** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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**FORM 10-Q**

 

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

** **

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| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                    |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                |
| ** ** | **For the quarterly period ended April 2,  2005**                                                                                                                                    |
| ** ** | ** **                                                                                                                                                                                |
| ** ** | **OR**                                                                                                                                                                                    |
| ** ** | ** **                                                                                                                                                                                |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                   |
| ** ** | ** **                                                                                                                                                                                |
| ** ** | **For the transition period from               to              ** |

** **

**Commission File Number: 333-123631**

** **

**NSPHOLDINGS L.L.C.**

**(Exactname of Registrant as Specified in its Charter)**

** **
| **Delaware**                                                    | ** ** | **36-4251319**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization) |       | (I.R.S.  Employer Identification No.) |
| ** **                                                      | ** ** | ** **                            |
| **2211 York Road, Suite 215 Oak Brook, Illinois 60523**    | ** ** | **60523**                             |
| (Address  of Principal Executive Offices)                       |       | (Zip  Code)                           |

 

Registrant’stelephone number, including area code:

**(630) 572-5715**

 

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

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange ActRule 12b-2).   Yes o  No ý

 

On May 11,2005 NSP Holdings L.L.C. had the following common units outstanding (in eachcase rounded to the nearest unit): 7,265,804 Class A Common Units, 184,523Class C Common Units, and 212,018 Class D Common Units.

 

 

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**NSP HOLDINGS L.L.C.**FORM 10-QQUARTERLY REPORT

**For the Quarterly Period Ended April 2,2005**

** **

**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 | 10 |
|                                    |     |   |   |
|                                    | Item  3. | Quantitative  and Qualitative Disclosures About Market Risk | 17 |
|                                    |     |   |   |
|                                    | Item 4.  | Controls and  Procedures | 18 |
|                                    |     |   |   |
| PART II Other Information          | 19       |
|                                    |     |   |   |
|                                    | Item 1.  | Legal Proceedings | 19 |
|                                    |     |   |   |
|                                    | Item 6.  | Exhibits and Reports on  Form 8-K | 21 |
|                                    |     |   |   |
| Signatures                              | 22       |
|                                    |     |   |   |
| **Form 10-Q Listing  of Exhibits** | 23       |

 

i

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**PART I**FINANCIAL INFORMATION

** **

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

** **

**NSP HOLDINGSL.L.C.**

**CONSOLIDATEDBALANCE SHEETS**

**(Amountsin Thousands) (Unaudited)**

 
| ** **                                                                               | ** ** | **December 31,  2004 (1)** | ** ** | **April 2,  2005** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| **Assets**                                                                               |       |                            |       |                    |       |
| Current assets:                                                                          |       |                            |       |                    |       |
| Cash and cash equivalents                                                                |       | $                               | 35,731     |                    | $          | 50,958 |   |
| Accounts receivable, less allowance of  $2,063 and $2,165 in 2004 and 2005, respectively |       | 61,167                          |       | 69,707                  |       |
| Inventories                                                                              |       | 82,532                          |       | 83,503                  |       |
| Deferred income taxes                                                                    |       | 60                              |       | 60                      |       |
| Prepaid expenses and other current assets                                                |       | 3,183                           |       | 2,980                   |       |
| Total current assets                                                                     |       | 182,673                         |       | 207,208                 |       |
| Property, plant, and equipment, net                                                      |       | 51,809                          |       | 49,581                  |       |
| Deferred financing costs, net                                                            |       | 9,960                           |       | 13,060                  |       |
| Goodwill, net                                                                            |       | 132,662                         |       | 132,986                 |       |
| Other intangible assets, net                                                             |       | 6,256                           |       | 6,080                   |       |
| Other noncurrent assets                                                                  |       | 5,831                           |       | 5,633                   |       |
| Total assets                                                                             |       | $                               | 389,191    |                    | $          | 414,548 |   |
|                                                                                     |       |                            |       |                    |       |
| **Liabilities and members’ equity**                                                 |       |                            |       |                    |       |
| Current liabilities:                                                                     |       |                            |       |                    |       |
| Accounts payable                                                                         |       | $                               | 17,871     |                    | $          | 20,315 |   |
| Accrued expenses                                                                         |       | 29,024                          |       | 21,527                  |       |
| Current maturities of long-term obligations                                              |       | 15,252                          |       | 2,690                   |       |
| Total current liabilities                                                                |       | 62,147                          |       | 44,532                  |       |
| Pension, post-retirement, and deferred  compensation                                     |       | 22,923                          |       | 22,937                  |       |
| Long-term obligations                                                                    |       | 238,314                         |       | 340,630                 |       |
| Mandatorily redeemable preferred units                                                   |       | 134,310                         |       | 76,551                  |       |
| Other noncurrent liabilities                                                             |       | 1,653                           |       | 1,646                   |       |
| Deferred income taxes                                                                    |       | 4,799                           |       | 5,036                   |       |
| Minority interest                                                                        |       | 142                             |       | 139                     |       |
|                                                                                     |       | 402,141                         |       | 446,939                 |       |
| Members’ deficit:                                                                   |       |                            |       |                    |       |
| Class E units                                                                       |       | 1                               |       | 1                       |       |
| Common units:                                                                            |       |                            |       |                    |       |
| Class A units                                                                       |       | 38,676                          |       | 38,676                  |       |
| Class C units                                                                       |       | 188                             |       | 188                     |       |
| Class D units                                                                       |       | 1,248                           |       | 1,248                   |       |
| Accumulated deficit                                                                      |       | (118,739                        | )          | (118,045                | )          |
| Accumulated other comprehensive income                                                   |       | 3,529                           |       | 1,009                   |       |
| Total members’ deficit                                                              |       | (75,097                         | )          | (76,923                 | )          |
| Total liabilities and members’ deficit                                              |       | $                               | 389,191    |                    | $          | 414,548 |   |

 

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

 

*See notes to unaudited consolidated financialstatements.*

 

1

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**NSP HOLDINGS L.L.C.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Amountsin Thousands) (Unaudited)**

 
| ** **                                        | ** ** | **Three months ended**  | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **April 3,  2004** | ** ** | **April 2,  2005** | ** ** |
| Net sales                                         |       | $                       | 109,073    |   | $ | 120,423 |   |
| Cost of goods sold                                |       | 68,707                  |       | 75,602 |   |
| Gross profit                                      |       | 40,366                  |       | 44,821 |   |
| Operating expenses:                               |       |                    |       |   |   |
| Selling                                           |       | 10,404                  |       | 11,857 |   |
| Distribution                                      |       | 5,368                   |       | 6,274 |   |
| General and administrative                        |       | 10,121                  |       | 11,067 |   |
| Amortization of intangibles                       |       | 126                     |       | 142 |   |
| Total operating expenses                          |       | 26,019                  |       | 29,340 |   |
| Income from operations                            |       | 14,347                  |       | 15,481 |   |
| Other expense (income):                           |       |                    |       |   |   |
| Interest expense                                  |       | 8,941                   |       | 10,721 |   |
| Interest income                                   |       | (35                     | )          | (428 | ) |
| Other, net                                        |       | 534                     |       | 386 |   |
| Income before income taxes and minority  interest |       | 4,907                   |       | 4,802 |   |
| Income tax expense                                |       | 1,036                   |       | 1,604 |   |
| Minority interest                                 |       | 5                       |       | 4 |   |
| Net income                                        |       | $                       | 3,866      |   | $ | 3,194 |   |

 

*See notes to unaudited consolidatedfinancial statements.*

 

2

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**NSP HOLDINGSL.L.C.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

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

 
| ** **                                                                     | ** ** | **Three months ended**  | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **April 3,  2004** | ** ** | **April 2,  2005** | ** ** |
| **Operating activities**                                                       |       |                    |       |   |   |
| Net income                                                                     |       | $                       | 3,866      |   | $ | 3,194 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |       |                    |       |   |   |
| Depreciation                                                                   |       | 2,853                   |       | 2,705 |   |
| Amortization of intangibles                                                    |       | 126                     |       | 142 |   |
| Amortization of deferred financing costs                                       |       | 441                     |       | 601 |   |
| Amortization of original issue discount                                        |       | 22                      |       | 25 |   |
| Deferred income taxes                                                          |       | (46                     | )          | 237 |   |
| Minority interest                                                              |       | 5                       |       | 4 |   |
| Noncash interest                                                               |       | 3,294                   |       | 4,982 |   |
| Changes in operating assets and  liabilities:                                  |       |                    |       |   |   |
| Accounts receivable                                                            |       | (9,029                  | )          | (8,540 | ) |
| Inventories                                                                    |       | (1,315                  | )          | (969 | ) |
| Prepaid expenses and other current assets                                      |       | (388                    | )          | 220 |   |
| Other noncurrent assets                                                        |       | (30                     | )          | 73 |   |
| Accounts payable                                                               |       | 202                     |       | 2,445 |   |
| Accrued expenses                                                               |       | (7,241                  | )          | (7,499 | ) |
| Pension, postretirement, and deferred  compensation                            |       | 787                     |       | 14 |   |
| Other noncurrent liabilities                                                   |       | (2                      | )          | (6 | ) |
| Other                                                                          |       | 4                       |       | (6 | ) |
| Net cash used in operating activities                                          |       | (6,451                  | )          | (2,378 | ) |
|                                                                           |       |                    |       |   |   |
| **Investing activities**                                                       |       |                    |       |   |   |
| Purchase of businesses, net of cash  acquired                                  |       | (112                    | )          | (431 | ) |
| Purchases of property, plant, and equipment                                    |       | (1,507                  | )          | (1,327 | ) |
| Net cash used in investing activities                                          |       | (1,619                  | )          | (1,758 | ) |
|                                                                           |       |                    |       |   |   |
| **Financing activities**                                                       |       |                    |       |   |   |
| Payments for deferred financing costs                                          |       | —                  |       | (3,700 | ) |
| Proceeds from borrowings                                                       |       | —                  |       | 100,000 |   |
| Payments of debt                                                               |       | (953                    | )          | (13,013 | ) |
| Distributions on preferred units                                               |       | —                  |       | (60,000 | ) |
| Distributions on common units                                                  |       | —                  |       | (2,500 | ) |
| Net cash (used in) provided by financing  activities                           |       | (953                    | )          | 20,787 |   |
| Effect of exchange rate changes on cash                                        |       | (458                    | )          | (1,424 | ) |
| Net decrease in cash and cash equivalents                                      |       | (9,481                  | )          | 15,227 |   |
| Cash and cash equivalents at beginning of  period                              |       | 16,341                  |       | 35,731 |   |
| Cash and cash equivalents at end of period                                     |       | $                       | 6,860      |   | $ | 50,958 |   |

* *

*See notes to unaudited consolidated financialstatements*

 

3

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**NSPHOLDINGS L.L.C.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in Thousands) (Unaudited)**

 

# **1.     Basisof Presentation**

# ** **

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

 

In the opinion ofmanagement, all adjustments (consisting only of adjustments of a normal andrecurring nature) considered necessary for a fair presentation of the financialposition and results of operations have been included. Interim results are notnecessarily indicative of the results that might be expected for any otherinterim period or for the fiscal year ending December 31, 2005. Thefinancial statements presented should be read in conjunction with theconsolidated financial statements and footnotes thereto included in our 2004consolidated financial statements.

 

Certain account balanceshave been reclassified from the prior year to conform with current yearpresentation.

 

# **2.     Inventories**

# ** **

Inventories consist of the following:

 
| ** **              | ** ** | **December 31,  2004** | ** ** | **April 2,  2005** | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------|------------|
| At FIFO cost:           | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Raw materials           |       | $                           | 21,726     |                    | $          | 24,393 |   |
| Work in process         |       | 10,419                      |       | 10,973                  |       |
| Finished goods          |       | 52,045                      |       | 49,795                  |       |
|                    |       | 84,190                      |       | 85,161                  |       |
| Adjustment to LIFO cost |       | (1,658                      | )          | (1,658                  | )          |
|                    |       | $                           | 82,532     |                    | $          | 83,503 |   |

 

4

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# **3.     Debt**

# ** **

The Company’s debt consists of the following:

 
| ** **                                         | ** ** | **December 31,  2004** | ** ** | **April 2,  2005** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Revolving credit facilities                        |       | $                           | —     |                    | $          | — |   |
| Term loan                                          |       | 97,725                      |       | 85,200                  |       |
| Senior pay in kind notes                           |       | —                      |       | 102,741                 |       |
| Senior subordinated notes                          |       | 152,500                     |       | 152,500                 |       |
| European term loans                                |       | 469                         |       | 358                     |       |
| Arbin seller notes                                 |       | 454                         |       | 430                     |       |
| Subordinated seller notes                          |       | 3,121                       |       | 2,801                   |       |
| Capital lease obligations                          |       | 207                         |       | 175                     |       |
| Unamortized discount on senior subordinated  notes |       | (910                        | )          | (885                    | )          |
|                                               |       | 253,566                     |       | 343,320                 |       |
| Less: Current maturities of long-term  obligations |       | 15,252                      |       | 2,690                   |       |
|                                               |       | $                           | 238,314    |                    | $          | 340,630 |   |

 

Aggregate maturities oflong-term debt as of April 2, 2005, are as follows:

 
| 2006       |       | $       | 2,690   |       |
|------------|------------|---------|---------|------------|
| 2007       |       | 3,293   |    |
| 2008       |       | 1,223   |    |
| 2009       |       | 81,197  |    |
| 2010       |       | 34      |    |
| Thereafter |       | 254,883 |    |
|       | ** ** | $       | 343,320 | ** ** |

 

On January 7, 2005, the Company issued$100.0 million of 113⁄4% senior pay in kind notes due 2012. The proceedswere used to: (i) make a payment in respect of preferred units of $60,000,$57,995 of which were payments in respect of accrued preferred yield and $2,005of which was the return of a portion of the original capital contribution madeby holders of the Company’s preferred units, (ii) make distributions inrespect of the common units of certain members of management of $2,500, and (iii) payfees and expenses. The remainder of the net proceeds will be used for generalcorporate purposes, including potential acquisitions and/or distributions tothe Company’s unit holders.

 

In connection withthe offering, we amended our senior credit facility to provide for the issuanceof the outstanding senior pay in kind notes. The amendment also modifiedcertain of the covenants under our senior credit facility.

 

5

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# **4.     EmployeeBenefit Plans**

# ** **

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

 
| ** **                         | ** ** | **Three months ended April 3, 2004** | ** ** | **Three months ended April 2, 2005** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **Pension  Benefits**                     | ** ** | **Post-retirement  Benefits**             | ** ** | **Pension  Benefits** | ** ** | **Post-retirement  Benefits** | ** ** |
|                               |       |                                      |       |                                      |       |   |   |   |   |
| Service cost                       |       | $                                         | 373        |                                      | $          | 7 |   | $ | 417 |   | $ | 6 |   |
| Interest cost                      |       | 872                                       |       | 20                                        |       | 905 |   | 20 |   |
| Expected return on plan assets     |       | (668                                      | )          | —                                    |       | (777 | ) | — |   |
| Amortization of prior service cost |       | 1                                         |       | 4                                         |       | 1 |   | 4 |   |
| Amortization of actuarial loss     |       | 212                                       |       | 21                                        |       | 284 |   | 22 |   |
|                               |       | $                                         | 790        |                                      | $          | 52 |   | $ | 830 |   | $ | 52 |   |

 

6

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# **5.     LegalProceedings**

# ** **

The Company is subject to various claims arisingin the ordinary course of business. Most of these lawsuits and claims areproduct liability matters that arise out of the use of respiratory productlines manufactured by the Company’s North Safety Products subsidiary. As of April 2,2005, the Company’s North Safety Products subsidiary, along with itspredecessors and/or the former owners of such business were named as defendantsin approximately 864 lawsuits involving respirators manufactured and soldby it or its predecessors . The Company is also monitoring an additional 11lawsuits in which it feels that North Safety Products, its predecessors and/orthe former owners of such businesses may be named as defendants. Collectively,these 875 lawsuits represent a total of approximately 26,300 plaintiffs.Approximately 91% of these lawsuits involve plaintiffs alleging injuryresulting from exposure to silica dust, with the remainder alleging injuryresulting from exposure to other particles, including asbestos. These lawsuits typicallyallege that the purported injuries resulted in part from respirators that werenegligently designed or manufactured. Invensys plc (“Invensys”), formerly Siebeplc, is contractually obligated to indemnify the Company for any losses,including costs of defending claims, resulting from respiratory productsmanufactured or sold prior to the acquisition of North Safety Products in October 1998.

 

In addition, the Company’s North 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,Siebe Norton, Inc. did not assume any liability for claims relating toproducts shipped by Norton Company prior to the closing date. Moreover, NortonCompany covenanted in the Agreement to indemnify Siebe Norton and itssuccessors and assigns against any liability resulting from or arising out ofany state of facts, omissions or events existing or occurring on or before theclosing date, including, without limitation, any claims arising from productsshipped by Norton Company or any of its affiliates prior to the closing date.Siebe Norton, 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 could potentially be liable for losses or claims relating toproducts manufactured prior to the October 1998 acquisition date ifInvensys fails to meet its obligations to indemnify the Company and the Companycould potentially be liable for losses and claims relating to products soldprior to January 10, 1983 if both Invensys and Norton fail to meet theirobligations to indemnify the Company. The Company could also be liable if thealleged exposure involved the use of a product manufactured by the Companyafter its October 1998 acquisition of the North Safety Products business.Invensys is currently handling the defense of all of the cases prior to October 1998in which North Safety Products, its predecessors and/or former owners of suchbusiness have been named as defendants. The Company is jointly with Invensyshandling the defense of all of the cases which allege exposure, includingperiods pre and post October 1998. The Company will individually handle the defense of all cases withexclusive post October 1998 exposure, however, it has not been involved ina case with exclusive post October 1998 exposure to date.  As of April 2, 2005, Invensys has sentus requests for reimbursement totaling $147, relating to settled cases in whichInvensys claims that the period of alleged exposure included periods after October 1998.Based on information provided to the Company by Invensys, the Company believesthat Invensys has made payments with respect to settlement of these claims of$4 for the three months ended April 2, 2005 . The Company believes thatInvensys has the ability to pay these claims based on its current financialposition, as publicly disclosed by Invensys.

 

Consistent with thecurrent environment being experienced by companies involved in silica andasbestos-related litigation, there has been an increase in the number ofasserted claims that could 

 

7

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potentially involve the Company. Based uponinformation provided to the Company by Invensys, the Company believes activityrelated to these lawsuits was as follows for the three months ended April 2,2005:

 

| Beginning lawsuits   |   | 858 |   |
|----------------------|--------|-----|--------|
| New lawsuits         |   | 66  |   |
| Settlements          |   | (3  | )      |
| Dismissals and other |   | (46 | )      |
| Ending lawsuits      |   | 875 |   |

 

Plaintiffs have asserted specific dollarclaims in approximately a quarter of the approximately 864 cases pendingas of April 2, 2005 in which North Safety Products, its predecessorsand/or the former owners of such businesses have been named as defendants. Amajority of jurisdictions prohibit specifying damages in tort cases such asthese, and most of the remaining jurisdictions do not require suchspecification. In those cases in which plaintiffs choose to assert specificdollar amounts in their complaints, brought in states that permit suchpleading, the amounts claimed are typically not meaningful as an indicator of acompany’s potential liability. This is because (1) the amounts claimedtypically bear no relation to the level of the plaintiff’s injury, (2) thecomplaints typically assert claims against numerous defendants, and (3) manycases are brought on behalf of plaintiffs who have not suffered any medicalinjury, and, ultimately, are resolved without any payment or payment of a smallfraction of the damages initially claimed. Of the 864 complaints maintained inthe Company’s records, 648 do not specify the amount of damages sought, 41generally allege damages in excess of $50, three allege compensatorydamages in excess of $50 and an unspecified amount of punitive damages, 92allege compensatory damages and punitive damages, each in excess of $25, threegenerally allege damages in excess of $100, 19 allege compensatory damages andpunitive damages, each in excess of $50, 29 generally allege damages of$15,000, one generally alleges damages not to exceed $290,000, one allegescompensatory damages and punitive damages, each in excess of $10, one allegescompensatory and punitive damages, each in excess of $15, one alleges punitivedamages in excess of $25, one alleges punitive damages in excess of $50, 18generally allege damages in excess of $15, three generally allege damages inexcess of $25, one generally alleges damages in excess of $4, 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 11 monitored cases, and therefore do not know whetherthese cases allege specific damages, or if so, the amount of such damages, butare in the process of seeking to obtain such information.  Due to the reasons noted above and to theindemnification arrangements benefiting the Company, it does not believe thatthe damage amounts specified in these complaints are a meaningful factor in anyassessment of the Company’s potential liability.

 

The Company recorded a $1,250 liability andcharge to operating expenses to establish a reserve for respiratory claimsduring the year ended December 31, 2004, which remains outstanding as of April 2,2005.  The Company believes that thisreserve represents a reasonable estimate of the Company’s probable andestimable liabilities for claims alleging injury resulting from exposure tosilica dust and other particles, including asbestos, as determined by theCompany in consultation with an independent consultant.  The Company believes that a five-yearprojection of claims and defense costs is the most reasonable approach.  However, it is possible that the Company mayincur liabilities in excess of the amounts currently reserved.  This reserve will be re-evaluatedperiodically and additional charges or credits will be recorded to operating expensesas additional information becomes available.

 

8

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The Company is not otherwise involved in anymaterial lawsuits. The Company historically has not been required to pay anymaterial liability claims. The Company maintains insurance against productliability claims (with the exception of asbestosis and silicosis cases, forwhich coverage is not commercially available), but it is possible thatinsurance coverage will not continue to be available on terms acceptable to theCompany or that such coverage will not be adequate for liabilities actuallyincurred.  In connection with the NorthSafety Products acquisition, the Company recorded a $2,500 reserve forpotential uninsured product liability claims of North Safety Products forperiods prior to October 1998. The reserve was established at the date ofacquisition and relates to potential claims primarily associated with fallprotection products sold in Canada. Through December 31, 2003, the Companyincurred charges of $200 against this reserve, which reduced the balance to$2,300.  During 2004, the Company reducedthis reserve to $1,000 to reflect its current expectations of the liabilitybased on information available and recorded a $1,300 credit to operatingexpenses. The $1,000 reserve remains outstanding as of April 2, 2005. Thisreserve is re-evaluated periodically, and additional charges or credits will berecorded to operating expenses as additional information becomes available.

 

It is possible that the Company may incurliabilities in an amount in excess of amounts currently reserved. However,taking into account currently available information, historical experience, andthe Company’s indemnification from Invensys, but recognizing the inherentuncertainties in the projection of any future events, the Company believes thatthese suits or claims should not result in final judgments or settlements inexcess of its reserve.

 

# **6.     SegmentData**

# ** **

The following tablepresents information about the Company by segment:

 
| ** **                                | ** ** | **General  Industrial** | ** ** | **Fire  Service** | ** ** | **Utility/  High  Voltage** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-------------------|------------|-----------------------------|------------|---------------|------------|------------------|------------|-----------|------------|
| **Three Months Ended April 3, 2004** |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net sales—third parties              |       | $                       | 76,464     |              | $          | 20,293                      |       | $             | 12,316     |             | $          | —    |       | $ | — |   | $ | 109,073 |   |
| Net sales—intersegment               |       | 2,722                   |       | —            |       | —                      |       | —        |       | (2,722           | )          | —    |       |
| Income (loss) from operations             |       | 8,946                   |       | 3,941             |       | 2,717                       |       | (1,257        | )          | —           |       | 14,347    |       |
| **Three Months Ended April 2, 2005** |       |                    |       |              |       |                        |       |          |       |             |       |      |       |
| Net sales—third parties              |       | 83,220                  |       | 23,000            |       | 14,203                      |       | —        |       | —           |       | 120,423   |       |
| Net sales—intersegment               |       | 2,558                   |       | —            |       | —                      |       | —        |       | (2,558           | )          | —    |       |
| Income (loss) from operations             |       | 8,812                   |       | 4,381             |       | 3,685                       |       | (1,397        | )          | —           |       | 15,481    |       |
|                                           |            |                         |            |                   |            |                             |            |               |            |                  |            |           |            |  |  |  |  |  |  |

 

**7.     ComprehensiveIncome**

 

Total comprehensive income for the three months ended April 3,2004 and April 2, 2005 amounted to $2,483 and $674, respectively.

 

**8.     Guarantors**

** **

NSP Holdings Capital Corp. is a 100% ownedfinance subsidiary of NSP Holdings L.L.C. with no assets or operations. None ofNSP Holdings L.L.C.’s other subsidiaries guarantee the 113⁄4% senior pay in kindnotes. The terms of its senior credit facility significantly restrict NorcrossSafety Products L.L.C. from paying dividends and otherwise transferring assetsto NSP Holdings L.L.C. Further, the terms of the indenture governing its 9.875%Senior Subordinated Notes due 2011 significantly restrict Norcross SafetyProducts L.L.C. and NSP Holdings L.L.C.’s other subsidiaries from payingdividends and otherwise transferring assets to NSP Holdings L.L.C., except fortaxes and ordinary course corporate operating expenses.

 

9

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

** **

**Overview**

** **

We are a leadingdesigner, manufacturer and marketer of branded products in the fragmentedpersonal protection equipment industry. We manufacture and market a full lineof personal protection equipment for workers in the general industrial, fireservice and utility/high voltage industries. We sell our products undertrusted, long-standing and well-recognized brand names, including *North*, *MorningPride*, *Ranger*, *Servus*, *Pro-Warrington*and *Salisbury*. Our broad productoffering includes, among other things, respiratory protection, protectivefootwear, hand protection, bunker gear and linemen equipment.

 

We classify our diverse product offerings into three primary operatingsegments:

 

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

 

Fire Service. We manufacture and market one of the broadest lines ofpersonal protection equipment for the fire service segment, offeringfirefighters head-to-toe protection. Our products include bunker gear, fireboots, helmets, gloves and other accessories. We market our products under our *Total Fire Group* umbrella, using the brandnames of *Morning Pride*, *Ranger*, *Servus*and *Pro-Warrington*. We are thevendor of choice for many of the largest fire departments in North America. Wesell our fire service products primarily through specialized fire servicedistributors.

 

Utility/High Voltage. We manufacture and market one of the broadestlines of personal protection equipment for the utility/high voltage servicesegment under the *Salisbury* and *Servus* brands. Our products, includinglinemen equipment, gloves, sleeves and footwear, are designed to protectworkers from up to 40,000 volts of electricity. All of our products either meetor exceed the applicable standards of ANSI and ASTM. We distribute ourutility/high voltage products through specialized distributors and direct toutilities and electrical contractors.

 

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**Results ofOperations**

** **

The following tables setforth our results of operations in dollars and as a percentage of net sales forthe three months ended April 3, 2004 and April 2, 2005. The data forthe three months ended April 3, 2004 and April 2, 2005 have beenderived from our historical unaudited financial statements.

 
| ** **                                        | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **April 3,  2004**    | ** ** | **April 2,  2005** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)** | ** ** |
| Net sales:                                        |       |                       |       |   |   |
| General industrial                                |       | $                          | 76,464     |   | $ | 83,220 |   |
| Fire service                                      |       | 20,293                     |       | 23,000 |   |
| Utility/high voltage                              |       | 12,316                     |       | 14,203 |   |
| Total net sales                                   |       | 109,073                    |       | 120,423 |   |
| Cost of goods sold                                |       | 68,707                     |       | 75,602 |   |
| Gross profit                                      |       | 40,366                     |       | 44,821 |   |
| Operating expenses                                |       | 26,019                     |       | 29,340 |   |
| Income from operations:                           |       |                       |       |   |   |
| General industrial                                |       | 8,946                      |       | 8,812 |   |
| Fire service                                      |       | 3,941                      |       | 4,381 |   |
| Utility/high voltage                              |       | 2,717                      |       | 3,685 |   |
| Corporate                                         |       | (1,257                     | )          | (1,397 | ) |
| Total income from operations                      |       | 14,347                     |       | 15,481 |   |
| Other expense (income):                           |       |                       |       |   |   |
| Interest expense                                  |       | 8,941                      |       | 10,721 |   |
| Interest income                                   |       | (35                        | )          | (428 | ) |
| Other, net                                        |       | 534                        |       | 386 |   |
| Income before income taxes and minority  interest |       | 4,907                      |       | 4,802 |   |
| Income tax expense                                |       | 1,036                      |       | 1,604 |   |
| Minority interest                                 |       | 5                          |       | 4 |   |
| Net income                                        |       | $                          | 3,866      |   | $ | 3,194 |   |

 

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| ** **                                        | ** ** | **Three Months Ended**             | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | **April 3,  2004**            | ** ** | **April 2,  2005** | ** ** |
| ** **                                        | ** ** | **(as a percentage of net sales)** | ** ** |
| Net sales:                                        |       |                               |       |   |   |
| General industrial                                |       | 70.1                               | %          | 69.1 | % |
| Fire service                                      |       | 18.6                               | %          | 19.1 | % |
| Utility/high voltage                              |       | 11.3                               | %          | 11.8 | % |
| Total net sales                                   |       | 100.0                              | %          | 100.0 | % |
| Cost of goods sold                                |       | 63.0                               | %          | 62.8 | % |
| Gross profit                                      |       | 37.0                               | %          | 37.2 | % |
| Operating expenses                                |       | 23.9                               | %          | 24.4 | % |
| Income from operations:                           |       |                               |       |   |   |
| General industrial                                |       | 8.2                                | %          | 7.3 | % |
| Fire service                                      |       | 3.6                                | %          | 3.6 | % |
| Utility/high voltage                              |       | 2.5                                | %          | 3.1 | % |
| Corporate                                         |       | (1.2                               | )%         | (1.2 | )% |
| Total income from operations                      |       | 13.1                               | %          | 12.8 | % |
| Other expense (income):                           |       |                               |       |   |   |
| Interest expense                                  |       | 8.2                                | %          | 8.9 | % |
| Interest income                                   |       | (0.0                               | )%         | (0.4 | )% |
| Other, net                                        |       | 0.5                                | %          | 0.3 | % |
| Income before income taxes and minority  interest |       | 4.4                                | %          | 4.0 | % |
| Income tax expense                                |       | 0.9                                | %          | 1.3 | % |
| Minority interest                                 |       | 0.0                                | %          | 0.0 | % |
| Net income                                        |       | 3.5                                | %          | 2.7 | % |

 

***ThreeMonths Ended April 2, 2005 as Compared to Three Months Ended April 3,2004***

 

*Netsales.*Net salesincreased by $11.3 million, or 10.4%, from $109.1 million for thethree months ended April 3, 2004 to $120.4 million for the threemonths ended April 2, 2005. In our general industrial segment, net salesincreased by $6.7 million, or 8.8%, from $76.5 million for the threemonths ended April 3, 2004 to $83.2 million for the three monthsended April 2, 2005. This increase was primarily due to: higher net salesin the United States of $1.0, overall organic growth in our Canadian andEuropean operations of $2.8 million, and favorable exchange rates, which had animpact of $2.7 million. In our fire service segment, net sales increasedby $2.7 million, or 13.3%, from $20.3 million for the three monthsended April 3, 2004 to $23.0 million for the three months ended April 2,2005 reflecting strong market demand. In our utility/high voltage segment, netsales increased by $1.9 million, or 15.3%, from $12.3 million for thethree months ended April 3, 2004 to $14.2 million for the threemonths ended April 2, 2005 primarily driven by strong market demand andnew product penetration.

 

*Grossprofit.*Grossprofit increased by $4.4 million, or 11.0%, from $40.4 million forthe three months ended April 3, 2004 to $44.8 million for the threemonths ended April 2, 2005, primarily due to the $11.3 million, or10.4%, increase in net sales. Our gross profit margin of 37.2% for the threemonths ended April 2, 2005 was favorable to the 37.0% gross profit marginfor the three months ended April 3, 2004. In our general industrialsegment, gross profit increased by $2.5 million, or 8.7%, from $29.0 millionfor the three months ended April 3, 2004 to $31.5 million for thethree months ended April 2, 2005. This increase was primarily due to theoverall net sales increase of $6.7 million, or 8.8%, and favorable exchange rateswhich had an impact of $1.0 million.

 

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In our fire service segment, gross profit increased by$0.7 million, or 11.5%, from $6.7 million for the three months ended April 3,2004 to $7.4 million for the three months ended April 2, 2005,primarily due to the $2.7 million, or 13.3% increase in net sales. In ourutility/high voltage segment, gross profit increased by $1.2 million, or24.4%, from $4.8 million for the three months ended April 3, 2004 to$6.0 million for the three months ended April 2, 2005, primarily dueto the $1.9 million, or 15.3% increase in net sales and improved manufacturingperformance.

 

*Operatingexpenses.*Operatingexpenses increased by $3.3 million, or 12.8%, from $26.0 million forthe three months ended April 3, 2004 to $29.3 million for the threemonths ended April 2, 2005. In our general industrial segment, operatingexpenses increased by $2.7 million, or 13.3%, from $20.0 million forthe three months ended April 3, 2004 to $22.7 million for the threemonths ended April 2, 2005, primarily due to higher exchange rates, whichhad an impact of $0.7 million; higher payroll and other administrativecosts; and increased variable distribution and selling expenses associated withthe $6.7 million, or 8.8% increase in net sales. In our fire service segment, operatingexpenses increased $0.3 million, or 12.0%, from $2.7 million for thethree months ended April 3, 2004 to $3.0 million for the three monthsended April 2, 2005, primarily due to additional variable selling expensesassociated with the $2.7 million, or 13.3%, increase in net sales. In ourutility/high voltage segment, operating expenses increased by$0.2 million, or 9.7%, from $2.1 million for the three months ended April 3,2004 to $2.3 million for the three months ended April 2, 2005,primarily due to higher selling expenses. Our corporate expense increased $0.1 million,or 11.1%, primarily due to higher payroll and administrative expenses includingcosts associated with public reporting and Sarbanes-Oxley Act relatedcompliance requirements.

 

*Incomefrom operations.*Incomefrom operations increased by $1.2 million, or 7.9%, from $14.3 millionfor the three months ended April 3, 2004 to $15.5 million for thethree months ended April 2, 2005. As a percentage of net sales, income fromoperations decreased from 13.1% for the three months ended April 3, 2004to 12.8% for the three months ended April 2, 2005. In our generalindustrial segment, income from operations decreased by $0.1 million, or1.5%, from $8.9 million for the three months ended April 3, 2004 to $8.8 millionfor the three months ended April 2, 2005 as higher net sales of $6.7million, or 8.8%, were offset by higher overall operating expenses. In our fireservice segment, income from operations increased by $0.4 million, or11.2%, from $4.0 million for the three months ended April 3, 2004 to$4.4 million for the three months ended April 2, 2005, primarily dueto the $2.7 million, or 13.3%, increase in net sales. In our utility/highvoltage segment, income from operations increased by $1.0 million, or35.6%, from $2.7 million for the three months ended April 3, 2004 to$3.7 million for the three months ended April 2, 2005, primarily dueto higher net sales of $1.9 million, or 15.3% and improved manufacturingperformance. Our corporate expenses increased $0.1 million, or 11.1%,primarily due to higher payroll and administrative expenses including costsassociated with public reporting and Sarbanes-Oxley Act related compliancerequirements.

 

Included in income fromoperations for the three months ended April 2, 2005 and April 3, 2004were depreciation and amortization expenses of $2.8 million and $3.0 million,respectively. Of these amounts, $2.3 million, $0.1 million, and$0.4 million were attributable to the general industrial, fire service, andutility/high voltage segments, respectively, for the three months ended April 2,2005 and $2.4 million, $0.1 million, $0.3 million and$0.2 million were attributable to the general industrial, fire service,utility/high voltage, and corporate segments for the three months ended April 3,2004.

 

*Interestexpense.*Interestexpense increased $1.8 million, or 19.9%, from $8.9 million for the threemonths ended April 3, 2004 to $10.7 million for the three months ended April 2,2005 due to the net impact of an increase in interest expense associated withthe $100.0 million senior pay in kind notes and a decrease in preferred unitdividends included in interest expense associated with the redemption of $60.0million of mandatorily redeemable preferred units.  Included in interest expense were non-cashinterest charges associated with the senior pay in kind notes and preferredunit dividends of $5.0 million and $3.3 million for the three months ended April 2,2005 and the three months ended April 3, 2004, respectively.

 

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*Other,net.*Other, netdecreased by $0.1 from $0.5 million for the three months ended April 3,2004 to $0.4 million for the three months ended April 2, 2005.

 

*Incometax expense.*Incometax expense increased by $0.6 million, from $1.0 million for thethree months ended April 3, 2004 to $1.6 million for the three monthsended April 2, 2005, as a result of higher income tax expense levels atforeign operations.

 

*Netincome.*Netincome decreased by $0.7 million, or 17.4%, from $3.9 million for thethree months ended April 3, 2004 to $3.2 million for the three monthsended April 2, 2005. This was the result of the reasons discussed above.

 

**Liquidity andCapital Resources**

** **

We have historically usedinternal cash flow from operations, commercial borrowings on our lines ofcredit, seller notes, investments from our equityholders and capital marketstransactions to fund our operations, acquisitions, capital expenditures andworking capital requirements. For the three months ended April 2, 2005 andApril 3, 2004, cash used in operating activities was $2.4 million and$6.5 million, respectively. The $4.1 million improvement wasprimarily attributable to the $1.2 increase in income from operations and favorableworking capital activity.

 

Historically, our principal uses of cash have been capitalexpenditures, acquisitions and working capital. Our capital expenditures were$1.3 million for the three months ended April 2, 2005 and $1.5 millionfor the three months ended April 3, 2004.

 

As of April 2, 2005, we had working capital of $162.7 millionand cash of $51.0 million. We maintain inventory levels sufficient tosatisfy customer orders on demand, with generally a three month supply on hand.Bunker gear is an exception and is generally made to order. Our accountsreceivable terms are generally 30 days, net.

 

For the three months ended April 2, 2005, net cash provided by financingactivities was $20.8 million, representing payments for deferred financingfees of $3.7 million; proceeds from the issuance of 113⁄4% senior pay in kindnotes of $100.0 million; payments on long-term obligations of $13.0 million,including an excess cash flow sweep payment under the terms of the senior creditfacility of $12.2 million; payment in respect of preferred units of $60.0million; and distributions in respect of the common units of certain members ofmanagement of $2.5 million. For the three months ended April 3, 2004, netcash used in financing activities was $1.0 million, representing paymentson long term debt obligations.

 

On March 21, 2003,we entered into a senior credit facility which provides for aggregateborrowings by us of $160.0 million and C$10.0 million, consisting of (1) a$30.0 million United States revolving credit facility; (2) aC$10.0 million Canadian revolving credit facility; and (3) a$130.0 million term loan. As of April 2, 2005, there wasapproximately $85.2 million of outstanding indebtedness under the seniorcredit facility and approximately $36.9 million of available borrowingsunder the revolving facilities. We used the proceeds of our senior creditfacility to refinance our then existing senior credit facility and for generalcorporate purposes, including working capital, refinancings, acquisitions,investments and capital expenditures.

 

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As of April 2, 2005,borrowings under the senior credit facility bore interest at a weighted averagerate of 6.1%. Prior to March 20, 2008, we may borrow, repay and re-borrowunder the revolving facilities without payment of penalty or premium. The termloan is payable in quarterly installments totaling $1.3 million per annum,with the remainder due on March 20, 2009. All of the domestic borrowers’obligations under the senior credit facility are secured by a pledge of all ourequity securities and the equity securities of our direct and indirect domesticsubsidiaries, substantially all of our tangible and intangible assets and 65%of the equity securities of, or equity interest in, each of our foreignsubsidiaries. All of the obligations under the senior credit facility areguaranteed by all of our present and future domestic subsidiaries, and all ofthe Canadian borrower’s obligations under the senior credit facility areguaranteed by all of our present and future Canadian subsidiaries.

 

Our senior credit facility contains, and the indentures governing oursenior pay in kind notes and Norcross Safety Products L.L.C's seniorsubordinated notes contain, numerous restrictive covenants, including, amongother things, covenants that limit our ability to incur indebtedness, use ourassets as security in other transactions, make fundamental changes to ourcapital structure, dispose of assets, pay dividends, make capital expenditures,enter into transactions with affiliates and enter into sale and leasebacktransactions. In addition, our senior credit facility requires us to meetspecified financial ratios and tests.

 

On January 7, 2005, we issued $100.0 millionof 113⁄4% senior pay in kind notes due 2012. The proceeds were used to: (i) makea payment in respect of preferred units of $60.0 million, $58.0 million ofwhich were payments in respect of accrued preferred yield and $2.0 million ofwhich was the return of a portion of the original capital contribution made byholders of our preferred units, (ii) make distributions in respect of thecommon units of certain members of management of $2.5 million, and (iii) payfees and expense. The remainder of the net proceeds will be used for generalcorporate purposes, including potential acquisitions and/or distributions toour unit holders.

 

In connection withthe offering of our senior pay in kind notes, we amended our senior creditfacility to provide for the issuance of these notes. The amendment alsomodified certain of the covenants under our senior credit facility.

 

We believe that ourinternal cash flows and borrowings under the revolving portions of our seniorcredit facility will provide us with sufficient liquidity and capital resourcesto meet our current and future financial obligations for the foreseeablefuture, including funding our operations, debt service and capitalexpenditures. Our future operating performance will be subject to future economicconditions and to financial, business and other factors, many of which arebeyond our control. If our future cash flow from operations and other capitalresources are insufficient to pay our obligations as they mature or to fund ourliquidity needs, we may be forced to reduce or delay our business activitiesand capital expenditures, sell assets, obtain additional debt or equity capitalor restructure or refinance all or a portion of our debt, including the notes,on or before maturity. We cannot assure you that we would be able to accomplishany of these alternatives on a timely basis or on satisfactory terms, if atall. In addition, the terms of our existing and future indebtedness, including oursenior subordinated notes and our senior credit facility, may limit our abilityto pursue any of these alternatives.

 

**Forward-Looking Statements**

 

This Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains forward-looking information. These statements reflect management’s expectations,estimates, and assumptions based on information available at the time of thestatement. Forward-looking statements include, but are not limited to,statements regarding future events, plans, goals, objectives, and expectations.The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intent,” “likely,”“will,” “should,” and similar expressions are intended to identifyforward-looking statements. Forward-looking statements are not guarantees offuture performance and involve risks, uncertainties, and other

 

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factors, including those set forth below, which maycause our actual results, performance, or achievements to be materiallydifferent from any future results, performance, or achievements expressed orimplied by those statements. Important factors that could cause our actualresults, performance, or achievements to be materially different from anyfuture results, performance, or achievements expressed or implied by thosestatements include, but are not limited to: (i) our high degree ofleverage and significant debt service obligations; (ii) the impact ofcurrent and future laws and governmental regulations affecting us or ourproduct offerings; (iii) the impact of governmental spending; (iv) ourability to retain existing customers, maintain key supplier status with thosecustomers with which we have achieved such status, and obtain new customers; (v) thehighly competitive nature of the personal protection equipment industry; (vi) anyfuture changes in management; (vii) acceptance by consumers of newproducts we develop or acquire; (viii) the importance and costs of productinnovation; (ix) unforeseen problems associated with international sales,including gains and losses from foreign currency exchange and restrictions onthe efficient repatriation of earnings; (x) the unpredictability of patentprotection and other intellectual property issues; (xi) cancellation of currentorders; (xii) the outcome of pending product liability claims and theavailability of indemnification for those claims; (xiii) general risksassociated with the personal protection equipment industry; and (xiv) thesuccessful integration of acquired companies on economically acceptable terms.We undertake no obligation to publicly update or revise any forward-lookingstatements to reflect changed assumptions, the occurrence of anticipated orunanticipated events, or changes to future results over time.

 

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

** **

There have been nomaterial changes to our exposure to market risk since December 31, 2004.

 

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**Item 4. Controls and Procedures**

** **

Based on their evaluation as of the end of the periodcovered by this quarterly report on Form 10-Q, our Chief Executive Officerand Chief Financial Officer have concluded that our disclosure controls andprocedures (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 ourinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) identified in connection with theevaluation required by Rule 13a-15(d) of the Exchange Act thatoccurred during the period covered by this quarterly report on Form 10-Qthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II**OTHER INFORMATION

** **

**Item 1. Legal Proceedings**

** **

As of April 2, 2005, our North SafetyProducts subsidiary, along with its predecessors and/or the former owners ofsuch business were named as defendants in approximately 864 lawsuits involvingrespirators manufactured and sold by it or its predecessors. We are alsomonitoring an additional 11 lawsuits in which we feel that North SafetyProducts, its predecessors and/or the former owners of such businesses may benamed as defendants. Collectively, these 875 lawsuits represent approximately26,300 (excluding spousal claims) plaintiffs. Approximately 91% of theselawsuits involve plaintiffs alleging injury resulting from exposure to silicadust, with the remainder alleging injury from exposure to other particles,including asbestos. These lawsuits typically allege that the purported injuriesresulted in part from respirators that were negligently designed and/ormanufactured. The defendants in these lawsuits are often numerous, and include,in addition to respirator manufacturers, employers of the plaintiffs andmanufacturers of sand (used in sand blasting) and asbestos.  We acquired our North Safety Productssubsidiary on October 2, 1998 from Siebe plc.  In connection with the acquisition, Siebe,which was subsequently merged with BTR plc (now known as “Invensys plc”),contractually agreed to indemnify us for any losses, including costs ofdefending claims, resulting from respiratory products manufactured or sold priorto our acquisition of North Safety Products in October 1998.

 

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

 

Despite theseindemnification arrangements, we could potentially be liable for losses orclaims relating to products manufactured prior to the October 1998acquisition date if Invensys fails to meet its obligations to indemnify us andwe could potentially be liable for losses and claims relating to products soldprior to January 10, 1983 if both Invensys and Norton fail to meet theirobligations to indemnify us. We could also be liable if the alleged exposureinvolved the use of a product manufactured by us after our October 1998acquisition of the North Safety Products business. Invensys is currentlyhandling the defense of all of the cases prior to October 1998 in whichNorth Safety Products, its predecessors and/or the former owners of suchbusinesses have been named as defendants. We are jointly with Invensys handlingthe defense of all of the cases which allege exposure including periods pre andpost October 1998. We will individually handle the defense of all caseswith exclusive post October 1998 exposure, however, we have not beeninvolved in a case with exclusive post October 1998 exposure to date. Asof April 2, 2005, Invensys has sent us requests for reimbursement totaling$146,696, relating to settled cases in which Invensys claims that the period ofalleged exposure included periods after October 1998. To date, we have notreimbursed Invensys for these claims, as we are currently pursuing negotiationsregarding the allocation of costs and the determination of the alleged exposureperiods. Based on information provided to us by Invensys, we believe thatInvensys has made payments with respect to settlement of these claims of $3,550for the three months ended April 2, 2005.

 

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Consistent with the current environment being experienced by companiesinvolved in silica and asbestos-related litigation, there has been an increasein the number of asserted claims that could potentially involve us. Based uponinformation provided to us by Invensys, we believe activity related to theselawsuits was as follows for the three months ended April 2, 2005:

 
| Beginning lawsuits   |   | 858 |   |
|----------------------|--------|-----|--------|
| New lawsuits         |   | 66  |   |
| Settlements          |   | (3  | )      |
| Dismissals and other |   | (46 | )      |
| Ending lawsuits      |   | 875 |   |

 

Plaintiffs have asserted specific dollar claims inless than a quarter of the approximately 864 cases pending as of April 2,2005, in which North Safety Products, its predecessors and/or the former ownersof such businesses have been named as defendants. A majority of jurisdictionsprohibit specifying damages in tort cases such as these, and most of theremaining jurisdictions do not require such specification. In those cases inwhich plaintiffs choose to assert specific dollar amounts in their complaints,brought in states that permit such pleading, the amounts claimed are typicallynot meaningful as an indicator of a company’s potential liability. This isbecause (1) the amounts claimed typically bear no relation to the level ofthe plaintiff’s injury, (2) the complaints typically assert claims againstnumerous defendants, and (3) many cases are brought on behalf ofplaintiffs who have not suffered any medical injury, and, ultimately,are resolved without any payment or payment of a small fraction of the damagesinitially claimed. Of the 864 complaints maintained in our records, 648 do notspecify the amount of damages sought, 41 generally allege damages in excess of$50,000, three allege compensatory damages in excess of $50,000 and anunspecified amount of punitive damages, 92 allege compensatory damages andpunitive damages, each in excess of $25,000, three generally allege damages inexcess of $100,000, 19 allege compensatory damages and punitive damages, eachin excess of $50,000, 29 generally allege damages of $15.0 million, onegenerally alleges damages not to exceed $290.0 million, one allegescompensatory damages and punitive damages, each in excess of $10,000, onealleges compensatory and punitive damages, each in excess of $15,000, onealleges punitive damages in excess of $25,000, one alleges punitive damages inexcess of $50,000, 18 generally allege damages in excess of $15,000, threegenerally allege damages in excess of $25,000, one generally alleges damages inexcess of $4,000 and two allege compensatory and punitive damages each inexcess of $15.0 million. We currently do not have access to the complaints withrespect to the previously mentioned additional 11 monitored cases, andtherefore do not know whether these cases allege specific damages, and if so, theamount of such damages, but are in the process of seeking to obtain suchinformation. Due to the reasons noted above and to the indemnificationarrangements benefiting us, we do not believe that the damage amounts specifiedin these complaints are a meaningful factor in any assessment of our potentialliability.

 

Bankruptcy filingsof companies with asbestos and silica-related litigation could increase ourcost over time. If we were found liable in these cases and either Invensys orNorton failed to meet its indemnification obligations to us or the suitinvolved products manufactured by us after our October 1998 acquisition ofNorth Safety Products, it would have a material adverse effect on our business.

 

During the yearended December 31, 2004, we recorded a $1.25 million liability and chargeto operating expenses to establish a reserve for respiratory claims, whichremains outstanding as of April 2, 2005. We believe that this reserverepresents a reasonable estimate of our probable and estimable liabilities forproduct claims 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 we may incur liabilities in excess of theamounts currently reserved. This reserve will be re-evaluated periodically andadditional charges or credits will be recorded to operating expenses as additionalinformation becomes available.

 

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We are nototherwise involved in any material lawsuits. We historically have not been required to pay any material liabilityclaims.  We maintain insurance againstproduct liability claims (with the exception of asbestosis and silicosis cases,for which coverage is not commercially available), but it is possible thatinsurance coverage will not continue to be available on terms acceptable to usor that such coverage will not be adequate for liabilities actually incurred.In connection with the North Safety Products acquisition, we recorded a$2.5 million reserve for potential uninsured product liability claims ofNorth Safety Products for periods prior to October 1998. This reserve wasestablished at the date of acquisition and relates to potential claimsprimarily associated with fall protection products sold in Canada. Through December 2003,we incurred charges of approximately $0.2 million against this reserve, whichreduced the reserve balance to $2.3 million. During 2004, we reduced thisreserve to $1.0 million to reflect our current expectations of the liabilitybased on information available and recorded a $1.3 million credit to operatingexpenses. The $1.0 million reserve remains outstanding as of April 2,2005. This reserve is re-evaluated periodically, and additional charges orcredits will be recorded to operating expenses as additional informationbecomes available.

 

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

 

**Item 6****. Exhibits**

** **

Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                        |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                   |
| 10.1                 |       | Indenture,  dated as of January 7, 2005, by and between NSP Holdings L.L.C., NSP Holdings  Capital Corp. and Wilmington Trust Company as Trustee (incorporated by  reference to Exhibit 4.1 to the Registration Statement on Form S-4 (File No.  333-123631) filed by the Registrant on March 28, 2005).               |
|                 |       |                                                                                                                                                                                                                                                                                                                   |
| 10.2                 |       | Registration  Rights Agreement dated as of January 7, 2005, by and among NSP Holdings  L.L.C., NSP Holdings Capital Corp. and Credit Suisse First Boston LLC  (incorporated by reference to Exhibit 4.3 to the Registration Statement on  Form S-4 (File No. 333-123631) filed by the Registrant on March 28, 2005).   |
|                 |       |                                                                                                                                                                                                                                                                                                                   |
| 10.3                 |       | CIVC  Registration Rights Agreement, dated as of January 7, 2005, by and among NSP  Holdings L.L.C., NSP Holdings Capital Corp. and CIVC Partners Fund, L.P.  (incorporated by reference to Exhibit 10.38 to the Registration Statement on  Form S-4 (File No. 333-123631) filed by the Registrant on March 28, 2005). |
|                 |       |                                                                                                                                                                                                                                                                                                                   |
| 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, NSP Holdings L.L.C. has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 
|              | NSP HOLDINGS L.L.C. |
|-------------------|---------------------|
|              |                |
|              |                |
| May 11, 2005 | By:                 | /s/ ROBERT A. PETERSON |   |
|              |                | Robert A. Peterson |
|              |                | President, Chief Executive Officer and Manager |
|              |                | (Principal Executive Officer) |
|              |                |   |
|              |                |   |
| May 11, 2005 | By:                 | /s/ DAVID F. MYERS, JR. |   |
|              |                | David F. Myers, Jr. |
|              |                | Executive Vice President, Chief  Financial Officer, |
|              |                | Secretary and Manager |
|              |                | (Principal Financial and Accounting Officer) |
|                   |                     |  |  |  |

 

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**NSP HOLDINGS L.L.C.FORM 10-Q LISTING OF EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                        | ** ** |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                 |       |                                                                                                                                                                                                                                                                                                                   |       |
| 10.1                 |       | Indenture,  dated as of January 7, 2005, by and between NSP Holdings L.L.C., NSP Holdings  Capital Corp. and Wilmington Trust Company as Trustee (incorporated by  reference to Exhibit 4.1 to the Registration Statement on Form S-4 (File No.  333-123631) filed by the Registrant on March 28, 2005).               |       |
|                 |       |                                                                                                                                                                                                                                                                                                                   |       |
| 10.2                 |       | Registration  Rights Agreement dated as of January 7, 2005, by and among NSP Holdings  L.L.C., NSP Holdings Capital Corp. and Credit Suisse First Boston LLC  (incorporated by reference to Exhibit 4.3 to the Registration Statement on  Form S-4 (File No. 333-123631) filed by the Registrant on March 28, 2005).   |       |
|                 |       |                                                                                                                                                                                                                                                                                                                   |       |
| 10.3                 |       | CIVC  Registration Rights Agreement, dated as of January 7, 2005, by and among NSP  Holdings L.L.C., NSP Holdings Capital Corp. and CIVC Partners Fund, L.P.  (incorporated by reference to Exhibit 10.38 to the Registration Statement on  Form S-4 (File No. 333-123631) filed by the Registrant on March 28, 2005). |       |
|                 |       |                                                                                                                                                                                                                                                                                                                   |       |
| 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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