** **

**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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| **x**  | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------|------------|---------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                    |
|   | ** ** | **For the  quarterly period ended June 30, 2007**                                                       |
|   | ** ** | ** **                                                                                              |
|   | ** ** | **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: 333-110531**

**NORCROSSSAFETY PRODUCTS L.L.C.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                    |   | **61-1283304**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
| ** **                                                      |   | ** **                            |
| **2001  Spring Road, Suite 425 Oak Brook, Illinois**       |   | **60523**                             |
| (Address of  Principal Executive Offices)                       |   | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code:

**(630) 572-5715**

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

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

Largeaccelerated filer  o Accelerated filer  o Non-accelerated filer  x

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o     No x

On August 13, 2007Norcross Safety Products L.L.C. had 100 units outstanding, all of which wereowned by a holding company.

 

 

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**NORCROSS SAFETY PRODUCTS L.L.C.FORM 10-Q QUARTERLY REPORT**

**For the Quarterly Period Ended June30, 2007**

**TABLEOF 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 |   | 18     |   |
|                                                                                                |   |   |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |   | 25     |   |
|                                                                                                |   |   |   |
| Item 4. Controls and Procedures                                                                     |   | 26     |   |
|                                                                                                |   |   |   |
| **PART II Other  Information**                                                                      |   | 27     |   |
|                                                                                                |   |   |   |
| Item  1. Legal Proceedings                                                                          |   | 27     |   |
|                                                                                                |   |   |   |
| Item  1A. Risk Factors                                                                              |   | 30     |   |
|                                                                                                |   |   |   |
| Item 6.  Exhibits                                                                                   |   | 31     |   |
|                                                                                                |   |   |   |
| **Signatures**                                                                                      |   | 32     |   |
|                                                                                                |   |   |   |
| **Form  10-Q Listing of Exhibits**                                                                  |   | 33     |   |

 

 

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**PART I**

**FINANCIALINFORMATION**

**Item 1. FinancialStatements**

**NORCROSS SAFETY PRODUCTS L.L.C.**

**CONSOLIDATED BALANCE SHEETS**

**(Amounts in Thousands)**
| ** **                                                                                | ** ** | **December 31,  2006 (1)** | ** ** | **June 30,  2007** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| ** **                                                                                | ** ** | ** **                           | ** ** | **(Unaudited)**         | ** ** |
| **Assets**                                                                                | ** ** | ** **                           | ** ** | ** **              | ** ** |
| Current assets:                                                                           |       |                                 |       |                    |       |
| Cash and cash  equivalents                                                                |       | $                                    | 26,096     |                    | $          | 32,812 |   |
| Accounts  receivable, less allowance of $2,323 and $2,310 in 2006 and 2007,  respectively |       | 73,306                               |       | 92,564                  |       |
| Inventories                                                                               |       | 108,270                              |       | 107,984                 |       |
| Deferred income  taxes                                                                    |       | 2,143                                |       | 1,946                   |       |
| Prepaid expenses  and other current assets                                                |       | 3,555                                |       | 4,483                   |       |
| Total current assets                                                                      |       | 213,370                              |       | 239,789                 |       |
| Property, plant and  equipment, net                                                       |       | 69,627                               |       | 68,691                  |       |
| Deferred financing  costs, net                                                            |       | 6,387                                |       | 5,716                   |       |
| Goodwill                                                                                  |       | 158,011                              |       | 160,832                 |       |
| Other intangible  assets, net                                                             |       | 281,438                              |       | 277,743                 |       |
| Other noncurrent assets                                                                   |       | 5,119                                |       | 6,059                   |       |
| Total assets                                                                              |       | $                                    | 733,952    |                    | $          | 758,830 |   |
|                                                                                      |       |                                 |       |                    |       |
| **Liabilities and member’s equity**                                                  | ** ** | ** **                           | ** ** | ** **              | ** ** |
| Current liabilities:                                                                      |       |                                 |       |                    |       |
| Accounts payable                                                                          |       | $                                    | 21,891     |                    | $          | 24,747 |   |
| Accrued expenses                                                                          |       | 41,882                               |       | 43,426                  |       |
| Current  maturities of long-term obligations                                              |       | 5,830                                |       | 3,424                   |       |
| Total current  liabilities                                                                |       | 69,603                               |       | 71,597                  |       |
| Long-term liabilities:                                                                    |       |                                 |       |                    |       |
| Pension,  post-retirement and deferred compensation                                       |       | 17,082                               |       | 15,124                  |       |
| Long-term  obligations                                                                    |       | 320,666                              |       | 318,896                 |       |
| Other noncurrent  liabilities                                                             |       | 7,008                                |       | 8,199                   |       |
| Deferred income  taxes                                                                    |       | 64,602                               |       | 67,196                  |       |
| Total long-term  liabilities                                                              |       | 409,358                              |       | 409,415                 |       |
|                                                                                      |       |                                 |       |                    |       |
| Minority interest                                                                         |       | 199                                  |       | 213                     |       |
|                                                                                      |       |                                 |       |                    |       |
| Member’s equity:                                                                     |       |                                 |       |                    |       |
| Contributed  capital                                                                      |       | 222,828                              |       | 223,528                 |       |
| Retained  earnings                                                                        |       | 21,169                               |       | 33,824                  |       |
| Accumulated  other comprehensive income                                                   |       | 10,795                               |       | 20,253                  |       |
| Total member’s equity                                                                |       | 254,792                              |       | 277,605                 |       |
| Total liabilities and member’s equity                                                |       | $                                    | 733,952    |                    | $          | 758,830 |   |

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

*See notes to unaudited consolidated financialstatements.*

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**NORCROSS SAFETY PRODUCTS L.L.C.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Amounts in Thousands) (Unaudited)**
| ** **                                                                                                                                                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **July 1,  2006**           | ** ** | **June 30,  2007**        | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| Net sales                                                                                                                                                                      |       | $                                | 131,275    |                           | $          | 156,406 |   | $ | 267,634 |   | $ | 304,557 |   |
| Cost of goods sold                                                                                                                                                             |       | 79,157                           |       | 94,379                         |       | 163,259 |   | 185,088 |   |
| Gross profit                                                                                                                                                                   |       | 52,118                           |       | 62,027                         |       | 104,375 |   | 119,469 |   |
| Operating expenses:                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Selling                                                                                                                                                                        |       | 12,739                           |       | 13,665                         |       | 25,128 |   | 27,154 |   |
| Distribution                                                                                                                                                                   |       | 7,776                            |       | 9,623                          |       | 15,400 |   | 18,682 |   |
| General and  administrative (1)                                                                                                                                                |       | 12,395                           |       | 14,148                         |       | 25,959 |   | 27,754 |   |
| Amortization of  intangibles                                                                                                                                                   |       | 2,741                            |       | 2,912                          |       | 5,467 |   | 5,877 |   |
| Total operating  expenses                                                                                                                                                      |       | 35,651                           |       | 40,348                         |       | 71,954 |   | 79,467 |   |
| Income from operations                                                                                                                                                         |       | 16,467                           |       | 21,679                         |       | 32,421 |   | 40,002 |   |
| Other expense (income):                                                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                                                                                                                                               |       | 6,606                            |       | 6,931                          |       | 13,068 |   | 13,965 |   |
| Interest income                                                                                                                                                                |       | (160                             | )          | (228                           | )          | (314 | ) | (453 | ) |
| Other, net                                                                                                                                                                     |       | (230                             | )          | 495                            |       | (525 | ) | 399 |   |
| Income from continuing  operations before income taxes and minority interest                                                                                                   |       | 10,251                           |       | 14,481                         |       | 20,192 |   | 26,091 |   |
| Income tax expense                                                                                                                                                             |       | 3,580                            |       | 5,457                          |       | 7,013 |   | 10,067 |   |
| Minority interest                                                                                                                                                              |       | 4                                |       | 8                              |       | 15 |   | 14 |   |
| Income from continuing  operations                                                                                                                                             |       | 6,667                            |       | 9,016                          |       | 13,164 |   | 16,010 |   |
| Loss (income) from  discontinued operations (including loss on disposal of subsidiary of $3,022  for the three and six months ended June 30, 2007), net of income tax (Note 2) |       | 204                              |       | 2,974                          |       | (93 | ) | 2,813 |   |
| Net income                                                                                                                                                                     |       | $                                | 6,463      |                           | $          | 6,042 |   | $ | 13,257 |   | $ | 13,197 |   |

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 (1)          General and administrative expenses excludeamortization of intangibles and include $280 and $360 of management incentivecompensation for the three months ended July 1, 2006 and June 30, 2007,respectively and $1,080 and $700 of management incentive compensation for thesix months ended July 1, 2006 and June 30, 2007, respectively.

*See notes to unaudited consolidatedfinancial statements.*

 

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**NORCROSS SAFETY PRODUCTS L.L.C.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amountsin Thousands) (Unaudited**)
| ** **                                                                         | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **July 1,  2006**         | ** ** | **June 30,  2007** | ** ** |
| **Operating  activities**                                                          |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 13,257     |   | $ | 13,197 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation (1)                                                                   |       | 6,496                          |       | 7,337 |   |
| Amortization of intangibles                                                        |       | 5,467                          |       | 5,877 |   |
| Amortization of deferred financing costs                                           |       | 657                            |       | 671 |   |
| Amortization of original issue premium                                             |       | (508                           | )          | (553 | ) |
| Deferred income taxes                                                              |       | 140                            |       | 1,807 |   |
| Minority interest                                                                  |       | 15                             |       | 14 |   |
| Management incentive compensation                                                  |       | 1,080                          |       | 700 |   |
| (Gain) loss on sale of property, plant and equipment                               |       | (67                            | )          | 108 |   |
| Loss on sale of subsidiary                                                         |       | —                         |       | 3,022 |   |
| Changes in operating assets and liabilities:                                       |       |                           |       |   |   |
| Accounts receivable                                                                |       | (10,607                        | )          | (20,779 | ) |
| Inventories                                                                        |       | (15,739                        | )          | (617 | ) |
| Prepaid expenses and other current assets                                          |       | (166                           | )          | — |   |
| Other noncurrent assets                                                            |       | 11                             |       | (404 | ) |
| Accounts payable                                                                   |       | 4,405                          |       | 4,540 |   |
| Accrued expenses                                                                   |       | 1,880                          |       | 578 |   |
| Pension, postretirement and deferred compensation                                  |       | (729                           | )          | (1,965 | ) |
| Other noncurrent liabilities                                                       |       | (28                            | )          | (9 | ) |
| Net cash  provided by operating activities                                         |       | 5,564                          |       | 13,524 |   |
|                                                                               |       |                           |       |   |   |
| **Investing  activities**                                                          |       |                           |       |   |   |
| Purchase of  businesses, net of cash acquired                                      |       | (26,998                        | )          | (951 | ) |
| Proceeds from  sale of subsidiary, net of cash disposed                            |       | —                         |       | 3,223 |   |
| Purchases of  property, plant and equipment                                        |       | (4,787                         | )          | (5,675 | ) |
| Proceeds from  sale of property, plant and equipment                               |       | 113                            |       | 29 |   |
| Net cash used in  investing activities                                             |       | (31,672                        | )          | (3,374 | ) |
|                                                                               |       |                           |       |   |   |
| **Financing  activities**                                                          |       |                           |       |   |   |
| Payments for  deferred financing costs                                             |       | (201                           | )          | — |   |
| Proceeds from  borrowings                                                          |       | 15,000                         |       | — |   |
| Payments of debt                                                                   |       | (948                           | )          | (3,447 | ) |
| Capital  contribution                                                              |       | 150                            |       | — |   |
| Dividends to  Safety Product Holdings, Inc.                                        |       | (383                           | )          | (166 | ) |
| Net cash  provided by (used in) financing activities                               |       | 13,618                         |       | (3,613 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 918                            |       | 179 |   |
| Net (decrease)  increase in cash and cash equivalents                              |       | (11,572                        | )          | 6,716 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 20,683                         |       | 26,096 |   |
| Cash and cash  equivalents at end of period                                        |       | $                              | 9,111      |   | $ | 32,812 |   |

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 (1)          Depreciation includes depreciation expense of$58 and $71 for the six months ended July 1, 2006 and June 30, 2007,respectively, related to discontinued operations (Note 2).

*Seenotes to unaudited consolidated financial statements*

 

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**NORCROSS SAFETY PRODUCTS L.L.C.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in Thousands) (Unaudited)**

**1.**                 Transactions

OnFebruary 2, 2006, Norcross Safety Products L.L.C. (the “Company”) completed theacquisition of all of the issued and outstanding capital stock of AmericanFirewear, Inc. (“American Firewear”). The purchase price consisted of $4,453 incash (including acquisition costs of $203 and net of cash acquired of $183) anda $1,000 subordinated seller note. In addition, the purchase price may beincreased by $750 over a four year period based on American Firewear achievingcertain financial and operating objectives. The Company financed theacquisition through cash on the balance sheet and the issuance of the $1,000subordinated seller note. The Companybelieves the acquisition of American Firewear will strengthen its handprotection product line in the fire service segment. The results ofoperations of American Firewear are included in the Company’s consolidatedstatement of operations from the date of acquisition.

OnJune 9, 2006, the Company completed the acquisition of all of the issued andoutstanding capital stock of The White Rubber Corporation (“White Rubber”). Thepurchase price was $22,182 (including acquisition costs of $636 and gross ofoutstanding checks of $773). The Company financed the acquisition throughadditional term borrowings under the senior credit facility and cash on thebalance sheet. The Company believes theacquisition of White Rubber will strengthen its hand protection product line inthe electrical safety segment. The results of operations of White Rubberare included in the Company’s consolidated statement of operations from thedate of acquisition.

OnSeptember 19, 2006, the Company completed the acquisition of all of the issuedand outstanding capital stock of The New England Overshoe Company, Inc. (“NEOS”).The purchase price consisted of $3,639 in cash (including acquisition costs of$139 and net of cash acquired of $6) and a $750 subordinated seller note. In addition,the purchase price may be increased over a five year period based on NEOSachieving certain net sales targets. The Company financed the acquisitionthrough cash on the balance sheet and the issuance of the $750 subordinatedseller note. The Company believes theacquisition of NEOS will broaden its footwear product portfolio in the generalsafety and preparedness segment. The results of NEOS are included in theCompany’s consolidated statement of operations from the date of acquisition.

**2.**                 DiscontinuedOperations

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

Thefollowing table sets forth the net sales, net (loss) income from operations andnet loss on disposal of subsidiary for South Africa for the periods presented:
| ** **                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **July 1,  2006**           | ** ** | **June 30,  2007**        | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| Net sales                           |       | $                                | 4,971      |                           | $          | 3,103 |   | $ | 10,488 |   | $ | 8,152 |   |
| Net (loss)  income from operations  |       | (204                             | )          | 48                             |       | 93 |   | 209 |   |
| Net loss on disposal of  subsidiary |       | —                           |       | (3,022                         | )          | — |   | (3,022 | ) |
|                                     |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

** **

**3.**                 Basis ofPresentation

The accompanyingunaudited consolidated financial statements of the Company have been preparedin accordance with accounting principles generally accepted in the UnitedStates for interim financial information. Accordingly, they do not 

4

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include all of theinformation and notes required by accounting principles generally accepted inthe United States for complete financial statements.

In the opinion of management, all adjustments(consisting only of adjustments of a normal and recurring nature) considerednecessary for a fair presentation of the financial position and results ofoperations have been included. Interim results are not necessarily indicative ofthe results that might be expected for any other interim period or for thefiscal year ending December 31, 2007. The financial statements presented shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in our 2006 consolidated financial statements, included in theCompany’s annual report on Form 10-K.

The consolidated financial statements reflect all acquisitions underthe purchase method of accounting, in accordance with SFAS No. 141, *Business Combinations*.

Assuming all acquisitions had occurred on January 1, 2006, the proforma net sales, income from operations and net income for the Company for thesix months ended July 1, 2006 would have been $277,122, $32,941 and $12,210,respectively.

**4.**                 Recent AccountingPronouncements

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*, which definesfair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. The provisions of SFAS No. 157 areeffective for the Company as of the beginning of its fiscal year ended December31, 2008. The Company is in the process of determining the effects, if any,that adoption of SFAS No. 157 will have on its financial statements.

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

**5.**                 ManagementIncentive Compensation

Management incentive compensation related to stockbased compensation was $280 and $360 for the three months ended July 1, 2006and June 30, 2007, respectively and $1,080 and $700 for the six months endedJuly 1, 2006 and June 30, 2007, respectively.

**6.**                 Inventories

Inventories consist of the following:
| ** **               | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|--------------------------|------------|-----------------------------|------------|-------------------------|------------|
| At FIFO cost:            |       |                        |       |                    |       |
| Raw materials            |       | $                           | 24,823     |                    | $          | 28,116 |   |
| Work in process          |       | 13,756                      |       | 12,450                  |       |
| Finished goods           |       | 70,799                      |       | 68,526                  |       |
|                     |       | 109,378                     |       | 109,092                 |       |
| Adjustment to  LIFO cost |       | (1,108                      | )          | (1,108                  | )          |
| Total inventory          |       | $                           | 108,270    |                    | $          | 107,984 |   |

 

5

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

The Company’s long-termobligations consist of the following:
| ** **                                         | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Revolving credit  facilities                       |       | $                           | —     |                    | $          | — |   |
| Term loan                                          |       | 165,720                     |       | 162,566                 |       |
| Senior  subordinated notes                         |       | 152,500                     |       | 152,500                 |       |
| European term  loans                               |       | 173                         |       | 159                     |       |
| Subordinated  seller notes                         |       | 1,750                       |       | 1,500                   |       |
| Capital lease  obligations                         |       | 205                         |       | —                  |       |
| Unamortized  premium on senior subordinated notes  |       | 6,148                       |       | 5,595                   |       |
|                                               |       | 326,496                     |       | 322,320                 |       |
| Less: Current  maturities of long-term obligations |       | 5,830                       |       | 3,424                   |       |
|                                               |       | $                           | 320,666    |                    | $          | 318,896 |   |

 

Aggregate maturities of long-term obligations as ofJune 30, 2007, are as follows:
| 2008       |   | $       | 3,424   |   |
|------------|--------|---------|---------|--------|
| 2009       |   | 3,780   |    |
| 2010       |   | 3,395   |    |
| 2011       |   | 3,271   |    |
| 2012       |   | 308,450 |    |
| Thereafter |   | —  |    |
|       |   | $       | 322,320 |   |

 

**8.**                 Income Taxes

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

As a result of the implementation of FIN No. 48, the Company recordedat the date of adoption an additional liability of $5,961 for unrecognized taxbenefits relating to uncertain tax positions. Of this amount, approximately$376 was accounted for as a reduction to the January 1, 2007 balance ofretained earnings. There have been no significant changes to these amountsduring the three and six months ended June 30, 2007.

At January 1, 2007, the Company had $7,024 in unrecognized taxbenefits, the recognition of which would have an effect of $776 on theeffective tax rate. In addition, $4,261 of unrecognized tax benefits would, ifrealized, reduce goodwill.

Included in the balance of unrecognized tax benefits at January 1,2007, is $1,525 related to tax positions for which it is reasonably possiblethat the total amounts could significantly change during the next twelvemonths. This amount represents the maximum potential decrease in unrecognizedtax benefits comprised of items related to foreign income tax filings and auditsettlement negotiations.

The Company recognizes interest and penalties related to unrecognizedtax benefits as a component of income tax expense. At January 1, 2007, theCompany had accrued $219 and $279 for the potential payment of interest andpenalties related to unrecognized tax benefits, respectively. There have beenno significant changes to these amounts during the three and six months endedJune 30, 2007.

The Company and its subsidiaries are subject to U.S. federal income taxas well as income tax of multiple state and international jurisdictions. As ofJanuary 1, 2007, the Company is subject to U.S. Federal income tax examinationsfor the tax years 1998 through 2000 and 2002 through 2006 and to non-U.S.income tax examinations for the tax years of 1998 through 2006. In addition,the Company is subject to state and local income tax examinations for the taxyears 1998 through 2006.

The income tax expense for the Company differs from the amount ofincome tax expense computed by applying the U.S. federal income tax rate to incomebefore income taxes primarily due to: 1) state taxes and 2) the impact ofvaried foreign 

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statutory rates on the Company’s foreign earnings. Inaddition, the three and six months ended June 30, 2007 were impacted by therecording of a valuation allowance against capital losses associated with thesale of South Africa.

**9.**                 Employee BenefitPlans

The following table sets forth the components of netperiodic benefit expense (income) for the Company’s pension benefits:
| ** **                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **July 1,  2006**           | ** ** | **June 30,  2007**        | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| Service cost                    |       | $                                | 491        |                           | $          | 27 |   | $ | 982 |   | $ | 54 |   |
| Interest cost                   |       | 944                              |       | 981                            |       | 1,888 |   | 1,962 |   |
| Expected return  on plan assets |       | (906                             | )          | (1,068                         | )          | (1,812 | ) | (2,137 | ) |
|                            |       | $                                | 529        |                           | $          | (60 | ) | $ | 1,058 |   | $ | (121 | ) |

 

The following table sets forth the components of netperiodic benefit expense for the Company’s post-retirement benefits:
| ** **    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **    | ** ** | **July 1,  2006**           | ** ** | **June 30,  2007**        | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| Service cost  |       | $                                | 6          |                           | $          | 2 |   | $ | 12 |   | $ | 5 |   |
| Interest cost |       | 18                               |       | 16                             |       | 36 |   | 32 |   |
|          |       | $                                | 24         |                           | $          | 18 |   | $ | 48 |   | $ | 37 |   |

 

**10.          Restructuringand Merger-Related Charges**

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

In conjunctionwith the White Rubber Transaction, the Company initiated a restructuring planto move certain production and distribution functions located in Ohio andWashington to its Charleston, South Carolina, Skokie, Illinois and Chicago,Illinois facilities. The Company initiated this plan in order to increaseprofitability by utilizing excess capacity and consolidating distributionfunctions. The restructuring was substantially completed in the second quarterof 2007. As of the date of the White Rubber Transaction, the Company recordedan accrual for costs associated with the plan of $1,018, comprised of severanceand severance related costs. The restructuring liability is classified withinthe accrued expenses caption on the consolidated balance sheet.

A rollforward of the restructuring liability is asfollows:
| ** **                              | ** ** | **Severance  and  severance  related  costs** | ** ** | **Facility  closure and  other exit  costs** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------------|------------|-----------|------------|
| Balance as of  January 1, 2007          |       | $                                             | 1,880      |                                                   | $          | 173       |       | $ | 2,053 |   |
| Payments                                |       | (985                                          | )          | (174                                                   | )          | (1,159    | )          |
| Effect of  foreign currency translation |       | —                                        |       | 1                                                      |       | 1         |       |
| Balance as of June 30,  2007            |       | $                                             | 895        |                                                   | $          | —    |       | $ | 895 |   |

 

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**11.**          Legal Proceedings

The Company is subject to various claims arising in the ordinary courseof business. Most of these lawsuits and claims are product liability mattersthat arise out of the use of respiratory product lines manufactured by theCompany’s North Safety Products subsidiary. As of June 30, 2007, the Company’sNorth Safety Products subsidiary, along with its predecessors and/or the formerowners of such business were named as defendants in approximately 636 lawsuitsinvolving respirators allegedly manufactured and sold by it or itspredecessors. The Company is also monitoring an additional two lawsuits inwhich it feels that North Safety Products, its predecessors and/or the formerowners of such businesses may be named as defendants. Collectively, these 638lawsuits represent a total of approximately 8,438 plaintiffs. Approximately 85%of these lawsuits involve plaintiffs alleging injury resulting from exposure tosilica dust, with the remainder alleging injury resulting from exposure toother dust particles, including asbestos. These lawsuits typically allege thatthe purposed injuries resulted in part from respirators that were negligentlydesigned or manufactured. Invensys plc (“Invensys”), formerly Siebe plc, iscontractually obligated to indemnify the Company for any losses, includingcosts of defending claims, resulting from respiratory products manufactured orsold prior to the acquisition of North Safety Products in October 1998.

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., anewly formed wholly-owned subsidiary of Norton Company, acquired the assets ofNorton’s Safety Products Division and the stock of this company was in turnacquired by Siebe Gorman Holdings PLC. Under the terms of the agreement, SiebeNorton, Inc. did not assume any liability for claims relating to productsshipped by Norton Company prior to the closing date. Moreover, Norton Companycovenanted in the agreement to indemnify Siebe Norton, Inc. and its successorsand assigns against any liability resulting from or arising out of any state offacts, omissions or events existing or occurring on or before the closing date,including, without limitation, any claims arising from products shipped byNorton Company or any of its affiliates prior to the closing date. SiebeNorton, Inc., 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 potentiallybe liable for losses or claims relating to products manufactured prior to theOctober 1998 acquisition date if Invensys fails to meet its obligations toindemnify the Company and the Company could potentially be liable for lossesand claims relating to products sold prior to January 10, 1983 if both Invensysand Norton fail to meet their obligations to indemnify the Company.  The Company believes that Invensys has theability to pay these claims based on its current financial position, aspublicly disclosed by Invensys. The Company could also be liable if the allegedexposure involved the use of a product manufactured by the Company after theOctober 1998 acquisition of the North Safety Products business.

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

Although the JDAexpires on December 31, 2008, the Company expects to incur additional defenseand settlement costs beyond this date. The Company will consider itsalternatives for defending the claims as the JDA nears expiration and determinethe appropriate course of action, which would include an extension of the JDA.

Based upon information provided to the Company by Invensys, the Companybelieves activity related to these lawsuits was as follows for the six monthsended June 30, 2007:

8

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| ** **                                | ** ** | **Plaintiffs** | ** ** | **Cases** | ** ** |
|-------------------------------------------|------------|----------------|------------|-----------|------------|
| Beginning  lawsuits as of January 1, 2007 |       | 8,746          |       | 644       |       |
| New lawsuits                              |       | 6              |       | 3         |       |
| Settlements                               |       | —         |       | —    |       |
| Dismissals and  other                     |       | (314           | )          | (9        | )          |
| Ending lawsuits as of  June 30, 2007      |       | 8,438          |       | 638       |       |

 

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

Plaintiffs haveasserted specific dollar claims in approximately 30% of the approximately 636cases pending as of June 30, 2007 in which North Safety Products, itspredecessors and/or the former owners of such businesses have been named asdefendants. A majority of jurisdictions prohibit specifying damages in tortcases such as these, and most of the remaining jurisdictions do not requiresuch specification. In those cases in which plaintiffs choose to assertspecific dollar amounts in their complaints, 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 of theplaintiff’s injury, (2) the complaints typically assert claims against numerousdefendants, and (3) many cases are brought on behalf of plaintiffs who have notsuffered any medical injury, and ultimately are resolved without any payment orpayment of a small fraction of the damages initially claimed. Of the 636complaints maintained in the Company’s records, 446 do not specify the amountof damages sought, 25 generally allege damages in excess of $50, one allegescompensatory damages in excess of $50 and an unspecified amount of punitivedamages, 103 allege compensatory damages and punitive damages, each in excessof $25, two generally allege damages in excess of $100, two allege compensatorydamages and punitive damages, each in excess of $50, 20 generally allegedamages in excess of $15,000, one generally alleges damages of $23,000, onealleges compensatory damages and punitive damages, each in excess of $10, fourallege general damages of $18,000 and punitive damages of $10,000, two allegegeneral damages of $13,000 and punitive damages of $10,000, one allegescompensatory and punitive damages, each in excess of $15, one alleges punitivedamages in excess of $50, one generally alleges damages in excess of $15, 12generally allege damages in excess of $25, one alleges compensatory damages of$18,000 and punitive damages of $10,000, one alleges punitive damages of$13,500 and compensatory damages of $10,000, one alleges punitive damages of$13,000 and compensatory damages of $10,000, eight allege compensatory damagesof $13,000 and punitive damages of $10,000, one alleges compensatory andpunitive damages, each of $15 and two allege compensatory and punitive damages,each in excess of $15,000. The Company currently does not have access to thecomplaints with respect to the previously mentioned additional two monitoredcases, and therefore it does not know whether these cases allege specificdamages, or if so, the amount of such damages, but is in the process of seekingto obtain such information. Due to the reasons noted above and to theindemnification arrangements benefiting the Company, it does not believe thatthe damage amounts specified in these complaints are a meaningful factor in anyassessment of the Company’s potential liability.

The Company recorded a $1,250 reserve for respiratoryclaims during the year ended December 31, 2004. The Company re-evaluated this reserve in its first and second quarter2005 financial statements and concluded the $1,250 recorded reserve continuedto be its best estimate of the probable loss for the respiratory contingency.

In the July 2005 acquisition purchase accounting (asfirst reported in the Form 10-Q for the third quarter of 2005), the Companycarried forward the $1,250 liability for this pre-acquisition contingency.  Although management concluded that it waslikely their estimate of this pre-acquisition contingent liability would beincreased during the purchase accounting 

9

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allocationperiod as the new ownership finalized their strategy for addressing theliability and gathered information (primarily related to case information andthe working relationship among the prior owners of North), it was unlikely theamount would be lower than the $1,250. Thus, the $1,250 amount represented thelow end of a probable loss range, subject to further adjustment during theallocation period.

In December 2005, the Company began negotiations withthe former owners of the North business to enter into the JDA. The Companydetermined that the liability should be increased to $5,000 as of December 31,2005 as part of the purchase price allocation process. The $5,000 reserve as ofDecember 31, 2005 represented management’s best estimate of the liability basedon the current status of negotiations. As of December 31, 2005, the estimatewas still preliminary as the Company was awaiting finalization of the JDAnegotiation process.

As discussed above, the Company entered into the JDAeffective July 1, 2006 and completed its evaluation of the reserve. After allinformation was obtained, the Company adjusted the reserve to $7,000 as part ofthe purchase price allocation process during the permitted allocation period.As of June 30, 2007, the reserve balance was $6,800.

The final estimated amount recorded in purchaseaccounting related entirely to losses incurred before the July 2005acquisition. The Company’s final estimate of the probable loss for therespiratory contingency incorporated the new ownerships’ decision to enter intothe JDA. The decision represented a significantly different plan as newownership agreed to assume losses related to claims with unknown years ofexposure. In addition, the decision to enter the JDA was being considered fromthe date of the acquisition and the ultimate decision was made during theallocation period.

The Company believes that this reserve represents areasonable estimate of its probable and estimable liabilities for productclaims alleging injury resulting from exposure to silica dust and otherparticles, including asbestos. The Company believes that a five-year projectionof claims and related defense costs is the most reasonable approach. Thisreserve will be re-evaluated periodically and additional charges or creditswill be recorded to operating expenses as additional information becomesavailable.

It is possible that the Company may incur liabilities in an amount inexcess of amounts currently reserved. However, taking into account currentlyavailable information, historical experience, and the Company’s indemnificationfrom Invensys, but recognizing the inherent uncertainties in the projection ofany future events, the Company believes that these suits or claims should notresult in final judgments or settlements in excess of its reserve.

The Company historically has not been required to pay any materialliability claims. The Company maintains insurance against product liabilityclaims (with the exception of asbestosis and silicosis cases, for whichcoverage is not commercially available), but it is possible that its insurancecoverage will not continue to be available on terms acceptable to the Companyor that such coverage will not be adequate for liabilities actually incurred.

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**12.**                               SegmentData

The following table presents information about theCompany by segment:
| ** **                            | ** ** | **General  Safety &  Preparedness** | ** ** | **Fire  Service** | ** ** | **Electrical  Safety** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|-------------------|------------|------------------------|------------|---------------|------------|------------------|------------|-----------|------------|
| **Three  Months Ended July 1, 2006**  |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |
| Net sales—third  parties         |       | $                                            | 90,241     |              | $          | 22,184                 |       | $             | 18,850     |             | $          | —    |       | $ | — |   | $ | 131,275 |   |
| Net  sales—intersegment          |       | 2,238                                        |       | —            |       | —                 |       | —        |       | (2,238           | )          | —    |       |
| Income (loss)  from operations        |       | 11,790                                       |       | 2,026             |       | 4,271                  |       | (1,620        | )          | —           |       | 16,467    |       |
|                                  |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |
| **Three  Months Ended June 30, 2007** |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |
| Net sales—third  parties         |       | 106,158                                      |       | 25,692            |       | 24,556                 |       | —        |       | —           |       | 156,406   |       |
| Net  sales—intersegment          |       | 2,351                                        |       | —            |       | 110                    |       | —        |       | (2,461           | )          | —    |       |
| Income (loss)  from operations        |       | 15,510                                       |       | 3,416             |       | 5,057                  |       | (2,304        | )          | —           |       | 21,679    |       |
|                                  |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |
| **Six  Months Ended July 1, 2006**    |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |
| Net sales—third  parties         |       | 183,907                                      |       | 46,256            |       | 37,471                 |       | —        |       | —           |       | 267,634   |       |
| Net  sales—intersegment          |       | 4,903                                        |       | —            |       | —                 |       | —        |       | (4,903           | )          | —    |       |
| Income (loss)  from operations        |       | 22,733                                       |       | 4,688             |       | 9,148                  |       | (4,148        | )          | —           |       | 32,421    |       |
|                                  |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |
| **Six  Months Ended June 30, 2007**   |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |
| Net sales—third  parties         |       | 205,608                                      |       | 49,539            |       | 49,410                 |       | —        |       | —           |       | 304,557   |       |
| Net  sales—intersegment          |       | 4,685                                        |       | —            |       | 215                    |       | —        |       | (4,900           | )          | —    |       |
| Income (loss) from  operations        |       | 27,758                                       |       | 6,374             |       | 10,704                 |       | (4,834        | )          | —           |       | 40,002    |       |
|                                       |            |                                              |            |                   |            |                        |            |               |            |                  |            |           |            |  |  |  |  |  |  |

 

**13.**                               SubsidiaryGuarantors

All of the Company’s direct or indirect 100% ownedactive domestic subsidiaries, fully, unconditionally, jointly and severallyguarantee the senior subordinated notes. NSP Capital is a 100% owned financesubsidiary of Safety Products Holdings, Inc. with no assets or operations. NSPCapital a co-issuer of the notes. Separate financial statements of theguarantor subsidiaries are not separately presented because, in the opinion ofmanagement, such financial statements are not material to investors. Thenon-guarantor subsidiaries include wholly owned subsidiaries of the Companyorganized under the laws of foreign jurisdictions and inactive subsidiaries,all of which are included in the consolidated financial statements. Thefollowing is summarized combining financial information for Norcross SafetyProducts L.L.C. on a stand-alone basis (“NSP”), Norcross Capital Corp. (“NCC”)(a wholly-owned subsidiary of the Company and co-issuer of the seniorsubordinated notes), the guarantor subsidiaries of the Company and thenon-guarantor subsidiaries of the Company:

 

11

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| ** **                                          | ** ** | **NSP**    | ** ** | **NCC**    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------|------------|
| **June 30, 2007**                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Current assets:                                     |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Cash and cash  equivalents                          |       | $          | 27,167     |       | $          | —                      |       | $                                 | (3,926     | )                | $          | 9,571      |       | $ | — |   | $ | 32,812 |   |
| Accounts  receivable, net                           |       | 8,496      |       | —     |       | 48,128                      |       | 35,940                            |       | —           |       | 92,564     |       |
| Inventories                                         |       | 13,976     |       | —     |       | 50,094                      |       | 43,914                            |       | —           |       | 107,984    |       |
| Deferred income  taxes                              |       | 588        |       | —     |       | 1,241                       |       | 117                               |       | —           |       | 1,946      |       |
| Prepaid expenses  and other current assets          |       | 590        |       | —     |       | 1,794                       |       | 2,099                             |       | —           |       | 4,483      |       |
| Total current assets                                |       | 50,817     |       | —     |       | 97,331                      |       | 91,641                            |       | —           |       | 239,789    |       |
| Property, plant and  equipment, net                 |       | 7,492      |       | —     |       | 39,114                      |       | 22,085                            |       | —           |       | 68,691     |       |
| Deferred financing  costs, net                      |       | 5,716      |       | —     |       | —                      |       | —                            |       | —           |       | 5,716      |       |
| Goodwill                                            |       | 23,290     |       | —     |       | 89,058                      |       | 48,484                            |       | —           |       | 160,832    |       |
| Other intangible  assets, net                       |       | 24,394     |       | —     |       | 215,562                     |       | 37,787                            |       | —           |       | 277,743    |       |
| Investment in  subsidiaries                         |       | 289,158    |       | —     |       | 112,329                     |       | —                            |       | (401,487         | )          | —     |       |
| Other noncurrent assets                             |       | —     |       | —     |       | 4,925                       |       | 1,134                             |       | —           |       | 6,059      |       |
| Total assets                                        |       | $          | 400,867    |       | $          | —                      |       | $                                 | 558,319    |             | $          | 201,131    |       | $ | (401,487 | ) | $ | 758,830 |   |
|                                                |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Current liabilities:                                |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Accounts payable                                    |       | $          | 2,785      |       | $          | —                      |       | $                                 | 13,029     |             | $          | 8,933      |       | $ | — |   | $ | 24,747 |   |
| Accrued expenses                                    |       | 6,747      |       | —     |       | 22,003                      |       | 14,676                            |       | —           |       | 43,426     |       |
| Current  maturities of long-term obligations        |       | 3,139      |       | —     |       | 250                         |       | 35                                |       | —           |       | 3,424      |       |
| Total current  liabilities                          |       | 12,671     |       | —     |       | 35,282                      |       | 23,644                            |       | —           |       | 71,597     |       |
| Long-term liabilities:                              |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Pension,  post-retirement and deferred compensation |       | (108       | )          | —     |       | 14,961                      |       | 271                               |       | —           |       | 15,124     |       |
| Long-term  obligations                              |       | 318,272    |       | —     |       | 500                         |       | 124                               |       | —           |       | 318,896    |       |
| Intercompany  balances                              |       | (209,348   | )          | —     |       | 162,118                     |       | 47,230                            |       | —           |       | —     |       |
| Other noncurrent  liabilities                       |       | —     |       | —     |       | 8,168                       |       | 31                                |       | —           |       | 8,199      |       |
| Deferred income  taxes                              |       | 1,775      |       | —     |       | 49,179                      |       | 16,242                            |       | —           |       | 67,196     |       |
| Total long-term  liabilities                        |       | 110,591    |       | —     |       | 234,926                     |       | 63,898                            |       | —           |       | 409,415    |       |
|                                                |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Minority interest                                   |       | —     |       | —     |       | —                      |       | 213                               |       | —           |       | 213        |       |
|                                                |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Member’s equity:                               |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Contributed  capital                                |       | 223,528    |       | —     |       | 211,313                     |       | 86,705                            |       | (298,018         | )          | 223,528    |       |
| Retained  earnings                                  |       | 33,824     |       | —     |       | 56,547                      |       | 14,685                            |       | (71,232          | )          | 33,824     |       |
| Accumulated  other comprehensive income             |       | 20,253     |       | —     |       | 20,251                      |       | 11,986                            |       | (32,237          | )          | 20,253     |       |
| Total member’s equity                          |       | 277,605    |       | —     |       | 288,111                     |       | 113,376                           |       | (401,487         | )          | 277,605    |       |
| Total liabilities and member’s equity          |       | $          | 400,867    |       | $          | —                      |       | $                                 | 558,319    |             | $          | 201,131    |       | $ | (401,487 | ) | $ | 758,830 |   |

 

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| ** **                                         | ** ** | **NSP**    | ** ** | **NCC**    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------|------------|
| **December  31, 2006**                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Current assets:                                    |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Cash and cash equivalents                          |       | $          | 19,271     |       | $          | —                      |       | $                                 | (1,283     | )                | $          | 8,108      |       | $ | — |   | $ | 26,096 |   |
| Accounts receivable, net                           |       | 10,278     |       | —     |       | 34,377                      |       | 28,651                            |       | —           |       | 73,306     |       |
| Inventories                                        |       | 12,648     |       | —     |       | 50,781                      |       | 44,841                            |       | —           |       | 108,270    |       |
| Deferred income taxes                              |       | 588        |       | —     |       | 1,241                       |       | 314                               |       | —           |       | 2,143      |       |
| Prepaid expenses and other current assets          |       | 808        |       | —     |       | 1,627                       |       | 1,120                             |       | —           |       | 3,555      |       |
| Total current  assets                              |       | 43,593     |       | —     |       | 86,743                      |       | 83,034                            |       | —           |       | 213,370    |       |
| Property, plant  and equipment, net                |       | 8,079      |       | —     |       | 39,367                      |       | 22,181                            |       | —           |       | 69,627     |       |
| Deferred  financing costs, net                     |       | 6,387      |       | —     |       | —                      |       | —                            |       | —           |       | 6,387      |       |
| Goodwill                                           |       | 23,289     |       | —     |       | 89,058                      |       | 45,664                            |       | —           |       | 158,011    |       |
| Other intangible  assets, net                      |       | 24,946     |       | —     |       | 219,940                     |       | 36,552                            |       | —           |       | 281,438    |       |
| Investment in  subsidiaries                        |       | 456,360    |       | —     |       | 100,004                     |       | —                            |       | (556,364         | )          | —     |       |
| Other noncurrent  assets                           |       | —     |       | —     |       | 3,520                       |       | 1,599                             |       | —           |       | 5,119      |       |
| Total assets                                       |       | $          | 562,654    |       | $          | —                      |       | $                                 | 538,632    |             | $          | 189,030    |       | $ | (556,364 | ) | $ | 733,952 |   |
|                                               |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Current  liabilities:                              |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Accounts payable                                   |       | $          | 3,266      |       | $          | —                      |       | $                                 | 9,901      |             | $          | 8,724      |       | $ | — |   | $ | 21,891 |   |
| Accrued expenses                                   |       | 9,083      |       | —     |       | 21,210                      |       | 11,589                            |       | —           |       | 41,882     |       |
| Current maturities of long-term obligations        |       | 5,393      |       | —     |       | 334                         |       | 103                               |       | —           |       | 5,830      |       |
| Total current  liabilities                         |       | 17,742     |       | —     |       | 31,445                      |       | 20,416                            |       | —           |       | 69,603     |       |
| Long-term  liabilities:                            |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Pension, post-retirement and deferred compensation |       | (96        | )          | —     |       | 16,902                      |       | 276                               |       | —           |       | 17,082     |       |
| Long-term obligations                              |       | 319,725    |       | —     |       | 666                         |       | 275                               |       | —           |       | 320,666    |       |
| Intercompany balances                              |       | (30,300    | )          | —     |       | (14,296                     | )          | 44,596                            |       | —           |       | —     |       |
| Other noncurrent liabilities                       |       | —     |       | —     |       | 6,961                       |       | 47                                |       | —           |       | 7,008      |       |
| Deferred income taxes                              |       | 791        |       | —     |       | 47,508                      |       | 16,303                            |       | —           |       | 64,602     |       |
| Total long-term  liabilities                       |       | 290,120    |       | —     |       | 57,741                      |       | 61,497                            |       | —           |       | 409,358    |       |
|                                               |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Minority  interest                                 |       | —     |       | —     |       | —                      |       | 199                               |       | —           |       | 199        |       |
|                                               |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Member’s equity:                              |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Contributed capital                                |       | 222,828    |       | —     |       | 398,658                     |       | 92,819                            |       | (491,477         | )          | 222,828    |       |
| Retained earnings                                  |       | 21,169     |       | —     |       | 50,788                      |       | 14,099                            |       | (64,887          | )          | 21,169     |       |
| Accumulated other comprehensive income             |       | 10,795     |       | —     |       | —                      |       | —                            |       | —           |       | 10,795     |       |
| Total member’s  equity                        |       | 254,792    |       | —     |       | 449,446                     |       | 106,918                           |       | (556,364         | )          | 254,792    |       |
| Total liabilities and  member’s equity        |       | $          | 562,654    |       | $          | —                      |       | $                                 | 538,632    |             | $          | 189,030    |       | $ | (556,364 | ) | $ | 733,952 |   |

 

 

13

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| ** **                                                                   | ** ** | **NSP**    | ** ** | **NCC**    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------|------------|
| **Six  months ended June 30, 2007**                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Third party                                                                  |       | $          | 36,007     |       | $          | —                      |       | $                                 | 165,503    |             | $          | 103,047    |       | $ | — |   | $ | 304,557 |   |
| Intercompany                                                                 |       | 3,972      |       | —     |       | 5,109                       |       | 9,350                             |       | (18,431          | )          | —     |       |
| Net sales                                                                    |       | 39,979     |       | —     |       | 170,612                     |       | 112,397                           |       | (18,431          | )          | 304,557    |       |
| Cost of goods  sold                                                          |       | 27,677     |       | —     |       | 107,436                     |       | 68,406                            |       | (18,431          | )          | 185,088    |       |
| Gross profit                                                                 |       | 12,302     |       | —     |       | 63,176                      |       | 43,991                            |       | —           |       | 119,469    |       |
| Operating  expenses:                                                         |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Selling                                                                      |       | 2,138      |       | —     |       | 14,436                      |       | 10,580                            |       | —           |       | 27,154     |       |
| Distribution                                                                 |       | 2,607      |       | —     |       | 8,919                       |       | 7,156                             |       | —           |       | 18,682     |       |
| General and administrative                                                   |       | 6,855      |       | —     |       | 13,723                      |       | 7,176                             |       | —           |       | 27,754     |       |
| Amortization of intangibles                                                  |       | 553        |       | —     |       | 4,377                       |       | 947                               |       | —           |       | 5,877      |       |
| Total operating  expenses                                                    |       | 12,153     |       | —     |       | 41,455                      |       | 25,859                            |       | —           |       | 79,467     |       |
| Income from operations                                                       |       | 149        |       | —     |       | 21,721                      |       | 18,132                            |       | —           |       | 40,002     |       |
| Other expense  (income):                                                     |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Interest expense                                                             |       | 13,931     |       | —     |       | 30                          |       | 4                                 |       | —           |       | 13,965     |       |
| Interest income                                                              |       | (386       | )          | —     |       | —                      |       | (67                               | )          | —           |       | (453       | )          |
| Intercompany charges                                                         |       | (29,229    | )          | —     |       | (2,557                      | )          | 7,939                             |       | 23,847           |       | —     |       |
| Other, net                                                                   |       | (1         | )          | —     |       | (333                        | )          | 733                               |       | —           |       | 399        |       |
| Income from  continuing operations before income taxes and minority interest |       | 15,834     |       | —     |       | 24,581                      |       | 9,523                             |       | (23,847          | )          | 26,091     |       |
| Income tax  (benefit) expense                                                |       | (385       | )          | —     |       | 7,370                       |       | 3,082                             |       | —           |       | 10,067     |       |
| Minority  interest                                                           |       | —     |       | —     |       | —                      |       | 14                                |       | —           |       | 14         |       |
| Income from continuing  operations                                           |       | 16,219     |       | —     |       | 17,211                      |       | 6,427                             |       | (23,847          | )          | 16,010     |       |
| Loss (income) from  discontinued operations, net of income tax               |       | 3,022      |       | —     |       | —                      |       | (209                              | )          | —           |       | 2,813      |       |
| Net income                                                                   |       | $          | 13,197     |       | $          | —                      |       | $                                 | 17,211     |             | $          | 6,636      |       | $ | (23,847 | ) | $ | 13,197 |   |

 

14

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| ** **                                              | ** ** | **NSP**    | ** ** | **NCC**    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------|------------|
| **Six  months ended July 1, 2006**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Third party                                             |       | $          | 30,864     |       | $          | —                      |       | $                                 | 145,691    |             | $          | 91,079     |       | $ | — |   | $ | 267,634 |   |
| Intercompany                                            |       | 4,036      |       | —     |       | 6,040                       |       | 7,745                             |       | (17,821          | )          | —     |       |
| Net sales                                               |       | 34,900     |       | —     |       | 151,731                     |       | 98,824                            |       | (17,821          | )          | 267,634    |       |
| Cost of goods  sold                                     |       | 22,965     |       | —     |       | 96,354                      |       | 61,761                            |       | (17,821          | )          | 163,259    |       |
| Gross profit                                            |       | 11,935     |       | —     |       | 55,377                      |       | 37,063                            |       | —           |       | 104,375    |       |
| Operating  expenses:                                    |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Selling                                                 |       | 1,741      |       | —     |       | 13,462                      |       | 9,925                             |       | —           |       | 25,128     |       |
| Distribution                                            |       | 2,110      |       | —     |       | 7,086                       |       | 6,204                             |       | —           |       | 15,400     |       |
| General and administrative                              |       | 5,826      |       | —     |       | 13,776                      |       | 6,357                             |       | —           |       | 25,959     |       |
| Amortization of intangibles                             |       | 535        |       | —     |       | 4,014                       |       | 918                               |       | —           |       | 5,467      |       |
| Total operating  expenses                               |       | 10,212     |       | —     |       | 38,338                      |       | 23,404                            |       | —           |       | 71,954     |       |
| Income from  operations                                 |       | 1,723      |       | —     |       | 17,039                      |       | 13,659                            |       | —           |       | 32,421     |       |
| Other expense  (income):                                |       |       |       |       |       |                        |       |                              |       |             |       |       |       |
| Interest expense                                        |       | 13,018     |       | —     |       | 37                          |       | 13                                |       | —           |       | 13,068     |       |
| Interest income                                         |       | (276       | )          | —     |       | —                      |       | (38                               | )          | —           |       | (314       | )          |
| Intercompany charges                                    |       | (21,389    | )          | —     |       | (9,140                      | )          | 5,684                             |       | 24,845           |       | —     |       |
| Other, net                                              |       | 6          |       | —     |       | (252                        | )          | (279                              | )          | —           |       | (525       | )          |
| Income before  income taxes and minority interest       |       | 10,364     |       | —     |       | 26,394                      |       | 8,279                             |       | (24,845          | )          | 20,192     |       |
| Income tax  (benefit) expense                           |       | (2,893     | )          | —     |       | 7,780                       |       | 2,126                             |       | —           |       | 7,013      |       |
| Minority  interest                                      |       | —     |       | —     |       | —                      |       | 15                                |       | —           |       | 15         |       |
| Income from continuing  operations                      |       | 13,257     |       | —     |       | 18,614                      |       | 6,138                             |       | (24,845          | )          | 13,164     |       |
| Income from  discontinued operations, net of income tax |       | —     |       | —     |       | —                      |       | (93                               | )          | —           |       | (93        | )          |
| Net income                                              |       | $          | 13,257     |       | $          | —                      |       | $                                 | 18,614     |             | $          | 6,231      |       | $ | (24,845 | ) | $ | 13,257 |   |

 

 

15

----

 

 
| ** **                                              | ** ** | **NSP**    | ** ** | **NCC**    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------|------------|
| **Six  months ended June 30, 2007**                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| **Operating  activities**                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net cash  provided by operating activities              |       | $          | 113        |       | $          | —                      |       | $                                 | 9,542      |             | $          | 3,869      |       | $ | — |   | $ | 13,524 |   |
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| **Investing  activities**                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Purchase of  businesses, net of cash acquired           |       | —     |       | —     |       | —                      |       | (951                              | )          | —           |       | (951       | )          |
| Proceeds from  sale of subsidiary, net of cash disposed |       | 3,856      |       | —     |       | —                      |       | (633                              | )          | —           |       | 3,223      |       |
| Purchase of  property, plant and equipment              |       | (532       | )          | —     |       | (3,570                      | )          | (1,573                            | )          | —           |       | (5,675     | )          |
| Proceeds from  sale of property, plant  and equipment   |       | —     |       | —     |       | —                      |       | 29                                |       | —           |       | 29         |       |
| Net cash  provided by (used in) investing activities    |       | 3,324      |       | —     |       | (3,570                      | )          | (3,128                            | )          | —           |       | (3,374     | )          |
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| **Financing  activities**                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Payments of debt                                        |       | (3,154     | )          | —     |       | (250                        | )          | (43                               | )          | —           |       | (3,447     | )          |
| Intercompany                                            |       | 7,760      |       | —     |       | (10,807                     | )          | 3,047                             |       | —           |       | —     |       |
| Dividends to  Safety Products Holdings, Inc.            |       | (166       | )          | —     |       | —                      |       | —                            |       | —           |       | (166       | )          |
| Net cash  provided by (used in) financing activities    |       | 4,440      |       | —     |       | (11,057                     | )          | 3,004                             |       | —           |       | (3,613     | )          |
| Effect of  exchange rate changes on cash                |       | 19         |       | —     |       | 2,442                       |       | (2,282                            | )          | —           |       | 179        |       |
| Net increase  (decrease) in cash and cash equivalents   |       | 7,896      |       | —     |       | (2,643                      | )          | 1,463                             |       | —           |       | 6,716      |       |
| Cash and cash  equivalents at beginning  of period      |       | 19,271     |       | —     |       | (1,283                      | )          | 8,108                             |       | —           |       | 26,096     |       |
| Cash and cash  equivalents at end of period             |       | $          | 27,167     |       | $          | —                      |       | $                                 | (3,926     | )                | $          | 9,571      |       | $ | — |   | $ | 32,812 |   |

 

16

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| ** **                                            | ** ** | **NSP**    | ** ** | **NCC**    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------|------------|
| **Six  months ended July 1, 2006**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| **Operating  activities**                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net cash (used  in) provided by operating activities  |       | $          | (8,090     | )          | $          | —                      |       | $                                 | 12,323     |             | $          | 1,331      |       | $ | — |   | $ | 5,564 |   |
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| **Investing  activities**                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Purchase of  businesses, net of cash acquired         |       | (229       | )          | —     |       | (26,635                     | )          | (134                              | )          | —           |       | (26,998    | )          |
| Purchase of  property, plant and equipment            |       | (1,153     | )          | —     |       | (2,643                      | )          | (991                              | )          | —           |       | (4,787     | )          |
| Proceeds from  sale of property, plant  and equipment |       | —     |       | —     |       | —                      |       | 113                               |       | —           |       | 113        |       |
| Net cash used in  investing activities                |       | (1,382     | )          | —     |       | (29,278                     | )          | (1,012                            | )          | —           |       | (31,672    | )          |
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| **Financing  activities**                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Payments for  deferred financing costs                |       | (201       | )          | —     |       | —                      |       | —                            |       | —           |       | (201       | )          |
| Proceeds from  borrowings                             |       | 15,000     |       | —     |       | —                      |       | —                            |       | —           |       | 15,000     |       |
| Payments of debt                                      |       | (816       | )          | —     |       | (68                         | )          | (64                               | )          | —           |       | (948       | )          |
| Intercompany                                          |       | (13,528    | )          | —     |       | 13,992                      |       | (464                              | )          | —           |       | —     |       |
| Capital  contribution                                 |       | 150        |       | —     |       | —                      |       | —                            |       | —           |       | 150        |       |
| Dividends to  Safety Products Holdings, Inc.          |       | (383       | )          | —     |       | —                      |       | —                            |       | —           |       | (383       | )          |
| Net cash  provided by (used in) financing activities  |       | 222        |       | —     |       | 13,924                      |       | (528                              | )          | —           |       | 13,618     |       |
| Effect of  exchange rate changes on cash              |       | —     |       | —     |       | 1,821                       |       | (903                              | )          | —           |       | 918        |       |
| Net decrease in  cash and cash equivalents            |       | (9,250     | )          | —     |       | (1,210                      | )          | (1,112                            | )          | —           |       | (11,572    | )          |
| Cash and cash  equivalents at beginning  of period    |       | 17,885     |       | —     |       | (265                        | )          | 3,063                             |       | —           |       | 20,683     |       |
| Cash and cash  equivalents at end of period           |       | $          | 8,635      |       | $          | —                      |       | $                                 | (1,475     | )                | $          | 1,951      |       | $ | — |   | $ | 9,111 |   |

 

**13.          Comprehensive Income**

Totalcomprehensive income (which includes the impact of foreign currencytranslation) was $11,699 and $14,346 for the three months ended July 1, 2006and June 30, 2007, respectively. Total comprehensive income was $20,197 and$22,655 for the six months ended July 1, 2006 and June 30, 2007, respectively.

 

17

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

**Overview**

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

We classify our diverse product offerings into threeoperating segments:

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

*Fire Service*.We manufacture and market one of the broadest lines of personal protectionequipment for the fire service market, offering firefighters head-to-toeprotection. Our products include bunker gear, fireboots, helmets, gloves andother accessories. We market our products under our Total Fire Group umbrella,using the brand names of *MorningPride*, *Ranger*, *Servus*,*Pro-Warrington*and*AmericanFirewear*. We are the vendor of choice for many of the largest firedepartments in North America. We sell our fire service products primarilythrough specialized fire service distributors.

*Electrical Safety*.We manufacture and market a broad line of personal protection equipment for theutility market under the *Salisbury, SafetyLine*and*Servus* brands. Our products includelinemen equipment, gloves, sleeves and footwear. All our products either meetor exceed the applicable standards of the American National Standards Institute(“ANSI”) and the American Society for Testing of Materials (“ASTM”). Wedistribute our electrical safety products through specialized distributors,test labs, utilities and electrical contractors.

**Acquisitions**

InFebruary 2006, we completed the acquisition of all of the issued andoutstanding capital stock of American Firewear. The purchase price consisted of$4.5 million in cash (including acquisition costs of $0.2 million and net ofcash acquired of $0.2 million) and a $1.0 million subordinated seller note. Inaddition, the purchase price may be increased by $0.8 million over a four yearperiod based on American Firewear achieving certain financial and operatingobjectives. We financed the acquisition through cash on the balance sheet andthe issuance of the $1.0 million subordinated seller note.

InJune 2006, we completed the acquisition of all of the issued and outstandingcapital stock of White Rubber. The purchase price of $22.2 million (including$0.6 million of acquisition costs and gross of outstanding checks of $0.8million) was financed through $15.0 million of additional term borrowings underthe senior credit facility and cash on the balance sheet.

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

**DiscontinuedOperations**

InJune 2007, we completed the sale of all of the issued and outstanding capitalstock of South Africa. We received net cash proceeds of $3.2 million andrecorded a net loss related to the transaction of $3.0 million. In accordancewith SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived**Assets*,we have reflected South Africa’s results of operations through the date of thesale and transaction loss as discontinued operations for all periods presented.Assets and liabilities of 

18

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South Africa werenot material and as a result have not been reclassified as discontinuedoperations in our consolidated statement of financial position as of December31, 2006. We have combined cash flows from discontinued operations with cashflows from continuing operations within each cash flow statement category asthe cash flows from discontinued operations are not material to ourconsolidated results.

**Resultsof Operations**

The following tables set forth our results of operations in dollars andas a percentage of net sales for the three and six months ended July 1, 2006and the three and six months ended June 30, 2007 and have been derived from theunaudited statements of operations.
| ** **                                                                   | ** ** | **Three months ended**     | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **July 1,  2006**               | ** ** | **June 30,  2007**        | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| ** **                                                                   | ** ** | **(dollars in thousands)** | ** ** |
| Net sales:                                                                   |       |                                 |       |                           |       |   |   |   |   |
| General Safety & Preparedness                                            |       | $                                    | 90,241     |                           | $          | 106,158 |   | $ | 183,907 |   | $ | 205,608 |   |
| Fire Service                                                                 |       | 22,184                               |       | 25,692                         |       | 46,256 |   | 49,539 |   |
| Electrical Safety                                                            |       | 18,850                               |       | 24,556                         |       | 37,471 |   | 49,410 |   |
| Total net sales                                                              |       | 131,275                              |       | 156,406                        |       | 267,634 |   | 304,557 |   |
| Cost of goods  sold                                                          |       | 79,157                               |       | 94,379                         |       | 163,259 |   | 185,088 |   |
| Gross profit                                                                 |       | 52,118                               |       | 62,027                         |       | 104,375 |   | 119,469 |   |
| Operating  expenses                                                          |       | 35,651                               |       | 40,348                         |       | 71,954 |   | 79,467 |   |
| Income from  operations:                                                     |       |                                 |       |                           |       |   |   |   |   |
| General Safety & Preparedness                                            |       | 11,790                               |       | 15,510                         |       | 22,733 |   | 27,758 |   |
| Fire Service                                                                 |       | 2,026                                |       | 3,416                          |       | 4,688 |   | 6,374 |   |
| Electrical Safety                                                            |       | 4,271                                |       | 5,057                          |       | 9,148 |   | 10,704 |   |
| Corporate                                                                    |       | (1,620                               | )          | (2,304                         | )          | (4,148 | ) | (4,834 | ) |
| Total income  from operations                                                |       | 16,467                               |       | 21,679                         |       | 32,421 |   | 40,002 |   |
| Other expense  (income):                                                     |       |                                 |       |                           |       |   |   |   |   |
| Interest expense                                                             |       | 6,606                                |       | 6,931                          |       | 13,068 |   | 13,965 |   |
| Interest income                                                              |       | (160                                 | )          | (228                           | )          | (314 | ) | (453 | ) |
| Other, net                                                                   |       | (230                                 | )          | 495                            |       | (525 | ) | 399 |   |
| Income from  continuing operations before income taxes and minority interest |       | 10,251                               |       | 14,481                         |       | 20,192 |   | 26,091 |   |
| Income tax  expense                                                          |       | 3,580                                |       | 5,457                          |       | 7,013 |   | 10,067 |   |
| Minority  interest                                                           |       | 4                                    |       | 8                              |       | 15 |   | 14 |   |
| Income from  continuing operations                                           |       | 6,667                                |       | 9,016                          |       | 13,164 |   | 16,010 |   |
| Loss (income)  from discontinued operations, net of income tax               |       | 204                                  |       | 2,974                          |       | (93 | ) | 2,813 |   |
| Net income                                                                   |       | $                                    | 6,463      |                           | $          | 6,042 |   | $ | 13,257 |   | $ | 13,197 |   |

 

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| ** **                                                                   | ** ** | **Three months ended**                            | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **July 1,  2006**                                      | ** ** | **June 30,  2007**        | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| ** **                                                                   | ** ** | **(as a percentage of net sales)** | ** ** |
| Net sales:                                                                   |       |                                                        |       |                           |       |   |   |   |   |
| General Safety & Preparedness                                            |       | 68.7                                                        | %          | 67.9                           | %          | 68.7 | % | 67.5 | % |
| Fire Service                                                                 |       | 16.9                                                        | %          | 16.4                           | %          | 17.3 | % | 16.3 | % |
| Electrical Safety                                                            |       | 14.4                                                        | %          | 15.7                           | %          | 14.0 | % | 16.2 | % |
| Total net sales                                                              |       | 100.0                                                       | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                                                          |       | 60.3                                                        | %          | 60.3                           | %          | 61.0 | % | 60.8 | % |
| Gross profit                                                                 |       | 39.7                                                        | %          | 39.7                           | %          | 39.0 | % | 39.2 | % |
| Operating  expenses                                                          |       | 27.2                                                        | %          | 25.8                           | %          | 26.9 | % | 26.1 | % |
| Income from  operations:                                                     |       |                                                        |       |                           |       |   |   |   |   |
| General Safety & Preparedness                                            |       | 9.0                                                         | %          | 9.9                            | %          | 8.5 | % | 9.1 | % |
| Fire Service                                                                 |       | 1.5                                                         | %          | 2.2                            | %          | 1.8 | % | 2.1 | % |
| Electrical Safety                                                            |       | 3.3                                                         | %          | 3.2                            | %          | 3.4 | % | 3.5 | % |
| Corporate                                                                    |       | (1.3                                                        | )%         | (1.4                           | )%         | (1.6 | )% | (1.6 | )% |
| Total income  from operations                                                |       | 12.5                                                        | %          | 13.9                           | %          | 12.1 | % | 13.1 | % |
| Other expense  (income):                                                     |       |                                                        |       |                           |       |   |   |   |   |
| Interest expense                                                             |       | 5.0                                                         | %          | 4.4                            | %          | 4.9 | % | 4.6 | % |
| Interest income                                                              |       | (0.1                                                        | )%         | (0.1                           | )%         | (0.1 | )% | (0.2 | )% |
| Other, net                                                                   |       | (0.2                                                        | )%         | 0.3                            | %          | (0.2 | )% | 0.1 | % |
| Income from  continuing operations before income taxes and minority interest |       | 7.8                                                         | %          | 9.3                            | %          | 7.5 | % | 8.6 | % |
| Income tax  expense                                                          |       | 2.7                                                         | %          | 3.5                            | %          | 2.6 | % | 3.4 | % |
| Minority  interest                                                           |       | 0.0                                                         | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |
| Income from  continuing operations                                           |       | 5.1                                                         | %          | 5.8                            | %          | 4.9 | % | 5.2 | % |
| Loss (income)  from discontinued operations, net of income tax               |       | 0.2                                                         | %          | 1.9                            | %          | (0.1 | )% | 0.9 | % |
| Net income                                                                   |       | 4.9                                                         | %          | 3.9                            | %          | 5.0 | % | 4.3 | % |

 

***Three Months Ended June 30, 2007  as Compared to Three Months Ended July 1,2006***

*Net sales.*Net sales increased by $25.1 million, or19.1%, from $131.3 million for the three months ended July 1, 2006 to $156.4million for the three months ended June 30, 2007. In our general safety andpreparedness segment, net sales increased by $15.9 million, or 17.6%, from$90.3 million for the three months ended July 1, 2006 to $106.2 million for thethree months ended June 30, 2007. The increase reflects a combination of thefollowing: combined organic growth in our international operations of $3.4million, favorable exchange rates, which had an impact of $2.5 million, overallorganic growth in our North American non-government business of $9.2 million,and an increase in government contract shipments of $0.8 million. In our fireservice segment, net sales increased by $3.5 million, or 15.8%, from $22.2million for the three months ended July 1, 2006 to $25.7 million for the threemonths ended June 30, 2007, due in part to the favorable impact of the issuanceof the new National Fire Protection Association (“NFPA”) standard. In ourelectrical safety segment, net sales increased by $5.7 million, or 30.3%, from$18.9 million for the three months ended July 1, 2006 to $24.6 million for thethree months ended June 30, 2007, primarily driven by strong market demand, newproduct penetration and incremental White Rubber net sales.

*Gross profit.*Gross profit increased by $9.9 million,or 19.0%, from $52.1 million for the three months ended July 1, 2006 to $62.0million for the three months ended June 30, 2007, primarily due to the $25.1million, or 19.1%, increase in net sales. Our gross profit margin was 39.7% forthe three months ended July 1, 2006 and June 30, 2007. In our general safetyand preparedness segment, gross profit increased by $6.7 million, or 17.9%,from $37.7 million for the three months ended July 1, 2006 to $44.4 million forthe three months ended June 30, 2007. This increase was primarily due to theoverall net sales increase of $15.9 million, or 17.6%, and improved marginperformance in our European operations. In our fire service segment, grossprofit increased by $1.8 million, or 26.6%, from $6.6 million for the threemonths ended July 1, 2006 to $8.4 million for the three months ended June 30,2007, primarily due to the increase in net sales of $3.5 million, or 15.8%, andfavorable margin realization. In our electrical safety segment, gross profitincreased by $1.4 million, or 17.9%, from $7.8 million for the three monthsended July 1, 2006 to $9.2 million for the three months ended June 30, 2007, asthe increase in net sales of $5.7 million, or 30.3%, was partially offset bylower margin realization primarily due to White Rubber product line integrationcosts and the impact of product mix.

 

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*Operating expenses. *Operating expenses increased by $4.6 million, or13.2%, from $35.7 million for the three months ended July 1, 2006 to $40.3million for the three months ended June 30, 2007. In our general safety andpreparedness segment, operating expenses increased $3.0 million, or 11.7%, from$25.9 million for the three months ended July 1, 2006 to $28.9 million for thethree months ended June 30, 2007, driven by increased variable selling anddistribution expenses associated with the $15.9 million, or 17.6%, increase innet sales and higher payroll expenses. In our fire service segment, operatingexpenses increased $0.3 million, or 8.2%, from $4.7 million for the threemonths ended July 1, 2006 to $5.0 million for the three months ended June 30,2007, primarily due to increased variable selling and distribution expensesrelated to the $3.5 million, or 15.8%, increase in net sales and higher generaland administrative expenses. In our electrical safety segment, operatingexpenses increased by $0.6 million, or 17.4%, from $3.5 million for the threemonths ended July 1, 2006 to $4.1 million for the three months ended June 30,2007, primarily due to increased variable selling and distributions expensesrelated to the $5.7 million, or 30.3%, increase in net sales, higheramortization of intangibles of $0.2 million associated with intangible assetsrecorded as part of purchase accounting and incremental White Rubber operatingexpenses. Corporate expenses for the three months ended July 1, 2006 consistedof $1.3 million of general and administrative expenses and $0.3 million ofmanagement incentive compensation expense. Corporate expenses for the threemonths ended June 30, 2007 consisted of $1.9 million of general andadministrative expenses and $0.4 million of management incentive compensationexpense. The increase in corporate general and administrative expenses of$0.6 million was primarily due to higher payroll, administrative expensesand professional fees.

*Income from operations.*Income from operations increased by $5.2million, or 31.7%, from $16.5 million for the three months ended July 1, 2006to $21.7 million for the three months ended June 30, 2007. In our generalsafety and preparedness segment, income from operations increased by $3.7million, or 31.6%, from $11.8 million for the three months ended July 1, 2006to $15.5 million for the three months ended June 30, 2007, primarily due tohigher net sales of $15.9 million, or 17.6%, and favorable margin realization.In our fire service segment, income from operations increased by $1.4 million,or 68.6%, from $2.0 million for the three months ended July 1, 2006 to $3.4million for the three months ended June 30, 2007, primarily due to higher netsales of $3.5 million, or 15.8%, and favorable margin performance. In ourelectrical safety segment, income from operations increased by $0.8 million, or18.4%, from $4.3 million for the three months ended July 1, 2006 to $5.1million for the three months ended June 30, 2007, as the higher net sales of$5.7 million, or 30.3%, was partially offset by lower margin realization.Corporate expenses for the three months ended July 1, 2006 consisted of $1.3million of general and administrative expenses and $0.3 million of managementincentive compensation expense. Corporate expenses for the three months endedJune 30, 2007 consisted of $1.9 million of general and administrative expensesand $0.4 million of management incentive compensation expense. The increase incorporate general and administrative expenses of $0.6 million wasprimarily due to higher payroll, administrative expenses and professional fees.

Included in income from operations for the threemonths ended July 1, 2006 and June 30, 2007 were depreciation and amortizationexpenses of $6.1 million and $6.6 million, respectively. Of these amounts, $4.1million, $1.1 million, and $0.9 million were attributable to the general safetyand preparedness, fire service, and electrical safety segments, respectively,for the three months ended July 1, 2006 and $4.2 million, $1.1 million, and$1.3 million were attributable to these segments for the three months endedJune 30, 2007.

*Interest expense.*Interestexpense increased by $0.3 million, or 4.9%, from $6.6 million for the threemonths ended July 1, 2006 to $6.9 million for the three months ended June 30,2007, primarily due to higher outstanding debt balances related to the WhiteRubber Transaction. Interest expense incurred by Norcross and the subsidiaryguarantors totaled $6.6 million for the three months ended July 1, 2006 and$7.0 million for the three months ended June 30, 2007.

*Other, net.*Other,net increased by $0.7 million from $(0.2) million for the three months endedJuly 1, 2006 to $0.5 million for the three months ended June 30, 2007,primarily due to unrealized foreign exchange rate losses.

*Income tax expense.*Income tax expense increased by $1.9million, from $3.6 million for the three months ended July 1, 2006 to $5.5million for the three months ended June 30, 2007, primarily as a result ofimproved operating performance.

*Loss (income) from discontinued operations.*Loss from discontinued operations for thethree months ended June 30, 2007 included a $3.0 million loss related to thesale of South Africa. Loss from discontinued operations for the three months endedJune 30, 2006 included a $0.2 million loss associated with South Africadiscontinued operations.

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*Net income.*Net income decreased by $0.5 million,from $6.5 million for the three months ended July 1, 2006 to $6.0 million forthe three months ended June 30, 2007 as a result of the reasons discussedabove.

***Six Months Ended June 30, 2007  as Compared to Six Months Ended July 1, 2006***

*Net sales.*Net sales increased by $37.0 million, or13.8%, from $267.6 million for the six months ended July 1, 2006 to $304.6million for the six months ended June 30, 2007. In our general safety andpreparedness segment, net sales increased by $21.7 million, or 11.8%, from$183.9 million for the six months ended July 1, 2006 to $205.6 million for thesix months ended June 30, 2007. The increase reflects a combination of thefollowing: combined organic growth in our international operations of $6.5million, favorable exchange rates, which had an impact of $4.4 million, andoverall organic growth in our North American non-government business of $14.1million, which offset a decrease in government contract shipments of $3.3million. In our fire service segment, net sales increased by $3.3 million, or7.1%, from $46.2 million for the six months ended July 1, 2006 to $49.5 millionfor the six months ended June 30, 2007, due in part to the favorable impact ofnew NFPA standard. In our electrical safety segment, net sales increased by$12.0 million, or 31.9%, from $37.4 million for the six months ended July 1,2006 to $49.4 million for the six months ended June 30, 2007, primarily drivenby strong market demand, new product penetration and incremental White Rubbernet sales.

*Gross profit.*Gross profit increased by $15.1 million,or 14.5%, from $104.4 million for the six months ended July 1, 2006 to $119.5million for the six months ended June 30, 2007, primarily due to the $37.0million, or 13.8%, increase in net sales. Excluding the impact of inventorypurchase accounting adjustments of $0.7 million for the six months ended July1, 2006, gross profit increased by $14.4 million, or 13.7%. After adjusting forthe inventory purchase accounting adjustments, our gross profit margin was39.2% for the six months ended June 30, 2007 as compared to 39.3% for the sixmonths ended July 1, 2006. In our general safety and preparedness segment(after adjusting for charges related to purchase accounting of $0.7 million forthe six months ended July 1, 2006), gross profit increased by $9.8 million, or13.1%, from $75.1 million for the six months ended July 1, 2006 to $84.9million for the six months ended June 30, 2007. This increase was primarily dueto the overall net sales increase of $21.7 million, or 11.8%, and improvedmargin realization in our European operations. In our fire service segment, grossprofit increased by $1.6 million, or 11.1%, from $14.2 million for the sixmonths ended July 1, 2006 to $15.8 million for the six months ended June 30,2007, primarily due to the increase in net sales of $3.3 million, or 7.1%, andthe favorable margin realization. In our electrical safety segment, grossprofit increased by $3.0 million, or 18.6%, from $15.8 million for the sixmonths ended July 1, 2006 to $18.8 million for the six months ended June 30,2007, as the increase in net sales of $12.0 million, or 31.9%, was partiallyoffset by lower margin realization primarily due to White Rubber product lineintegration costs and the impact of product mix.

*Operating expenses. *Operating expenses increased by $7.5 million, or10.4%, from $72.0 million for the six months ended July 1, 2006 to $79.5million for the six months ended June 30, 2007. In our general safety andpreparedness segment, operating expenses increased $5.5 million, or 10.7%, from$51.6 million for the six months ended July 1, 2006 to $57.1 million for thesix months ended June 30, 2007, driven by increased variable selling anddistribution expenses associated with the $21.7 million, or 11.8%, increase innet sales and higher payroll expenses. In our fire service segment, operatingexpenses decreased $0.1 million, or 1.1%, from $9.5 million for the six monthsended July 1, 2006 to $9.4 million for the six months ended June 30, 2007. Inour electrical safety segment, operating expenses increased by $1.4 million, or20.8%, from $6.7 million for the six months ended July 1, 2006 to $8.1 millionfor the six months ended June 30, 2007, due to increased variable selling anddistribution expenses related to the $12.0 million, or 31.9%, increase in netsales, higher amortization expense of $0.4 million associated with intangibleassets recorded as part of purchase accounting and incremental White Rubberoperating expenses. Corporate expenses for the six months ended July 1, 2006consisted of $3.0 million of general and administrative expenses and $1.1 millionof management incentive compensation expense. Corporate expenses for the sixmonths ended June 30, 2007 consisted of $4.1 million of general andadministrative expenses and $0.7 million of management incentive compensationexpense. The increase in corporate general and administrative expenses of$1.1 million was primarily due to higher payroll, administrative expensesand professional fees.

*Income from operations.*Income from operations increased by $7.6million, or 23.4%, from $32.4 million for the six months ended July 1, 2006 to$40.0 million for the six months ended June 30, 2007. Excluding the impact ofinventory purchase accounting adjustments of $0.7 million for the six monthsended July 1, 2006, income from operations increased by $6.9 million, or 20.6%.In our general safety and preparedness segment (after adjusting for chargesrelated to purchase accounting of $0.7 million), income from operationsincreased by $4.3 million, or 18.2%, from $23.5 million for the six monthsended July 1, 2006 to $27.8 million for the six months ended June 30, 2007,primarily due to higher net sales of $21.7 million, or 11.8%, and favorablemargin realization. In our fire service segment, income from operationsincreased by $1.7 million, or 36.0%, from $4.7 million for the six months endedJuly 1, 2006 to $6.4 million for the six months ended June 30, 

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2007, primarily due to the higher net sales of $3.3 million, or 7.1%,and favorable margin realization. In our electrical safety segment, income fromoperations increased by $1.6 million, or 17.0%, from $9.1 million for the sixmonths ended July 1, 2006 to $10.7 million for the six months ended June 30,2007, as the higher net sales of $12.0 million, or 31.9%, was partially offsetby lower margin realization. Corporate expenses for the six months ended July1, 2006 consisted of $3.0 million of general and administrative expenses and$1.1 million of management incentive compensation expense. Corporate expensesfor the six months ended June 30, 2007 consisted of $4.1 million of general andadministrative expenses and $0.7 million of management incentive compensationexpense. The increase in corporate general and administrative expenses of$1.1 million was primarily due to higher payroll, administrative expensesand professional fees.

Included in income from operations for the six monthsended July 1, 2006 and June 30, 2007 were depreciation and amortizationexpenses of $11.9 million and $13.1 million, respectively. Of these amounts,$7.9 million, $2.2 million, and $1.8 million were attributable to the generalsafety and preparedness, fire service, and electrical safety segments,respectively, for the six months ended July 1, 2006 and $8.2 million, $2.3million, and $2.6 million were attributable to these segments for the six monthsended June 30, 2007.

*Interest expense.*Interestexpense increased by $0.9 million, or 6.9%, from $13.1 million for the sixmonths ended July 1, 2006 to $14.0 million for the six months ended June 30,2007, primarily due to higher outstanding debt balances related to the WhiteRubber Transaction. Interest expense incurred by Norcross and the subsidiaryguarantors totaled $13.1 million for the six months ended July 1, 2006 and$14.0 million for the six months ended June 30, 2007.

*Other, net.*Other,net increased by $0.9 million from $(0.5) million for the six months ended July1, 2006 to $0.4 million for the six months ended June 30, 2007, primarily dueto unrealized foreign exchange rate losses.

*Income tax expense.*Income tax expense increased by $3.1 million,from $7.0 million for the six months ended July 1, 2006 to $10.1 million forthe six months ended June 30, 2007, primarily as a result of improved operatingperformance.

*Loss (income) from discontinued operations.*Loss from discontinued operations for thesix months ended June 30, 2007 included a $3.0 million loss related to the saleof South Africa and $(0.2) million of income associated with South Africadiscontinued operations. Income from discontinued operations for the six monthsended June 30, 2006 included $(0.1) million of income associated with SouthAfrica discontinued operations.

*Net income.*Net income decreased by $0.1 million,from $13.3 million for the six months ended July 1, 2006 to $13.2 million forthe six months ended June 30, 2007 as a result of the reasons discussed above.

**Liquidityand Capital Resources**

We have historically used internal cash flow fromoperations, commercial borrowings on our lines of credit, seller notes,investments from our equityholders and capital markets transactions to fund ouroperations, acquisitions, capital expenditures and working capitalrequirements. For the six months ended June 30, 2007, net cash provided byoperating activities was $13.5 million, as income from operations of $40.0million was partially offset by an increase in accounts receivable due tohigher net sales. For the six months ended July 1, 2006, net cash provided byoperating activities was $5.6 million, as income from operations of $32.4million was partially offset by an increase in accounts receivables due tohigher net sales and higher inventory in part due to pending plantconsolidations.

Historically, our principal uses of cash have beencapital expenditures, acquisitions and working capital. Our capitalexpenditures were $4.8 million for the six months ended July 1, 2006 and $5.7million for the six months ended June 30, 2007. Investing activities for thesix months ended June 30, 2007 included $0.4 million of royalty payments madeto the sellers of Arbin, $0.5 million for the purchase of Hungary, and $3.2million of cash proceeds from the sale of South Africa. For the six monthsended July 1, 2006, investing activities included $22.2 million for theacquisition of White Rubber, $4.5 million for the acquisition of American Firewearand $0.3 million of royalty payments made to the sellers of Muck Boot andArbin.

As of June 30, 2007, we had working capital of $168.2million and cash of $32.8 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 six months ended June 30, 2007, net cash usedin financing activities was $3.6 million, consisting of $3.4 

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millionof payments on long-term obligations (including an excess cash flow sweeppayment of $2.3 million under the terms of our senior credit facility) and $0.2million of dividends to Safety Products Holdings, Inc. For the six months endedJuly 1, 2006, net cash provided by financing activities was $13.6 million,consisting of the following: proceeds from additional term borrowings of $15.0million under the senior credit facility related to the White Rubbertransaction, $0.9 million of payments on long-term obligations, $0.4 million ofdividends to Safety Products Holdings Inc., $0.2 million of capitalcontributions, and $0.2 million of payments for deferred financing costs.

As of June 30, 2007, borrowings under the new seniorcredit facility bore interest at a weighted average rate of 7.4%. As of June30, 2007, there was approximately $162.6 million of outstanding indebtednessunder the senior credit facility and approximately $47.3 million of availableborrowings under the revolving credit facility.

We believe that our internal cash flows and borrowingsunder our new senior credit facility will provide us with sufficient liquidityand capital resources to meet our current and future financial obligations forthe foreseeable future, including funding our operations, debt service andcapital expenditures. Our future operating performance will be subject tofuture economic conditions and to financial, business and other factors, manyof which are beyond our control. If our future cash flow from operations andother capital resources are insufficient to pay our obligations as they matureor to fund our liquidity needs, we may be forced to reduce or delay ourbusiness activities and capital expenditures, sell assets, obtain additionaldebt or equity capital or restructure or refinance all or a portion of ourdebt, including the senior subordinated notes, on or before maturity. We cannotassure you that we would be able to accomplish any of these alternatives on atimely basis or on satisfactory terms, if at all. In addition, the terms of ourexisting and future indebtedness, including our senior subordinated notes andour senior credit facility, may limit our ability to pursue any of thesealternatives.

**Forward-Looking Statements**

This Management’s Discussion and Analysis of Financial Condition andResults of Operations contains forward-looking information.  These statements reflect management’sexpectations, estimates, and assumptions based on information available at thetime of the statement.  Forward-lookingstatements include, but are not limited to, statements regarding future events,plans, goals, objectives, and expectations. The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intent,”“likely,” “will,” “should,” and similar expressions are intended to identifyforward-looking statements. Forward-looking statements are not guarantees of future performance andinvolve risks, uncertainties, and other factors, including those set forth below,which may cause our actual results, performance, or achievements to bematerially different from any future results, performance, or achievementsexpressed or implied by those statements. Important factors that could cause our actual results, performance, orachievements to be materially different from any future results, performance,or achievements expressed or implied by those statements include, but are notlimited to: (i) our high degree of leverage and significant debt serviceobligations; (ii) the impact of current and future laws and governmentalregulations affecting us or our product offerings; (iii) the impact ofgovernmental spending; (iv) our ability to retain existing customers, maintainkey supplier status with those customers with which we have achieved suchstatus, and obtain new customers; (v) the highly competitive nature of thepersonal protection equipment industry; (vi) any future changes in management;(vii) acceptance by consumers of new products we develop or acquire; (viii) theimportance and costs of product innovation; (ix) unforeseen problems associatedwith international sales, including gains and losses from foreign currencyexchange and restrictions on the efficient repatriation of earnings; (x) theunpredictability of patent protection and other intellectual property issues;(xi) cancellation of current orders; (xii) the outcome of pending productliability claims and the availability of indemnification for those claims;(xiii) general risks associated with the personal protection equipmentindustry; and (xiv) the successful integration of acquired companies oneconomically acceptable terms.  Weundertake 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, 2006.

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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 ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) areeffective. There was no change in our internal control over financial reporting(as defined in Rules 13a-15(f) and 15d-15(f) under the ExchangeAct) identified in connection with the evaluation required by Rule 13a-15(d)of the Exchange Act that occurred during the period covered by this quarterlyreport on Form 10-Q that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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**PART II**

**OTHERINFORMATION**

**Item1. Legal Proceedings**

We are subject to various claims arising in theordinary course of business. Most of these lawsuits and claims are productliability matters that arise out of the use of respiratory product linesmanufactured by our North Safety Products subsidiary. As of June 30, 2007, ourNorth Safety Products subsidiary, along with its predecessors and/or the formerowners of such business were named as defendants in approximately 636 lawsuitsinvolving respirators allegedly manufactured and sold by it or itspredecessors. We are also monitoring an additional two lawsuits in which wefeel that North Safety Products, its predecessors and /or the former owners ofsuch businesses may be named as defendants. Collectively, these 638lawsuits represent approximately 8,438 (excluding spousal claims) plaintiffs.Approximately 85% of these lawsuits involve plaintiffs alleging injuryresulting from exposure to silica dust, with the remainder alleging injury fromexposure to other particles, including asbestos. These lawsuits typicallyallege that the purported injuries resulted in part from respirators thatwere negligently designed and/or manufactured. The defendants in these lawsuitsare often numerous, and include, in addition to respirator manufacturers,employers of the plaintiffs and manufacturers of sand (used in sand blasting)and asbestos. We acquired our North Safety Products subsidiary onOctober 2, 1998 from Siebe plc. In connection with the acquisition, Siebe,which was subsequently merged with BTR plc (now known as “Invensys plc”),contractually agreed to indemnify us for any losses, including costs ofdefending claims, resulting from respiratory products manufactured or soldprior to our acquisition of North Safety Products in October 1998.

In addition, our North Safety 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, SiebeNorton, Inc., a newly formed wholly-owned subsidiary of Norton Company,acquired the assets of Norton’s Safety Products Division and the stock of thiscompany was in turn acquired by Siebe Gorman Holdings PLC. Under the terms ofthe agreement, Siebe Norton, Inc. did not assume any liability for claimsrelating to products shipped by Norton Company prior to the closing date.Moreover, Norton Company covenanted in the agreement to indemnify Siebe Norton,Inc. and its successors and assigns against any liability resulting from orarising out of any state of facts, omissions or events existing or occurring onor before the closing date, including, without limitation, any claims arisingfrom products shipped by Norton Company or any of its affiliates prior to theclosing date.  Siebe Norton, Inc., whosename was subsequently changed to Siebe North Inc., was subsequently acquired byus as part of the 1998 acquisition of the North Safety Products businessfrom Invensys.

Despite these indemnification arrangements, we couldpotentially be liable for losses or claims relating to products manufacturedprior to the October 1998 acquisition date if Invensys fails to meet itsobligations to indemnify us and we could potentially be liable for losses andclaims relating to products sold prior to January 10, 1983 if bothInvensys and Norton fail to meet their obligations to indemnify us. We couldalso be liable if the alleged exposure involved the use of a productmanufactured by us after our October 1998 acquisition of the North SafetyProducts business.

Effective July 1, 2006, we entered into a jointdefense agreement through December 31, 2008 with the former owners of the NorthSafety Products business (the “Joint Defense Agreement” or “JDA”).  Under the terms of the Joint DefenseAgreement, we agreed to pay a weighted average percentage of defense costs(including legal fees, expert witnesses and out of pocket expenses) associatedwith defending ourselves and the prior owners of the North Safety Productsbusiness subject to a cap of $525,000, $960,000 and $1.0 million for the periodfrom July 1, 2006 through December 31, 2006, the year ended December 31, 2007and the year ended December 31, 2008, respectively.  The cap excludes settlement costs and othercosts incurred exclusively by us (including trial costs and special requests ofcounsel), which we will be required to pay under the JDA.  Separately, we agreed to pay Invensys$200,000 related to settled cases through June 30, 2006 in which Invensysclaims that the period of alleged exposure included periods after October 1998.

Although the JDAexpires on December 31, 2008, we expect to incur additional defense andsettlement costs beyond this date. We will consider our alternatives fordefending the claims as the JDA nears expiration and determine the appropriatecourse of action, which would include an extension of the JDA.

Based upon informationprovided to us by Invensys, we believe activity related to these lawsuits wasas follows for the three months ended June 30, 2007:

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| ** **                                | ** ** | **Plaintiffs** | ** ** | **Cases** | ** ** |
|-------------------------------------------|------------|----------------|------------|-----------|------------|
| Beginning  lawsuits as of January 1, 2007 |       | 8,746          |       | 644       |       |
| New lawsuits                              |       | 6              |       | 3         |       |
| Settlements                               |       | —         |       | —    |       |
| Dismissals and  other                     |       | (314           | )          | (9        | )          |
| Ending lawsuits as of  June 30, 2007      |       | 8,438          |       | 638       |       |

 

Both the rate of new filings and the number ofexisting claimants have declined dramatically since 2003 as courts andlegislatures have tightened the rules on when and where the silica claims canbe pursued in an effort to reduce the large number of unmeritorious claims.  The new rules make bringing silica cases on amass level much less attractive to the plaintiffs’ bar.  Plaintiffs’ attorneys in many jurisdictionscan no longer (1) find a worker with some stated exposure to silica, (2) takean X-ray of his chest, (3) have it interpreted as demonstrating lung shadows bya radiologist, (4) then file a single lawsuit in a dangerous venue withhundreds of other plaintiffs against hundreds of defendants with the pleadingcontaining little more than the parties’ names and some standard pleadinglanguage. More specifically, the legislatures of at least seven states —including former hotbeds of silica litigation such as Texas, Florida and Ohio —passed impairment-criteria legislation that redefined injury. These acts forceplaintiffs to prove impairment as a result of their exposure to qualify forjudicial treatment.  The same legislationrequires that each silica claimant be tried individually, and not in themultiple plaintiff format in which the potential for large verdicts resultedfrom increased plaintiffs and where a few meritorious claims could increase thevalue of unmeritorious ones. Further tort reform in Texas created a state-widemulti-district litigation (“MDL”) wherein one judge presides over the pretrialof all Texas-silica cases. In Mississippi, the Supreme Court changed the venuerules making it much more difficult to file out-of-state plaintiffs there. TheMississippi court also changed the pleading requirements making the plaintiffs’attorneys include plaintiff-specific allegations against each defendant sued,instead of the vague allegations against hundreds of defendants.

Plaintiffs haveasserted specific dollar claims in approximately 30% of the approximately 636cases pending as of June 30, 2007 in which North Safety Products, itspredecessors and/or the former owners of such businesses have been named asdefendants. A majority of jurisdictions prohibit specifying damages in tortcases such as these, and most of the remaining jurisdictions do not require suchspecification. In those cases in which plaintiffs choose to assert specificdollar amounts in their complaints, the amounts claimed are typically notmeaningful as an indicator of a company’s potential liability. This is because(1) the amounts claimed typically bear no relation to the level of theplaintiff’s injury, (2) the complaints typically assert claims against numerousdefendants, and (3) many cases are brought on behalf of plaintiffs who have notsuffered any medical injury, and ultimately are resolved without any payment orpayment of a small fraction of the damages initially claimed. Of the 636complaints maintained in our records, 446 do not specify the amount of damagessought, 25 generally allege damages in excess of $50,000, one alleges compensatorydamages in excess of $50,000 and an unspecified amount of punitive damages, 103allege compensatory damages and punitive damages, each in excess of $25,000,two generally allege damages in excess of $100,000, two allege compensatorydamages and punitive damages, each in excess of $50,000, 20 generally allegedamages in excess of $15.0 million, one generally alleges damages of $23.0million, one alleges compensatory damages and punitive damages, each in excessof $10,000, four allege general damages of $18.0 million and punitive damagesof $10.0 million, two allege general damages of $13.0 million and punitivedamages of $10.0 million, one alleges compensatory and punitive damages, eachin excess of $15,000, one alleges punitive damages in excess of $50,000, onegenerally alleges damages in excess of $15,000, 12 generally allege damages inexcess of $25,000, one alleges compensatory damages of $18.0 million andpunitive damages of $10.0 million, one alleges punitive damages of $13.5million and compensatory damages of $10.0 million, one alleges punitive damagesof $13.0 million and compensatory damages of $10.0 million, eight allegecompensatory damages of $13.0 million and punitive damages of $10.0 million,one alleges compensatory and punitive damages, each of $15,000 and two allegecompensatory and punitive damages, each in excess of $15.0 million. Wecurrently do not have access to the complaints with respect to the previouslymentioned additional two monitored cases, and therefore we 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 reasonsnoted above and to the indemnification arrangements benefiting us, we do notbelieve that the damage amounts specified in these complaints are a meaningfulfactor in any assessment of our potential liability.

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

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We recorded a $1.25 million reserve for respiratoryclaims during the year ended December 31, 2004. We re-evaluated this reserve in its first and second quarter 2005financial statements and concluded the $1.25 million recorded reserve continuedto be its best estimate of the probable loss for the respiratory contingency.

In the July 2005 acquisition purchase accounting (asfirst reported in the Form 10-Q for the third quarter of 2005), we carriedforward the $1.25 million liability for this pre-acquisition contingency.  Although management concluded that it waslikely their estimate of this pre-acquisition contingent liability would beincreased during the purchase accounting allocation period as the new ownershipfinalized their strategy for addressing the liability and gathered information(primarily related to case information and the working relationship among theprior owners of North), it was unlikely the amount would be lower than the$1.25 million. Thus, the $1.25 million amount represented the low end of aprobable loss range, subject to further adjustment during the allocationperiod.

In December 2005, we began negotiations with theformer owners of the North business to enter into the JDA. We determined thatthe liability should be increased to $5.0 million as of December 31, 2005 aspart of the purchase price allocation process. The $5.0 million reserve as ofDecember 31, 2005 represented management’s best estimate of the liability basedon the current status of negotiations. As of December 31, 2005, the estimatewas still preliminary as we were awaiting finalization of the JDA negotiationprocess.

As discussed above, we entered into the JDA effectiveJuly 1, 2006 and completed our evaluation of the reserve.  After all information was obtained, weadjusted the reserve to $7.0 million as part of the purchase price allocationprocess during the permitted “allocation period”.  As of June 30, 2007, the reserve balance was$6.8 million.

The final estimated amount recorded in purchase accountingrelated entirely to losses incurred before the July 2005 acquisition. Our finalestimate of the probable loss for the respiratory contingency incorporated thenew ownerships’ decision to enter into the JDA. The decision represented asignificantly different plan as new ownership agreed to assume losses relatedto claims with unknown years of exposure. In addition, the decision to enterthe JDA was being considered from the date of the acquisition and the ultimatedecision was made during the allocation period.

We believe that this reserve represents a reasonableestimate of our probable and estimable liabilities for product claims alleginginjury resulting from exposure to silica dust and other particles, includingasbestos. We believe that a five-year projection of claims and related defensecosts is the most reasonable approach. This reserve will be re-evaluatedperiodically and additional charges or credits will be recorded to operatingexpenses as additional information becomes available.

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

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

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

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** **

**Item 1A. Risk Factors**

There have been nomaterial changes to the risks impacting our business since December 31, 2006.

 

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**Item 6. Exhibits**
| Exhibit No. | ** ** | **Description**                                                                                          |
|-------------|------------|----------------------------------------------------------------------------------------------------------|
| 31.1        |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|        |       |                                                                                                     |
| 31.2        |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002      |
|        |       |                                                                                                     |
| 32.1        |       | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002      |
|        |       |                                                                                                     |
| 32.2        |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002      |

 

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, Norcross Safety Products L.L.C. has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.
|                 | NORCROSS SAFETY PRODUCTS L.L.C. |                                               |   |
|-----------------|---------------------------------|----------------------------------------------------|--------|
|            |                            |                                               |   |   |
|            |                            |                                               |   |   |
| August 13, 2007 | By:                             | /s/ ROBERT A. PETERSON                             |   |   |
|            |                            | Robert A. Peterson                                 |   |   |
|            |                            | President, Chief Executive Officer and Manager     |   |   |
|            |                            | (Principal Executive Officer)                      |   |   |
|            |                            |                                               |   |   |
|            |                            |                                               |   |   |
| August 13, 2007 | 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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**NORCROSSSAFETY PRODUCTS L.L.C.**

**FORM 10-Q LISTINGOF EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                          |
|-------------|------------|----------------------------------------------------------------------------------------------------------|
| 31.1        |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|        |       |                                                                                                     |
| 31.2        |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002      |
|        |       |                                                                                                     |
| 32.1        |       | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002      |
|        |       |                                                                                                     |
| 32.2        |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002      |

 

 

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