**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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

 

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

 

**Commission File Number: 333-127020**

 

**SAFETY PRODUCTS HOLDINGS, INC.**

**(Exact name of Registrant as Specified in itsCharter)**

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).   Yes o  No ý

 

On August 10,2005 Safety Products Holdings, Inc. had 10,967,000 common shares outstanding. 

 

 

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**SAFETY PRODUCTS HOLDINGS,INC.**FORM 10-QQUARTERLY REPORT

** **

**Forthe Quarterly Period Ended July 2, 2005**

 

**TABLE OF CONTENTS**

 
| **PART I Financial Information**  |
|----------------------------------------|
|                                   |
|                                   | Item 1. Financial  Statements (Unaudited) | 1 |
|                                   |   |
|                                   |   | Consolidated Balance Sheets | 1 |
|                                   |   |   |   |
|                                   |   | Consolidated Statements of Operations | 2 |
|                                   |   |   |   |
|                                   |   | Consolidated Statements of Cash Flows | 3 |
|                                   |   |   |
|                                   | Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11 |
|                                   |   |   |
|                                   | Item 3. Quantitative and  Qualitative Disclosures About Market Risk | 20 |
|                                   |   |   |
|                                   | Item 4. Controls and Procedures | 21 |
|                                   |   |   |
| **PART II Other Information**     | 22 |
|                                   |   |   |
|                                   | Item 1. Legal Proceedings | 24 |
|                                   |   |   |
|                                   | Item 6. Exhibits | 24 |
|                                   |   |   |
| **Signatures**                         | 25 |
|                                   |   |
| **Form 10-Q Listing of Exhibits** | 26 |

 

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**PART I**FINANCIAL INFORMATION

** **

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

 

**NSPHOLDINGS L.L.C.(as predecessor of Safety Products Holdings, Inc.)**

**CONSOLIDATED BALANCE SHEETS**

**(Amountsin Thousands) (Unaudited)**

 
| ** **                                                                                | ** ** | **December 31,  2004(1)** | ** ** | **July 2,  2005** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------|------------|
| **Assets**                                                                                |       |                           |       | ** **             |       |
| Current  assets:                                                                          |       |                           |       |                   |       |
| Cash and  cash equivalents                                                                |       | $                              | 35,731     |                   | $          | 63,528 |   |
| Accounts  receivable, less allowance of $2,063 and $2,212 in 2004 and 2005,  respectively |       | 61,167                         |       | 67,754                 |       |
| Inventories                                                                               |       | 82,532                         |       | 84,263                 |       |
| Deferred  income taxes                                                                    |       | 60                             |       | 61                     |       |
| Prepaid  expenses and other current assets                                                |       | 3,183                          |       | 2,978                  |       |
| Total  current assets                                                                     |       | 182,673                        |       | 218,584                |       |
| Property,  plant, and equipment, net                                                      |       | 51,809                         |       | 48,078                 |       |
| Deferred  financing costs, net                                                            |       | 9,960                          |       | 12,021                 |       |
| Goodwill,  net                                                                            |       | 132,662                        |       | 131,842                |       |
| Other  intangible assets, net                                                             |       | 6,256                          |       | 5,895                  |       |
| Other  noncurrent assets                                                                  |       | 5,831                          |       | 5,799                  |       |
| Total assets                                                                              |       | $                              | 389,191    |                   | $          | 422,219 |   |
|                                                                                      |       |                           |       |                   |       |
| **Liabilities and members’ deficit**                                                 |       |                           |       |                   |       |
| Current  liabilities:                                                                     |       |                           |       |                   |       |
| Accounts  payable                                                                         |       | $                              | 17,871     |                   | $          | 19,036 |   |
| Accrued  expenses                                                                         |       | 29,024                         |       | 28,305                 |       |
| Current  maturities of long-term obligations                                              |       | 15,252                         |       | 2,443                  |       |
| Total  current liabilities                                                                |       | 62,147                         |       | 49,784                 |       |
| Pension,  post-retirement, and deferred compensation                                      |       | 22,923                         |       | 22,822                 |       |
| Long-term  obligations                                                                    |       | 238,314                        |       | 343,284                |       |
| Mandatorily  redeemable preferred units                                                   |       | 134,310                        |       | 78,675                 |       |
| Other  noncurrent liabilities                                                             |       | 1,653                          |       | 1,625                  |       |
| Deferred  income taxes                                                                    |       | 4,799                          |       | 4,647                  |       |
| Minority  interest                                                                        |       | 142                            |       | 146                    |       |
|                                                                                      |       | 402,141                        |       | 451,199                |       |
| Members’  deficit:                                                                   |       |                           |       |                   |       |
| Class E  units                                                                       |       | 1                              |       | 1                      |       |
| Common  units:                                                                            |       |                           |       |                   |       |
| Class A  units                                                                       |       | 38,676                         |       | 38,676                 |       |
| Class C  units                                                                       |       | 188                            |       | 188                    |       |
| Class D  units                                                                       |       | 1,248                          |       | 1,248                  |       |
| Accumulated  deficit                                                                      |       | (118,739                       | )          | (115,342               | )          |
| Accumulated  other comprehensive income (loss)                                            |       | 3,529                          |       | (3,535                 | )     |
| Total  members’ deficit                                                              |       | (75,097                        | )          | (78,764                | )          |
| Total  liabilities and members’ deficit                                              |       | $                              | 389,191    |                   | $          | 422,219 |   |

 

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

 

*See notes to unaudited consolidated financialstatements.*

 

1

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**NSP HOLDINGS L.L.C.**(as predecessor of Safety Products Holdings, Inc.)

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Amountsin Thousands) (Unaudited)**

 
| ** **                                        | ** ** | **Three months ended** | ** ** | **Six months ended**   | ** ** |
|---------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** |
| Net sales                                         |       | $                      | 107,005    |                   | $          | 118,845 |   | $ | 216,078 |   | $ | 239,268 |   |
| Cost of  goods sold                               |       | 68,625                 |       | 73,457                 |       | 137,332 |   | 149,059 |   |
| Gross profit                                      |       | 38,380                 |       | 45,388                 |       | 78,746 |   | 90,209 |   |
| Operating  expenses:                              |       |                   |       |                   |       |   |   |   |   |
| Selling                                           |       | 10,422                 |       | 11,697                 |       | 20,826 |   | 23,554 |   |
| Distribution                                      |       | 5,527                  |       | 6,346                  |       | 10,895 |   | 12,620 |   |
| General and  administrative                       |       | 9,696                  |       | 11,361                 |       | 19,817 |   | 22,428 |   |
| Amortization  of intangibles                      |       | 124                    |       | 141                    |       | 250 |   | 283 |   |
| Strategic  alternatives                           |       | 613                    |       | —                 |       | 613 |   | — |   |
| Total  operating expenses                         |       | 26,382                 |       | 29,545                 |       | 52,401 |   | 58,885 |   |
| Income from  operations                           |       | 11,998                 |       | 15,843                 |       | 26,345 |   | 31,324 |   |
| Other  expense (income):                          |       |                   |       |                   |       |   |   |   |   |
| Interest  expense                                 |       | 8,964                  |       | 10,936                 |       | 17,905 |   | 21,657 |   |
| Interest  income                                  |       | (29                    | )          | (401                   | )          | (64 | ) | (829 | ) |
| Other, net                                        |       | 59                     |       | 436                    |       | 593 |   | 822 |   |
| Income  before income taxes and minority interest |       | 3,004                  |       | 4,872                  |       | 7,911 |   | 9,674 |   |
| Income tax  expense                               |       | 1,323                  |       | 2,153                  |       | 2,359 |   | 3,757 |   |
| Minority  interest                                |       | 11                     |       | 7                      |       | 16 |   | 11 |   |
| Net income                                        |       | $                      | 1,670      |                   | $          | 2,712 |   | $ | 5,536 |   | $ | 5,906 |   |

 

See notes to unaudited consolidated financialstatements.

 

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**NSPHOLDINGS L.L.C.(as predecessor of Safety Products Holdings, Inc.)**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Amountsin Thousands) (Unaudited)**

 
| ** **                                                                         | ** ** | **Six months ended**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** |
| **Operating activities**                                                           |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 5,536      |   | $ | 5,906 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation                                                                       |       | 5,682                  |       | 5,311 |   |
| Amortization  of intangibles                                                       |       | 250                    |       | 283 |   |
| Amortization  of deferred financing costs                                          |       | 883                    |       | 1,185 |   |
| Amortization  of original issue discount                                           |       | 45                     |       | 50 |   |
| Loss on sale  of property, plant and equipment                                     |       | 384                    |       | — |   |
| Deferred  income taxes                                                             |       | (40                    | )          | (153 | ) |
| Minority  interest                                                                 |       | 16                     |       | 11 |   |
| Noncash  interest                                                                  |       | 6,588                  |       | 10,113 |   |
| Changes in  operating assets and liabilities:                                      |       |                   |       |   |   |
| Accounts  receivable                                                               |       | (10,866                | )          | (6,587 | ) |
| Inventories                                                                        |       | (3,808                 | )          | (1,731 | ) |
| Prepaid  expenses and other current assets                                         |       | (29                    | )          | 222 |   |
| Other  noncurrent assets                                                           |       | 103                    |       | (219 | ) |
| Accounts  payable                                                                  |       | 1,968                  |       | 1,165 |   |
| Accrued  expenses                                                                  |       | (1,312                 | )          | (717 | ) |
| Pension,  postretirement, and deferred compensation                                |       | 1,288                  |       | (101 | )  |
| Other  noncurrent liabilities                                                      |       | (26                    | )          | (28 | ) |
| Other                                                                              |       | 13                     |       | 10 |   |
| Net cash  provided by operating activities                                         |       | 6,675                  |       | 14,720 |   |
|                                                                               |       |                   |       |   |   |
| **Investing activities**                                                           |       |                   |       |   |   |
| Purchase of  businesses, net of cash acquired                                      |       | (235                   | )          | (605 | ) |
| Purchases of  property, plant, and equipment                                       |       | (2,614                 | )          | (3,478 | ) |
| Proceeds  from sale of property, plant and equipment                               |       | 480                    |       | — |   |
| Net cash  used in investing activities                                             |       | (2,369                 | )          | (4,083 | ) |
|                                                                               |       |                   |       |   |   |
| **Financing activities**                                                           |       |                   |       |   |   |
| Payments for  deferred financing costs                                             |       | —                 |       | (3,246 | ) |
| Proceeds  from borrowing                                                           |       | —                 |       | 100,000 |   |
| Payments of  debt                                                                  |       | (1,331                 | )          | (13,637 | ) |
| Proceeds  from capital contributions                                               |       | 1                      |       | — |   |
| Distributions  on preferred units                                                  |       | —                 |       | (60,000 | ) |
| Distributions  on common units                                                     |       | (1,192                 | )     | (2,509 | )  |
| Net cash (used  in) provided by financing activities                               |       | (2,522                 | )          | 20,608 |   |
| Effect of  exchange rate changes on cash                                           |       | (412                   | )          | (3,448 | ) |
| Net increase  in cash and cash equivalents                                         |       | 1,372                  |       | 27,797 |   |
| Cash and  cash equivalents at beginning of period                                  |       | 16,341                 |       | 35,731 |   |
| Cash and  cash equivalents at end of period                                        |       | $                      | 17,713     |   | $ | 63,528 |   |

* *

*See notes to unaudited consolidated financialstatements*

 

3

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**NSP HOLDINGS L.L.C.**(as predecessor of Safety Products Holdings, Inc.)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in Thousands) (Unaudited)**

 

# **1.     Basis ofPresentation**

#  

On July 19,2005, Safety Products Holdings, Inc. (“Safety Products”) closed thetransactions under which it acquired all of the outstanding membership units ofNorcross Safety Products L.L.C. (“Norcross”) and assumed all of the obligationsof NSP Holdings L.L.C. (the “Company”) under the Company’s and NSP HoldingsCapital Corp.’s outstanding $100 million 113⁄4% senior pay in kind notes due 2012(the “Notes”) and the indenture governing the Notes (the “Acquisition”). Uponclosing of the Acquisition, Safety Products became a successor issuer to theCompany pursuant to Rule 15d-5 promulgated under the Securities Exchange Act,as amended. The consolidated financial statements of the predecessor owner for thequarterly period ended July 2, 2005 are presented herein by Safety Products.

#  

The accompanying unaudited consolidated financialstatements of NSP Holdings L.L.C. have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information. Accordingly, they do not include all of the informationand notes required by accounting principles generally accepted in the UnitedStates for complete financial statements.

 

In the opinion of management, all adjustments(consisting only of adjustments of a normal and recurring nature) considerednecessary for a fair presentation of the financial position and results ofoperations have been included. Interim results are not necessarily indicativeof the results that might be expected for any other interim period or for thefiscal year ending December 31, 2005. The financial statements presentedshould be read in conjunction with the consolidated financial statements andfootnotes thereto included in our 2004 consolidated financial statements,included in the Company’s Form S-4, as filed on March 28, 2005.

 

# **2.     Inventories**

#  

Inventories consist of the following:

 
| ** **               | ** ** | **December 31,  2004** | ** ** | **July 2,  2005** | ** ** |
|--------------------------|------------|-----------------------------|------------|------------------------|------------|
| At FIFO  cost:           | ** ** | ** **                  | ** ** | ** **             | ** ** |
| Raw  materials           |       | $                           | 21,726     |                   | $          | 21,927 |   |
| Work in  process         |       | 10,419                      |       | 11,879                 |       |
| Finished  goods          |       | 52,045                      |       | 52,115                 |       |
|                     |       | 84,190                      |       | 85,921                 |       |
| Adjustment  to LIFO cost |       | (1,658                      | )          | (1,658                 | )          |
|                     |       | $                           | 82,532     |                   | $          | 84,263 |   |

 

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# **3.     Debt**

#  

The Company’s debt consists of the following:

 
| ** **                                         | ** ** | **December 31,  2004** | ** ** | **July 2,  2005** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| Revolving  credit facilities                       |       | $                           | —     |                   | $          | — |   |
| Term loan                                          |       | 97,725                      |       | 84,875                 |       |
| Senior pay in  kind notes                          |       | —                      |       | 105,748                |       |
| Senior  subordinated notes                         |       | 152,500                     |       | 152,500                |       |
| European  term loans                               |       | 469                         |       | 307                    |       |
| Arbin seller  notes                                |       | 454                         |       | 398                    |       |
| Subordinated  seller notes                         |       | 3,121                       |       | 2,616                  |       |
| Capital  lease obligations                         |       | 207                         |       | 143                    |       |
| Unamortized  discount on senior subordinated notes |       | (910                        | )          | (860                   | )          |
|                                               |       | 253,566                     |       | 345,727                |       |
| Less:  Current maturities of long-term obligations |       | 15,252                      |       | 2,443                  |       |
|                                               |       | $                           | 238,314    |                   | $          | 343,284 |   |

 

Aggregate maturities of long-term debt as of July 2,2005, are as follows:

 
| 2006       | ** ** | $       | 2,443      | ** ** |
|------------|------------|---------|------------|------------|
| 2007       | ** ** | 3,244   | ** ** |
| 2008       | ** ** | 1,214   | ** ** |
| 2009       | ** ** | 80,704  | ** ** |
| 2010       | ** ** | 31      | ** ** |
| Thereafter | ** ** | 258,091 | ** ** |
| ** ** | ** ** | $       | 345,727    | ** ** |

 

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# **4.     EmployeeBenefit Plans**

#  

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

 
| ** **                          | ** ** | **Six months ended July 3, 2004** | ** ** | **Six months ended July 2, 2005** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **Pension  Benefits**                  | ** ** | **Post-retirement  Benefits**          | ** ** | **Pension  Benefits** | ** ** | **Post-retirement  Benefits** | ** ** |
|                                |       |                                   |       |                                   |       |   |   |   |   |
| Service cost                        |       | $                                      | 746        |                                   | $          | 14 |   | $ | 834 |   | $ | 12 |   |
| Interest  cost                      |       | 1,744                                  |       | 40                                     |       | 1,810 |   | 40 |   |
| Expected return  on plan assets     |       | (1,336                                 | )          | —                                 |       | (1,554 | ) | — |   |
| Amortization  of prior service cost |       | 2                                      |       | 8                                      |       | 2 |   | 8 |   |
| Amortization  of actuarial loss     |       | 424                                    |       | 42                                     |       | 568 |   | 44 |   |
|                                |       | $                                      | 1,580      |                                   | $          | 104 |   | $ | 1,660 |   | $ | 104 |   |

 

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# **5.     LegalProceedings**

#  

The Company is subject to various claimsarising in the ordinary course of business. Most of these lawsuits and claimsare product liability matters that arise out of the use of respiratory productlines manufactured by the Company’s North Safety Products subsidiary. As of July 2,2005, the Company’s North Safety Products subsidiary, along with itspredecessors and/or the former owners of such business were named as defendantsin approximately 928 lawsuits involving respirators manufactured and soldby it or its predecessors . The Company is also monitoring an additional 11lawsuits in which it feels that North Safety Products, its predecessors and/orthe former owners of such businesses may be named as defendants. Collectively,these 939 lawsuits represent a total of approximately 25,000 plaintiffs.Approximately 92% of these lawsuits involve plaintiffs alleging injuryresulting from exposure to silica dust, with the remainder alleging injuryresulting from exposure to other particles, including asbestos. These lawsuitstypically allege that the purported injuries resulted in part from respiratorsthat were negligently designed or manufactured. Invensys plc (“Invensys”),formerly Siebe plc, is contractually obligated to indemnify the Company for anylosses, including costs of defending claims, resulting from respiratoryproducts manufactured or sold prior to the acquisition of North Safety Productsin October 1998.

 

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

 

Despite these indemnification arrangements,the Company could potentially be liable for losses or claims relating toproducts manufactured prior to the October 1998 acquisition date ifInvensys fails to meet its obligations to indemnify the Company and the Companycould potentially be liable for losses and claims relating to products soldprior to January 10, 1983 if both Invensys and Norton fail to meet theirobligations to indemnify the Company. The Company could also be liable if thealleged exposure involved the use of a product manufactured by the Companyafter its October 1998 acquisition of the North Safety Products business.Invensys is currently handling the defense of all of the cases prior to October 1998in which North Safety Products, its predecessors and/or former owners of suchbusiness have been named as defendants. The Company is jointly with Invensyshandling the defense of all of the cases which allege exposure, includingperiods pre and post October 1998. The Company will individually handle the defense of all cases withexclusive post October 1998 exposure, however, it has not been involved ina case with exclusive post October 1998 exposure to date.  As of July 2, 2005, Invensys has sent usrequests for reimbursement totaling $178, relating to settled cases in whichInvensys claims that the period of alleged exposure included periods after October 1998.Based on information provided to the Company by Invensys, the Company believesthat Invensys has made payments with respect to settlement of these claims of$40 for the six months ended July 2, 2005 . The Company believes thatInvensys has the ability to pay these claims based on its current financialposition, as publicly disclosed by Invensys.

 

Consistent with the current environment beingexperienced by companies involved in silica and asbestos-related litigation,there has been an increase in the number of asserted claims that could

 

7

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

 
| Beginning  lawsuits   |   | 858  |   |
|-----------------------|--------|------|--------|
| New lawsuits          |   | 192  |   |
| Settlements           |   | (10  | )      |
| Dismissals  and other |   | (101 | )      |
| Ending  lawsuits      |   | 939  |   |

 

Plaintiffs have asserted specific dollarclaims in approximately a quarter of the approximately 928 cases pendingas of July 2, 2005 in which North Safety Products, its predecessors and/orthe former owners of such businesses have been named as defendants. A majorityof jurisdictions prohibit specifying damages in tort cases such as these, andmost of the remaining jurisdictions do not require such specification. In thosecases in which plaintiffs choose to assert specific dollar amounts in theircomplaints, brought in states that permit such pleading, the amounts claimedare typically not meaningful as an indicator of a company’s potentialliability. This is because (1) the amounts claimed typically bear norelation to the level of the plaintiff’s injury, (2) the complaintstypically assert claims against numerous defendants, and (3) many casesare brought on behalf of plaintiffs who have not suffered any medical injury,and, ultimately, are resolved without any payment or payment of a smallfraction of the damages initially claimed. Of the 928 complaints maintained inthe Company’s records, 700 do not specify the amount of damages sought, 36generally allege damages in excess of $50, three allege compensatorydamages in excess of $50 and an unspecified amount of punitive damages, 92allege compensatory damages and punitive damages, each in excess of $25, threegenerally allege damages in excess of $100, 18 allege compensatory damages andpunitive damages, each in excess of $50, 28 generally allege damages of$15,000, one generally alleges damages not to exceed $290,000, one allegescompensatory damages and punitive damages, each in excess of $10, one allegescompensatory and punitive damages, each in excess of $15, seven allege punitivedamages in excess of $25, one alleges punitive damages in excess of $50, 28generally allege damages in excess of $15, six generally allege damages inexcess of $25, one alleges compensatory damages in excess of $25, and twoallege compensatory and punitive damages, each in excess of $15,000. TheCompany currently does not have access to the complaints with respect to thepreviously mentioned additional 11 monitored cases, and therefore do not knowwhether these cases allege specific damages, or if so, the amount of suchdamages, but are in the process of seeking to obtain such information.  Due to the reasons noted above and to theindemnification arrangements benefiting the Company, it does not believe thatthe damage amounts specified in these complaints are a meaningful factor in anyassessment of the Company’s potential liability.

 

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

 

8

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

 

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

 

# **6.     SegmentData**

#  

The following table presents information about theCompany by segment:

 
| ** **                               | ** ** | **General  Industrial** | ** ** | **Fire  Service** | ** ** | **Utility/  High  Voltage** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total**    | ** ** |
|------------------------------------------|------------|-------------------------|------------|-------------------|------------|-----------------------------|------------|---------------|------------|------------------|------------|--------------|------------|
| **Three Months Ended July 3, 2004** |       |                    |       |              |       |                        |       |          |       |             |       |         |       |
| Net  sales—third parties            |       | $                       | 75,428     |              | $          | 19,345                      |       | $             | 12,232     |             | $          | —       |       | $ | — |   | $ | 107,005 |   |
| Net  sales—intersegment             |       | 2,167                   |       | —            |       | —                      |       |  —  |       | (2,167           | )          |  — |       |
| Income  (loss) from operations           |       | 8,127                   |       | 3,304             |       | 2,427                       |       | (1,860        | )          |  —     |       | 11,998       |       |
| **Three Months Ended July 2, 2005** |       |                    |       |              |       |                        |       |          |       |             |       |         |       |
| Net  sales—third parties            |       | 81,859                  |       | 22,086            |       | 14,900                      |       | —        |       | —           |       | 118,845      |       |
| Net  sales—intersegment             |       | 2,297                   |       | —            |       | —                      |       |  —  |       | (2,297           | )          |  — |       |
| Income  (loss) from operations           |       | 9,291                   |       | 3,763             |       | 4,142                       |       | (1,353        | )          |  —     |       | 15,843       |       |
|                                     |       |                    |       |              |       |                        |       |          |       |             |       |         |       |
| **Six Months Ended July 3, 2004**   |       |                    |       |              |       |                        |       |          |       |             |       |         |       |
| Net  sales—third parties            |       | 151,892                 |       | 39,638            |       | 24,548                      |       | —        |       | —           |       | 216,078      |       |
| Net  sales—intersegment             |       | 4,889                   |       | —            |       | —                      |       | —        |       | (4,889           | )          | —       |       |
| Income  (loss) from operations           |       | 17,073                  |       | 7,245             |       | 5,144                       |       | (3,117        | )          | —           |       | 26,345       |       |
|                                     |       |                    |       |              |       |                        |       |          |       |             |       |         |       |
| **Six Months Ended July 2, 2005**   |       |                    |       |              |       |                        |       |          |       |             |       |         |       |
| Net  sales—third parties            |       | 165,079                 |       | 45,086            |       | 29,103                      |       | —        |       | —           |       | 239,268      |       |
| Net  sales—intersegment             |       | 4,855                   |       | —            |       | —                      |       | —        |       | (4,855           | )          | —       |       |
| Income  (loss) from operations           |       | 18,103                  |       | 8,144             |       | 7,827                       |       | (2,750        | )          | —           |       | 31,324       |       |
|                                          |            |                         |            |                   |            |                             |            |               |            |                  |            |              |            |  |  |  |  |  |  |

 

9

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**7. Comprehensive Income (Loss)**

 

Total comprehensive income (loss) (whichincludes the impact of foreign currency translation) for the three months endedJuly 3, 2004 and July 2, 2005 amounted to $1,703 and $(1,832),respectively. Total comprehensive income (loss) for the six months ended July 3,2004 and July 2, 2005 amounted to $4,186 and $(1,158), respectively.

 

# **8.     Guarantors**

 

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

 

**9. Strategic Alternatives**

 

The Company had previously announced that itwas in the process of exploring strategic alternatives, including a possiblesale of the Company.  A decision was madeby the Company in the second quarter of 2004 to terminate this process andtherefore it has expensed $613 in associated costs.  These costs are reflected in operatingexpenses as strategic alternatives.

 

**10. Subsequent Events**

 

On July 19, 2005, the Company announced theclosing of the transaction under which Norcross Safety Products L.L.C. wasacquired by Safety Products Holdings, Inc., a new holding company formedby Odyssey Investment Partners, LLC for the purpose of completing theacquisition (the “Acquisition”).  Pursuant to the terms of the Acquisition,Safety Products purchased all of the outstanding membership units of Norcross andall of the outstanding Common Stock of NSP Holdings Capital Corp., awholly-owned subsidiary of the Company, and pursuant to which Safety Productsassumed all of the outstanding indebtedness of Norcross and the Company, inexchange for a base purchase price to the Company of $472,000, plus the cash inNorcross as of April 2, 2005 in the amount of approximately $16,900, less (1) theindebtedness of Norcross and its subsidiaries as of April 2, 2005 and (2) certaintransaction fees and expenses. Thetransaction will be accounted for using the purchase method of accounting andaccordingly, the Company’s financial statements will reflect the allocation ofthe total purchase price to tangible and intangible assets acquired andliabilities assumed, based on their respective fair values.

 

On July 19, 2005, Norcrossentered into a new Senior Credit Facility (the “New Credit Facility”) whichprovides for aggregate borrowings of $138,000 consisting of (a) a termloan in the amount of $88,000, payable in twenty-eight consecutive quarterlyinstallments commencing on September 30, 2005 and (b) a revolvingcredit facility in an aggregate principal amount of $50,000.  Therevolving credit facility is comprised of a U.S. revolving facility and aCanadian subfacility.  The amount of the total U.S. revolving facility isan amount equal to $50,000 less the amount at such time outstanding under theCanadian subfacility.  The amount of the total Canadian subfacility is anamount denominated in Canadian dollars having a U.S. dollar equivalent of $25,000less the amount at such time outstanding under the U.S. revolvingfacility.  At any time upon the request of Norcross or the U.S. SubsidiaryBorrowers (as defined), one or more new term loan facilities may be added inany aggregate amount of up to $100,000 (and not less than $10,000 for any suchadditional term loan), subject to certain conditions, the proceeds of whichshall be used to finance permitted acquisitions, pay fees and related expensesthereto and to refinance indebtedness of the entity or associated with theassets to be so acquired.  The New Credit Facility is subject to certainmandatory prepayments upon the occurrence of certain events, subject to certainexceptions set forth in the credit agreement. The proceeds of the New CreditFacility were used primarily to refinance the Company’s existing senior creditfacility.

 

On July 19, 2005, Safety Products sold $25,000in principal amount of 113⁄4%senior pay in kind notes due 2012 (the “New Notes”).  The New Notes weresold pursuant to a purchase agreement, dated June 28, 2005 (the “PurchaseAgreement”), by and between Safety Products and Credit Suisse First Boston, LLC(the “Initial Purchaser”).  The New Notes were issued pursuant to theIndenture.  Pursuant to the term of the Purchase Agreement, the New Noteswere sold to the Initial Purchasers and are expected to be resold to qualifiedinstitutional buyers in compliance with the exemption from registration

 

10

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

 

**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 industrial, fire service and utility/high voltageindustries. We sell our products under trusted, long-standing andwell-recognized brand names, including *North*,*Morning Pride*, *Ranger*, *Servus*,*Pro-Warrington* and *Salisbury*. Our broad product offeringincludes, among other things, respiratory protection, protective footwear, handprotection, bunker gear and linemen equipment.

 

We classify our diverse product offeringsinto three primary operating segments:

 

General Industrial. We offer a diverseportfolio of leading products for a wide variety of industries, including themanufacturing, agriculture, automotive, construction, food processing andpharmaceutical industries and the military, under the *North*, *Ranger*and *Servus* brand names. Ourproduct offering is one of the broadest in the personal protection equipmentindustry and includes respiratory protection, protective footwear, handprotection, eye, head and face protection, first aid, hearing protection andfall protection. We sell our general industrial products primarily throughindustrial distributors.

 

Fire Service. We manufacture and market oneof the broadest lines of personal protection equipment for the fire servicesegment, offering firefighters head-to-toe protection. Our products includebunker gear, fire boots, helmets, gloves and other accessories. We market ourproducts under our *Total Fire Group*umbrella, using the brand names of *MorningPride*, *Ranger*, *Servus* and *Pro-Warrington*. We are the vendor of choice for many of thelargest fire departments in North America. We sell our fire service productsprimarily through specialized fire service distributors.

 

Utility/High Voltage. We manufacture andmarket one of the broadest lines of personal protection equipment for theutility/high voltage service segment under the *Salisbury*and *Servus* brands. Our products,including linemen equipment, gloves, sleeves and footwear, are designed toprotect workers from up to 40,000 volts of electricity. All of our productseither meet or exceed the applicable standards of ANSI and ASTM. We distributeour utility/high voltage products through specialized distributors and directto utilities and electrical contractors.

 

11

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**Results of Operations**

** **

The following tables set forth our results ofoperations in dollars and as a percentage of net sales for the three and sixmonths ended July 3, 2004 and July 2, 2005. The data for the threeand six months ended July 3, 2004 and July 2, 2005 have been derivedfrom our historical unaudited financial statements.

 
| ** **                                        | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended**   | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **July 3,  2004**     | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)** | ** ** |
| Net sales:                                        |       |                       |       |                   |       |   |   |   |   |
| General  industrial                               |       | $                          | 75,428     |                   | $          | 81,859 |   | $ | 151,892 |   | $ | 165,079 |   |
| Fire service                                      |       | 19,345                     |       | 22,086                 |       | 39,638 |   | 45,086 |   |
| Utility/high  voltage                             |       | 12,232                     |       | 14,900                 |       | 24,548 |   | 29,103 |   |
| Total net  sales                                  |       | 107,005                    |       | 118,845                |       | 216,078 |   | 239,268 |   |
| Cost of  goods sold                               |       | 68,625                     |       | 73,457                 |       | 137,332 |   | 149,059 |   |
| Gross profit                                      |       | 38,380                     |       | 45,388                 |       | 78,746 |   | 90,209 |   |
| Operating  expenses                               |       | 26,382                     |       | 29,545                 |       | 52,401 |   | 58,885 |   |
| Income from  operations:                          |       |                       |       |                   |       |   |   |   |   |
| General industrial                                |       | 8,127                      |       | 9,291                  |       | 17,073 |   | 18,103 |   |
| Fire service                                      |       | 3,304                      |       | 3,763                  |       | 7,245 |   | 8,144 |   |
| Utility/high  voltage                             |       | 2,427                      |       | 4,142                  |       | 5,144 |   | 7,827 |   |
| Corporate                                         |       | (1,860                     | )          | (1,353                 | )          | (3,117 | ) | (2,750 | ) |
| Total income  from operations                     |       | 11,998                     |       | 15,843                 |       | 26,345 |   | 31,324 |   |
| Other  expense (income):                          |       |                       |       |                   |       |   |   |   |   |
| Interest  expense                                 |       | 8,964                      |       | 10,936                 |       | 17,905 |   | 21,657 |   |
| Interest  income                                  |       | (29                        | )          | (401                   | )          | (64 | ) | (829 | ) |
| Other, net                                        |       | 59                         |       | 436                    |       | 593 |   | 822 |   |
| Income  before income taxes and minority interest |       | 3,004                      |       | 4,872                  |       | 7,911 |   | 9,674 |   |
| Income tax  expense                               |       | 1,323                      |       | 2,153                  |       | 2,359 |   | 3,757 |   |
| Minority  interest                                |       | 11                         |       | 7                      |       | 16 |   | 11 |   |
| Net income                                        |       | $                          | 1,670      |                   | $          | 2,712 |   | $ | 5,536 |   | $ | 5,906 |   |

 

12

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| ** **                                        | ** ** | **Three Months Ended**             | ** ** | **Six Months Ended**   | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **July 3,  2004**             | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** |
| ** **                                        | ** ** | **(as a percentage of net sales)** | ** ** |
| Net sales:                                        |       |                               |       |                   |       |   |   |   |   |
| General  industrial                               |       | 70.5                               | %          | 68.9                   | %          | 70.3 | % | 69.0 | % |
| Fire service                                      |       | 18.1                               | %          | 18.6                   | %          | 18.3 | % | 18.8 | % |
| Utility/high  voltage                             |       | 11.4                               | %          | 12.5                   | %          | 11.4 | % | 12.2 | % |
| Total net  sales                                  |       | 100.0                              | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Cost of  goods sold                               |       | 64.1                               | %          | 61.8                   | %          | 63.6 | % | 62.3 | % |
| Gross profit                                      |       | 35.9                               | %          | 38.2                   | %          | 36.4 | % | 37.7 | % |
| Operating  expenses                               |       | 24.7                               | %          | 24.9                   | %          | 24.2 | % | 24.6 | % |
| Income from  operations:                          |       |                               |       |                   |       |   |   |   |   |
| General  industrial                               |       | 7.6                                | %          | 7.8                    | %          | 7.9 | % | 7.6 | % |
| Fire service                                      |       | 3.1                                | %          | 3.2                    | %          | 3.4 | % | 3.4 | % |
| Utility/high  voltage                             |       | 2.3                                | %          | 3.5                    | %          | 2.4 | % | 3.3 | % |
| Corporate                                         |       | (1.8                               | )%         | (1.2                   | )%         | (1.5 | )% | (1.2 | )% |
| Total income  from operations                     |       | 11.2                               | %          | 13.3                   | %          | 12.2 | % | 13.1 | % |
| Other  expense (income):                          |       |                               |       |                   |       |   |   |   |   |
| Interest  expense                                 |       | 8.4                                | %          | 9.2                    | %          | 8.3 | % | 9.1 | % |
| Interest  income                                  |       | (0.0                               | )%         | (0.3                   | )%         | (0.0 | )% | (0.3 | )% |
| Other, net                                        |       | 0.1                                | %          | 0.3                    | %          | 0.2 | % | 0.3 | % |
| Income  before income taxes and minority interest |       | 2.7                                | %          | 4.1                    | %          | 3.7 | % | 4.0 | % |
| Income tax  expense                               |       | 1.1                                | %          | 1.8                    | %          | 1.1 | % | 1.5 | % |
| Minority  interest                                |       | 0.0                                | %          | 0.0                    | %          | 0.0 | % | 0.0 | % |
| Net income                                        |       | 1.6                                | %          | 2.3                    | %          | 2.6 | % | 2.5 | % |

 

***Three Months Ended July 2, 2005 asCompared to Three Months Ended July 3, 2004***

 

*Net sales.*Netsales increased by $11.8 million, or 11.1%, from $107.0 million forthe three months ended July 3, 2004 to $118.8 million for the threemonths ended July 2, 2005. In our general industrial segment, net salesincreased by $6.4 million, or 8.5%, from $75.5 million for the three monthsended July 3, 2004 to $81.9 million for the three months ended July 2,2005. This increase reflects a combination of the following: overall organicgrowth in our Canadian, European and South African operations of $5.3 million;favorable exchange rates, which had an impact of $2.5 million; and loweroverall net sales in the United States of $1.5 million, as strong overallmarket demand was offset by a decrease in government contract shipments of $3.6million. In our fire service segment, net sales increased by $2.7 million,or 14.2%, from $19.4 million for the three months ended July 3, 2004to $22.1 million for the three months ended July 2, 2005 reflectingstrong market demand. In our utility/high voltage segment, net sales increasedby $2.7 million, or 21.8%, from $12.2 million for the three monthsended July 3, 2004 to $14.9 million for the three months ended July 2,2005 primarily driven by strong market demand and new product penetration.

 

*Gross profit.*Grossprofit increased by $7.0 million, or 18.3%, from $38.4 million forthe three months ended July 3, 2004 to $45.4 million for the threemonths ended July 2, 2005, primarily due to the $11.8 million, or11.1%, increase in net sales. Our gross profit margin of 38.2% for the threemonths ended July 2, 2005 was favorable to the 35.9% gross profit marginfor the three months ended July 3, 2004. In our general industrial segment,gross profit increased by $4.5 million, or 16.2%, from $27.5 million forthe three months ended July 3, 2004 to $32.0 million for the threemonths ended July 2, 2005. This increase was primarily due to the overallnet sales increase of  $6.4 million, or8.5%, favorable exchange rates which has an impact of $1.0 million, andimproved margin realization. In our fire service segment, gross profitincreased by $0.5 million, or 9.2%, from $6.3 million for the three monthsended July 3, 2004 to $6.8 million for the three months ended July 2,2005, primarily due to the $2.7 million, or 14.2% increase in net sales.In our utility/high voltage segment, gross profit increased $2.0 million, or43.2%, from $4.5 million for the three months ended July 3, 2004 to $6.5million for the three months ended July 2, 2005, primarily due to the $2.7million, or 21.8%, increase in net sales and improved manufacturingperformance.

 

13

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*Operating expenses.*Operatingexpenses increased by $3.1 million, or 12.0%, from $26.4 million forthe three months ended July 3, 2004 to $29.5 million for the threemonths ended July 2, 2005. In our general industrial segment, operatingexpenses increased by $3.3 million, or 17.0%, from $19.5 million forthe three months ended July 3, 2004 to $22.8 million for the threemonths ended July 2, 2005, primarily due to higher exchange rates, whichhad an impact of $0.6 million; higher payroll and other administrativecosts; and increased variable distribution and selling expenses associated withthe $6.4 million, or 8.5% increase in net sales. In our fire service segment, operatingexpenses increased $0.1 million, or 3.9%, from $3.0 million for thethree months ended July 3, 2004 to $3.1 million for the three monthsended July 2, 2005, primarily due to higher general and administrativeexpenses. In our utility/high voltage segment, operating expenses increased by$0.2 million, or 11.7%, from $2.2 million for the three months ended July 3,2004 to $2.4 million for the three months ended July 2, 2005,primarily due to higher selling expenses. Excluding the $0.6 million ofexpenses associated with exploring strategic alternatives during the threemonths ended July 3, 2004, corporate expense increased $0.1 million,primarily due to higher payroll and administrative expenses including costsassociated with public reporting and Sarbanes-Oxley Act related compliancerequirements.

 

*Income from operations.*Incomefrom operations increased by $3.8 million, or 32.0%, from $12.0 millionfor the three months ended July 3, 2004 to $15.8 million for thethree months ended July 2, 2005. As a percentage of net sales, income fromoperations increased from 11.2% for the three months ended July 3, 2004 to13.3% for the three months ended July 2, 2005. In our general industrialsegment, income from operations increased by $1.2 million, or 14.3%, from$8.1 million for the three months ended July 3, 2004 to $9.3 millionfor the three months ended July 2, 2005, primarily due to higher net salesof $6.4 million, or 8.5%. In our fire service segment, income fromoperations increased by $0.5 million, or 13.9%, from $3.3 million forthe three months ended July 3, 2004 to $3.8 million for the three monthsended July 2, 2005, primarily due to the $2.7 million, or 14.2% increasein net sales. In our utility/high voltage segment, income from operationsincreased by $1.7 million, or 70.7%, from $2.4 million for the threemonths ended July 3, 2004 to $4.1 million for the three months ended July 2,2005, primarily due to higher net sales of $2.7 million, or 21.8%, and improvedmanufacturing performance. Excluding the $0.6 million of expenses associatedwith exploring strategic alternatives during the three months ended July 3,2004, corporate expense increased $0.1 million, primarily due to higherpayroll and administrative expenses including costs associated with publicreporting and Sarbanes-Oxley Act related compliance requirements.

 

14

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Included in income from operations for the threemonths ended July 2, 2005 and July 3, 2004 were depreciation andamortization expenses of $2.7 million and $3.0 million, respectively.Of these amounts, $2.3 million, $0.1 million, $0.3 million and$0.0 million were attributable to the general industrial, fire service,utility/high voltage segments and corporate, respectively, for the three monthsended July 2, 2005 and $2.4 million, $0.1 million, $0.3 millionand $0.2 million were attributable to these segments and corporate for thethree months ended July 3, 2004.

 

*Interest expense.*Interestexpense increased $1.9 million, or 22.0%, from $9.0 million for the threemonths ended July 3, 2004 to $10.9 million for the three months ended July 2,2005 due to the net impact of an increase in interest expense associated withthe $100.0 million senior pay in kind notes and a decrease in preferred unitdividends included in interest expense associated with the redemption of $60.0million of mandatorily redeemable preferred units.  Included in interest expense were non-cashinterest charges associated with the senior pay in kind notes and preferredunit dividends of $5.1 million and $3.3 million for the three months ended July 2,2005 and the three months ended July 3, 2004, respectively.

 

*Other, net.*Other,net increased by $0.3 from $0.1 million for the three months ended July 3,2004 to $0.4 million for the three months ended July 2, 2005 as unrealizedforeign exchange losses recorded during the three months ended July 2,2005 exceeded the $0.4 million loss recorded on the sale of property, plant andequipment for the three months ended July 3, 2004.

 

*Income tax expense.*Incometax expense increased by $0.9 million, from $1.3 million for thethree months ended July 3, 2004 to $2.2 million for the three monthsended July 2, 2005, as a result of higher income tax expense levels atforeign operations.

 

*Net income.*Netincome increased by $1.0 million, or 62.4%, from $1.7 million for thethree months ended July 3, 2004 to $2.7 million for the three months endedJuly 2, 2005. This was the result of the reasons discussed above.

 

***Six Months Ended July 2, 2005 asCompared to Six Months Ended July 3, 2004***

 

*Net sales.*Netsales increased by $23.2 million, or 10.7%, from $216.1 million forthe six months ended July 3, 2004 to $239.3 million for the sixmonths ended July 2, 2005. In our general industrial segment, net salesincreased by $13.2 million, or 8.7%, from $151.9 million for the sixmonths ended July 3, 2004 to $165.1 million for the six months ended July 2,2005. This increase reflects a combination of the following: overall organicgrowth in our Canadian, European and South African operations of $8.4 million;favorable exchange rates, which had an impact of $5.2 million; and loweroverall net sales in the United States of $0.5 million, as strong overallmarket demand was offset by a decrease in government contract shipments of $3.9million. In our fire service segment, net sales increased by $5.4 million,or 13.7%, from $39.7 million for the six months ended July 3, 2004 to$45.1 million for the six months ended July 2, 2005 reflecting strongmarket demand. In our utility/high voltage segment, net sales increased by$4.6 million, or 18.6%, from $24.5 million for the six months ended July 3,2004 to $29.1 million for the six months ended July 2, 2005 primarilydriven by strong overall market demand and new product penetration.

 

*Gross profit.*Grossprofit increased by $11.5 million, or 14.6%, from $78.7 million forthe six months ended July 3, 2004 to $90.2 million for the six monthsended July 2, 2005, primarily due to the $23.2 million, or 10.7%,increase in net sales. Our gross profit margin of 37.7% for the six monthsended July 2, 2005 was favorable to the 36.4% gross profit margin for thesix months ended July 3, 2004. In our general industrial segment, grossprofit increased by $7.0 million, or 12.4%, from $56.5 million forthe six months ended July 3, 2004 to $63.5 million for the six monthsended July 2, 2005. This increase was primarily due to the overall netsales increase of  $13.2 million, or8.7%, favorable exchange rates which has an impact of $2.0 million, andimproved margin realization.

 

15

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In our fire service segment, gross profit increased by$1.3 million, or 10.4%, from $12.9 million for the six months ended July 3,2004 to $14.2 million for the six months ended July 2, 2005,primarily due to the $5.4 million, or 13.7% increase in net sales. In ourutility/high voltage segment, gross profit increased by $3.2 million, or33.5%, from $9.3 million for the six months ended July 3, 2004 to$12.5 million for the six months ended July 2, 2005, primarily due tothe $4.6 million, or 18.6% increase in net sales and improved manufacturingperformance.

 

*Operating expenses.*Operatingexpenses increased by $6.5 million, or 12.4%, from $52.4 million forthe six months ended July 3, 2004 to $58.9 million for the six monthsended July 2, 2005. In our general industrial segment, operating expensesincreased by $5.9 million, or 15.1%, from $39.5 million for the sixmonths ended July 3, 2004 to $45.4 million for the six months ended July 2,2005, primarily due to higher exchange rates, which had an impact of $1.3 million;higher payroll and other administrative costs; and increased variabledistribution and selling expenses associated with the $13.2 million, or 8.7%increase in net sales. In our fire service segment, operating expensesincreased $0.5 million, or 7.8%, from $5.6 million for the six monthsended July 3, 2004 to $6.1 million for the six months ended July 2,2005, primarily due to additional general and administrative expenses. In ourutility/high voltage segment, operating expenses increased by$0.4 million, or 10.7%, from $4.2 million for the six months ended July 3,2004 to $4.6 million for the six months ended July 2, 2005, primarilydue to higher selling expenses. Excluding the $0.6 million of expensesassociated with exploring strategic alternatives during the six months ended July 3,2004, corporate expense increased $0.3 million, primarily due to higherpayroll and administrative expenses including costs associated with publicreporting and Sarbanes-Oxley Act related compliance requirements.

 

*Income from operations.*Incomefrom operations increased by $5.0 million, or 18.9%, from $26.3 millionfor the six months ended July 3, 2004 to $31.3 million for the sixmonths ended July 2, 2005. As a percentage of net sales, income fromoperations increased from 12.2% for the six months ended July 3, 2004 to13.1% for the six months ended July 2, 2005. In our general industrialsegment, income from operations increased by $1.0 million, or 6.0%, from$17.1 million for the six months ended July 3, 2004 to $18.1 millionfor the six months ended July 2, 2005, primarily due to higher net salesof $13.2 million, or 8.7%. In our fire service segment, income fromoperations increased by $0.9 million, or 12.4%, from $7.2 million forthe six months ended July 3, 2004 to $8.1 million for the six monthsended July 2, 2005, primarily due to the $5.4 million, or 13.7%,increase in net sales. In our utility/high voltage segment, income fromoperations increased by $2.7 million, or 52.2%, from $5.1 million forthe six months ended July 3, 2004 to $7.8 million for the six monthsended July 2, 2005, primarily due to higher net sales of $4.6 million, or18.6%, and improved manufacturing performance. Excluding the $0.6 million ofexpenses associated with exploring strategic alternatives during the six monthsended July 3, 2004, corporate expense increased $0.3 million,primarily due to higher payroll and administrative expenses including costsassociated with public reporting and Sarbanes-Oxley Act related compliancerequirements.

 

Included in income from operations for the six monthsended July 2, 2005 and July 3, 2004 were depreciation andamortization expenses of $5.6 million and $5.9 million, respectively.Of these amounts, $4.6 million, $0.2 million, $0.8 million and$0.0 million were attributable to the general industrial, fire service,utility/high voltage segments and corporate, respectively, for the six monthsended July 2, 2005 and $4.8 million, $0.2 million,$0.6 million and $0.3 million were attributable to these segments andcorporate for the six months ended July 3, 2004.

 

*Interest expense.*Interestexpense increased $3.8 million, or 21.0%, from $17.9 million for the six monthsended July 3, 2004 to $21.7 million for the six months ended July 2,2005 due to the net impact of an increase in interest expense associated withthe $100.0 million senior pay in kind notes and a decrease in preferred unitdividends included in interest expense associated with the redemption of $60.0million of mandatorily redeemable preferred units.  Included in interest expense were non-cashinterest charges associated with the senior pay in kind notes and preferredunit dividends of $10.1 million and $6.6 million for the six months ended July 2,2005 and the six months ended July 3, 2004, respectively.

 

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*Other, net.*Other,net increased by $0.2 from $0.6 million for the six months ended July 3,2004 to $0.8 million for the six months ended July 2, 2005 as unrealizedforeign exchange losses recorded during the six months ended July 2, 2005exceeded the $0.4 million loss recorded on the sale of property, plant andequipment for the six months ended July 3, 2004.

 

*Income tax expense.*Incometax expense increased by $1.4 million, from $2.4 million for the sixmonths ended July 3, 2004 to $3.8 million for the six months ended July 2,2005, as a result of higher income tax expense levels at foreign operations.

 

*Net income.*Netincome increased by $0.4 million, or 6.7%, from $5.5 million for thesix months ended July 3, 2004 to $5.9 million for the six monthsended July 2, 2005. This was the result of the reasons discussed above.

 

**Liquidity and 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 July 2, 2005 and July 3, 2004,cash provided by operating activities was $14.7 million and$6.7 million, respectively. The $8.0 million improvement was primarilyattributable to the $5.0 million increase in income from operations andfavorable working capital activity.

 

Historically, our principal uses of cash havebeen capital expenditures, acquisitions and working capital. Our capital expenditureswere $3.5 million for the six months ended July 2, 2005 and $2.6 millionfor the six months ended July 3, 2004.

 

As of July 2, 2005, we had workingcapital of $168.8 million and cash of $63.5 million. We maintaininventory levels sufficient to satisfy customer orders on demand, withgenerally a three month supply on hand. Bunker gear is an exception and isgenerally made to order. Our accounts receivable terms are generally30 days, net.

 

For the six months ended July 2, 2005,net cash provided by financing activities was $20.6 million, representingpayments for deferred financing fees of $3.2 million; proceeds from theissuance of 113⁄4% senior pay in kind notes of $100.0 million; payments onlong-term obligations of $13.6 million, including an excess cash flow sweeppayment under the terms of the senior credit facility of $12.2 million; paymentin respect of preferred units of $60.0 million; and distributions in respect ofthe common units of certain members of management of $2.5 million. For the sixmonths ended July 3, 2004, net cash used in financing activities was $2.5 million,representing payments on long-term debt obligations of $1.3 million anddistributions to members of $1.2 million.

 

On March 21, 2003, we entered into a seniorcredit facility which provides for aggregate borrowings by us of$160.0 million and C$10.0 million, consisting of (1) a$30.0 million United States revolving credit facility; (2) aC$10.0 million Canadian revolving credit facility; and (3) a$130.0 million term loan. As of July 2, 2005, there was approximately$84.9 million of outstanding indebtedness under the senior credit facilityand approximately $35.9 million of available borrowings under the revolvingfacilities. We used the proceeds of our senior credit facility to refinance ourprevious senior credit facility and for general corporate purposes, includingworking capital, refinancings, acquisitions, investments and capitalexpenditures.

 

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

 

Our senior credit facilityand the indenture governing the notes contain, numerous restrictive covenants,including, among other things, covenants that limit our ability to incurindebtedness, use our assets as security in other transactions, makefundamental changes to our capital structure, dispose of assets, pay dividends,make capital expenditures, enter into transactions with affiliates and enterinto sale and leaseback transactions. In addition, our senior credit facilityrequires us to meet specified financial ratios and tests.

 

On July 19, 2005, SafetyProducts announced the closing of the transaction under which it acquired allof the membership units of Norcross Safety Products L.L.C. and assumed theobligations of the Company and NSP Holdings Capital Corp.’s outstanding $100million 113/4% senior pay in kind notes due 2012 (the “Existing Notes”) and theindenture governing such notes (the “Acquisition”).

 

On July 19, 2005, byoperation of law upon consummation of the merger of SPH Acquisition LLC (“SPHAcquisition”) and Norcross (the “Merger”), and pursuant to an assumptionagreement entered into among SPH Acquisition, Norcross, North Safety ProductsInc. (“North Safety”), and Morning Pride Manufacturing L.L.C. (“Morning Pride”,and together with North Safety, the “U.S. Subsidiary Borrowers”), all of therights and obligations of SPH Acquisition, as borrower, under the creditagreement among SPH Acquisition, Safety Products, as a guarantor, North SafetyProducts Ltd. (the “Canadian Borrower,” which became a party to the creditagreement upon consummation of the Merger), Credit Suisse, as AdministrativeAgent, Bank of America, NA, as Syndication Agent, GMAC Commercial FinancingLLC, La Salle Bank National Association and US Bank NA, as DocumentationAgents, Credit Suisse, Toronto Branch, as Canadian Agent, and certain otherlenders (the “New Credit Facility”) were assigned by SPH Acquisition to Norcrossand the U.S. Subsidiary Borrowers, and assumed by Norcross and the U.S.Subsidiary Borrowers from SPH Acquisition, and whereby Norcross became ParentBorrower (as defined in the New Credit Facility).

 

The New Credit Facilityprovides for aggregate borrowings of $138.0 million, consisting of (a) aterm loan in the amount of $88.0 million, payable in twenty-eight consecutivequarterly installments commencing on September 30, 2005 and (b) arevolving credit facility in an aggregate principal amount of $50.0million.  The revolving credit facility is comprised of a U.S. revolvingfacility and a Canadian subfacility.  The amount of the total U.S.revolving facility is an amount equal to $50.0 million less the amount at suchtime outstanding under the Canadian subfacility.  The amount of the totalCanadian subfacility is an amount denominated in Canadian dollars having a U.S.dollar equivalent of $25.0 million less the amount at such time outstandingunder the U.S. revolving facility.  At any time upon the request of Norcrossor the U.S. Subsidiary Borrowers, one or more new term loan facilities may beadded in any aggregate amount of up to $100.0 million (and not less than $10.0million for any such additional term loan), subject to certain conditions, theproceeds of which shall be used to finance permitted acquisitions, pay fees andrelated expenses thereto and to refinance indebtedness of the entity orassociated with the assets to be so acquired.  The New Credit Facility issubject to certain mandatory prepayments upon the occurrence of certain events,subject to certain exceptions set forth in the credit agreement.  The proceeds of the New Credit Facility wereused primarily to refinance our existing senior credit facility.

 

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Borrowings under the U.S.revolving facility and term loan will bear interest at a rate per annum equalto Norcross’ choice of (a) an alternate base rate (which is equal to thehigher of (i) the rate of interest announced by Credit Suisse as its primerate in effect and (ii) the federal funds rate plus 0.50%) or (b) theEurodollar rate, plus an applicable margin.  Borrowings under the Canadiansubfacility will bear interest at a rate per annum equal to the Canadian primerate (which is the higher of (i) the rate of interest announced by CreditSuisse, Toronto Branch, as its reference rate then in effect for determininginterest rates on Canadian dollar denominated commercial loans in Canada and(ii) the CDOR rate plus 0.50% per annum), plus an applicable margin, orwith respect to banker’s acceptances or their equivalents, the discount rate(as defined the credit agreement) plus an applicable margin.

 

Initially, the applicablemargin with respect to the revolving credit facility is (a) 1.25% in thecase of alternate base rate loans and Canadian dollar prime loans and(b) 2.25% in the case of Eurodollar rate loans and bankers’ acceptancerate loans.  With respect to the term loan, the applicable margin will be(a) 1.00% in the case of alternate base rate loans and (b) 2.00% inthe case of Eurodollar rate loans.  After Norcross’ fiscal quarter endingDecember 31, 2005, the margins applicable to the revolving credit facilityand the U.S. swing line loans will adjust on a sliding scale based on the totalleverage ratio of Norcross and its subsidiaries.  In addition, Norcrosswill be required to pay to the lenders under the revolving credit facility aninitial commitment fee in respect of the unused commitments thereunder at a perannum rate of 0.50%.  After Norcross’ fiscal quarter endingDecember 31, 2005, the commitment fee rate will adjust on a sliding scalebased on the total leverage ratio of Norcross and its subsidiaries.

 

Norcross’ domesticsubsidiaries (including any future or indirect subsidiaries that may be createdor acquired by Norcross) and the Company guarantee the U.S. SubsidiaryBorrowers’ and Norcross’ obligations under the New Credit Facility. Theguarantees in respect of the New Credit Facility are secured by a perfectedfirst priority security interest in all of Norcross’ equity securities, theequity securities of its direct and indirect domestic subsidiaries,substantially all of the guarantors’ tangible and intangible assets and 65% ofthe equity securities of, or equity interest in, certain of its foreignfirst-tier subsidiaries, subject to certain exceptions.  All of theCanadian Borrower’s obligations under the New Credit Facility are be secured byall of the assets of Norcross’ present and future Canadian subsidiaries, andare guaranteed by all of Norcross’ present and future Canadian subsidiaries.

 

TheNew Credit Facility contains certain customary covenants, including among otherthings:

 

•      affirmativecovenants requiring Norcross to provide certain financial statements to theAdministrative Agent for distribution to its lenders and to pay materialobligations when due, maintain its legal existence, keep its materialproperties in good working order and condition, provide certain notices to theAdministrative Agent for distribution to its lenders, comply in all materialrespects with environmental laws and maintain at all times ratings for the New CreditFacility;

 

•      restrictivecovenants including limitations on other indebtedness, liens, fundamentalchanges, asset sales, restricted payments, capital expenditures, investments,prepayments, transactions with affiliates, sales and leasebacks, negativepledges, lines of business; and

 

•      financialcovenants requiring Norcross to maintain a maximum total leverage ratio oftotal debt over EBITDA for the period, a minimum fixed charge coverage ratio ofEBITDA less capital expenditures over fixed charges for the period and aminimum interest coverage ratio of EBITDA over interest expense for the period.

 

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The New Credit Facilitycontains certain customary representations and warranties and events ofdefault, including failure to pay interest, principal or fees, any materialinaccuracy of any representation and warranty, failure to comply withcovenants, material cross-defaults, bankruptcy and insolvency events, ERISAevents, change of control, failure to maintain first priority perfectedsecurity interest, material judgments, invalidity of guarantee and loss ofsubordination.  Certain of the events of defaults are subject toexceptions, materiality qualifiers and baskets.

 

On January 7, 2005, ourpredecessor issued $100.0 million of 113⁄4% senior pay in kind notes due2012 the “Senior Notes”. The proceeds were used to: (i) make a payment inrespect of preferred units of $60.0 million, $58.0 million of which werepayments in respect of accrued preferred yield and $2.0 million of which wasthe return of a portion of the original capital contribution made by holders ofour preferred units, (ii) make distributions in respect of the commonunits of certain members of management of $2.5 million, and (iii) pay feesand expense. The remainder of the net proceeds will be used for generalcorporate purposes, including potential acquisitions and/or distributions toour unit holders.

 

In connection with theclosing of the Acquisition, Safety Products entered into a second supplementalindenture dated as of July 19, 2005 (the “Second Supplemental Indenture”) amongthe Company, NSP Holdings Capital Corp. (“Capital”), Safety Products andWilmington Trust Company, as trustee (the “Trustee”) under the indenture datedas of January 7, 2005 (the “Indenture”) by and among the Company, Capital andthe Trustee providing for the issuance of the Company’s and Capital’s ExistingNotes. Pursuant to the terms of the Second Supplemental Indenture, SafetyProducts assumed all of the rights, powers, commitments, obligations andliabilities of Holdings under the Indenture and the Existing Notes.

 

On July 19, 2005, SafetyProducts sold $25.0 million in principal amount of 113⁄4% senior pay in kindnotes due 2012 (the “New Notes”). The New Notes were sold pursuant to apurchase agreement, dated June 28, 2005 (the “Purchase Agreement”), by andbetween Safety Products and Credit Suisse First Boston, LLC (the “InitialPurchaser”). The New Notes were issued pursuant to the Indenture. Pursuant tothe term of the Purchase Agreement, the New Notes were sold to the InitialPurchasers and are expected to be resold to qualified institutional buyers incompliance with the exemption from registration.

 

In connection with theclosing of the Acquisition, Norcross entered into a supplemental indenturedated as of July 19, 2005 (the “Norcross Supplemental Indenture”) by and amongNorcross, Norcross Capital Corp. (“Norcross Capital”), the guarantors listed onthe signature pages thereto and Wilmington Trust Company, as trustee (the “Trustee”)under the indenture dated as of August 13, 2003 (the “Norcross Indenture”)providing for the issuance by Norcross and Norcross Capital of $152.5 millionaggregate principal amount of 9 7/8% senior subordinated notes due 2011.Pursuant to the terms of the Norcross Supplemental Indenture, the definition ofPermitted Holders was amended and the parties confirmed that the RequisiteConsents (as defined in the Norcross Supplemental Indenture) had been deliveredin order to waive our obligations under the Change in Control covenant of theNorcross Indenture in connection with the Acquisition.

 

We believe that our internalcash flows and borrowings under the revolving portions of our senior creditfacility will provide us with sufficient liquidity and capital resources tomeet our current and future financial obligations for the foreseeable future,including funding our operations, debt service and capital expenditures. Ourfuture operating performance will be subject to future economic conditions andto financial, business and other factors, many of which are beyond our control.If our future cash flow from operations and other capital resources areinsufficient to pay our obligations as they mature or to fund our liquidityneeds, we may be forced to reduce or delay our business activities and capitalexpenditures, sell assets, obtain additional debt or equity capital orrestructure or refinance all or a portion of our debt, on or before maturity.We cannot assure you that we would be able to accomplish any of thesealternatives on a timely basis or on satisfactory terms, if at all. Inaddition, the terms of our existing and future indebtedness, including oursenior subordinated notes and our senior credit facility, may limit our abilityto pursue any of these alternatives.

 

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**Forward-Looking Statements**

 

This Management’s Discussionand Analysis of Financial Condition and Results of Operations containsforward-looking information. These statements reflect management’sexpectations, estimates, and assumptions based on information available at thetime of the statement. Forward-looking statements include, but are not limitedto, statements regarding future events, plans, goals, objectives, andexpectations. The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intent,”“likely,” “will,” “should,” and similar expressions are intended to identifyforward-looking statements. Forward-looking statements are not guarantees offuture performance and involve risks, uncertainties, and other factors,including those set forth below, which may cause our actual results,performance, or achievements to be materially different from any futureresults, performance, or achievements expressed 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,maintain key supplier status with those customers with which we have achievedsuch status, and obtain new customers; (v) the highly competitive natureof the personal protection equipment industry; (vi) any future changes inmanagement; (vii) acceptance by consumers of new products we develop oracquire; (viii) the importance and costs of product innovation; (ix) unforeseenproblems associated with international sales, including gains and losses fromforeign currency exchange and restrictions on the efficient repatriation ofearnings; (x) the unpredictability of patent protection and other intellectualproperty issues; (xi) cancellation of current orders; (xii) the outcome ofpending product liability claims and the availability of indemnification forthose claims; (xiii) general risks associated with the personal protectionequipment industry; and (xiv) the successful integration of acquired companieson economically acceptable terms. We undertake no obligation to publicly updateor revise any forward-looking statements to reflect changed assumptions, theoccurrence of anticipated or unanticipated events, or changes to future resultsover time.

 

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

 

There have been no material changes to our exposure tomarket risk since December 31, 2004.

 

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**Item 4.Controls and Procedures**

 

Based on their evaluation as of the end of the periodcovered by this quarterly report on Form 10-Q, our Chief Executive Officerand Chief Financial Officer have concluded that our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) areeffective.  There was no change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) identified in connection with theevaluation required by Rule 13a-15(d) of the Exchange Act thatoccurred during the period covered by this quarterly report on Form 10-Qthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART IIOTHER INFORMATION**

** **

**Item 1.Legal Proceedings**

 

As of July 2, 2005, our North SafetyProducts subsidiary, along with its predecessors and/or the former owners ofsuch business were named as defendants in approximately 928 lawsuits involvingrespirators manufactured and sold by it or its predecessors. We are alsomonitoring an additional 11 lawsuits in which we feel that North SafetyProducts, its predecessors and/or the former owners of such businesses may benamed as defendants. Collectively, these 939 lawsuits represent approximately25,000 (excluding spousal claims) plaintiffs. Approximately 92% of theselawsuits involve plaintiffs alleging injury resulting from exposure to silicadust, with the remainder alleging injury from exposure to other particles,including asbestos. These lawsuits typically allege that the purported injuriesresulted in part from respirators that were negligently designed and/ormanufactured. The defendants in these lawsuits are often numerous, and include,in addition to respirator manufacturers, employers of the plaintiffs andmanufacturers of sand (used in sand blasting) and asbestos.  We acquired our North Safety Productssubsidiary on October 2, 1998 from Siebe plc.  In connection with the acquisition, Siebe,which was subsequently merged with BTR plc (now known as “Invensys plc”),contractually agreed to indemnify us for any losses, including costs ofdefending claims, resulting from respiratory products manufactured or 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, Siebe Norton, Inc.,a newly formed wholly-owned subsidiary of Norton Company, acquired the assetsof Norton’s Safety Products Division and the stock of this company was in turnacquired by Siebe Gorman Holdings PLC. Under the terms of the Agreement, SiebeNorton, Inc. did not assume any liability for claims relating to productsshipped by Norton Company prior to the closing date. Moreover, Norton Companycovenanted in the Agreement to indemnify Siebe Norton and its successors andassigns against any liability resulting from or arising out of any state offacts, omissions or events existing or occurring on or before the closing date,including, without limitation, any claims arising from products shipped byNorton Company or any of its affiliates prior to the closing date. SiebeNorton, whose name was subsequently changed to Siebe North Inc., wassubsequently acquired by us as part of the 1998 acquisition of the North SafetyProducts business from 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 its obligationsto indemnify us and we could potentially be liable for losses and claimsrelating to products sold prior to January 10, 1983 if both Invensys andNorton fail to meet their obligations to indemnify us. We could also be liableif the alleged exposure involved the use of a product manufactured by us afterour October 1998 acquisition of the North Safety Products business.Invensys is currently handling the defense of all of the cases prior to October 1998in which North Safety Products, its predecessors and/or the former owners ofsuch businesses have been named as defendants. We are jointly with Invensyshandling the defense of all of the cases which allege exposure includingperiods pre and post October 1998. We will individually handle the defenseof all cases with exclusive post October 1998 exposure, however, we havenot been involved in a case with exclusive post October 1998 exposure todate. As of July 2, 2005, Invensys has sent us requests for reimbursementtotaling $178,300, relating to settled cases in which Invensys claims that theperiod of alleged exposure included periods after October 1998. To date,we have not reimbursed Invensys for these claims, as we are currently pursuingnegotiations regarding the allocation of costs and the determination of thealleged exposure periods. Based on information provided to us by Invensys, webelieve that Invensys has made payments with respect to settlement of theseclaims of $40,200 for the six months ended July 2, 2005.

 

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Consistent with the current environment beingexperienced by companies involved in silica and asbestos-related litigation,there has been an increase in the number of asserted claims that couldpotentially involve us. Based upon information provided to us by Invensys, webelieve activity related to these lawsuits was as follows for the six monthsended July 2, 2005:

 
| Beginning  lawsuits   |   | 858  |   |
|-----------------------|--------|------|--------|
| New lawsuits          |   | 192  |   |
| Settlements           |   | (10  | )      |
| Dismissals  and other |   | (101 | )      |
| Ending  lawsuits      |   | 939  |   |

 

Plaintiffshave asserted specific dollar claims in approximately a quarter of theapproximately 928 cases pending as of July 2, 2005, in which North SafetyProducts, its predecessors and/or the former owners of such businesses havebeen named as defendants. A majority of jurisdictions prohibit specifyingdamages in tort cases such as these, and most of the remaining jurisdictions donot require such specification. In those cases in which plaintiffs choose toassert specific dollar amounts in their complaints, brought in states thatpermit such pleading, the amounts claimed are typically not meaningful as anindicator of a company’s potential liability. This is because (1) theamounts claimed typically bear no relation to the level of the plaintiff’s injury,(2) the complaints typically assert claims against numerous defendants,and (3) many cases are brought on behalf of plaintiffs who have notsuffered any medical injury, and, ultimately, are resolved without any paymentor payment of a small fraction of the damages initially claimed. Of the 928complaints maintained in our records, 700 do not specify the amount of damagessought, 36 generally allege damages in excess of $50,000, three allegecompensatory damages in excess of $50,000 and an unspecified amount of punitivedamages, 92 allege compensatory damages and punitive damages, each in excess of$25,000, three generally allege damages in excess of $100,000, 18 allegecompensatory damages and punitive damages, each in excess of $50,000, 28generally allege damages of $15.0 million, one generally alleges damages not toexceed $290.0 million, one alleges compensatory damages and punitive damages,each in excess of $10,000, one alleges compensatory and punitive damages, eachin excess of $15,000, seven allege punitive damages in excess of $25,000, onealleges punitive damages in excess of $50,000, 28 generally allege damages inexcess of $15,000, six generally allege damages in excess of $25,000, onealleges compensatory damages in excess of $25,000 and two allege compensatoryand punitive damages each in excess of $15.0 million. We currently do not haveaccess to the complaints with respect to the previously mentioned additional 11monitored cases, and therefore do not know whether these cases allege specificdamages, and if so, the amount of such damages, but are in the process ofseeking to obtain such information. Due to the reasons noted above and to theindemnification arrangements benefiting us, we do not believe that the damageamounts specified in these complaints are a meaningful factor in any assessmentof our potential liability.

 

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

 

During theyear ended December 31, 2004, we recorded a $1.25 million liability andcharge to operating expenses to establish a reserve for respiratory claims,which remains outstanding as of July 2, 2005. We believe that this reserverepresents a reasonable estimate of our probable and estimable liabilities forproduct claims alleging injury resulting from exposure to silica dust and otherparticles, including asbestos, as determined by us in consultation with anindependent consultant. We believe that a five-year projection of claims anddefense costs is the most reasonable approach. However, it is possible that wemay incur liabilities in excess of the amounts currently reserved. This reservewill be re-evaluated periodically and additional charges or credits will berecorded to operating expenses as additional information becomes available.

 

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We are not otherwise involved in any materiallawsuits.  We historically have not beenrequired to pay any material liability claims. We maintain insurance against product liability claims (with theexception of asbestosis and silicosis cases, for which coverage is notcommercially available), but it is possible that insurance coverage will notcontinue to be available on terms acceptable to us or that such coverage willnot be adequate for liabilities actually incurred. In connection with the NorthSafety Products acquisition, we recorded a $2.5 million reserve forpotential uninsured product liability claims of North Safety Products for periodsprior to October 1998. This reserve was established at the date ofacquisition and relates to potential claims primarily associated with fallprotection products sold in Canada. Through December 2003, we incurredcharges of approximately $0.2 million against this reserve, which reduced thereserve balance to $2.3 million. During 2004, we reduced this reserve to $1.0million to reflect our current expectations of the liability based oninformation available and recorded a $1.3 million credit to operating expenses.The $1.0 million reserve remains outstanding as of July 2, 2005. Thisreserve is re-evaluated periodically, and additional charges or credits will berecorded to operating expenses as additional information becomes available.

 

It is possible that we may incur liabilities in anamount 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.

 

**Item 6. Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                       |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                  |
|   3.1      |       | Amended and Restated Certificate of Incorporation of Safety Products  Holdings, Inc.                                                                  |
|                 |       |                                                                                                                                                  |
|   3.2      |       | Bylaws of Safety Products Holdings, Inc.                                                                                                              |
|                 |       |                                                                                                                                                  |
| 10.1                 |       | Purchase and Sale Agreement dated May 20, 2005 by and among NSP  Holdings L.L.C., Norcross Safety Products L.L.C. and Safety Products  Holdings, Inc. |
|                 |       |                                                                                                                                                  |
| 31.1                 |       | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                              |
|                 |       |                                                                                                                                                  |
| 31.2                 |       | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                              |
|                 |       |                                                                                                                                                  |
| 32.1                 |       | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                              |
|                 |       |                                                                                                                                                  |
| 32.2                 |       | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                              |

 

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**SIGNATURES**

** **

Pursuant to the requirements of the Securities Exchange Act of 1934, SafetyProducts Holdings, Inc. has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 

 
|                 | SAFETY PRODUCTS HOLDINGS, INC. |
|----------------------|--------------------------------|
|                 |                           |
|                 |                           |
| August 15, 2005 | By:                            | /s/ ROBERT  A. PETERSON |   |
|                 |                           | Robert A. Peterson |
|                 |                           | President, Chief Executive Officer and Director |
|                 |                           | (Principal Executive Officer) |
|                 |                           |   |
|                 |                           |   |
| August 15, 2005 | By:                            | /s/ DAVID F. MYERS, JR. |   |
|                 |                           | David F. Myers, Jr. |
|                 |                           | Executive Vice President, Chief  Financial Officer, |
|                 |                           | Secretary and Director |
|                 |                           | (Principal Financial and Accounting  Officer) |

 

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**SAFETY PRODUCTS HOLDINGS, INC.**FORM 10-Q LISTING OF EXHIBITS

** **
| **Exhibit No.** | ** ** | **Description**                                                                                                                                       |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                  |
|   3.1      |       | Amended and Restated Certificate of Incorporation of Safety Products  Holdings, Inc.                                                                  |
|                 |       |                                                                                                                                                  |
|   3.2      |       | Bylaws of Safety Products Holdings, Inc.                                                                                                              |
|                 |       |                                                                                                                                                  |
| 10.1                 |       | Purchase and Sale Agreement dated May 20, 2005 by and among NSP  Holdings L.L.C., Norcross Safety Products L.L.C. and Safety Products  Holdings, Inc. |
|                 |       |                                                                                                                                                  |
| 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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