of NortonCompany, acquired the assets of Norton’s Safety Products Division and the stockof this company was in turn acquired by Siebe Gorman Holdings plc. Under theterms of the agreement, Siebe Norton, Inc. did not assume any liabilityfor claims relating to products shipped by Norton Company prior to the closingdate. Moreover, Norton Company covenanted in the agreement to indemnify SiebeNorton, Inc. and its successors and assigns against any liability resultingfrom or arising out of any state of facts, omissions or events existing oroccurring on or before the closing date, including, without limitation, anyclaims arising from products shipped by Norton Company or any of its affiliatesprior to the closing date. Siebe Norton, Inc., whose name was subsequentlychanged to Siebe North Inc., was subsequently acquired by us as part ofthe 1998 acquisition of the North Safety Products business from Invensys.

 

Despite these indemnification arrangements,we could potentially be liable for losses or claims relating to productsmanufactured prior to the October 1998 acquisition date if Invensys failsto meet its obligations to indemnify us and we could potentially be liable forlosses and claims relating to products sold prior to January 10, 1983 ifboth Invensys and Norton fail to meet their obligations to indemnify us. Wecould also be liable if the alleged exposure involved the use of a productmanufactured by us after our October 1998 acquisition of the North SafetyProducts business.

 

Effective July 1, 2006, we entered into ajoint defense agreement through December 31, 2008 with the former owners of theNorth Safety Products business (the “Joint Defense Agreement” or “JDA”). Underthe terms of the Joint Defense Agreement, we agreed to pay a weighted averagepercentage of defense costs (including legal fees, expert witnesses and out ofpocket expenses) associated with defending ourselves and the prior owners ofthe North Safety Products business subject to a cap of $525,000, $960,000 and$1.0 million for the period from July 1, 2006 through December 31, 2006, theyear ended December 31, 2007 and the year ended December 31, 2008, respectively.The cap excludes settlement costs and other costs incurred exclusively by us(including trial costs and special requests of counsel), which we will berequired to pay under the JDA. Separately, we agreed to pay Invensys $200,000related to settled cases through June 30, 2006 in which Invensys claims thatthe period of alleged exposure included periods after October 1998.

 

Although the JDA expires on December 31,2008, we expect to incur additional defense and settlement costs beyond thisdate. We will consider our alternatives for defending the claims as the JDAnears expiration and determine the appropriate course of action, which couldinclude an extension of the JDA.

 

Based upon information provided to us by Invensys, webelieve activity related to these lawsuits was as follows for the three monthsended September 29, 2007:

 

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| ** **                                | ** ** | **Plaintiffs** | ** ** | **Cases** | ** ** |
|-------------------------------------------|------------|----------------|------------|-----------|------------|
| Beginning lawsuits as of  January 1, 2007 |       | 8,746          |       | 644       |       |
| New lawsuits                              |       | 19             |       | 16        |       |
| Settlements                               |       | —         |       | —    |       |
| Dismissals and other                      |       | (314           | )          | (9        | )          |
| Ending lawsuits as of  September 29, 2007 |       | 8,451          |       | 651       |       |

 

Both the rate of new filings and the number ofexisting claimants have declined dramatically since 2003 as courts andlegislatures have tightened the rules on when and where the silica claims canbe pursued in an effort to reduce the large number of unmeritorious claims. Thenew rules make bringing silica cases on a mass level much less attractive tothe plaintiffs’ bar. Plaintiffs’ attorneys in many jurisdictions can no longer(1) find a worker with some stated exposure to silica, (2) take an X-ray of hischest, (3) have it interpreted as demonstrating lung shadows by a radiologist,(4) then file a single lawsuit in a dangerous venue with hundreds of otherplaintiffs against hundreds of defendants with the pleading containing littlemore than the parties’ names and some standard pleading language. Morespecifically, the legislatures of at least seven states — including formerhotbeds of silica litigation such as Texas, Florida and Ohio — passedimpairment-criteria legislation that redefined injury. These acts forceplaintiffs to prove impairment as a result of their exposure to qualify forjudicial treatment. The same legislation requires that each silica claimant betried individually, and not in the multiple plaintiff format in which thepotential for large verdicts resulted from increased plaintiffs and where a fewmeritorious claims could increase the value of unmeritorious ones. Further tortreform in Texas created a state-wide multi-district litigation (“MDL”) whereinone judge presides over the pretrial of all Texas-silica cases. In Mississippi,the Supreme Court changed the venue rules making it much more difficult to fileout-of-state plaintiffs there. The Mississippi court also changed the pleading requirementsmaking the plaintiffs’ attorneys include plaintiff-specific allegations againsteach defendant sued, instead of the vague allegations against hundreds ofdefendants.

 

Plaintiffs have asserted specific dollarclaims in approximately 30% of the approximately 649 cases pending as ofSeptember 29, 2007 in which North Safety Products, its predecessors and/or theformer owners of such businesses have been named as defendants. A majority ofjurisdictions prohibit specifying damages in tort cases such as these, and mostof the remaining jurisdictions do not require such specification. In thosecases in which plaintiffs choose to assert specific dollar amounts in theircomplaints, the amounts claimed are typically not meaningful as an indicator ofa company’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 649 complaints maintained inour records, 459 do not specify the amount of damages sought, 25 generallyallege damages in excess of $50,000, one alleges compensatory damages in excessof $50,000 and an unspecified amount of punitive damages, 103 allegecompensatory damages and punitive damages, each in excess of $25,000, twogenerally allege damages in excess of $100,000, two allege compensatory damagesand punitive damages, each in excess of $50,000, 20 generally allege damages inexcess of $15.0 million, one generally alleges damages of $23.0 million, onealleges compensatory damages and punitive damages, each in excess of $10,000,four allege general damages of $18.0 million and punitive damages of $10.0million, two allege general damages of $13.0 million and punitive damages of$10.0 million, one alleges compensatory and punitive damages, each in excess of$15,000, one alleges punitive damages in excess of $50,000, one generallyalleges damages in excess of $15,000, 12 generally allege damages in excess of$25,000, one alleges compensatory damages of $18.0 million and punitive damagesof $10.0 million, one alleges punitive damages of $13.5 million andcompensatory damages of $10.0 million, one alleges punitive damages of $13.0million and compensatory damages of $10.0 million, eight allege compensatorydamages of $13.0 million and punitive damages of $10.0 million, one allegescompensatory and punitive damages, each of $15,000 and two allege compensatoryand punitive damages, each in excess of $15.0 million. We currently do not haveaccess to the complaints with respect to the previously mentioned additionaltwo monitored cases, and therefore we do not know whether these cases allegespecific damages, or if so, the amount of such damages, but are in the processof seeking to obtain such information. Due to the reasons noted above and tothe indemnification arrangements benefiting us, we do not believe that thedamage amounts specified in these complaints are a meaningful factor in anyassessment of our potential liability.

 

Bankruptcy filings of companies with asbestosand silica-related litigation could increase our cost over time. If we werefound liable in these cases and either Invensys or Norton Company failed tomeet its indemnification obligations to us or the suit involved productsmanufactured by us after our October 1998 acquisition of North SafetyProducts, it would have a material adverse effect on our business.

 

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Norcross recorded a $1.25 million reserve forrespiratory claims during the year ended December 31, 2004. Norcross re-evaluatedthis reserve in its first and second quarter 2005 financial statements andconcluded the $1.25 million recorded reserve continued to be its best estimateof the probable loss for the respiratory contingency.

 

In the July 2005 acquisition purchase accounting(as first reported in the Form 10-Q for the third quarter of 2005), we carriedforward the $1.25 million liability for this pre-acquisition contingency. Althoughmanagement concluded that it was likely their estimate of this pre-acquisitioncontingent liability would be increased during the purchase accountingallocation period as the new ownership finalized their strategy for addressingthe liability and gathered information (primarily related to case informationand the working relationship among the prior owners of North), it was unlikelythe amount would be lower than the $1.25 million. Thus, the $1.25 millionamount represented the low end of a probable loss range, subject to furtheradjustment during the allocation period.

 

In December 2005, we began negotiations withthe former owners of the North business to enter into the JDA. We determinedthat the liability should be increased to $5.0 million as of December 31, 2005as part of the purchase price allocation process. The $5.0 million reserve asof December 31, 2005 represented management’s best estimate of the liabilitybased on the current status of negotiations. As of December 31, 2005, theestimate was still preliminary as we were awaiting finalization of the JDAnegotiation process.

 

As discussed above, we entered into the JDAeffective July 1, 2006 and completed our evaluation of the reserve. After allinformation was obtained, we adjusted the reserve to $7.0 million as part ofthe purchase price allocation process during the permitted “allocation period”.As of September 29, 2007, the reserve balance was $6.8 million.

 

The final estimated amount recorded inpurchase accounting related entirely to losses incurred before the July 2005acquisition. Our final estimate of the probable loss for the respiratorycontingency incorporated the new ownerships’ decision to enter into the JDA.The decision represented a significantly different plan as new ownership agreedto assume losses related to claims with unknown years of exposure. In addition,the decision to enter into the JDA was being considered from the date of theacquisition and the ultimate decision was made during the allocation period.

 

We believe that this reserve represents areasonable estimate of our probable and estimable liabilities for productclaims alleging injury resulting from exposure to silica dust and otherparticles, including asbestos. We believe that a five-year projection of claimsand related defense costs is the most reasonable approach. This reserve will bere-evaluated periodically and additional charges or credits will be recorded tooperating expenses as additional information becomes available.

 

It is possible that we may incurliabilities in an amount in excess of amounts currently reserved. However,taking into account currently available information, historical experience, andour indemnification from Invensys, but recognizing the inherent uncertaintiesin the projection of any future events, we believe that these suits or claimsshould not result in final judgments or settlements in excess of our reserve.

 

We historically have not been required to payany material liability claims. We maintain insurance against product liabilityclaims (with the exception of asbestosis and silicosis cases, for whichcoverage is not commercially available), but it is possible that insurancecoverage will not continue to be available on terms acceptable to us or thatsuch coverage will not be adequate for liabilities actually incurred.

 

We are subject to legal proceedings andclaims that arise in the ordinary course of our business. In our opinion, theoutcome of these actions will not have a material adverse effect on ourfinancial position or results of operations.

 

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**Item 1A. Risk Factors**

** **

There have been no materialchanges to the risks impacting our business since December 31, 2006.

 

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**Item 6. Exhibits**

** **
| Exhibit No. | ** ** | **Description**                                                                                          |
|-------------|------------|----------------------------------------------------------------------------------------------------------|
| 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,Safety Products Holdings, Inc. has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
|                  | SAFETY PRODUCTS HOLDINGS, INC. |
|------------------|--------------------------------|
|             |                           |
|             |                           |
| November 8, 2007 | By:                            | /s/ ROBERT A. PETERSON |   |
|             |                           | Robert A. Peterson |
|             |                           | President, Chief Executive Officer and Director |
|             |                           | (Principal Executive Officer) |
|             |                           |
|             |                           |
| November 8, 2007 | 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 OF EXHIBITS**

** **
| Exhibit No. | ** ** | **Description**                                                                                          |
|-------------|------------|----------------------------------------------------------------------------------------------------------|
| 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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