**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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

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| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**          |
|------------|------------|-----------------------------------------------------------------------------------------------------------------|
|       | ** ** | **For the quarterly period ended  April 1, 2006**                                                          |
| **OR**     |       |                                                                                                            |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
| ** ** | ** ** | **For the transition period from               to** |

 

**CommissionFile 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 check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes ý   No o

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated. See definition of “accelerated filerand large accelerated filer” in Rule 12b-2 of the Exchange Act.

Largeaccelerated filer  o  Accelerated filer  o  Non-accelerated filer  **x**

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No **x**

On May 12, 2006 Safety Products Holdings, Inc. had 11,023,258common shares outstanding.

 

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**SAFETY PRODUCTSHOLDINGS, INC.FORM 10-Q QUARTERLY REPORTFor the Quarterly Period Ended April 1, 2006**

**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 |   | 13 |
|                                                                        |    |   |   |   |   |
|                                                                        | Item 3. |   | Quantitative  and Qualitative Disclosures About Market Risk |   | 21 |
|                                                                        |    |   |   |   |   |
|                                                                        | Item 4. |   | Controls and Procedures |   | 22 |
|                                                                        |    |   |   |   |   |
| PART II  Other Information                                             |    | 23     |
|                                                                        |    |   |
|                                                                        | Item 1. |   | Legal Proceedings |   | 23 |
|                                                                        |    |   |   |   |   |
|                                                                        | Item 2. |   | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 25 |
|                                                                        |    |   |   |   |   |
|                                                                        | Item 6. |   | Exhibits |   | 25 |
|                                                                        |    |   |   |   |   |
| Signatures                                    |    | 26     |
|                                                                        |    |   |
| **Form 10-Q  Listing of Exhibits**       |    | 27     |

 

i

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**PART IFINANCIAL INFORMATION**

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

**SAFETY PRODUCTS HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS**(Amounts in Thousands)(Unaudited)

 
| ** **                                                                               | ** ** | **Successor**                        | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                               | ** ** | **December 31,  2005 (1)** | ** ** | **April 1,  2006** | ** ** |
| **Assets**                                                                               |       |                                 |       |   |   |
| Current assets:                                                                          |       |                                 |       |   |   |
| Cash and cash equivalents                                                                |       | $                                    | 20,819     |   | $ | 11,896 |   |
| Accounts receivable, less allowance of $2,317 and  $2,267 in 2005 and 2006, respectively |       | 68,286                               |       | 79,288 |   |
| Inventories                                                                              |       | 93,462                               |       | 97,523 |   |
| Deferred income taxes                                                                    |       | 3,230                                |       | 3,230 |   |
| Prepaid expenses and other current assets                                                |       | 3,206                                |       | 2,794 |   |
| Total current  assets                                                                    |       | 189,003                              |       | 194,731 |   |
| Property, plant,  and equipment, net                                                     |       | 67,315                               |       | 66,973 |   |
| Deferred  financing costs, net                                                           |       | 19,669                               |       | 18,836 |   |
| Goodwill, net                                                                            |       | 135,718                              |       | 140,241 |   |
| Other intangible  assets, net                                                            |       | 276,842                              |       | 274,981 |   |
| Other noncurrent  assets                                                                 |       | 5,109                                |       | 4,902 |   |
| Total assets                                                                             |       | $                                    | 693,656    |   | $ | 700,664 |   |
|                                                                                     |       |                                 |       |   |   |
| **Liabilities and shareholders’  equity**                                           |       |                                 |       |   |   |
| Current liabilities:                                                                     |       |                                 |       |   |   |
| Accounts payable                                                                         |       | $                                    | 21,229     |   | $ | 25,234 |   |
| Accrued expenses                                                                         |       | 34,137                               |       | 25,894 |   |
| Current maturities of long-term obligations                                              |       | 1,846                                |       | 2,098 |   |
| Total current  liabilities                                                               |       | 57,212                               |       | 53,226 |   |
| Pension,  post-retirement, and deferred compensation                                     |       | 32,340                               |       | 32,071 |   |
| Long-term  obligations                                                                   |       | 441,393                              |       | 445,676 |   |
| Other noncurrent  liabilities                                                            |       | 5,376                                |       | 5,360 |   |
| Deferred income  taxes                                                                   |       | 50,268                               |       | 50,499 |   |
| Minority  interest                                                                       |       | 176                                  |       | 187 |   |
|                                                                                     |       | 529,553                              |       | 533,793 |   |
| Shareholders’ equity:                                                               |       |                                 |       |   |   |
| Common shares                                                                            |       | 110                                  |       | 110 |   |
| Contributed capital                                                                      |       | 109,560                              |       | 110,923 |   |
| Accumulated deficit                                                                      |       | (4,766                               | )          | (1,079 | ) |
| Accumulated other comprehensive income                                                   |       | 1,987                                |       | 3,691 |   |
| Total  shareholders’ equity                                                         |       | 106,891                              |       | 113,645 |   |
| Total liabilities and  shareholders’ equity                                         |       | $                                    | 693,656    |   | $ | 700,664 |   |

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(1)          December 31, 2005balances were obtained from audited financial statements.

*See notes to unaudited consolidated financialstatements.*

1

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**SAFETYPRODUCTS HOLDINGS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS****(Amounts in Thousands) (Unaudited)**
| ** **                                        | ** ** | **Predecessor**                  | ** ** | **Successor**          | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Three months ended** | ** ** |
| ** **                                        | ** ** | **April 2, 2005**           | ** ** | **April 1, 2006** | ** ** |
| Net sales                                         |       | $                                | 119,944    |                   | $          | 141,876 |   |
| Cost of goods  sold                               |       | 75,602                           |       | 88,145                 |       |
| Gross profit                                      |       | 44,342                           |       | 53,731                 |       |
| Operating expenses:                               |       |                             |       |                   |       |
| Selling                                           |       | 11,378                           |       | 12,875                 |       |
| Distribution                                      |       | 6,274                            |       | 7,926                  |       |
| General and administrative                        |       | 11,067                           |       | 13,957                 |       |
| Amortization of intangibles                       |       | 142                              |       | 2,726                  |       |
| Total operating  expenses                         |       | 28,861                           |       | 37,484                 |       |
| Income from  operations                           |       | 15,481                           |       | 16,247                 |       |
| Other expense (income):                           |       |                             |       |                   |       |
| Interest expense                                  |       | 10,721                           |       | 11,248                 |       |
| Interest income                                   |       | (428                             | )          | (163                   | )          |
| Other, net                                        |       | 386                              |       | (371                   | )          |
| Income before  income taxes and minority interest |       | 4,802                            |       | 5,533                  |       |
| Income tax  expense                               |       | 1,604                            |       | 1,835                  |       |
| Minority  interest                                |       | 4                                |       | 11                     |       |
| Net income                                        |       | $                                | 3,194      |                   | $          | 3,687 |   |

 

*See notes to unaudited consolidatedfinancial statements.*

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**SAFETY PRODUCTS HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**(Amounts inThousands) (Unaudited)

 
| ** **                                                                     | ** ** | **Predecessor**                  | ** ** | **Successor**           | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **Three months ended** | ** ** |
| ** **                                                                     | ** ** | **April 2,  2005**          | ** ** | **April 1,  2006** | ** ** |
| **Operating activities**                                                       |       |                             |       |                    |       |
| Net income                                                                     |       | $                                | 3,194      |                    | $          | 3,687 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                             |       |                    |       |
| Depreciation                                                                   |       | 2,705                            |       | 3,139                   |       |
| Amortization of intangibles                                                    |       | 142                              |       | 2,726                   |       |
| Amortization of deferred financing costs                                       |       | 601                              |       | 833                     |       |
| Amortization of net original issue discount  (premium)                         |       | 25                               |       | (35                     | )          |
| Deferred income taxes                                                          |       | 237                              |       | 231                     |       |
| Minority interest                                                              |       | 4                                |       | 11                      |       |
| Noncash interest                                                               |       | 4,982                            |       | 4,064                   |       |
| Management incentive compensation                                              |       | —                           |       | 800                     |       |
| Gain on sale of property, plant, and equipment                                 |       | —                           |       | (79                     | )          |
| Changes in operating  assets and liabilities:                                  |       |                             |       |                    |       |
| Accounts receivable                                                            |       | (8,540                           | )          | (10,337                 | )          |
| Inventories                                                                    |       | (969                             | )          | (3,104                  | )          |
| Prepaid expenses and other current assets                                      |       | 220                              |       | 412                     |       |
| Other noncurrent assets                                                        |       | 73                               |       | 73                      |       |
| Accounts payable                                                               |       | 2,445                            |       | 3,768                   |       |
| Accrued expenses                                                               |       | (7,499                           | )          | (8,353                  | )          |
| Pension, postretirement, and deferred compensation                             |       | 14                               |       | (269                    | )          |
| Other noncurrent liabilities                                                   |       | (6                               | )          | (15                     | )          |
| Other                                                                          |       | (6                               | )          | (9                      | )          |
| Net cash used in  operating activities                                         |       | (2,378                           | )          | (2,457                  | )          |
|                                                                           |       |                             |       |                    |       |
| **Investing activities**                                                       |       |                             |       |                    |       |
| Purchase of  businesses, net of cash acquired                                  |       | (431                             | )          | (5,636                  | )          |
| Purchases of  property, plant, and equipment                                   |       | (1,327                           | )          | (2,291                  | )          |
| Proceeds from  sale of property, plant, and equipment                          |       | —                           |       | 113                     |       |
| Net cash used in  investing activities                                         |       | (1,758                           | )          | (7,814                  | )          |
|                                                                           |       |                             |       |                    |       |
| **Financing activities**                                                       |       |                             |       |                    |       |
| Payments for  deferred financing costs                                         |       | (3,700                           | )          | —                  |       |
| Proceeds from  borrowings                                                      |       | 100,000                          |       | 1,000                   |       |
| Payments of debt                                                               |       | (13,013                          | )          | (494                    | )          |
| Capital  contribution                                                          |       | —                           |       | 563                     |       |
| Distributions on  preferred units                                              |       | (60,000                          | )          | —                  |       |
| Distributions on  common units                                                 |       | (2,500                           | )          | —                  |       |
| Net cash  provided by provided by financing activities                         |       | 20,787                           |       | 1,069                   |       |
| Effect of  exchange rate changes on cash                                       |       | (1,424                           | )          | 279                     |       |
| Net increase  (decrease) in cash and cash equivalents                          |       | 15,227                           |       | (8,923                  | )          |
| Cash and cash  equivalents at beginning of period                              |       | 35,731                           |       | 20,819                  |       |
| Cash and cash  equivalents at end of period                                    |       | $                                | 50,958     |                    | $          | 11,896 |   |

 

*See notes to unaudited consolidated financial statements*

 

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** **

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

**1. Transactions**

On July 19, 2005, Norcross Safety Products L.L.C. (“Norcross”)announced the closing of the transaction under which it was acquired by SafetyProducts Holdings, Inc. (the “Company” or “Safety Products”), a newholding company formed by Odyssey Investment Partners, LLC (“Odyssey”) for thepurpose of completing the acquisition. Pursuant to the terms of the purchaseagreement, Safety Products purchased all of the outstanding membership units ofNorcross and all of the outstanding common stock of NSP Holdings Capital Corp.(“NSP Capital”), a wholly-owned subsidiary of NSP Holdings L.L.C. (“NSPHoldings”), and pursuant to which Safety Products assumed all of theoutstanding indebtedness of Norcross and NSP Holdings, in exchange for a basepurchase price to NSP Holdings of $472,000, plus the cash in Norcross as of April 2,2005 in the amount of approximately $16,900, less (1) the indebtedness ofNorcross and its subsidiaries as of April 2, 2005 and (2) certaintransaction fees and expenses. The cash purchase price was $204,488 includingdirect costs of acquisition of $2,346, and excluding assumed debt of $260,523.

On November 1, 2005, the Company completed the acquisition of allof the issued and outstanding capital stock of The Fibre-Metal Products Company(“Fibre-Metal”). The purchase price was $68,723, including acquisition costs of$723. The Company financed the acquisition through additional term borrowingsunder the senior credit facility and cash on the balance sheet. The results ofoperations of Fibre-Metal are included in the Company’s consolidated statementof operations from the date of acquisition.

On February 2,2006, the Company completed the acquisition of all of the issued andoutstanding capital stock of American 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. Inaddition, the purchase price may be increased by $750 over the next four yearsbased on American Firewear achieving certain financial and operating objectives.The Company financed the acquisition through cash on the balance sheet and theissuance of the $1,000 subordinated seller note. The results of operations ofAmerican Firewear are included in the Company’s consolidated statement ofoperations from the date of acquisition. The Company has not finalized theallocation of purchase price as of April 1, 2006.

The acquisition of Norcross is referred to as the “Norcross Transaction”,the acquisition of Fibre-Metal is referred to as the “Fibre-Metal Transaction”,and the acquisition of American Firewear is referred to as the “AmericanFirewear Transaction”. Collectively, the Norcross Transaction, the Fibre-MetalTransaction and the American Firewear Transaction are referred to as the “Transactions.”

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

The accompanyingunaudited consolidated financial statements of the Company have been preparedin accordance with accounting principles generally accepted in the UnitedStates for interim financial information. Accordingly, they do not include allof the information and notes required by accounting principles generallyaccepted in the United States for complete financial statements.

In the opinion of management, all adjustments(consisting only of adjustments of a normal and recurring nature) considerednecessary for a fair presentation of the financial position and results ofoperations have been included. Interim results are not necessarily indicativeof the results that might be expected for any other interim period or for thefiscal year ending December 31, 2006. The financial statements presentedshould be read in conjunction with the consolidated financial statements andfootnotes thereto included in our 2005 consolidated financial statements,included in the Company’s annual report on Form 10-K.

Predecessor — The consolidated financial statements of the Predecessorrepresent the consolidated results of operations of NSP Holdings L.L.C. priorto the Norcross Transaction.

Successor — The consolidated financial statements of the Successorrepresent the consolidated results of operations of Safety Products Holdings, Inc.subsequent to the Norcross Transaction.

The consolidated financial statements of the Successor reflect theTransactions under the purchase method of accounting, in accordance with theFinancial Accounting Standards Board (FASB) Statement of Accounting Standards(SFAS) No. 141, *Business Combinations*.

4

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The following table presents the pro forma net sales,income from operations, and net income of the Company assuming the Transactionshad occurred on January 1, 2005:
| ** **              | ** ** | **Predecessor**                                   | ** ** | **Successor**                                     | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **Three months  ended  April 2,  2005** | ** ** | **Three months  ended  April 1,  2006** | ** ** |
| Net sales               |       | $130,368                                          |       | $142,467                                          |       |
| Income from  operations |       | 11,425                                            |       | 17,085                                            |       |
| Net income              |       | (1,199                                            | )          | 4,520                                             |       |

 

**3.**                 Reclassifications

Certain account balances have been reclassified from the prior year toconform with current year presentation. Specifically, discounts and rebateexpenses were reclassified from selling expenses to net sales. The impact ofthis reclassification resulted in a reduction of selling expenses and net salesof $479 for the three months ended April 2, 2005.

**4.****                ****Management Incentive Compensation**

The Company’s Option Plan (the “Plan”) was adopted andapproved by the Board of Directors in December 2005, and provides for theissuance of up to 1,286,631 shares of common stock of the Company in connectionwith the granting of non-qualified or incentive stock options. The principalpurposes of the Plan are: 1) to further the growth, development and financialsuccess of the Company and its subsidiaries, by providing additional incentivesto employees, consultants and independent directors (as defined) of the Companyand its subsidiaries and 2) to enable the Company and its subsidiaries toobtain and retain the services of the type of professional, technical andmanagerial employees, consultants and independent directors consideredessential to the long-range success of the Company.

 Priorto December 31, 2005, the Company accounted for stock-based compensationprograms according to the provisions of Accounting Principles Board Opinion (“ABP”)No. 25, *Accounting for Stock Issued to**Employees*(“APB No. 25”), as permitted by Statement ofFinancial Accounting Standards (“SFAS”) No. 123, *Accounting for Stock-Based**Compensation*. Effective January 1, 2006, the Companyadopted the fair value recognition provisions of SFAS 123 (R), *Share-Based Payments*(“SFAS No. 123(R)”). As a resultof adopting SFAS No. 123(R) on January 1, 2006, income beforeincome taxes and net income for the three months ended April 1, 2006, are$800 and $550 lower, respectively, than if the Company had continued to accountfor share-based compensation under APB No. 25. The application of the fairvalue provisions of SFAS No. 123(R) would not have had an impact onthe Company’s results for the three months ended April 2, 2005. The $800of management incentive compensation is recorded in general and administrativeexpenses for the three months ended April 1, 2006.

In January 2006, the Company granted of a totalof 1,201,059 non-qualified options in connection with the Plan. Outstandingnon-qualified stock options have an expiration date ten years from the date ofgrant. All non-qualified stock options were granted with an exercise priceequal to the fair market value on the date of grant. During the three monthsended April 1, 2006, no options were forfeited or exercised.

The non-qualified stock options are scheduled to vestover an approximate eight year period. In addition, a portion of thenon-qualified stock options are subject to accelerated vesting provisions whencertain performance targets are met. The first performance target was met, andtherefore the first installment was vested as of April 1, 2006. If certainadditional performance targets are met, the remaining four installments willvest on, or within 120 days following, December 31 of each calendar year2006 through 2009. The non-qualified stock options are subject to furtheracceleration clauses based on change in control provisions. As of April 1,2006, 203,689 shares of non-qualified stock options were vested. As of April 1,2006, there was approximately $3,944 of unrecognized management incentivecompensation related to nonvested non-qualified stock options. The Companyexpects to recognize this management incentive compensation over a weightedaverage period of 4.0 years.

5

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The Company used the Black-Scholes option-pricingmodel to estimate the fair value of each option grant as of the date of grant. Expectedvolatilities are based on historical volatility of the common stock ofcomparable public companies. The Company estimated the expected life of theoptions based on the likelihood of the achievement of performance targets,change in control provisions, and historic employee termination data. Therisk-free interest rate is based on U.S. Treasury yields in effect at the timeof grant. The estimated weighted-average fair values of and related assumptionsfor options granted were as follows:

Weighted-averagefair value of options granted:
| At fair value |   | $3.95 |   |
|---------------|--------|-------|--------|

 

Assumptions:
| Dividend yield                   |   | 0.0  | %      |
|----------------------------------|--------|------|--------|
| Expected volatility              |   | 40.0 | %      |
| Risk-free interest rate          |   | 5.0  | %      |
| Expected life of  option (years) |   | 5.00 |   |

 

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

Inventories consist of the following:
| ** **              | ** ** | **Successor**               | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **December 31,  2005** | ** ** | **April 1,  2006** | ** ** |
| At FIFO cost:           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Raw materials           |       | $                           | 23,755     |   | $ | 25,685 |   |
| Work in process         |       | 12,745                      |       | 12,505 |   |
| Finished goods          |       | 57,126                      |       | 59,497 |   |
|                    |       | 93,626                      |       | 97,687 |   |
| Adjustment to LIFO cost |       | (164                        | )          | (164 | ) |
|                    |       | $                           | 93,462     |   | $ | 97,523 |   |

 

6

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# **6.****              Debt**

The Company’s debt consists of the following:
| ** **                                         | ** ** | **Successor**               | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **December 31,  2005** | ** ** | **April 1,  2006** | ** ** |
| Revolving credit  facilities                       |       | $                           | —     |   | $ | — |   |
| Term loan                                          |       | 152,390                     |       | 152,001 |   |
| Senior pay in  kind notes                          |       | 138,357                     |       | 142,421 |   |
| Senior  subordinated notes                         |       | 152,500                     |       | 152,500 |   |
| European term  loans                               |       | 248                         |       | 177 |   |
| Subordinated  seller note                          |       | —                      |       | 1,000 |   |
| Capital lease  obligations                         |       | 75                          |       | 41 |   |
| Unamortized  discount on senior pay in kind notes  |       | (7,517                      | )          | (7,301 | ) |
| Unamortized  premium on senior subordinated notes  |       | 7,186                       |       | 6,935 |   |
|                                               |       | 443,239                     |       | 447,774 |   |
| Less: Current  maturities of long-term obligations |       | 1,846                       |       | 2,098 |   |
|                                               |       | $                           | 441,393    |   | $ | 445,676 |   |

 

Aggregate maturities oflong-term debt as of April 1, 2006, are as follows:
| 2007       |   | $       | 2,098   |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 2,024   |    |
| 2009       |   | 1,985   |    |
| 2010       |   | 1,603   |    |
| 2011       |   | 154,042 |    |
| Thereafter |   | 286,022 |    |
|       |   | $       | 447,774 |   |

 

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# ** **

# **7.****              Employee Benefit Plans**

The following table sets forth the components of netperiodic benefit cost:
| ** **                          | ** ** | **Predecessor**                                               | ** ** | **Successor**                                                 | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                          | ** ** | **Three months ended April 2, 2005** | ** ** | **Three months ended April 1, 2006** | ** ** |
| ** **                          | ** ** | **Pension  Benefits**                                         | ** ** | **Post-retirement  Benefits**                                 | ** ** | **Pension  Benefits** | ** ** | **Post-retirement  Benefits** | ** ** |
|                                |       |                                                          |       |                                                          |       |   |   |   |   |
| Service cost                        |       | $                                                             | 417        |                                                          | $          | 6 |   | $ | 491 |   | $ | 6 |   |
| Interest cost                       |       | 905                                                           |       | 20                                                            |       | 944 |   | 18 |   |
| Expected return  on plan assets     |       | (777                                                          | )          | —                                                        |       | (906 | ) | — |   |
| Amortization of  prior service cost |       | 1                                                             |       | 4                                                             |       | — |   | — |   |
| Amortization of  actuarial loss     |       | 284                                                           |       | 22                                                            |       | — |   | — |   |
|                                |       | $                                                             | 830        |                                                          | $          | 52 |   | $ | 529 |   | $ | 24 |   |

 

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

In conjunction with theFibre-Metal Transaction, the Company initiated a restructuring plan to closethe Fibre-Metal manufacturing facility located in Concordville, Pennsylvaniaand move production to its Cranston, Rhode Island and Mexicali, Mexicofacilities. In addition, the Company plans to close certain Fibre-Metaldistribution centers and integrate Fibre-Metal distribution into its existingdistribution facilities. The Company initiated this plan in order to increaseprofitability through utilizing excess capacity at its existing plants andmoving manufacturing to locations with favorable labor costs. As of the date ofthe Fibre-Metal Transaction, the Company recorded an accrual for costs associatedwith the plan of $1,716, comprised of $1,383 in severance costs and $333 infacility closure and other exit costs. Since the Fibre-Metal Transaction therehave been no payments or adjustments to the liability.

8

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# **9.****              Legal Proceedings**

The Company is subject to various claims arising in the ordinary courseof business. Most of these lawsuits and claims are product liability mattersthat arise out of the use of respiratory product lines manufactured by theCompany’s North Safety Products subsidiary. As of April 1, 2006, theCompany’s North Safety Products subsidiary, along with its predecessors and/orthe former owners of such business were named as defendants in approximately1,424 lawsuits involving respirators allegedly manufactured and sold by it or itspredecessors. The Company is also monitoring an additional 12 lawsuits in whichit feels that North Safety Products, its predecessors and/or the former ownersof such businesses may be named as defendants. Collectively, these 1,436lawsuits represent a total of approximately 13,107 plaintiffs. Approximately91% of these lawsuits involve plaintiffs alleging injury resulting fromexposure to silica dust, with the remainder alleging injury resulting fromexposure to other dust particles, including asbestos. These lawsuits typicallyallege that the purposed injuries resulted in part from respirators that werenegligently designed or manufactured. Invensys plc (“Invensys”), formerly Siebeplc, is contractually obligated to indemnify the Company for any losses,including costs of defending claims, resulting from respiratory productsmanufactured or sold prior to the acquisition of North Safety Products in October 1998.

In addition, the Company’s North Safety Products subsidiary iscontractually entitled to indemnification from Norton Company, an affiliate ofSaint-Gobain, which owned the North Safety Products business prior to Invensys.Pursuant to a December 14, 1982 asset purchase agreement, Siebe Norton, Inc.,a newly formed wholly-owned subsidiary of Norton Company, acquired the assetsof Norton’s Safety Products Division and the stock of this company was in turnacquired by Siebe Gorman Holdings PLC. Under the terms of the agreement, SiebeNorton, Inc. did not assume any liability for claims relating to productsshipped by Norton Company prior to the closing date. Moreover, Norton Companycovenanted in the agreement to indemnify Siebe Norton and its successors andassigns against any liability resulting from or arising out of any state offacts, omissions or events existing or occurring on or before the closing date,including, without limitation, any claims arising from products shipped byNorton Company or any of its affiliates prior to the closing date. SiebeNorton, whose name was subsequently changed to Siebe North Inc., wassubsequently acquired by the Company as part of the 1998 acquisition of theNorth Safety Products business from Invensys.

Despite these indemnification arrangements, the Company couldpotentially be liable for losses or claims relating to products manufacturedprior to the October 1998 acquisition date if Invensys fails to meet itsobligations to indemnify the Company and the Company could potentially beliable for losses and claims relating to products sold prior to January 10,1983 if both Invensys and Norton fail to meet their obligations to indemnifythe Company. The Company could also be liable if the alleged exposure involvedthe use of a product manufactured by the Company after the October 1998acquisition of the North Safety Products business. Invensys is currentlyhandling the defense of all of the cases prior to October 1998 in whichNorth Safety Products, its predecessors and/or former owners of such businesshave been named as defendants. The Company is jointly with Invensys handlingthe defense of all of the cases which allege exposure including periods pre andpost October 1998. The Company will individually handle the defense of allcases with exclusive post October 1998 exposure, however, it has not beeninvolved in a case with exclusive post October 1998 exposure to date. Asof April 1, 2006, Invensys has sent the Company requests for reimbursementtotaling $301, relating to settled cases in which Invensys claims that theperiod of alleged exposure included periods after October 1998. To date,the Company has not reimbursed Invensys for these claims, as its currentlypursuing negotiations regarding the allocation of costs and the determinationof the alleged exposure periods. Based on information provided to the Companyby Invensys, the Company believes that Invensys has made payments with respectto settlement of these claims of $1 for the three months ended April 1,2006. The Company believes that Invensys has the ability to pay these claimsbased on its current financial position, as publicly disclosed by Invensys.

Based upon information provided to the Company by Invensys, the Companybelieves activity related to these lawsuits was as follows for the three monthsended April 1, 2006:

|                       | ** ** | **Plaintiffs** | ** ** | **Cases** | ** ** | ** ** |
|-----------------------|------------|----------------|------------|-----------|------------|------------|
| Beginning  lawsuits   |       | 18,459         |       | 1,148     |       |       |
| New lawsuits          |       | 544            |       | 437       |       |       |
| Settlements           |       | (2             | )          | (2        | )          |       |
| Dismissals and  other |       | (5,894         | )          | (147      | )          |       |
| Ending lawsuits       |       | 13,107         |       | 1,436     |       |       |

 

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Plaintiffs have asserted specific dollar claims in approximately aquarter of the approximately 1,424 cases pending as of April 1, 2006 inwhich North Safety Products, its predecessors and/or the former owners of suchbusinesses have been named as defendants. A majority of jurisdictions prohibitspecifying damages in tort cases such as these, and most of the remainingjurisdictions do not require such specification. In those cases in whichplaintiffs choose to assert specific dollar amounts in their complaints,brought in states that permit such pleading, the amounts claimed are typicallynot meaningful as an indicator of a company’s potential liability. This isbecause (1) the amounts claimed typically bear no relation to the level ofthe plaintiff’s injury, (2) the complaints typically assert claims againstnumerous defendants, and (3) many cases are brought on behalf ofplaintiffs who have not suffered any medical injury, and, ultimately, areresolved without any payment or payment of a small fraction of the damagesinitially claimed. Of the 1,424 complaints maintained in the Company’s records,1,150 do not specify the amount of damages sought, 26 generally allege damagesin excess of $50, three allege compensatory damages in excess of $50 and anunspecified amount of punitive damages, 95 allege compensatory damages andpunitive damages, each in excess of $25, two generally allege damages in excessof $100, 12 allege compensatory damages and punitive damages, each in excess of$50, 21 generally allege damages of $15,000, one generally alleges damages notto exceed $290,000, one generally alleges damages of $23,000, one allegescompensatory damages and punitive damages, each in excess of $10, four allegegeneral damages of $18,000 and punitive damages of $10,000, two allege generaldamages of $13,000 and punitive damages of $10,000, one alleges compensatoryand punitive damages, each in excess of $15, six allege punitive damages inexcess of $25, one alleges punitive damages in excess of $50, 88 generallyallege damages in excess of $15, five generally allege damages in excess of $25,one alleges compensatory damages of $18,000 and punitive damages of $10,000,one alleges compensatory damages of $13,000 and punitive damages of $10,000,one alleges compensatory and punitive damages, each of $15, and two allegecompensatory and punitive damages, each in excess of $15,000. The Companycurrently does not have access to the complaints with respect to the previouslymentioned additional 12 monitored cases, and therefore it does not know whetherthese cases allege specific damages, or if so, the amount of such damages, butis in the process of seeking to obtain such information. Due to the reasonsnoted above and to the indemnification arrangements benefiting the Company, itdoes not believe that the damage amounts specified in these complaints are ameaningful factor in any assessment of the Company’s potential liability.

During the year ended December 31, 2004, the Company recorded a$1,250 charge to operating expenses to establish a reserve for respiratoryclaims. The Company increased this reserve to $5,000 and recorded the increaseas part of the purchase price allocation process associated with the NorcrossTransaction. The increase represents a decision by new ownership to negotiatethe Company’s participation in a joint defense group with the prior owners ofNorth Safety Products. This reserve represents a reasonable estimate of theCompany’s probable and estimable liabilities for claims alleging injuryresulting from exposure to silica dust and other dust particles, includingasbestos as determined by the Company in consultation with an independentconsultant. The Company has determined that a five-year projection of claimsand defense costs is the most reasonable approach. However, it is possible thatthe Company may incur liabilities in excess of the amounts currently reserved. Thisreserve will be re-evaluated periodically and additional charges or creditswill be recorded to operating expenses as additional information becomesavailable.

It is possible that the Company may incur liabilities in an amount inexcess of amounts currently reserved. However, taking into account currentlyavailable information, historical experience, and the Company’s indemnificationfrom Invensys, 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.

In connection with an ongoing dispute, one of the Company’s competitorshas filed a complaint against it alleging that the Company has made a series ofmisrepresentations concerning this competitor and its products. The complaintseeks a retraction of all statements alleged to have been made by the Companyand unspecified damages, including legal fees. A bench trial on the issue ofliability was held in February 2006 and the matter is now awaiting rulingby the court. The Company intends to vigorously defend against these claims.

The Company is not otherwise involved in any material lawsuits. TheCompany historically has not been required to pay any material liability claims.The Company maintains insurance against product liability claims (with theexception 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.

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# **10.****       Segment Data**

The following tablepresents information about the Company by segment:
| ** **                                 | ** ** | **General   Safety &  Preparedness** | ** ** | **Fire  Service** | ** ** | **Electrical   Safety** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|-------------------|------------|------------------------------|------------|---------------|------------|------------------|------------|-----------|------------|
| **Predecessor**                            |       |                                               |       |              |       |                         |       |          |       |             |       |      |       |
| **Three Months Ended  April 2, 2005** |       |                                               |       |              |       |                         |       |          |       |             |       |      |       |
| Net sales—third  parties              |       | $                                                  | 82,741     |              | $          | 23,000                       |       | $             | 14,203     |             | $          | —    |       | $ | — |   | $ | 119,944 |   |
| Net  sales—intersegment               |       | 2,558                                              |       | —            |       | —                       |       | —        |       | (2,558           | )          | —    |       |
| Income (loss)  from operations             |       | 8,812                                              |       | 4,381             |       | 3,685                        |       | (1,397        | )          | —           |       | 15,481    |       |
| **Successor**                              |       |                                               |       |              |       |                         |       |          |       |             |       |      |       |
| **Three Months Ended  April 1, 2006** |       |                                               |       |              |       |                         |       |          |       |             |       |      |       |
| Net sales—third  parties              |       | 99,183                                             |       | 24,072            |       | 18,621                       |       | —        |       | —           |       | 141,876   |       |
| Net  sales—intersegment               |       | 2,665                                              |       | —            |       | —                       |       | —        |       | (2,665           | )          | —    |       |
| Income (loss) from  operations             |       | 11,276                                             |       | 2,662             |       | 4,877                        |       | (2,568        | )          | —           |       | 16,247    |       |
|                                            |            |                                                    |            |                   |            |                              |            |               |            |                  |            |           |            |  |  |  |  |  |  |

 

11

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# ** **

# **11.****       Subsidiary Guarantors**

NSP Capital is a 100% owned finance subsidiary of theCompany with no assets or operations. None of the Company’s other subsidiariesguarantee the 113¤4% senior pay inkind notes due 2012. The terms of the credit facility significantly restrictNorcross from paying dividends and otherwise transferring assets to theCompany. Further, the terms of the indenture governing its 97¤8%senior subordinated notes due 2011 significantly restrict Norcross and theCompany’s other subsidiaries from paying dividends and otherwise transferringassets to the Company, except for ordinary course operating expenses.

**12. Comprehensive Income**

Total comprehensive income for the three months ended April 2,2005 and April 1, 2006 amounted to $674 and $5,391, respectively.

 

 

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**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

**Overview**

We are a leading designer, manufacturer and marketerof branded products in the fragmented personal protection equipment industry.We manufacture and market a full line of personal protection equipment forworkers in the general safety and preparedness, fire service and electricalsafety industries. We sell our products under trusted, long-standing andwell-recognized brand names, including *North*, *KCL**, Fibre-Metal, *MorningPride**, *Ranger*, *Servus*,*Pro-Warrington, AmericanFirewear,*and*Salisbury*. Our broad product offering includes, among other things,respiratory protection, protective footwear, hand protection, bunker gear andlinemen equipment.

We classify our diverse product offerings into threeoperating segments:

*General Safety andPreparedness*. 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, Ranger and Servus* brand names. Our productoffering is one of the broadest in the personal protection equipment industryand includes respiratory protection, protective footwear, hand protection, eye,head and face protection, first aid, hearing protection and fall protection. Wesell our general safety and preparedness products primarily through industrialdistributors.

*Fire Service*.We manufacture and market one of the broadest lines of personal protectionequipment for the fire service market, offering firefighters head-to-toeprotection. Our products include bunker gear, fireboots, helmets, gloves andother accessories. We market our products under our Total Fire Group umbrella,using the brand names of *MorningPride*, *Ranger*, *Servus*,*Pro-Warrington and American Firewear*. Weare 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 of personal protection equipment for theutility market under the *Salisbury* and *Servus* brands. Our products, including linemen equipment,gloves, sleeves and footwear, are designed to protect workers from up to 36,000volts of electricity. All of our products either meet or exceed the applicablestandards of the American National Standards Institute (“ANSI”) and theAmerican Society for Testing of Materials (“ASTM”). We distribute ourelectrical safety products through specialized distributors, test labs,utilities and electrical contractors.

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**Predecessorand Successor**

In May 2005, Safety Products entered into apurchase and sale agreement with NSP Holdings and Norcross to purchase from NSPHoldings all of the outstanding equity interests of Norcross and NSP Capitalfor an aggregate purchase price of approximately $481.0 million, which includedthe assumption or repayment of indebtedness but excluded payment of fees andexpenses. The acquisition closed on July 19, 2005 and was funded withproceeds to Safety Products from the issuance and sale of senior pay in kindnotes as well as an equity investment from affiliates of Odyssey and GeneralElectric Pension Trust (“GEPT”) and certain members of management of Norcross.Concurrently with the acquisition, Norcross entered into a new senior creditfacility, consisting of a revolving credit facility that provides for up to$50.0 million of borrowings and a $88.0 million term loan. As a result of theacquisition, Safety Products became the sole unit holder of Norcross. SafetyProducts, following the Norcross Transaction, is referred to as the “Successor.”  NSP Holdings, prior to the NorcrossTransaction, is referred to as the “Predecessor.”

In accordance with GAAP, our historical financialresults for the Predecessor and the Successor are presented separately. Theseparate presentation is required under GAAP in situations when there is achange in accounting basis, which occurred when purchase accounting was appliedto the Norcross Transaction. Purchase accounting requires that the historicalcarrying value of assets acquired and liabilities assumed be adjusted to fairvalue, which may yield results that are not comparable on a period-to-periodbasis due to the different, and sometimes higher, cost basis associated withthe allocation of the purchase price. There have been no material changes tothe operations or customer relationships of our business as a result of theNorcross Transaction.

**Acquisitions**

In November 2005, we completed the acquisition ofall of the issued and outstanding capital stock of Fibre-Metal. The purchaseprice of $68.7 million (including $0.7 million of acquisition costs) wasfinanced through $65.0 million of additional term borrowings under the seniorcredit facility and cash on the balance sheet.

In February 2006,we completed the acquisition of all of the issued and outstanding capital stockof American Firewear. The purchase price consisted of $4.5 million in cash(including acquisition costs of $0.2 million and net of cash acquired of $0.2million) and a $1.0 million subordinated seller note. In addition, the purchaseprice may be increased by $0.8 million over the next four years based onAmerican Firewear achieving certain financial and operating objectives. Wefinanced the acquisition through cash on the balance sheet and the issuance ofthe $1.0 million subordinated seller note.

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**Results ofOperations**

The following tables set forth our results ofoperations in dollars and as a percentage of net sales for the three monthsended April 2, 2005 and April 1, 2006. The data for the three monthsended April 2, 2005 and April 1, 2006 have been derived from ourhistorical unaudited financial statements.

 
| ** **                                        | ** ** | **Predecessor**                      | ** ** | **Successor**           | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended**     | ** ** |
| ** **                                        | ** ** | **April 2,  2005**              | ** ** | **April 1,  2006** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)** | ** ** |
| Net sales:                                        |       |                                 |       |                    |       |
| General safety and preparedness                   |       | $                                    | 82,741     |                    | $          | 99,183 |   |
| Fire service                                      |       | 23,000                               |       | 24,072                  |       |
| Electrical safety                                 |       | 14,203                               |       | 18,621                  |       |
| Total net sales                                   |       | 119,944                              |       | 141,876                 |       |
| Cost of goods  sold                               |       | 75,602                               |       | 88,145                  |       |
| Gross profit                                      |       | 44,342                               |       | 53,731                  |       |
| Operating  expenses                               |       | 28,861                               |       | 37,484                  |       |
| Income (loss) from  operations:                   |       |                                 |       |                    |       |
| General safety and preparedness                   |       | 8,812                                |       | 11,276                  |       |
| Fire service                                      |       | 4,381                                |       | 2,662                   |       |
| Electrical safety                                 |       | 3,685                                |       | 4,877                   |       |
| Corporate                                         |       | (1,397                               | )          | (2,568                  | )          |
| Total income from operations                      |       | 15,481                               |       | 16,247                  |       |
| Other expense (income):                           |       |                                 |       |                    |       |
| Interest expense                                  |       | 10,721                               |       | 11,248                  |       |
| Interest income                                   |       | (428                                 | )          | (163                    | )          |
| Other, net                                        |       | 386                                  |       | (371                    | )          |
| Income before  income taxes and minority interest |       | 4,802                                |       | 5,533                   |       |
| Income tax  expense                               |       | 1,604                                |       | 1,835                   |       |
| Minority  interest                                |       | 4                                    |       | 11                      |       |
| Net income                                        |       | $                                    | 3,194      |                    | $          | 3,687 |   |

 

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| ** **                                        | ** ** | **Predecessor**                    | ** ** | **Successor**                 | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended**   | ** ** |
| ** **                                        | ** ** | **April 2,   2005**      | ** ** | **April 1,   2006** | ** ** |
| ** **                                        | ** ** | **(as a percentage of net sales)** | ** ** |
| Net sales:                                        |       |                               |       |                          |       |
| General safety and preparedness                   |       | 69.0                               | %          | 69.9                          | %          |
| Fire service                                      |       | 19.2                               | %          | 17.0                          | %          |
| Electrical safety                                 |       | 11.8                               | %          | 13.1                          | %          |
| Total net sales                                   |       | 100.0                              | %          | 100.0                         | %          |
| Cost of goods  sold                               |       | 63.0                               | %          | 62.1                          | %          |
| Gross profit                                      |       | 37.0                               | %          | 37.9                          | %          |
| Operating  expenses                               |       | 24.1                               | %          | 26.5                          | %          |
| Income (loss) from  operations:                   |       |                               |       |                          |       |
| General safety and preparedness                   |       | 7.3                                | %          | 7.9                           | %          |
| Fire service                                      |       | 3.7                                | %          | 1.9                           | %          |
| Electrical safety                                 |       | 3.1                                | %          | 3.4                           | %          |
| Corporate                                         |       | (1.2                               | )%         | (1.83                         | )%         |
| Total income from operations                      |       | 12.9                               | %          | 11.4                          | %          |
| Other expense (income):                           |       |                               |       |                          |       |
| Interest expense                                  |       | 8.9                                | %          | 7.9                           | %          |
| Interest income                                   |       | (0.4                               | )%         | (0.1                          | )%         |
| Other, net                                        |       | 0.4                                | %          | (0.3                          | )%         |
| Income before  income taxes and minority interest |       | 4.0                                | %          | 3.9                           | %          |
| Income tax  expense                               |       | 1.3                                | %          | 1.3                           | %          |
| Minority  interest                                |       | 0.0                                | %          | 0.0                           | %          |
| Net income                                        |       | 2.7                                | %          | 2.6                           | %          |

 

***Three Months Ended April 1, 2006as Compared to Three Months Ended April 2, 2005***

*Net sales.*Net sales increased by$22.0 million, or 18.3%, from $119.9 million for the three monthsended April 2, 2005 to $141.9 million for the three months ended April 1,2006. In our general safety and preparedness segment, net sales increased by$16.5 million, or 19.9%, from $82.7 million for the three monthsended April 2, 2005 to $99.2 million for the three months ended April 1,2006. The increase reflects a combination of the following: incrementalFibre-Metal net sales of $10.5 million, overall organic growth in North Americaof $2.6 million, combined organic growth in our European and South Africanoperations of $4.4 million, and unfavorable exchange rates, which had anegative impact of $1.0 million. In our fire service segment, net salesincreased by $1.1 million, or 4.7%, from $23.0 million for the threemonths ended April 2, 2005 to $24.1 million for the three monthsended April 1, 2006 due primarily to incremental American Firewear netsales of $1.2 million. In our electrical safety segment, net sales increased by$4.4 million, or 31.1%, from $14.2 million for the three months endedApril 2, 2005 to $18.6 million for the three months ended April 1,2006 primarily driven by strong market demand and new product penetration.

*Gross profit.*Gross profit increased by$9.4 million, or 21.2%, from $44.3 million for the three months endedApril 2, 2005 to $53.7 million for the three months ended April 1,2006, primarily due to the $22.0 million, or 18.3%, increase in net sales.Excluding the impact of inventory purchase accounting adjustments in ourgeneral safety and preparedness segment of $0.7 million, gross profit increasedby $10.1 million, or 22.8%. After adjusting for the inventory purchaseaccounting adjustments, our gross profit margin of 38.4% for the three monthsended April 1, 2006 was favorable to the 37.0% gross profit margin for thethree months ended April 2, 2005. In our general safety and preparednesssegment (after adjusting for charges related to purchase accounting of $0.7million), gross profit increased by $7.9 million, or 25.4%, from$31.0 million for the three months ended April 2, 2005 to$38.9 million for the three months ended April 1, 2006. This increasewas primarily due to the overall net sales increase of $16.5 million, or 19.9%and improved margin realization in our North American (in part due to thefavorable contribution of Fibre-Metal) and European operations.

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In our fire service segment, gross profit increased by$0.1 million, or 2.0%, from $7.4 million for the three months ended April 2,2005 to $7.5 million for the three months ended April 1, 2006 as the$1.1 million, or 4.7% increase in net sales was partially offset by lowermargin realization (in part due to the inherent lower margin of AmericanFirewear products and product line integration costs). In our electrical safetysegment, gross profit increased by $2.1 million, or 35.2%, from$6.0 million for the three months ended April 2, 2005 to$8.1 million for the three months ended April 1, 2006, primarily dueto the $4.4 million, or 31.1% increase in net sales and favorable product mixand plant performance.

*Operating expenses.*Operating expenses increased by $8.6million, or 29.9%, from $28.9 million for the three months ended April 2,2005 to $37.5 million for the three months ended April 1, 2006. Inour general safety and preparedness segment, operating expenses increased by$4.7 million, or 21.1%, from $22.2 million for the three months endedApril 2, 2005 to $26.9 million for the three months ended April 1,2006, primarily due to higher amortization expense of $1.2 million associatedwith intangible assets recorded as part of purchase accounting, incrementalFibre-Metal operating expenses of $2.3 million and increased variable sellingand distribution expenses associated with the $16.5 million, or 19.9% increasein net sales. In our fire service segment, operating expenses increased$1.9 million, or 62.2%, from $3.0 million for the three months ended April 2,2005 to $4.9 million for the three months ended April 1, 2006,primarily due to higher amortization expense of $1.0 million associated withintangible assets recorded as part of purchase accounting, incremental AmericanFirewear operating expenses of $0.1 million, and additional general andadministrative expenses, including legal costs related to litigation with acompetitor. In our electrical safety segment, operating expenses increased by$0.9 million, or 40.0%, from $2.3 million for the three months ended April 2,2005 to $3.2 million for the three months ended April 1, 2006,primarily due to higher amortization expense of $0.4 million associated withintangible assets recorded as part of purchase accounting and increased variableselling and distribution expenses related to the $4.4 million, or 31.1%,increase in net sales. Our corporate expenses increased $1.1 million,primarily due to non-cash management incentive compensation charges of $0.8million related to our equity option plan and increased payroll costs duringthe three month period ended April 1, 2006.

*Income from operations.*Income from operations increased by$0.8 million, or 4.9%, from $15.5 million for the three months ended April 2,2005 to $16.3 million for the three months ended April 1, 2006. Includedin income from operations for the three months ended April 1, 2006 were: (1) inventorypurchase accounting charges of $0.7 million, (2) incremental amortizationexpense of $2.6 million related to purchase accounting and (3) non-cashmanagement incentive compensation charges of $0.8 million. Excluding thesecharges, income from operations increased by $4.9 million, or 31.6%. Excludingthese same charges, as a percentage of net sales, income from operationsincreased from 12.9% for the three months ended April 2, 2005 to 14.4% forthe three months ended April 1, 2006. In our general safety andpreparedness segment (after adjusting for incremental charges related topurchase accounting of $1.9 million), income from operations increased by$4.4 million, or 50.1%, from $8.8 million for the three months ended April 2,2005 to $13.2 million for the three months ended April 1, 2006,primarily due to higher net sales of $16.5 million, or 19.9% and favorablemargin realization. In our fire service segment (after adjusting forincremental charges related to purchase accounting of $1.0 million), incomefrom operations decreased by $0.7 million, or 16.3%, from$4.4 million for the three months ended April 2, 2005 to$3.7 million for the three months ended April 1, 2006, as higher netsales of $1.1 million, or 4.7%, were offset by lower margin realization andhigher general and administrative expenses, including legal costs related tolitigation with a competitor. In our electrical safety segment (after adjustingfor incremental charges related to purchase accounting of $0.4 million), incomefrom operations increased by $1.6 million, or 42.4%, from$3.7 million for the three months ended April 2, 2005 to$5.3 million for the three months ended April 1, 2006, primarily dueto higher net sales of $4.4 million, or 31.1% and favorable product mix andplant performance. Our corporate expenses increased $1.1 million,primarily due to management incentive compensation charges of $0.8 millionrelated to our equity option plan and higher payroll costs during the threemonth period ended April 1, 2006.

Included in income from operations for the threemonths ended April 1, 2006 and April 2, 2005 were depreciation andamortization expenses of $5.9 million and $2.8 million, respectively. Ofthese amounts, $3.9 million, $1.1 million, and $0.9 million wereattributable to the general safety and preparedness, fire service, andelectrical safety segments, respectively, for the three months ended April 1,2006 and $2.3 million, $0.1 million, and $0.4 million wereattributable to these segments for the three months ended April 2, 2005.

*Interest expense.*Interestexpense increased by $0.5 million, or 4.9%, from $10.7 million for the threemonths ended April 2, 2005 to $11.2 million for the three months ended April 1,2006 primarily due to higher outstanding debt balances related to theFibre-Metal Transaction offset by a decrease in preferred unit dividendsincluded in interest expense. Included in interest expense were non-cashinterest charges associated with the senior pay in kind notes and preferredunit dividends of $5.0 million for the three months ended April 2, 2005and non-cash interest charges associated with the senior pay in kind notes of$4.1 million for the three months ended April 1, 2006.

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*Other, net.*Other, net decreased by $0.8 million from$0.4 million for the three months ended April 2, 2005 to $(0.4) millionfor the three months ended April 1, 2006, primarily due to unrealizedforeign exchange rate gains.

*Income tax expense.*Income tax expense increased by$0.2 million, from $1.6 million for the three months ended April 2,2005 to $1.8 million for the three months ended April 1, 2006.

*Net income.*Net income increased by$0.5 million, or 15.4%, from $3.2 million for the three months ended April 2,2005 to $3.7 million for the three months ended April 1, 2006. Thiswas the result of the reasons discussed above.

**Liquidity andCapital Resources**

We have historically used internal cash flow fromoperations, commercial borrowings on our lines of credit, seller notes,investments from our equityholders and capital markets transactions to fund ouroperations, acquisitions, capital expenditures and working capitalrequirements. For the three months ended April 1, 2006 and April 2,2005, net cash used in operating activities was $2.5 million and $2.3million, respectively. The $0.2 million improvement was primarily attributableto higher income from operations of $4.9 million (after adjusting for expensesrelated to purchase accounting and management incentive compensation), whichwas partially offset by increased inventory and accounts receivable balancesdue to the $22.0 million, or 18.3%, increase in net sales.

Historically, our principal uses of cash have beencapital expenditures, acquisitions and working capital. Our capitalexpenditures were $2.3 million for the three months ended April 1,2006 and $1.3 million for the three months ended April 2, 2005.Investing activities for the three months ended April 1, 2006 include $5.5million of purchase price related to the American Firewear Transaction and $0.2million of royalty payments made to the sellers of Muck Boot and Arbin. Duringthe three months ended April 1, 2006, we received cash proceeds of $0.1million related to the sale of property, plant, and equipment. For the threemonths ended April 2, 2005, investing activities included $0.4 million inacquisition and royalty payments.

As of April 1, 2006, we had working capital of$141.5 million and cash of $11.9 million. We maintain inventorylevels sufficient to satisfy customer orders on demand, with generally a threemonth supply on hand. Bunker gear is an exception and is generally made toorder. Our accounts receivable terms are generally 30 days, net.

For the three months ended April 1, 2006, netcash provided by financing activities was $1.1 million, consisting ofproceeds from the issuance of the American Firewear subordinated seller note of$1.0 million, $0.6 million of capital contributions and $0.5 million ofpayments on long-term obligations. For the three months ended April 2,2005, net cash provided by financing activities was $20.8 million, representingproceeds from the issuance of 113⁄4% senior pay in kind notes of $100.0 million;payments on long-term obligations of $13.0 million, including an excess cashflow sweep payment under the terms of the then existing senior credit facilityof $12.2 million; payment in respect of preferred units of $60.0 million;distributions in respect of the common units of certain members of managementof $2.5 million; and payments for deferred financing fees of $3.7 million.

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As of April 1, 2006, borrowings under the senior credit facilitybore interest at a weighted average rate of 6.8%. As of April 1, 2006,there was approximately $152.0 million of outstanding indebtedness under thesenior credit facility and approximately $47.4 million of available borrowingsunder the revolving credit facility.

We believe that our internal cash flows and borrowingsunder the revolving portions of our senior credit facility will provide us withsufficient liquidity and capital resources to meet our current and futurefinancial obligations for the foreseeable future, including funding ouroperations, debt service and capital expenditures. Our future operatingperformance will be subject to future economic conditions and to financial,business and other factors, many of which are beyond our control. If our futurecash flow from operations and other capital resources are insufficient to payour obligations as they mature or to fund our liquidity needs, we may be forcedto reduce or delay our business activities and capital expenditures, sellassets, obtain additional debt or equity capital or restructure or refinanceall or a portion of our debt, including the 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.

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**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 significantdebt service 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 existingcustomers, maintain key supplier status with those customers with which we haveachieved such status, and obtain new customers; (v) the highly competitivenature of the personal protection equipment industry; (vi) any futurechanges in management; (vii) acceptance by consumers of new products wedevelop or acquire; (viii) the importance and costs of product innovation;(ix) unforeseen problems associated with international sales, including gainsand losses from foreign currency exchange and restrictions on the efficientrepatriation of earnings; (x) the unpredictability of patent protectionand other intellectual property issues; (xi) cancellation of current orders;(xii) the outcome of pending product liability claims and the availability ofindemnification for those claims; (xiii) general risks associated with thepersonal protection equipment industry; and (xiv) the successful integration ofacquired companies on economically acceptable terms. We undertake no obligationto publicly update or revise any forward-looking statements to reflect changedassumptions, the occurrence of anticipated or unanticipated events, or changesto future results over time.

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**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

There have been no material changes to our exposure tomarket risk since December 31, 2005.

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**Item 4. Controls and Procedures**

Based on their evaluation as of the end of the period covered by thisquarterly report on Form 10-Q, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) areeffective. There was no change in our internal control over financial reporting(as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) identified in connection with the evaluation required by Rule 13a-15(d) ofthe Exchange Act that occurred during the period covered by this quarterlyreport on Form 10-Q that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART IIOTHER INFORMATION**

**Item 1. Legal Proceedings**

As of April 1, 2006, our North Safety Productssubsidiary, along with its predecessors and/or the former owners of suchbusiness were named as defendants in approximately 1,424 lawsuits involvingrespirators allegedly manufactured and sold by it or its predecessors. We arealso monitoring an additional 12 lawsuits in which we feel that North SafetyProducts, its predecessors and /or the former owners of such businessesmay be named as defendants. Collectively, these 1,436 lawsuits representapproximately 13,107 (excluding spousal claims) plaintiffs. Approximately 91%of these lawsuits involve plaintiffs alleging injury resulting from exposure tosilica dust, with the remainder alleging injury from exposure to otherparticles, including asbestos. These lawsuits typically allege that thepurported injuries resulted in part from respirators that were negligentlydesigned and/or manufactured. The defendants in these lawsuits are oftennumerous, and include, in addition to respirator manufacturers, employers ofthe plaintiffs and manufacturers of sand (used in sand blasting) and asbestos.We acquired our North Safety Products subsidiary on October 2, 1998 fromSiebe plc. In connection with the acquisition, Siebe, which was subsequentlymerged with BTR plc (now known as “Invensys plc”), contractually agreed toindemnify us for any losses, including costs of defending claims, resultingfrom respiratory products manufactured or sold prior to our acquisition ofNorth Safety Products in October 1998.

In addition, our North Safety Products subsidiary iscontractually entitled to indemnification from Norton Company, an affiliate ofSaint-Gobain, which owned the North Safety Products business prior to Invensys.Pursuant to a December 14, 1982 asset purchase agreement, Siebe Norton, Inc.,a newly formed wholly-owned subsidiary of Norton Company, acquired the assetsof Norton’s Safety Products Division and the stock of this company was in turnacquired by Siebe Gorman Holdings PLC. Under the terms of the agreement, SiebeNorton, Inc. did not assume any liability for claims relating to productsshipped by Norton Company prior to the closing date. Moreover, Norton Companycovenanted in the agreement to indemnify Siebe Norton and its successors andassigns against any liability resulting from or arising out of any state offacts, omissions or events existing or occurring on or before the closing date,including, without limitation, any claims arising from products shipped by NortonCompany or any of its affiliates prior to the closing date. Siebe Norton, whosename was subsequently changed to Siebe North Inc., was subsequently acquired byus as part of the 1998 acquisition of the North Safety Products businessfrom Invensys.

Despite these indemnification arrangements, we couldpotentially be liable for losses or claims relating to products manufacturedprior to the October 1998 acquisition date if Invensys fails to meet itsobligations to indemnify us and we could potentially be liable for losses andclaims relating to products sold prior to January 10, 1983 if bothInvensys and Norton fail to meet their obligations to indemnify us. We couldalso be liable if the alleged exposure involved the use of a productmanufactured by us after our October 1998 acquisition of the North SafetyProducts business. Invensys is currently handling the defense of all of thecases prior to October 1998 in which North Safety Products, itspredecessors and/or the former owners of such businesses have been named asdefendants. We are jointly with Invensys handling the defense of all of thecases which allege exposure including periods pre and post October 1998.We will individually handle the defense of all cases with exclusive post October 1998exposure; however, we have not been involved in a case with exclusive post October 1998exposure to date. As of April 1, 2006, Invensys has sent us requests forreimbursement totaling $301,092 relating to settled cases in which Invensysclaims that the period of alleged exposure included periods after October 1998.To date, we have not reimbursed Invensys for these claims, as we are currentlypursuing negotiations regarding the allocation of costs and the determinationof the alleged exposure periods. Based on information provided to us byInvensys, we believe that Invensys has made payments with respect to settlementof these claims of $1,000 in the three months ended April 1, 2006.

Based upon informationprovided to us by Invensys, we believe activity related to these lawsuits wasas follows for the three months ended April 1, 2006:

|                       | ** ** | **Plaintiffs** | ** ** | **Cases** | ** ** |
|-----------------------|------------|----------------|------------|-----------|------------|
| Beginning  lawsuits   |       | 18,459         |       | 1,148     |       |
| New lawsuits          |       | 544            |       | 437       |       |
| Settlements           |       | (2             | )          | (2        | )          |
| Dismissals and  other |       | (5,894         | )          | (147      | )          |
| Ending lawsuits       |       | 13,107         |       | 1,436     |       |

 

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Plaintiffs have asserted specific dollar claims inapproximately a quarter of the approximately 1,424 cases pending as of April 1,2006, in which North Safety Products, its predecessors and/or the former ownersof such businesses have been named as defendants. A majority of jurisdictionsprohibit specifying damages in tort cases such as these, and most of theremaining jurisdictions do not require such specification. In those cases inwhich plaintiffs choose to assert specific dollar amounts in their complaints,brought in states that permit such pleading, the amounts claimed are typicallynot meaningful as an indicator of a company’s potential liability. This isbecause (1) the amounts claimed typically bear no relation to the level ofthe plaintiff’s injury, (2) the complaints typically assert claims againstnumerous defendants, and (3) many cases are brought on behalf ofplaintiffs who have not suffered any medical injury, and, ultimately, areresolved without any payment or payment of a small fraction of the damagesinitially claimed. Of the 1,424 complaints maintained in our records, 1,150 donot specify the amount of damages sought, 26 generally allege damages in excessof $50,000, three allege compensatory damages in excess of $50,000 and anunspecified amount of punitive damages, 95 allege compensatory damages andpunitive damages, each in excess of $25,000, two generally allege damages inexcess of $100,000, 12 allege compensatory damages and punitive damages, eachin excess of $50,000, 21 generally allege damages of $15.0 million, onegenerally alleges damages not to exceed $290.0 million, one generally allegesdamages of $23.0 million, one alleges compensatory damages and punitivedamages, each in excess of $10,000, four allege general damages of $18.0million and punitive damages of $10.0 million, two allege general damages of$13.0 million and punitive damages $10.0 million, one alleges compensatory andpunitive damages, each in excess of $15,000, six allege punitive damages inexcess of $25,000, one alleges punitive damages in excess of $50,000, 88generally allege damages in excess of $15,000, five generally allege damages inexcess of $25,000, one alleges compensatory damages of $18.0 million andpunitive damages of $10.0 million, one allege compensatory damages of $13.0million and punitive damages of $10.0 million, one alleges compensatory andpunitive damages, each of $15,000, and two allege compensatory and punitivedamages, each in excess of $15.0 million. We currently do not have access tothe complaints with respect to the previously mentioned additional 12 monitoredcases, and therefore do not know whether these cases allege specific damages,and if so, the amount of such damages, but are in the process of seeking to obtainsuch information. Due to the reasons noted above and to the indemnificationarrangements benefiting us, we do not believe that the damage amounts specifiedin these complaints are a meaningful factor in any assessment of our potentialliability.

Bankruptcy filings of companies with asbestos andsilica-related litigation could increase our cost over time. If we were foundliable in these cases and either Invensys or Norton Company failed to meet itsindemnification obligations to us or the suit involved products manufactured byus after our October 1998 acquisition of North Safety Products, it wouldhave a material adverse effect on our business.

During the year ended December 31, 2004, werecorded a $1.25 million charge to operating expenses to establish a reservefor respiratory claims. We increased this reserve to $5.0 million and recordedthe increase as part of our purchase price allocation process associatedwith the Norcross Transaction. The increase represents a decision by newownership to negotiate our participation in a joint defense group with theprior owners of North Safety Products. We believe that this reserve representsa reasonable estimate of our probable and estimable liabilities for productclaims alleging injury resulting from exposure to silica dust and otherparticles, including asbestos, as determined by us in consultation with anindependent consultant. We believe that a five-year projection of claims anddefense costs is the most reasonable approach. However, it is possible that wemay incur liabilities in excess of the amounts currently reserved. Thisreserve will be re-evaluated periodically and additional charges or creditswill be recorded to operating expenses as additional information becomesavailable.

It is possible that we may incur liabilities inan amount in excess of amounts currently reserved. However, taking into accountcurrently available information, historical experience, and our indemnificationfrom Invensys, but recognizing the inherent uncertainties in the projection ofany future events, we believe that these suits or claims should not result infinal judgments or settlements in excess of our reserve.

In connection with an ongoing dispute, one of ourcompetitors has filed a complaint against us alleging that we have made aseries of misrepresentations concerning this competitor and its products.The complaint seeks a retraction of all statements alleged to have been made byus and unspecified damages, including legal fees. A bench trial on the issue ofliability was held in February 2006 and the matter is now awaiting rulingby the court. We intend to vigorously defend against these claims.

We are not otherwise involved in any materiallawsuits. We historically have not been required to pay any material liabilityclaims. We maintain insurance against product liability claims (with theexception of asbestosis and silicosis cases, for which coverage is notcommercially available), but it is possible that insurance coverage will notcontinue to be available on terms acceptable to us or that such coverage willnot be adequate for liabilities actually incurred.

We are subject to legal proceedings and claims thatarise in the ordinary course of our business. In our opinion, the outcome ofthese actions will not have a material adverse effect on our financial positionor results of operations.

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**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

Since January 1,2006, we have issued the following securities that were not registered underthe Securities Act:

In January 2006we sold 41,258.408 shares of our common stock for an aggregate purchase priceof $412,584.08 to Safety Products Coinvestment, LLC. The securities describedin this paragraph were issued in reliance upon the exemption from theregistration requirements of the Securities Act, as set forth in Section 4(2) underthe Securities Act and Rule 506 of Regulation D promulgated thereunderrelative to sales by an issuer not involving any public offering. Allrecipients either received adequate information about us or had access, throughemployment or other relationships, to such information.

In February 2006,in connection with the American Firewear Transaction, we sold 15,000 shares ofour common stock for an aggregate purchase price of $150,000 to two members ofmanagement. The securities described in this paragraph were issued in relianceupon the exemption from the registration requirements of the Securities Act, asset forth in Section 4(2) under the Securities Act and Rule 701promulgated thereunder relative to sales by an issuer not involving any publicoffering. All recipients either received adequate information about us or hadaccess, through employment or other relationships, to such information.

No underwriterswere involved in the foregoing sales of securities. The purchasers in each caserepresented their intention to acquire the securities for investment only andnot with a view to the distribution thereof. Appropriate legends were affixedto the stock certificates issued in such transactions. All of the foregoingsecurities are deemed restricted securities for the purposes of the SecuritiesAct.

**Item 6. Exhibits**

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 SecuritiesExchange Act of 1934, Safety Products Holdings, Inc. has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                    |   | SAFETY PRODUCTS HOLDINGS, INC.                     |
|--------------------|--------|----------------------------------------------------|
|               |   |                                               |
|               |   |                                               |
| May 12,  2006 | By:    | /s/ ROBERT A. PETERSON                             |
|               |   | Robert A. Peterson                                 |
|               |   | President, Chief Executive Officer and Director    |
|               |   | (Principal Executive Officer)                      |
|               |   |                                               |
|               |   |                                               |
| May 12,  2006 | 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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