The board of directors of the Company has exercised its option to terminate the Company’s contract with its Executive Chairman, Daniel Marks, upon 30 day’s notice. The role of Interim Chairman will be assumed immediately by independent director Fraser Campbell. Daniel Marks resigned his position as a director of the Company effective immediately. In addition, in order to create a separation between the Chief Executive Officer and Chief Financial Officer roles, Douglas Lucky remains the Chief Executive Officer of the Company and will relinquish his position as Interim Chief Financial Officer. The Company has appointed Sharon Johnston as Interim Chief Financial Officer; Ms. Johnston has been the Director of Finance for the Company since June, 2011.

The Company has been taking the necessary steps to align and size its operations to current North American business opportunities and expects these efforts to improve the financial outlook of PSP. The Company also continues to consider and evaluate on an ongoing basis all alternatives available to it in the course of realizing its strategic direction. The Company expects that its financial statements and MD&A for the quarter ended March 31, 2012 will be filed on SEDAR later this month.

About PSP: The mission statement of Pacific Safety Products Inc. is

…we bring everyday heroes home safely®. PSP is an established industry leader in the production, distribution and sale of high-performance and high-quality safety products for the defence and security market. These products include body armour to protect against ballistic, stab and fragmentation threats, ballistic blankets to reduce blast effects, tactical clothing, and protective products against chemical and biological hazards. PSP is the largest body armour manufacturer in Canada, directly supplying the Canadian Department of National Defence, Federal Government Agencies and major Canadian law enforcement organizations. The Company, through its U.S. subsidiary Sentry Armor Systems Inc., provides body armour products under the GH Armor Systems® brand to U.S. based law enforcement and private security firms. The Company also produces tactical clothing. Pacific Safety Products is a reporting issuer in British Columbia, Alberta and Ontario, Canada and publicly trades under the symbol PSP on the TSX Venture Exchange.

PACIFIC SAFETY PRODUCTS
Listing: TSX-Venture
Symbol: PSP

PACIFIC SAFETY PRODUCTS INC.
SIGNS LETTER OF INTENT FOR
PROPOSED REVERSE TAKE-OVER TRANSACTION WITH
ARMORWORKS ENTERPRISES CANADA, ULC

Arnprior, Ontario – April 18, 2012 – Pacific Safety Products Inc. (“PSP” or the “Company”), announced today that it has entered into a Letter of Intent (“LOI”) dated April 17, 2012 with ArmorWorks Enterprises LLC (“AWE”) to acquire all of the issued and outstanding shares of ArmorWorks Enterprises Canada, ULC (“AW Canada”) in a reverse take-over transaction (the “Transaction”). Upon completion of the Transaction, the combined entity (the “Resulting Issuer”) will look to be one of Canada’s leading survivability companies, providing a full range of protective products for the military, law enforcement and security sectors.

Information Concerning AW Canada and AWE

AW Canada was founded in 2009 as an indirectly owned subsidiary of AWE and is an unlimited liability company existing under the laws of British Columbia. AWE is a limited liability company existing under the laws of Arizona and is indirectly controlled by William J. Perciballi of Phoenix, Arizona. AWE is a leading provider of advanced survivability products to military and law enforcement agencies worldwide since 1996.

AW Canada services Canadian and international markets by designing and building advanced armour and survivability products including hard and soft body armour, armour protection for land, sea and airborne vehicles, and mine blast energy attenuating seating for land-based vehicles. It’s manufacturing facility located in Kelowna, British Columbia has state-of-the-art manufacturing equipment including an automated high capacity autoclave, high-pressure press and advanced ballistic test lab. Personnel at the facility include an experienced engineering staff, skilled management and a highly trained production team. AW Canada currently employs 30
individuals and anticipates an increase to 45 by June due to a recent contract award from GDLS Canada for vehicle survivability components for the Canadian LAV III upgrade program. AW Canada is also a major partner in Team TimberWolf, a consortium of companies competing for the multi-billion dollar Canadian Tactical Armored Patrol Vehicle Program (TAPV). The program award is expected in approximately June of this year and a Team TimberWolf win would position AW Canada to add an estimated 150 additional jobs in the next three years.

Selected AW Canada Financial Information

As the Canadian startup unit of AWE, AW Canada generated a loss of $2.1 million for the year ended December 31, 2011 on revenues of $4.1 million and an asset base of $3.4 million (U.S. dollars, unaudited). This loss is due to significant investment in R&D, facility setup, management recruitment and other startup costs which were required to position the company for the substantial growth opportunities in the Canadian and international markets.

Transaction Summary

The Transaction is an arm’s length transaction and will constitute a reverse take-over under the policies of the TSX Venture Exchange (the “TSX-V”). Completion of the Transaction (the “Closing”) is subject to, among other conditions some of which are listed below, the approval of a simple majority of PSP shareholders, and PSP intends to convene a special meeting of shareholders (the “Meeting”) to seek such shareholder approval as soon as practicable following the execution of a definitive share exchange agreement and receipt of all required TSX approvals.

PSP currently has issued and outstanding: (i) 57,454,895 common shares (the “PSP Common Shares”); (ii) incentive stock options to purchase 4,875,000 PSP Common Shares, each exercisable at a price of $0.10 per share; and (iii) $1,000,000 principal amount of debentures which are convertible into PSP Common Shares at a price of $0.10 per share (the “Convertible Debentures”). At the Meeting PSP intends to seek the approval of its shareholders to consolidate the PSP Common Shares on a 10 for 1 basis (the “Consolidation”). Assuming completion of the Consolidation, PSP would have issued and outstanding immediately prior to Closing: (i) 5,745,489 post-Consolidation PSP Common Shares; (ii) incentive stock options to purchase 487,500 post-Consolidation PSP Common Shares, each exercisable at a price of $1.00 per share; and (iii) $1,000,000 principal amount of Convertible Debentures which are convertible into post-Consolidation PSP Common Shares at a price of $1.00 per share.

At the Meeting, PSP will also seek shareholder approval to amend its articles to create convertible preference shares (the “PSP Preferred Shares”). The PSP Preferred Shares will be non-voting, will not pay a dividend and will be convertible, on a one-for-one basis, into post-Consolidation PSP Common Shares at any time provided the conversion will not result in the “public float” (within the meaning of the policies of the TSX-V) of PSP falling below 20% of the total post-Consolidation PSP Common Shares then outstanding.

It is currently contemplated that the Transaction will be completed by way of a share exchange agreement pursuant to which PSP will acquire all of the issued and outstanding shares of AW
Canada in consideration for the issuance to AWE of: (i) 17,143,121 post-Consolidation PSP Common Shares; and (ii) 34,566,280 PSP Preferred Shares, each at a deemed value of $0.30 per share for aggregate consideration of $15,512,820. Pursuant to the Transaction, AW Canada will become a wholly-owned subsidiary of PSP and AWE will control approximately 75% of the PSP Common Shares and 90% of the total equity of the Resulting Issuer.
Conditions to the Transaction

The proposed Transaction is subject to a number of terms and conditions, including the entering into by the parties of a definitive agreement with respect to the Transaction (such agreement to include representations, warranties, conditions and covenants typical for a transaction of this nature), a cross licensing agreement for products designed by the respective parties, the completion of satisfactory due diligence investigations, the approval of the directors of each of PSP and AWE, the approval of the shareholders of PSP, and the approval of the TSX-V and other applicable regulatory authorities.

Prior to Closing, AWE will ensure that AW Canada has no long-term debt and that a $5,000,000 cash injection is made into the accounts of AW Canada.

Management and Board of Directors of Resulting Issuer

Upon Closing, two members of PSP’s existing six member board of directors will be replaced with William J. Perciballi and Brad J. Field, each a nominee of AWE. In addition, AWE will be granted the right to nominate two-thirds of the management nominees to be proposed to shareholders for election as directors at the next annual general meeting of shareholders of the Resulting Issuer, provided the replacement of any new directors has been approved by the TSX-V.

Mr. Perciballi is the founder and President of AWE. He has more that twenty-five years experience in developing and producing armor and protective products, both in private and military organizations. He was an engineer in the U.S. Army Ballistic Research Laboratory and the U.S. Army Materials Technology Laboratory. Mr. Perciballi is a veteran of the Persian Gulf War. He holds a Bachelor of Science in industrial engineering technology from the University of Massachusetts Lowell.

Mr. Field is the founder and previous CEO of PSP. Under his tenure, PSP was named one of Canada’s fastest growing companies for three years running from 1999 to 2001 and received an Okanagan Science and Technology Innovation award in 2005. He is currently a Director of Corporate Development for AWE with responsibilities in the US, Canada and UK assisting in defining the strategic direction of the business. Mr. Field is the recipient of three Entrepreneur of the Year awards, a Science and Technology Innovator of the Year award, the Queen’s Golden Jubilee Community Achievement award and a St. John Ambulance Lifesaving award. He also holds numerous patents pertaining to safety related products.

Mr. Field is also expected to become Chief Executive Officer of the Resulting Issuer and lead an integrated management team.

Other Information

Closing of the Transaction is contemplated to take place on or about June 30, 2012 or such other date as may be agreed by AWE and PSP.

The LOI contains a non-solicitation covenant on the part of PSP and AWE and their respective directors, officers and affiliates.

Trading in PSP Common Shares will remain halted pending the satisfaction of all applicable requirements of the TSX-V. There can be no assurance that trading in PSP Common Shares will resume prior to the completion of the Transaction. Further details concerning the Transaction, AW Canada (including additional financial information) and other matters will be announced when a definitive agreement is reached.

PSP will engage a sponsor in connection with the Transaction if required in accordance with applicable TSX-V policies.

Information Concerning PSP

The mission statement of Pacific Safety Products Inc. is …we bring everyday heroes home safely®. PSP is an established industry leader in the production, distribution and sale of high-performance and high-quality safety products for the defence and security market. These products include body armour to protect against ballistic, stab and fragmentation threats, ballistic blankets to reduce blast effects, tactical clothing, and protective products against chemical and biological hazards. PSP is the largest body armour manufacturer in Canada, directly supplying the Canadian Department of National Defence, Federal Government Agencies and major Canadian law enforcement organizations. The Company, through its U.S. subsidiary Sentry Armor Systems Inc., provides body armour products under the GH Armor Systems® brand to U.S. based law enforcement and private security firms. The Company also produces tactical clothing. Pacific Safety Products is a reporting issuer in British Columbia, Alberta and Ontario, Canada and publicly trades under the symbol PSP on the TSX Venture Exchange.

Forward-looking statements

This news release contains certain “forward looking statements” within the meaning of applicable securities laws, including, but not limited to, statements relating to the completion of the proposed Transaction on the terms set out herein or at all, convening the Meeting and the approval of the Transaction by PSP’s shareholders, approval of the Transaction by regulatory authorities, satisfaction of the conditions to closing of the Transaction, PSP’s anticipated share capital, management of the Resulting Issuer and the business of PSP and AW Canada.

With respect to the forward-looking statements contained in this news release, PSP has made numerous assumptions regarding, among other things, the ability of PSP, AW Canada and AWE to satisfy all of the closing conditions to complete the Transaction. Readers are cautioned that the plans, intentions or expectations disclosed in any forward-looking statements and underlying assumptions may not be achieved and that they should not place undue reliance on any forward-looking statement.

Such forward-looking statements relate to anticipated or assumed events or results and are based on management’s expectations, estimates and projections. The forward-looking information contained herein is expressly qualified in its entirety by this cautionary statement. Although the Company believes that the expectations conveyed by the forward-looking information are reasonable based on information currently available to it, these statements are not guarantees and involve a number of risks, uncertainties and assumptions, both known and unknown. The results or events depicted in these forward-looking statements may differ materially from actual results or events. Many factors could cause results to differ materially from those stated including, but not limited to: the Transaction may not be completed upon the terms contemplated herein, or at all; the possibility of not satisfying all of the closing conditions to complete the Transaction; the possibility that PSP’s shareholders do not approve the Transaction at the special meeting of shareholders; difficulties or delays in obtaining regulatory approvals; the ability of AW Canada or PSP to retain existing customer contracts; AW Canada or the Resulting Issuer may not be the winner of the TAPV program award; risks related to integration of acquisitions; and the ability to retain and obtain qualified staff as well as various other factors which are discussed in PSP’s filings with applicable securities regulatory authorities at www.sedar.com. Any forward-looking statement speaks only as of the date of this news release and, except as may be required by applicable securities laws, PSP disclaims any intent or obligation to update any forward-looking statement, whether as a result of new information, future events or results or otherwise.

For further information, please contact:

Douglas Lucky

Chief Executive Officer

Pacific Safety Products Inc.
(613) 623-6001

 www.pacsafety.com

All information contained in this press release relating to AW Canada and AWE was provided by AW Canada or AWE to PSP for inclusion herein. PSP has not independently verified such information and shall bear no liability for any misrepresentation contained therein.

Completion of the Transaction is subject to a number of conditions, including, but not limited to, acceptance by the TSX-V and shareholder approval. The Transaction cannot close until the required shareholder approval is obtained. There can be no assurance that the Transaction will be completed as proposed or at all.

Investors are cautioned that, except as disclosed in the management information circular or filing statement, as applicable, of PSP to be prepared in connection with the Transaction, any information released or received with respect to the Transaction may not be accurate or
complete and should not be relied upon. Trading in the securities of PSP should be considered to be highly speculative.

The Exchange has in no way passed upon the merits of the proposed Transaction and has neither approved nor disapproved the contents of this press release.

NEITHER THE TSX VENTURE EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT TERM IS DEFINED IN THE POLICIES OF THE TSX VENTURE EXCHANGE) ACCEPTS RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE.

 
• The Company is reporting under International Financial Reporting Standards (“IFRS”) for the three month period ended December 31, 2011 including the restatement of comparative figures.

 

• Sales for the second quarter were $3.6 million, an increase of $0.2 million or 4.4% from the first quarter of fiscal 2012, and approximately $1.5 million or 28.6% lower than the second quarter of the prior year which included revenue from the Company’s former distribution business.

 

• The gross margin percentage for the second quarter was 28.1%, an improvement over the gross margins of 24.3% for the first quarter of fiscal 2012 and 21.7% for the second quarter of the prior year. The increase in gross margin percentage, offset by lower sales, represented a decrease of $0.1 million in gross margin dollars or 7.4% compared to the second quarter of the prior year.

 

• Operating expenses for the second quarter were $1.2 million, approximately 10.0% lower than the second quarter of the prior year of $1.4 million.

 

• Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)[1] was a loss of $0.09 million for the second quarter compared to a loss of $0.02 million in the second quarter of the prior year.

 

• The Company recorded an impairment charge with respect to intangible assets in the second quarter in the amount of $1.2 million.

 

• Working capital declined from $2.9 million at June 30, 2011 to $2.5 million at December 31, 2011. The working capital ratio at December 31, 2011 was 1.74 and improved compared to 1.69 at June 30, 2011, and the debt to tangible net worth ratio at December 31, 2011 was 1.72 and improved compared to 1.87 at June 30, 2011 and 25.9 at July 1, 2010.

 

• Effective January 16, 2012, the Company was awarded a new contract by the Ontario Ministry of Community Safety and Correctional Services for the delivery and disposal of ballistic personal soft body armour systems (“Contract”). This omnibus contract allows Municipal and Provincial agencies to acquire PSP’s products through pre-negotiated arrangements. This Contract has an initial term of three years with an option for an additional two years. Based on historical data the Company estimates the potential sales value of this Contract to be between $12.5 million to $15 million, including the option years. The Company was the incumbent.

 
“The Contract award is evidence that our strategy is working”, said Chief Executive Officer, Doug Lucky, “while in view of the proposed Sale Transaction, we continue to execute against our strategic goals to add value to our customer offering, achieve revenue growth, restore profitable operations and pursue value enhancing opportunities.”
Transaction update
On January 23, 2012, the Company announced that it has entered into a letter of intent (“LOI”) to sell substantially all of its assets on a cash-free, debt-free basis (the “Sale Transaction”). During an exclusivity period, the potential purchaser is completing a due diligence review, and the parties are endeavoring to negotiate a mutually satisfactory definitive purchase agreement.
The completion of the proposed Sale Transaction is subject to a number of conditions, including completion of satisfactory due diligence, execution of the definitive purchase agreement, and TSX Venture Exchange and shareholder approval. There can be no assurance that the Sale Transaction will be completed as proposed or at all or, if completed, that the net proceeds of the Sale Transaction would represent a premium to the current trading price of the Company’s securities.
About PSP:
The mission statement of Pacific Safety Products Inc. is …we bring everyday heroes home safely®. PSP is an established industry leader in the production, distribution and sale of high-performance and high-quality safety products for the defence and security market. These products include body armour to protect against ballistic, stab and fragmentation threats, ballistic blankets to reduce blast effects, tactical clothing, and protective products against chemical and biological hazards. PSP is the largest body armour manufacturer in Canada, directly supplying the Canadian Department of National Defence, Federal Government Agencies and major Canadian law enforcement organizations. The Company, through its U.S. subsidiary Sentry Armor Systems Inc., provides body armour products under the GH Armor Systems® brand to U.S. based law enforcement and private security firms. The Company also produces tactical clothing. Pacific Safety Products is a reporting issuer in British Columbia, Alberta and Ontario, Canada and publicly trades under the symbol PSP on the TSX Venture Exchange.
Forward-Looking Information: This news release contains certain statements which may constitute “forward-looking information” within the meaning of applicable securities laws. These statements relate to anticipated or assumed events or results including, without limitation, with respect to the anticipated value of the Contract, and are based on management’s expectations, estimates and projections. Although the Company believes that the expectations conveyed by the forward-looking information are reasonable based on information currently available to it, these statements are not guarantees and involve a number of risks, uncertainties and assumptions. Many factors could cause results to differ materially from those stated including termination of the Contract, failure by the Ministry to exercise the option under the Contract, delays in receiving or shortages in the supplies necessary to manufacture the products, possible changes to the product orders or order patterns, constraints on purchasing budgets, as well various other factors which are discussed in the Company’s filings with applicable securities regulatory authorities at www.sedar.com. The Company assumes no obligation to update forward-looking information should circumstances or management’s estimates or opinions change, except as required by applicable law.
For complete consolidated financial statements with notes and management discussion and analysis, refer to SEDAR (www.sedar.com).
[1] Adjusted EBITDA consists of earnings before interest expense, income taxes, stock based compensation, amortization, foreign exchange, and other one-time charges and gains. PSP believes EBITDA is a useful measure in the evaluation of performance. EBITDA is not a measure recognized under Generally Accepted Accounting Principles (“GAAP”) and does not have a standardized meaning as prescribed by GAAP. Therefore, EBITDA may not be comparable to similar measures presented by other entities. Investors are cautioned that EBITDA should not be construed as an alternative to net loss determined in accordance with GAAP.
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

The contract will allow the Municipal and Provincial agencies, including all advisory, adjudicative, regulatory and operational service agencies and other entities falling within the Public Service, to purchase the Company’s NIJ 0101.06 certified HeliX male and female armour and carriers. The products will be manufactured at the Company’s Arnprior, Ontario facility. The contract has commenced effective January 16, 2012 with new orders and deliveries.

According to Doug Lucky, CEO, “PSP has won this Contract in a fair, open and transparent competitive process, and the selection of the Company by this customer reflects well on the quality of our products, services we provide, and customer value we deliver.”

Customers of PSP include Defence, Security and Law Enforcement agencies. For reasons associated with the unique role our customers play in protecting citizens, the Company is not always at liberty to disclose their identity. Pacific Safety Products has been a trusted supplier of protective armour solutions to law enforcement in Canada for over 20 years.

Faced with a challenging operating environment, management and the board of directors of the Company have concluded the Sale Transaction is in the best interests of the Company and its stakeholders.

If the Sale Transaction closes, it is expected that the Company will have no operating assets, the Company will cease to be a manufacturing company and the Company’s common shares will be transferred to the NEX board of the TSX Venture Exchange while it formulates a strategic direction to maximize value for shareholders.

COMPLETION OF THE PROPOSED SALE TRANSACTION IS SUBJECT TO A NUMBER OF CONDITIONS, INCLUDING BUT NOT LIMITED TO TSX VENTURE EXCHANGE ACCEPTANCE AND SHAREHOLDER APPROVAL. THE SALE TRANSACTION CANNOT CLOSE UNTIL THE REQUIRED SHAREHOLDER APPROVAL IS OBTAINED. THERE CAN BE NO ASSURANCE THAT THE SALE TRANSACTION WILL BE COMPLETED AS PROPOSED OR AT ALL. THERE IS ALSO NO ASSURANCE THAT THE NET PROCEEDS OF SUCH A TRANSACTION WILL REPRESENT A PREMIUM TO THE CURRENT TRADING PRICE OF THE COMPANY’S SECURITIES.
INVESTORS ARE CAUTIONED THAT, EXCEPT AS DISCLOSED IN THE MANAGEMENT INFORMATION CIRCULAR WHICH IS TO BE MAILED TO SHAREHOLDERS, ANY INFORMATION RELEASED OR RECEIVED WITH RESPECT TO THE PROPOSED SALE TRANSACTION MAY NOT BE ACCURATE OR COMPLETE AND SHOULD NOT BE RELIED UPON. TRADING IN THE SECURITIES OF THE COMPANY SHOULD BE CONSIDERED HIGHLY SPECULATIVE.