** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM 10-Q**

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

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

 

**For thetransition period from                   to              **

**Commission File Number: 333-127781**

**SAFETY PRODUCTS HOLDINGS, INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                     |   | **34-2051198**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   |                                  |

 

 

| **2001 Spring Road, Suite 425 Oak Brook, Illinois** |   | **60523**  |
|-----------------------------------------------------|--------|------------|
| (Address of  Principal Executive Offices)           |   | (Zip Code) |

 

Registrant’stelephone number, including area code:**(630) 572-5715**

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days. Yes xNo o

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

Largeaccelerated filer oAccelerated filer o Non-acceleratedfiler x

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes oNo x

On August 13, 2007 SafetyProducts Holdings, Inc. had 11,030,884 common shares outstanding.

 

 

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**SAFETY PRODUCTS HOLDINGS, INC.FORM 10-Q QUARTERLY REPORTFor the Quarterly Period EndedJune 30, 2007**

**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 |   | 12     |
|                                                                                                |   |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |   | 19     |
|                                                                                                |   |   |
| Item 4. Controls and Procedures                                                                     |   | 20     |
|                                                                                                |   |   |
| **PART  II Other Information**                                                                      |   | 21     |
|                                                                                                |   |   |
| Item  1. Legal Proceedings                                                                          |   | 21     |
|                                                                                                |   |   |
| Item  1A. Risk Factors                                                                              |   | 24     |
|                                                                                                |   |   |
| Item 6. Exhibits                                                                                    |   | 25     |
|                                                                                                |   |   |
| **Signatures**                                                                                      |   | 26     |
|                                                                                                |   |   |
| **Form 10-Q Listing of Exhibits**                                                                   |   | 27     |

 

 

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**PART IFINANCIAL INFORMATION**

**Item 1. Financial Statements**

**SAFETY PRODUCTS HOLDINGS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Amounts in Thousands)**
| ** **                                                                                | ** ** | **December 31,  2006 (1)** | ** ** | **June 30,  2007** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| ** **                                                                                | ** ** | ** **                           | ** ** | **(Unaudited)**         | ** ** |
| **Assets**                                                                                | ** ** | ** **                           | ** ** | ** **              | ** ** |
| Current assets:                                                                           |       |                                 |       |                    |       |
| Cash and cash  equivalents                                                                |       | $                                    | 26,796     |                    | $          | 33,512 |   |
| Accounts  receivable, less allowance of $2,323 and $2,310 in 2006 and 2007,  respectively |       | 73,306                               |       | 92,564                  |       |
| Inventories                                                                               |       | 108,270                              |       | 107,984                 |       |
| Deferred income  taxes                                                                    |       | 2,143                                |       | 1,946                   |       |
| Prepaid expenses  and other current assets                                                |       | 3,624                                |       | 4,493                   |       |
| Total current assets                                                                      |       | 214,139                              |       | 240,499                 |       |
| Property, plant and  equipment, net                                                       |       | 69,627                               |       | 68,691                  |       |
| Deferred financing  costs, net                                                            |       | 16,517                               |       | 14,833                  |       |
| Goodwill                                                                                  |       | 157,242                              |       | 160,063                 |       |
| Other intangible  assets, net                                                             |       | 281,438                              |       | 277,743                 |       |
| Other noncurrent assets                                                                   |       | 5,119                                |       | 6,059                   |       |
| Total assets                                                                              |       | $                                    | 744,082    |                    | $          | 767,888 |   |
|                                                                                      |       |                                 |       |                    |       |
| **Liabilities and shareholders’  equity**                                            | ** ** | ** **                           | ** ** | ** **              | ** ** |
| Current liabilities:                                                                      |       |                                 |       |                    |       |
| Accounts payable                                                                          |       | $                                    | 21,891     |                    | $          | 24,747 |   |
| Accrued expenses                                                                          |       | 40,596                               |       | 38,288                  |       |
| Current  maturities of long-term obligations                                              |       | 4,820                                |       | 2,347                   |       |
| Total current  liabilities                                                                |       | 67,307                               |       | 65,382                  |       |
| Long-term liabilities:                                                                    |       |                                 |       |                    |       |
| Pension,  post-retirement and deferred compensation                                       |       | 17,082                               |       | 15,124                  |       |
| Long-term  obligations                                                                    |       | 470,140                              |       | 478,038                 |       |
| Other noncurrent  liabilities                                                             |       | 7,008                                |       | 11,794                  |       |
| Deferred income  taxes                                                                    |       | 55,460                               |       | 54,497                  |       |
| Total long-term  liabilities                                                              |       | 549,690                              |       | 559,453                 |       |
|                                                                                      |       |                                 |       |                    |       |
| Minority interest                                                                         |       | 199                                  |       | 213                     |       |
|                                                                                      |       |                                 |       |                    |       |
| Shareholders’ equity:                                                                |       |                                 |       |                    |       |
| Common shares                                                                             |       | 110                                  |       | 110                     |       |
| Contributed  capital                                                                      |       | 111,883                              |       | 112,583                 |       |
| Retained  earnings                                                                        |       | 4,098                                |       | 9,894                   |       |
| Accumulated  other comprehensive income                                                   |       | 10,795                               |       | 20,253                  |       |
| Total shareholders’  equity                                                          |       | 126,886                              |       | 142,840                 |       |
| Total liabilities and shareholders’ equity                                           |       | $                                    | 744,082    |                    | $          | 767,888 |   |

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

*See notesto unaudited consolidated financial statements.*

 

1

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**SAFETY PRODUCTS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Amounts in Thousands) (Unaudited)**
|   |   |   |   |   |   |
|--------|--------|--------|--------|--------|--------|

 
| ** **                                                                                                                                                                     | ** ** | **Three months ended** | ** ** | **Six months ended**    | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| Net sales                                                                                                                                                                      |       | $                      | 131,275    |                    | $          | 156,406 |   | $ | 267,634 |   | $ | 304,557 |   |
| Cost of goods sold                                                                                                                                                             |       | 79,157                 |       | 94,379                  |       | 163,259 |   | 185,088 |   |
| Gross profit                                                                                                                                                                   |       | 52,118                 |       | 62,027                  |       | 104,375 |   | 119,469 |   |
| Operating expenses:                                                                                                                                                            |       |                   |       |                    |       |   |   |   |   |
| Selling                                                                                                                                                                        |       | 12,739                 |       | 13,665                  |       | 25,128 |   | 27,154 |   |
| Distribution                                                                                                                                                                   |       | 7,776                  |       | 9,623                   |       | 15,400 |   | 18,682 |   |
| General and  administrative (1)                                                                                                                                                |       | 12,426                 |       | 14,190                  |       | 26,030 |   | 27,854 |   |
| Amortization of  intangibles                                                                                                                                                   |       | 2,741                  |       | 2,912                   |       | 5,467 |   | 5,877 |   |
| Total operating  expenses                                                                                                                                                      |       | 35,682                 |       | 40,390                  |       | 72,025 |   | 79,567 |   |
| Income from operations                                                                                                                                                         |       | 16,436                 |       | 21,637                  |       | 32,350 |   | 39,902 |   |
| Other expense (income):                                                                                                                                                        |       |                   |       |                    |       |   |   |   |   |
| Interest expense                                                                                                                                                               |       | 11,392                 |       | 12,238                  |       | 22,640 |   | 24,579 |   |
| Interest income                                                                                                                                                                |       | (160                   | )          | (228                    | )          | (314 | ) | (453 | ) |
| Other, net                                                                                                                                                                     |       | (230                   | )          | 495                     |       | (525 | ) | 399 |   |
| Income from continuing  operations before income taxes and minority interest                                                                                                   |       | 5,434                  |       | 9,132                   |       | 10,549 |   | 15,377 |   |
| Income tax expense                                                                                                                                                             |       | 1,757                  |       | 3,761                   |       | 3,471 |   | 6,378 |   |
| Minority interest                                                                                                                                                              |       | 4                      |       | 8                       |       | 15 |   | 14 |   |
| Income from continuing  operations                                                                                                                                             |       | 3,673                  |       | 5,363                   |       | 7,063 |   | 8,985 |   |
| Loss (income) from  discontinued operations (including loss on disposal of subsidiary of $3,022  for the three and six months ended June 30, 2007), net of income tax (Note 2) |       | 204                    |       | 2,974                   |       | (93 | ) | 2,813 |   |
| Net income                                                                                                                                                                     |       | $                      | 3,469      |                    | $          | 2,389 |   | $ | 7,156 |   | $ | 6,172 |   |

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(1)             Generaland administrative expenses exclude amortization of intangibles and include$280 and $360 of management incentive compensation for the three months endedJuly 1, 2006 and June 30, 2007, respectively and $1,080 and $700 of managementincentive compensation for the six months ended July 1, 2006 and June 30, 2007,respectively.

*See notes to unaudited consolidated financial statements.*

 

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**SAFETY PRODUCTS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amountsin Thousands) (Unaudited)**
| ** **                                                                         | ** ** | **Six months ended**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| **Operating activities**                                                           | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                      | 7,156      |   | $ | 6,172 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation (1)                                                                   |       | 6,496                  |       | 7,337 |   |
| Amortization of  intangibles                                                       |       | 5,467                  |       | 5,877 |   |
| Amortization of  deferred financing costs                                          |       | 1,670                  |       | 1,684 |   |
| Amortization of  original issue premium                                            |       | (77                    | )          | (65 | ) |
| Deferred income  taxes                                                             |       | 67                     |       | 1,845 |   |
| Minority  interest                                                                 |       | 15                     |       | 14 |   |
| Noncash interest                                                                   |       | 8,128                  |       | 9,113 |   |
| Management  incentive compensation                                                 |       | 1,080                  |       | 700 |   |
| (Gain) loss on  sale of property, plant and equipment                              |       | (67                    | )          | 108 |   |
| Loss on sale of  subsidiary                                                        |       | —                 |       | 3,022 |   |
| Changes in  operating assets and liabilities:                                      |       |                   |       |   |   |
| Accounts  receivable                                                               |       | (10,607                | )          | (20,779 | ) |
| Inventories                                                                        |       | (15,739                | )          | (617 | ) |
| Prepaid expenses  and other current assets                                         |       | (104                   | )          | 59 |   |
| Other noncurrent  assets                                                           |       | 11                     |       | (404 | ) |
| Accounts payable                                                                   |       | 4,405                  |       | 4,540 |   |
| Accrued expenses                                                                   |       | (1,959                 | )          | (3,274 | ) |
| Pension,  postretirement and deferred compensation                                 |       | (729                   | )          | (1,965 | ) |
| Other noncurrent  liabilities                                                      |       | (31                    | )          | (9 | ) |
| Net cash provided by  operating activities                                         |       | 5,182                  |       | 13,358 |   |
|                                                                               |       |                   |       |   |   |
| **Investing activities**                                                           | ** ** | ** **             | ** ** | ** ** | ** ** |
| Purchase of businesses,  net of cash acquired                                      |       | (26,998                | )          | (951 | ) |
| Proceeds from sale of  subsidiary, net of cash disposed                            |       | —                 |       | 3,223 |   |
| Purchases of property,  plant and equipment                                        |       | (4,787                 | )          | (5,675 | ) |
| Proceeds from sale of  property, plant and equipment                               |       | 113                    |       | 29 |   |
| Net cash used in  investing activities                                             |       | (31,672                | )          | (3,374 | ) |
|                                                                               |       |                   |       |   |   |
| **Financing activities**                                                           | ** ** | ** **             | ** ** | ** ** | ** ** |
| Payments for deferred  financing costs                                             |       | (201                   | )          | — |   |
| Proceeds from  borrowings                                                          |       | 15,000                 |       | — |   |
| Payments of debt                                                                   |       | (948                   | )          | (3,447 | ) |
| Proceeds from the  issuance of shares                                              |       | 563                    |       | — |   |
| Net cash provided by  (used in) financing activities                               |       | 14,414                 |       | (3,447 | ) |
| Effect of exchange rate  changes on cash and cash equivalents                      |       | 918                    |       | 179 |   |
| Net (decrease) increase  in cash and cash equivalents                              |       | (11,158                | )          | 6,716 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 20,819                 |       | 26,796 |   |
| Cash and cash equivalents at end of period                                         |       | $                      | 9,661      |   | $ | 33,512 |   |

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(1)             Depreciationincludes depreciation expense of $58 and $71 for the six months ended July 1,2006 and June 30, 2007, respectively, related to discontinued operations (Note2).

*Seenotes to unaudited consolidated financial statements*

 

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

**1.             Transactions**

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

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

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

**2.             Discontinued Operations**

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

Thefollowing table sets forth the net sales, net (loss) income from operations andnet loss on disposal of subsidiary for South Africa for the periods presented:

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Six months ended**    | ** ** |
|-------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
|                                |       |                   |       |                    |       |   |   |   |   |
| Net sales                           |       | $                      | 4,971      |                    | $          | 3,103 |   | $ | 10,488 |   | $ | 8,152 |   |
| Net (loss)  income from operations  |       | (204                   | )          | 48                      |       | 93 |   | 209 |   |
| Net loss on disposal of  subsidiary |       | —                 |       | (3,022                  | )          | — |   | (3,022 | ) |
|                                     |            |                        |            |                         |            |  |  |  |  |  |  |  |  |

** **

**3.             Basis of Presentation**

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

4

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

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

The consolidated financial statements reflect allacquisitions under the purchase method of accounting, in accordance with SFASNo. 141, *Business Combinations*.

Assuming all acquisitions had occurred on January 1,2006, the pro forma net sales, income from operations and net income for theCompany for the six months ended July 1, 2006 would have been $277,122, $32,870and $6,109, respectively.

**4.             Recent Accounting Pronouncements**

InSeptember 2006, the FASB issued SFAS No. 157, *FairValue Measurements*, which defines fair value, establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements. The provisions of SFAS No. 157 are effective for the Company asof the beginning of its fiscal year ended December 31, 2008. The Company is inthe process of determining the effects, if any, that adoption of SFAS No. 157will have on its financial statements.

InFebruary 2007, the FASB issued SFAS No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement No. 115.*This statement is intended toimprove financial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. It also establishes presentation and disclosure requirementsdesigned to facilitate comparisons between entities that choose differentmeasurement attributes for similar types of assets and liabilities. Thestatement does not affect any existing accounting literature that requirescertain assets and liabilities to be carried at fair value and it does notestablish requirements for recognizing dividend income, interest income orinterest expense. It also does not eliminate disclosure requirements includedin other accounting standards. The provisions of SFAS No. 159 are effective forthe Company as of the beginning of its fiscal year ended December 31, 2008. TheCompany is in the process of determining the effects, if any, that adoption ofSFAS No. 159 will have on its financial statements.

**5.             Management Incentive Compensation**

Managementincentive compensation related to stock based compensation was $280 and $360for the three months ended July 1, 2006 and June 30, 2007, respectively and$1,080 and $700 for the six months ended July 1, 2006 and June 30, 2007,respectively.

**6.             Inventories**

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

# ** **

5

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# **7.****                                     Long-TermObligations**

The Company’s long-term obligations consist of thefollowing:
| ** **                                         | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Revolving credit  facilities                       |       | $                           | —     |                    | $          | — |   |
| Term loan                                          |       | 165,720                     |       | 162,566                 |       |
| Senior pay in  kind notes                          |       | 155,090                     |       | 164,203                 |       |
| Senior  subordinated notes                         |       | 152,500                     |       | 152,500                 |       |
| European term  loans                               |       | 173                         |       | 159                     |       |
| Subordinated  seller notes                         |       | 1,750                       |       | 1,500                   |       |
| Capital lease  obligations                         |       | 205                         |       | —                  |       |
| Unamortized  discount on senior pay in kind notes  |       | (6,626                      | )          | (6,138                  | )          |
| Unamortized premium  on senior subordinated notes  |       | 6,148                       |       | 5,595                   |       |
|                                               |       | 474,960                     |       | 480,385                 |       |
| Less: Current  maturities of long-term obligations |       | 4,820                       |       | 2,347                   |       |
|                                               |       | $                           | 470,140    |                    | $          | 478,038 |   |

 

Aggregate maturities of long-term obligations as ofJune 30, 2007, are as follows:
| 2008       |   | $       | 2,347   |   |
|------------|--------|---------|---------|--------|
| 2009       |   | 2,556   |    |
| 2010       |   | 2,005   |    |
| 2011       |   | 40,895  |    |
| 2012       |   | 307,582 |    |
| Thereafter |   | 125,000 |    |
|       |   | $       | 480,385 |   |

** **

**8.             Income Taxes**

Effective January 1, 2007, the Company adopted FIN No.48, *Accounting for Uncertainty in Income Taxes*,which requires that the Company recognize in the financial statements, theimpact of a tax position, if that position is more likely than not of beingsustained on audit, based on the technical merits of the position. In addition,FIN 48 provides guidance on the derecognition, classification, accounting ininterim periods and disclosure requirements for uncertain tax positions.

As a result of the implementation of FIN No. 48, theCompany recorded at the date of adoption an additional liability of $5,961 forunrecognized tax benefits relating to uncertain tax positions. Of this amount,approximately $376 was accounted for as a reduction to the January 1, 2007balance of retained earnings. There have been no significant changes to theseamounts during the three and six months ended June 30, 2007.

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

Included in the balance of unrecognized tax benefitsat January 1, 2007, is $1,525 related to tax positions for which it isreasonably possible that the total amounts could significantly change duringthe next twelve months. This amount represents the maximum potential decreasein unrecognized tax benefits comprised of items related to foreign income taxfilings and audit settlement negotiations.

The Company recognizes interest and penalties relatedto unrecognized tax benefits as a component of income tax expense. At January1, 2007, the Company had accrued $219 and $279 for the potential payment ofinterest and penalties related to unrecognized tax benefits, respectively.There have been no significant changes to these amounts during the three andsix months ended June 30, 2007.

The Company and its subsidiaries are subject to U.S.federal income tax as well as income tax of multiple state and internationaljurisdictions. As of January 1, 2007, the Company is subject to U.S. Federalincome tax examinations for the tax years 1998 through 2000 and 2002 through2006 and to non-U.S. income tax examinations for the tax years of 1998 through2006. In addition, the Company is subject to state and local income taxexaminations for the tax years 1998 through 2006.

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The income tax expense for the Company differs fromthe amount of income tax expense computed by applying the U.S. federal incometax rate to income before income taxes primarily due to: 1) state taxes and 2)the impact of varied foreign statutory rates on the Company’s foreign earnings.In addition, the three and six months ended June 30, 2007 were impacted by therecording of a valuation allowance against capital losses associated with thesale of South Africa.

**9.             Employee Benefit Plans**

The following table sets forth the components of netperiodic benefit expense (income) for the Company’s pension benefits:

 
| ** **                      | ** ** | **Three months ended** | ** ** | **Six months ended**    | ** ** |
|---------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
|                            |       |                   |       |                    |       |   |   |   |   |
| Service cost                    |       | $                      | 491        |                    | $          | 27 |   | $ | 982 |   | $ | 54 |   |
| Interest cost                   |       | 944                    |       | 981                     |       | 1,888 |   | 1,962 |   |
| Expected return  on plan assets |       | (906                   | )          | (1,068                  | )          | (1,812 | ) | (2,137 | ) |
|                            |       | $                      | 529        |                    | $          | (60 | ) | $ | 1,058 |   | $ | (121 | ) |

 

The following table sets forth the components of netperiodic benefit expense for the Company’s post-retirement benefits:
|   |   |   |   |   |   |
|--------|--------|--------|--------|--------|--------|

 
| ** **    | ** ** | **Three months ended** | ** ** | **Six months ended**    | ** ** |
|---------------|------------|------------------------|------------|-------------------------|------------|
| ** **    | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
|          |       |                   |       |                    |       |   |   |   |   |
| Service cost  |       | $                      | 6          |                    | $          | 2 |   | $ | 12 |   | $ | 5 |   |
| Interest cost |       | 18                     |       | 16                      |       | 36 |   | 32 |   |
|          |       | $                      | 24         |                    | $          | 18 |   | $ | 48 |   | $ | 37 |   |

** **

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

In conjunction with theFibre-Metal Transaction, the Company initiated a restructuring plan to closethe Fibre-Metal manufacturing facility located in Concordville, Pennsylvaniaand move production to its Cranston, Rhode Island and Mexicali, Mexico facilities.In addition, the Company closed certain Fibre-Metal distribution centers andintegrated Fibre-Metal distribution into its existing distribution facilities.The Company implemented this plan in order to increase profitability throughutilizing excess capacity at its existing plants and moving manufacturing tolocations with favorable labor costs. The restructuring was substantiallycompleted in the second quarter of 2007. As of the date of the Fibre-MetalTransaction, the Company recorded an accrual for costs associated with the planof $1,716, comprised of $1,383 in severance costs and $333 in facility closureand other exit costs. The restructuring liability is classified within theaccrued expenses caption on the consolidated balance sheet.

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

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

 

 

7

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**11.****          LegalProceedings**

The Company is subject to various claims arising inthe ordinary course of business. Most of these lawsuits and claims are productliability matters that arise out of the use of respiratory product linesmanufactured by the Company’s North Safety Products subsidiary. As of June 30,2007, the Company’s North Safety Products subsidiary, along with itspredecessors and/or the former owners of such business were named as defendantsin approximately 636 lawsuits involving respirators allegedly manufactured andsold by it or its predecessors. The Company is also monitoring an additionaltwo lawsuits in which it feels that North Safety Products, its predecessorsand/or the former owners of such businesses may be named as defendants.Collectively, these 638 lawsuits represent a total of approximately 8,438plaintiffs. Approximately 85% of these lawsuits involve plaintiffs alleginginjury resulting from exposure to silica dust, with the remainder alleginginjury resulting from exposure to other dust particles, including asbestos.These lawsuits typically allege that the purposed injuries resulted in partfrom respirators that 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 Productssubsidiary is contractually entitled to indemnification from Norton Company, anaffiliate of Saint-Gobain, which owned the North Safety Products business priorto Invensys. Pursuant to a December 14, 1982 asset purchase agreement, SiebeNorton, Inc., a newly formed wholly-owned subsidiary of Norton Company,acquired the assets of Norton’s Safety Products Division and the stock of thiscompany was in turn acquired by Siebe Gorman Holdings PLC. Under the terms ofthe agreement, Siebe Norton, Inc. did not assume any liability for claimsrelating to products shipped by Norton Company prior to the closing date.Moreover, Norton Company covenanted in the agreement to indemnify Siebe Norton,Inc. and its successors and assigns against any liability resulting from orarising out of any state of facts, omissions or events existing or occurring onor before the closing date, including, without limitation, any claims arisingfrom products shipped by Norton Company or any of its affiliates prior to theclosing date. Siebe Norton, Inc., whose name was subsequently changed to SiebeNorth Inc., was subsequently acquired by the Company as part of the 1998acquisition of the North Safety Products business from Invensys.

Despite these indemnification arrangements, theCompany could potentially be liable for losses or claims relating to productsmanufactured prior to the October 1998 acquisition date if Invensys fails tomeet its obligations to indemnify the Company and the Company could potentiallybe liable for losses and claims relating to products sold prior to January 10,1983 if both Invensys and Norton fail to meet their obligations to indemnifythe Company. The Company believes that Invensys has the ability to pay theseclaims based on its current financial position, as publicly disclosed byInvensys. The Company could also be liable if the alleged exposure involved theuse of a product manufactured by the Company after the October 1998 acquisitionof the North Safety Products business.

Effective July 1, 2006, the Company entered into ajoint defense agreement through December 31, 2008 with the former owners of theNorth Safety Products business (the “Joint Defense Agreement” or “JDA”). Underthe terms of the Joint Defense Agreement, the Company agreed to pay a weightedaverage percentage of defense costs (including legal fees, expert witnesses andout of pocket expenses) associated with defending the Company and the priorowners of the North Safety Products business subject to a cap of $525, $960 and$1,000 for the period from July 1, 2006 through December 31, 2006, the yearended December 31, 2007 and the year ended December 31, 2008, respectively. Thecap excludes settlement costs and other costs incurred exclusively by theCompany (including trial costs and special requests of counsel), which it willbe required to pay under the JDA. Separately, the Company agreed to payInvensys $200 related to settled cases through June 30, 2006 in which Invensysclaimed that the period of alleged exposure included periods after October1998.

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

Based upon information provided to the Company byInvensys, the Company believes activity related to these lawsuits was asfollows for the six months ended June 30, 2007:

8

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

 

Both the rate of new filings and the number ofexisting claimants have declined dramatically since 2003 as courts andlegislatures have tightened the rules on when and where the silica claims canbe pursued in an effort to reduce the large number of unmeritorious claims. Thenew rules make bringing silica cases on a mass level much less attractive tothe plaintiffs’ bar. Plaintiffs’ attorneys in many jurisdictions can no longer(1) find a worker with some stated exposure to silica, (2) take an X-ray of hischest, (3) have it interpreted as demonstrating lung shadows by a radiologist,(4) then file a single lawsuit in a dangerous venue with hundreds of otherplaintiffs against hundreds of defendants with the pleading containing littlemore than the parties’ names and some standard pleading language. Morespecifically, the legislatures of at least seven states — including formerhotbeds of silica litigation such as Texas, Florida and Ohio — passedimpairment-criteria legislation that redefined injury. These acts forceplaintiffs to prove impairment as a result of their exposure to qualify forjudicial treatment. The same legislation requires that each silica claimant betried individually, and not in the multiple plaintiff format in which thepotential for large verdicts resulted from increased plaintiffs and where a fewmeritorious claims could increase the value of unmeritorious ones. Further tortreform in Texas created a state-wide multi-district litigation (“MDL”) whereinone judge presides over the pretrial of all Texas-silica cases. In Mississippi,the Supreme Court changed the venue rules making it much more difficult to fileout-of-state plaintiffs there. The Mississippi court also changed the pleadingrequirements making the plaintiffs’ attorneys include plaintiff-specificallegations against each defendant sued, instead of the vague allegationsagainst hundreds of defendants.

Plaintiffs haveasserted specific dollar claims in approximately 30% of the approximately 636cases pending as of June 30, 2007 in which North Safety Products, itspredecessors and/or the former owners of such businesses have been named asdefendants. A majority of jurisdictions prohibit specifying damages in tortcases such as these, and most of the remaining jurisdictions do not requiresuch specification. In those cases in which plaintiffs choose to assertspecific dollar amounts in their complaints, the amounts claimed are typicallynot meaningful as an indicator of a company’s potential liability. This isbecause (1) the amounts claimed typically bear no relation to the level of theplaintiff’s injury, (2) the complaints typically assert claims against numerousdefendants, and (3) many cases are brought on behalf of plaintiffs who have notsuffered any medical injury, and ultimately are resolved without any payment orpayment of a small fraction of the damages initially claimed. Of the 636complaints maintained in the Company’s records, 446 do not specify the amountof damages sought, 25 generally allege damages in excess of $50, one allegescompensatory damages in excess of $50 and an unspecified amount of punitivedamages, 103 allege compensatory damages and punitive damages, each in excessof $25, two generally allege damages in excess of $100, two allege compensatorydamages and punitive damages, each in excess of $50, 20 generally allege damagesin excess of $15,000, one generally alleges damages of $23,000, one allegescompensatory damages and punitive damages, each in excess of $10, four allegegeneral damages of $18,000 and punitive damages of $10,000, two allege generaldamages of $13,000 and punitive damages of $10,000, one alleges compensatoryand punitive damages, each in excess of $15, one alleges punitive damages inexcess of $50, one generally alleges damages in excess of $15, 12 generallyallege damages in excess of $25, one alleges compensatory damages of $18,000and punitive damages of $10,000, one alleges punitive damages of $13,500 andcompensatory damages of $10,000, one alleges punitive damages of $13,000 andcompensatory damages of $10,000, eight allege compensatory damages of $13,000and punitive damages of $10,000, one alleges compensatory and punitive damages,each of $15 and two allege compensatory and punitive damages, each in excess of$15,000. The Company currently does not have access to the complaints withrespect to the previously mentioned additional two monitored cases, andtherefore it does not know whether these cases allege specific damages, or ifso, the amount of such damages, but is in the process of seeking to obtain suchinformation. Due to the reasons noted above and to the indemnificationarrangements benefiting the Company, it does not believe that the damageamounts specified in these complaints are a meaningful factor in any assessmentof the Company’s potential liability.

Norcross Safety Products L.L.C., the Company’s whollyowned subsidiary (“Norcross”), recorded a $1,250 reserve for respiratory claimsduring the year ended December 31, 2004. The Company re-evaluated this reservein its first and second quarter 2005 financial statements and concluded the$1,250 recorded reserve continued to be its best estimate of the probable lossfor the respiratory contingency.

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

9

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it waslikely their estimate of this pre-acquisition contingent liability would beincreased during the purchase accounting allocation period as the new ownershipfinalized their strategy for addressing the liability and gathered information(primarily related to case information and the working relationship among theprior owners of North), it was unlikely the amount would be lower than the$1,250. Thus, the $1,250 amount represented the low end of a probable lossrange, subject to further adjustment during the allocation period.

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

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

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

The Company believes that this reserve represents areasonable estimate of its probable and estimable liabilities for productclaims alleging injury resulting from exposure to silica dust and other particles,including asbestos. The Company believes that a five-year projection of claimsand related defense costs is the most reasonable approach. This reserve will bere-evaluated periodically and additional charges or credits will be recorded tooperating expenses as additional information becomes available.

It is possible that the Company may incur liabilitiesin an amount in excess of amounts currently reserved. However, taking intoaccount currently available information, historical experience, and the Company’sindemnification from Invensys, but recognizing the inherent uncertainties inthe projection of any future events, the Company believes that these suits orclaims should not result in final judgments or settlements in excess of itsreserve.

The Company historically has not been required to payany material 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 itsinsurance coverage will not continue to be available on terms acceptable to theCompany or that such coverage will not be adequate for liabilities actuallyincurred.

**12.****          SegmentData**

Thefollowing table presents information about the Company by segment:

10

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| ** **                            | ** ** | **General  Safety &  Preparedness** | ** ** | **Fire  Service** | ** ** | **Electrical  Safety** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|-------------------|------------|------------------------|------------|---------------|------------|------------------|------------|-----------|------------|
| **Three  Months Ended July 1, 2006**  | ** ** |                                         | ** ** | ** **        | ** ** | ** **             | ** ** | ** **    |       | ** **       | ** ** |      | ** ** | ** ** | ** ** | ** ** |
| Net sales—third  parties         |       |                                         | $          | 90,241            |       | $                      | 22,184     |          | $          | 18,850           |       |      | $          | — |   |   | $ | — |   | $ | 131,275 |   |
| Net sales—intersegment           |       |                                         | 2,238      |              | —     |                   | —     |          |       | —           |       |      | (2,238     | ) | — |   |
| Income (loss)  from operations        |       |                                         | 11,790     |              | 2,026      |                   | 4,271      |          |       | (1,651           | )          |      | —     |   | 16,436 |   |
|                                  |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |   |   |   |
| **Three  Months Ended June 30, 2007** | ** ** |                                         | ** ** | ** **        | ** ** | ** **             | ** ** | ** **    |       | ** **       | ** ** |      | ** ** | ** ** | ** ** | ** ** |
| Net sales—third  parties         |       |                                         | 106,158    |              | 25,692     |                   | 24,556     |          |       | —           |       |      | —     |   | 156,406 |   |
| Net  sales—intersegment          |       |                                         | 2,351      |              | —     |                   | 110        |          |       | —           |       |      | (2,461     | ) | — |   |
| Income (loss)  from operations        |       |                                         | 15,510     |              | 3,416      |                   | 5,057      |          |       | (2,346           | )          |      | —     |   | 21,637 |   |
|                                  |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |   |   |   |
| **Six  Months Ended July 1, 2006**    | ** ** |                                         | ** ** | ** **        | ** ** | ** **             | ** ** | ** **    |       | ** **       | ** ** |      | ** ** | ** ** | ** ** | ** ** |
| Net sales—third  parties         |       |                                         | 183,907    |              | 46,256     |                   | 37,471     |          |       | —           |       |      | —     |   | 267,634 |   |
| Net  sales—intersegment          |       |                                         | 4,903      |              | —     |                   | —     |          |       | —           |       |      | (4,903     | ) | — |   |
| Income (loss)  from operations        |       |                                         | 22,733     |              | 4,688      |                   | 9,148      |          |       | (4,219           | )          |      | —     |   | 32,350 |   |
|                                  |       |                                         |       |              |       |                   |       |          |       |             |       |      |       |   |   |   |
| **Six  Months Ended June 30, 2007**   | ** ** |                                         | ** ** | ** **        | ** ** | ** **             | ** ** | ** **    |       | ** **       | ** ** |      | ** ** | ** ** | ** ** | ** ** |
| Net sales—third  parties         |       |                                         | 205,608    |              | 49,539     |                   | 49,410     |          |       | —           |       |      | —     |   | 304,557 |   |
| Net  sales—intersegment          |       |                                         | 4,685      |              | —     |                   | 215        |          |       | —           |       |      | (4,900     | ) | — |   |
| Income (loss) from  operations        |       |                                         | 27,758     |              | 6,374      |                   | 10,704     |          |       | (4,934           | )          |      | —     |   | 39,902 |   |
|                                       |            |                                              |            |                   |            |                        |            |               |            |                  |            |           |            |  |  |  |  |  |  |  |  |  |

** **

**13.****      SubsidiaryGuarantors**

NSP HoldingsCapital Corp. is a 100% owned finance subsidiary of the Company with no assetsor operations. None of the Company’s other subsidiaries guarantee the 113/4% senior pay in kind notesdue 2012. The terms of the senior credit facility significantly restrictNorcross from paying dividends and otherwise transferring assets to theCompany. Further, the terms of the indenture governing its 97/8% senior subordinated notes due 2011significantly restrict Norcross and the Company’s other subsidiaries frompaying dividends and otherwise transferring assets to the Company, except forordinary course operating expenses.

**14.      Comprehensive Income**

Totalcomprehensive income (which includes the impact of foreign currencytranslation) was $8,705 and $10,693 for the three months ended July 1, 2006 andJune 30, 2007, respectively. Total comprehensive income was $14,096 and $15,630for the six months ended July 1, 2006 and June 30, 2007, respectively.

 

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

**Overview**

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

We classify our diverse product offerings into threeoperating segments:

*General Safety and Preparedness.*We offer a diverse portfolio of leading products for a wide variety ofindustries, including manufacturing, agriculture, automotive, construction,food processing and pharmaceutical industries and the military, under the *North*, *KCL, Fibre-Metal, NEOS,Ranger*and*Servus* brandnames. Our product offering is one of the broadest in the personal protectionequipment industry and includes respiratory protection, protective footwear,hand protection, eye, head and face protection, first aid, hearing protectionand fall protection. We sell our general safety and preparedness productsprimarily through industrial distributors.

*Fire Service.* We manufacture andmarket one of the broadest lines of personal protection equipment for the fireservice market, offering firefighters head-to-toe protection. Our productsinclude bunker gear, fireboots, helmets, gloves and other accessories. Wemarket our products under our Total Fire Group umbrella, using the brand namesof Morning Pride, *Ranger*, *Servus*,*Pro-Warrington*and*AmericanFirewear*. We are the vendor of choice for many of the largest firedepartments in North America. We sell our fire service products primarilythrough specialized fire service distributors.

*Electrical Safety.* We manufactureand market a broad line of personal protection equipment for the utility marketunder the *Salisbury, SafetyLine*and *Servus* brands. Our products include linemen equipment, gloves,sleeves and footwear. All our products either meet or exceed the applicablestandards of the American National Standards Institute (“ANSI”) and theAmerican Society for Testing of Materials (“ASTM”). We distribute ourelectrical safety products through specialized distributors, test labs,utilities and electrical contractors.

**Acquisitions**

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

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

InSeptember 2006, we completed the acquisition of all of the issued andoutstanding capital stock of NEOS. The purchase price consisted of $3.6 millionin cash (including acquisition costs of $0.1 million and net of cash acquired)and a $0.8 million subordinated seller note. In addition, the purchase pricemay be increased over a five year period based on NEOS achieving certain netsales targets. We financed the acquisition through cash on the balance sheetand the issuance of the $0.8 million subordinated seller note.

**DiscontinuedOperations**

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

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

**Resultsof Operations**

The following tablesset forth our results of operations in dollars and as a percentage of net salesfor the three and six months ended July 1, 2006 and the three and six monthsended June 30, 2007 and have been derived from the unaudited statements ofoperations.

 
| ** **                                                                   | ** ** | **Three months ended**     | ** ** | **Six months ended**    | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                                   | ** ** | **July 1,  2006**     | ** ** | **June 30,  2007** | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| ** **                                                                   | ** ** | **(dollars in thousands)** | ** ** |
| Net sales:                                                                   |       |                       |       |                    |       |   |   |   |   |
| General Safety & Preparedness                                            |       | $                          | 90,241     |                    | $          | 106,158 |   | $ | 183,907 |   | $ | 205,608 |   |
| Fire Service                                                                 |       | 22,184                     |       | 25,692                  |       | 46,256 |   | 49,539 |   |
| Electrical Safety                                                            |       | 18,850                     |       | 24,556                  |       | 37,471 |   | 49,410 |   |
| Total net sales                                                              |       | 131,275                    |       | 156,406                 |       | 267,634 |   | 304,557 |   |
| Cost of goods  sold                                                          |       | 79,157                     |       | 94,379                  |       | 163,259 |   | 185,088 |   |
| Gross profit                                                                 |       | 52,118                     |       | 62,027                  |       | 104,375 |   | 119,469 |   |
| Operating  expenses                                                          |       | 35,682                     |       | 40,390                  |       | 72,025 |   | 79,567 |   |
| Income from  operations:                                                     |       |                       |       |                    |       |   |   |   |   |
| General Safety & Preparedness                                            |       | 11,790                     |       | 15,510                  |       | 22,733 |   | 27,758 |   |
| Fire Service                                                                 |       | 2,026                      |       | 3,416                   |       | 4,688 |   | 6,374 |   |
| Electrical Safety                                                            |       | 4,271                      |       | 5,057                   |       | 9,148 |   | 10,704 |   |
| Corporate                                                                    |       | (1,651                     | )          | (2,346                  | )          | (4,219 | ) | (4,934 | ) |
| Total income  from operations                                                |       | 16,436                     |       | 21,637                  |       | 32,350 |   | 39,902 |   |
| Other expense  (income):                                                     |       |                       |       |                    |       |   |   |   |   |
| Interest expense                                                             |       | 11,392                     |       | 12,238                  |       | 22,640 |   | 24,579 |   |
| Interest income                                                              |       | (160                       | )          | (228                    | )          | (314 | ) | (453 | ) |
| Other, net                                                                   |       | (230                       | )          | 495                     |       | (525 | ) | 399 |   |
| Income from  continuing operations before income taxes and minority interest |       | 5,434                      |       | 9,132                   |       | 10,549 |   | 15,377 |   |
| Income tax  expense                                                          |       | 1,757                      |       | 3,761                   |       | 3,471 |   | 6,378 |   |
| Minority  interest                                                           |       | 4                          |       | 8                       |       | 15 |   | 14 |   |
| Income from  continuing operations                                           |       | 3,673                      |       | 5,363                   |       | 7,063 |   | 8,985 |   |
| Loss (income)  from discontinued operations, net of income tax               |       | 204                        |       | 2,974                   |       | (93 | ) | 2,813 |   |
| Net income                                                                   |       | $                          | 3,469      |                    | $          | 2,389 |   | $ | 7,156 |   | $ | 6,172 |   |

 

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| ** **                                                                   | ** ** | **Three months ended**             | ** ** | **Six months ended**    | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|-------------------------|------------|
| ** **                                                                   | ** ** | **July 1,  2006**             | ** ** | **June 30,  2007** | ** ** | **July 1,  2006** | ** ** | **June 30,  2007** | ** ** |
| ** **                                                                   | ** ** | **(as a percentage of net sales)** | ** ** |
| Net sales:                                                                   |       |                               |       |                    |       |   |   |   |   |   |   |
| General Safety & Preparedness                                            |       | 68.7                               | %          |                    | 67.9       | % | 68.7 | % |   | 67.5 | % |
| Fire Service                                                                 |       | 16.9                               | %          |                    | 16.4       | % | 17.3 | % |   | 16.3 | % |
| Electrical Safety                                                            |       | 14.4                               | %          |                    | 15.7       | % | 14.0 | % |   | 16.2 | % |
| Total net sales                                                              |       | 100.0                              | %          |                    | 100.0      | % | 100.0 | % |   | 100.0 | % |
| Cost of goods  sold                                                          |       | 60.3                               | %          |                    | 60.3       | % | 61.0 | % |   | 60.8 | % |
| Gross profit                                                                 |       | 39.7                               | %          |                    | 39.7       | % | 39.0 | % |   | 39.2 | % |
| Operating  expenses                                                          |       | 27.2                               | %          |                    | 25.9       | % | 26.9 | % |   | 26.1 | % |
| Income from  operations:                                                     |       |                               |       |                    |       |   |   |   |   |   |   |
| General Safety & Preparedness                                            |       | 9.0                                | %          |                    | 9.9        | % | 8.5 | % |   | 9.1 | % |
| Fire Service                                                                 |       | 1.5                                | %          |                    | 2.2        | % | 1.8 | % |   | 2.1 | % |
| Electrical Safety                                                            |       | 3.3                                | %          |                    | 3.2        | % | 3.4 | % |   | 3.5 | % |
| Corporate                                                                    |       | (1.3                               | )%         |                    | (1.5       | )% | (1.6 | )% |   | (1.6 | )% |
| Total income  from operations                                                |       | 12.5                               | %          |                    | 13.8       | % | 12.1 | % |   | 13.1 | % |
| Other expense  (income):                                                     |       |                               |       |                    |       |   |   |   |   |   |   |
| Interest expense                                                             |       | 8.7                                | %          |                    | 7.8        | % | 8.5 | % |   | 8.1 | % |
| Interest income                                                              |       | (0.1                               | )%         |                    | (0.1       | )% | (0.1 | )% |   | (0.1 | )% |
| Other, net                                                                   |       | (0.2                               | )%         |                    | 0.3        | % | (0.2 | )% |   | 0.1 | % |
| Income from  continuing operations before income taxes and minority interest |       | 4.1                                | %          |                    | 5.8        | % | 3.9 | % |   | 5.0 | % |
| Income tax  expense                                                          |       | 1.3                                | %          |                    | 2.4        | % | 1.3 | % |   | 2.1 | % |
| Minority  interest                                                           |       | 0.0                                | %          |                    | 0.0        | % | 0.0 | % |   | 0.0 | % |
| Income from  continuing operations                                           |       | 2.8                                | %          |                    | 3.4        | % | 2.6 | % |   | 2.9 | % |
| Loss (income)  from discontinued operations, net of income tax               |       | 0.2                                | %          |                    | 1.9        | % | (0.1 | )% |   | 0.9 | % |
| Net income                                                                   |       | 2.6                                | %          |                    | 1.5        | % | 2.7 | % |   | 2.0 | % |

*** ***

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

*Net sales.*Netsales increased by $25.1 million, or 19.1%, from $131.3 million for the threemonths ended July 1, 2006 to $156.4 million for the three months ended June 30,2007. In our general safety and preparedness segment, net sales increased by$15.9 million, or 17.6%, from $90.3 million for the three months ended July 1,2006 to $106.2 million for the three months ended June 30, 2007. The increasereflects a combination of the following: combined organic growth in our internationaloperations of $3.4 million, favorable exchange rates, which had an impact of$2.5 million, overall organic growth in our North American non-governmentbusiness of $9.2 million, and an increase in government contract shipments of$0.8 million. In our fire service segment, net sales increased by $3.5 million,or 15.8%, from $22.2 million for the three months ended July 1, 2006 to $25.7million for the three months ended June 30, 2007, due in part to the favorableimpact of the issuance of the new National Fire Protection Association (“NFPA”)standard. In our electrical safety segment, net sales increased by $5.7million, or 30.3%, from $18.9 million for the three months ended July 1, 2006to $24.6 million for the three months ended June 30, 2007, primarily driven bystrong market demand, new product penetration and incremental White Rubber netsales.

*Gross profit.*Grossprofit increased by $9.9 million, or 19.0%, from $52.1 million for the threemonths ended July 1, 2006 to $62.0 million for the three months ended June 30,2007, primarily due to the $25.1 million, or 19.1%, increase in net sales. Ourgross profit margin was 39.7% for the three months ended July 1, 2006 and June30, 2007. In our general safety and preparedness segment, gross profit increasedby $6.7 million, or 17.9%, from $37.7 million for the three months ended July1, 2006 to $44.4 million for the three months ended June 30, 2007. Thisincrease was primarily due to the overall net sales increase of $15.9 million,or 17.6%, and improved margin performance in our European operations. In ourfire service segment, gross profit increased by $1.8 million, or 26.6%, from$6.6 million for the three months ended July 1, 2006 to $8.4 million for thethree months ended June 30, 2007, primarily due to the increase in net sales of$3.5 million, or 15.8%, and favorable margin realization. In our electricalsafety segment, gross profit increased by $1.4 million, or 17.9%, from $7.8million for the three months ended July 1, 2006 to $9.2 million for the threemonths ended June 30, 2007, as the increase in net sales of $5.7 million, or30.3%, was partially offset by lower margin realization primarily due to WhiteRubber product line integration costs and the impact of product mix.

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*Operating expenses.*Operatingexpenses increased by $4.7 million, or 13.2%, from $35.7 million for the threemonths ended July 1, 2006 to $40.4 million for the three months ended June 30,2007. In our general safety and preparedness segment, operating expensesincreased $3.0 million, or 11.7%, from $25.9 million for the three months endedJuly 1, 2006 to $28.9 million for the three months ended June 30, 2007, drivenby increased variable selling and distribution expenses associated with the$15.9 million, or 17.6%, increase in net sales and higher payroll expenses. Inour fire service segment, operating expenses increased $0.3 million, or 8.2%,from $4.7 million for the three months ended July 1, 2006 to $5.0 million forthe three months ended June 30, 2007, primarily due to increased variableselling and distribution expenses related to the $3.5 million, or 15.8%,increase in net sales and higher general and administrative expenses. In ourelectrical safety segment, operating expenses increased by $0.6 million, or17.4%, from $3.5 million for the three months ended July 1, 2006 to $4.1million for the three months ended June 30, 2007, primarily due to increasedvariable selling and distributions expenses related to the $5.7 million, or30.3%, increase in net sales, higher amortization of intangibles of $0.2million associated with intangible assets recorded as part of purchaseaccounting and incremental White Rubber operating expenses. Corporate expensesfor the three months ended July 1, 2006 consisted of $1.2 million of generaland administrative expenses and $0.3 million of management incentivecompensation expense. Corporate expenses for the three months ended June 30,2007 consisted of $1.9 million of general and administrative expenses and $0.4million of management incentive compensation expense. The increase in corporategeneral and administrative expenses of $0.7 million was primarily due to higherpayroll, administrative expenses and professional fees.

*Income from operations.*Incomefrom operations increased by $5.1 million, or 31.6%, from $16.5 million for thethree months ended July 1, 2006 to $21.6 million for the three months endedJune 30, 2007. In our general safety and preparedness segment, income fromoperations increased by $3.7 million, or 31.6%, from $11.8 million for thethree months ended July 1, 2006 to $15.5 million for the three months endedJune 30, 2007, primarily due to higher net sales of $15.9 million, or 17.6%,and favorable margin realization. In our fire service segment, income fromoperations increased by $1.4 million, or 68.6%, from $2.0 million for the threemonths ended July 1, 2006 to $3.4 million for the three months ended June 30,2007, primarily due to higher net sales of $3.5 million, or 15.8%, andfavorable margin performance. In our electrical safety segment, income fromoperations increased by $0.8 million, or 18.4%, from $4.3 million for the threemonths ended July 1, 2006 to $5.1 million for the three months ended June 30,2007, as the higher net sales of $5.7 million, or 30.3%, was partially offsetby lower margin realization. Corporate expenses for the three months ended July1, 2006 consisted of $1.2 million of general and administrative expenses and$0.3 million of management incentive compensation expense. Corporate expensesfor the three months ended June 30, 2007 consisted of $1.9 million of generaland administrative expenses and $0.4 million of management incentivecompensation expense. The increase in corporate general and administrativeexpenses of $0.7 million was primarily due to higher payroll, administrativeexpenses and professional fees.

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

*Interest expense.*Interestexpense increased by $0.8 million, or 7.4%, from $11.4 million for the threemonths ended July 1, 2006 to $12.2 million for the three months ended June 30,2007, primarily due to the combined impact of higher outstanding debt balancesrelated to the White Rubber Transaction and higher non-cash interest chargesassociated with the senior pay in kind notes. Included in interest expense werenon-cash interest charges associated with the senior pay in kind notes of $4.0million and $4.5 million for the three months ended July 1, 2006 and June 30,2007, respectively.

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

*Income tax expense.*Incometax expense increased by $2.0 million, from $1.8 million for the three monthsended July 1, 2006 to $3.8 million for the three months ended June 30, 2007,primarily as a result of improved operating performance.

*Loss (income) from discontinued operations.*Lossfrom discontinued operations for the three months ended June 30, 2007 includeda $3.0 million loss related to the sale of South Africa. Loss from discontinuedoperations for the three months ended June 30, 2006 included a $0.2 millionloss associated with South Africa discontinued operations.

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*Net income.*Netincome decreased by $1.1 million, from $3.5 million for the three months endedJuly 1, 2006 to $2.4 million for the three months ended June 30, 2007 as aresult of the reasons discussed above.

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

*Net sales.*Net salesincreased by $37.0 million, or 13.8%, from $267.6 million for the six monthsended July 1, 2006 to $304.6 million for the six months ended June 30, 2007. Inour general safety and preparedness segment, net sales increased by $21.7million, or 11.8%, from $183.9 million for the six months ended July 1, 2006 to$205.6 million for the six months ended June 30, 2007. The increase reflects acombination of the following: combined organic growth in our internationaloperations of $6.5 million, favorable exchange rates, which had an impact of$4.4 million, and overall organic growth in our North American non-governmentbusiness of $14.1 million, which offset a decrease in government contractshipments of $3.3 million. In our fire service segment, net sales increased by$3.3 million, or 7.1%, from $46.2 million for the six months ended July 1, 2006to $49.5 million for the six months ended June 30, 2007, due in part to thefavorable impact of new NFPA standard. In our electrical safety segment, netsales increased by $12.0 million, or 31.9%, from $37.4 million for the sixmonths ended July 1, 2006 to $49.4 million for the six months ended June 30,2007, primarily driven by strong market demand, new product penetration andincremental White Rubber net sales.

*Gross profit.*Grossprofit increased by $15.1 million, or 14.5%, from $104.4 million for the sixmonths ended July 1, 2006 to $119.5 million for the six months ended June 30,2007, primarily due to the $37.0 million, or 13.8%, increase in net sales.Excluding the impact of inventory purchase accounting adjustments of $0.7million for the six months ended July 1, 2006, gross profit increased by $14.4million, or 13.7%. After adjusting for the inventory purchase accountingadjustments, our gross profit margin was 39.2% for the six months ended June30, 2007 as compared to 39.3% for the six months ended July 1, 2006. In ourgeneral safety and preparedness segment (after adjusting for charges related topurchase accounting of $0.7 million for the six months ended July 1, 2006),gross profit increased by $9.8 million, or 13.1%, from $75.1 million for thesix months ended July 1, 2006 to $84.9 million for the six months ended June30, 2007. This increase was primarily due to the overall net sales increase of$21.7 million, or 11.8%, and improved margin realization in our Europeanoperations. In our fire service segment, gross profit increased by $1.6million, or 11.1%, from $14.2 million for the six months ended July 1, 2006 to$15.8 million for the six months ended June 30, 2007, primarily due to theincrease in net sales of $3.3 million, or 7.1%, and the favorable marginrealization. In our electrical safety segment, gross profit increased by $3.0million, or 18.6%, from $15.8 million for the six months ended July 1, 2006 to$18.8 million for the six months ended June 30, 2007, as the increase in netsales of $12.0 million, or 31.9%, was partially offset by lower marginrealization primarily due to White Rubber product line integration costs andthe impact of product mix.

*Operating expenses.*Operatingexpenses increased by $7.5 million, or 10.5%, from $72.1 million for the sixmonths ended July 1, 2006 to $79.6 million for the six months ended June 30,2007. In our general safety and preparedness segment, operating expensesincreased $5.5 million, or 10.7%, from $51.6 million for the six months endedJuly 1, 2006 to $57.1 million for the six months ended June 30, 2007, driven byincreased variable selling and distribution expenses associated with the $21.7million, or 11.8%, increase in net sales and higher payroll expenses. In ourfire service segment, operating expenses decreased $0.1 million, or 1.1%, from$9.5 million for the six months ended July 1, 2006 to $9.4 million for the sixmonths ended June 30, 2007. In our electrical safety segment, operatingexpenses increased by $1.4 million, or 20.8%, from $6.7 million for the sixmonths ended July 1, 2006 to $8.1 million for the six months ended June 30,2007, due to increased variable selling and distribution expenses related tothe $12.0 million, or 31.9%, increase in net sales, higher amortization expenseof $0.4 million associated with intangible assets recorded as part of purchaseaccounting and incremental White Rubber operating expenses. Corporate expensesfor the six months ended July 1, 2006 consisted of $3.1 million of general andadministrative expenses and $1.1 million of management incentive compensationexpense. Corporate expenses for the six months ended June 30, 2007 consisted of$4.2 million of general and administrative expenses and $0.7 million ofmanagement incentive compensation expense. The increase in corporate generaland administrative expenses of $1.1 million was primarily due to higherpayroll, administrative expenses and professional fees.

*Income from operations.*Incomefrom operations increased by $7.6 million, or 23.3%, from $32.3 million for thesix months ended July 1, 2006 to $39.9 million for the six months ended June30, 2007. Excluding the impact of inventory purchase accounting adjustments of$0.7 million for the six months ended July 1, 2006, income from operationsincreased by $6.9 million, or 20.6%. In our general safety and preparednesssegment (after adjusting for charges related to purchase accounting of $0.7million), income from operations increased by $4.3 million, or 18.2%, from$23.5 million for the six months ended July 1, 2006 to $27.8 million for thesix months ended June 30, 2007, primarily due to higher net sales of $21.7million, or 11.8%, and favorable margin realization. In our fire servicesegment, income from operations increased by $1.7 million, or 36.0%, from $4.7million for the six months ended July 1, 2006 to $6.4 million for the sixmonths ended June 30, 

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2007,primarily due to the higher net sales of $3.3 million, or 7.1%, and favorablemargin realization. In our electrical safety segment, income from operationsincreased by $1.6 million, or 17.0%, from $9.1 million for the six months endedJuly 1, 2006 to $10.7 million for the six months ended June 30, 2007, as thehigher net sales of $12.0 million, or 31.9%, was partially offset by lowermargin realization. Corporate expenses for the six months ended July 1, 2006consisted of $3.1 million of general and administrative expenses and $1.1million of management incentive compensation expense. Corporate expenses forthe six months ended June 30, 2007 consisted of $4.2 million of general andadministrative expenses and $0.7 million of management incentive compensationexpense. The increase in corporate general and administrative expenses of $1.1million was primarily due to higher payroll, administrative expenses andprofessional fees.

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

*Interest expense.*Interestexpense increased by $2.0 million, or 8.6%, from $22.6 million for the sixmonths ended July 1, 2006 to $24.6 million for the six months ended June 30,2007, primarily due to the combined impact of higher outstanding debt balancesrelated to the White Rubber Transaction and higher non-cash interest chargesassociated with the senior pay in kind notes. Included in interest expense werenon-cash interest charges associated with the senior pay in kind notes of $8.1million and $9.1 million for the three months ended July 1, 2006 and June 30,2007, respectively.

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

*Income tax expense.*Incometax expense increased by $2.9 million, from $3.5 million for the six monthsended July 1, 2006 to $6.4 million for the six months ended June 30, 2007,primarily as a result of improved operating performance.

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

*Net income.*Netincome decreased by $1.0 million, from $7.2 million for the six months endedJuly 1, 2006 to $6.2 million for the six months ended June 30, 2007 as a resultof the reasons discussed above.

**Liquidityand Capital Resources**

We have historically used internal cash flow fromoperations, commercial borrowings on our lines of credit, seller notes,investments from our equityholders and capital markets transactions to fund ouroperations, acquisitions, capital expenditures and working capitalrequirements. For the six months ended June 30, 2007, net cash provided byoperating activities was $13.4 million, as income from operations of $39.9million was partially offset by an increase in accounts receivable due tohigher net sales. For the six months ended July 1, 2006, net cash provided byoperating activities was $5.2 million, as income from operations of $32.4million was partially offset by an increase in accounts receivables due tohigher net sales and higher inventory in part due to pending plantconsolidations.

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

As of June 30, 2007, we had working capital of $175.1million and cash of $33.5 million. We maintain inventory levels sufficient tosatisfy customer orders on demand, with generally a three month supply on hand.Bunker gear is an exception and is generally made to order. Our accountsreceivable terms are generally 30 days, net.

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For the six months ended June 30, 2007, net cash usedin financing activities consisted of $3.4 million of payments on long-termobligations (including an excess cash flow sweep payment of $2.3 million underthe terms of our senior credit facility). For the six months ended July 1,2006, net cash provided by financing activities consisted of the following:proceeds from additional term borrowings of $15.0 million under the seniorcredit facility related to the White Rubber transaction, $0.9 million ofpayments on long-term obligations, $0.6 million of proceeds from the issuanceof shares, and $0.2 million of payments for deferred financing costs.

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

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

**Forward-LookingStatements**

This Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains forward-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, maintainkey supplier status with those customers with which we have achieved suchstatus, and obtain new customers; (v) the highly competitive nature of thepersonal protection equipment industry; (vi) any future changes in management;(vii) acceptance by consumers of new products we develop or acquire; (viii) theimportance and costs of product innovation; (ix) unforeseen problems associatedwith international sales, including gains and losses from foreign currencyexchange and restrictions on the efficient repatriation of earnings; (x) theunpredictability of patent protection and other intellectual property issues;(xi) cancellation of current orders; (xii) the outcome of pending productliability claims and the availability of indemnification for those claims;(xiii) general risks associated with the personal protection equipmentindustry; and (xiv) the successful integration of acquired companies oneconomically acceptable terms. We undertake no obligation to publicly update orrevise 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, 2006.

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**Item 4. Controls and Procedures**

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

 

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**PART IIOTHER INFORMATION**

**Item 1.Legal Proceedings**

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

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

Effective July 1, 2006, we entered into a jointdefense agreement through December 31, 2008 with the former owners of the NorthSafety Products business (the “Joint Defense Agreement” or “JDA”). Under theterms of the Joint Defense Agreement, we agreed to pay a weighted averagepercentage of defense costs (including legal fees, expert witnesses and out ofpocket expenses) associated with defending ourselves and the prior owners ofthe North Safety Products business subject to a cap of $525,000, $960,000 and$1.0 million for the period from July 1, 2006 through December 31, 2006, theyear ended December 31, 2007 and the year ended December 31, 2008,respectively. The cap excludes settlement costs and other costs incurredexclusively by us (including trial costs and special requests of counsel),which we will be required to pay under the JDA. Separately, we agreed to payInvensys $200,000 related to settled cases through June 30, 2006 in whichInvensys claims that the period of alleged exposure included periods afterOctober 1998.

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

Basedupon information provided to us by Invensys, we believe activity related tothese lawsuits was as follows for the three months ended June 30, 2007:

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

 

Both the rate of new filings and the number ofexisting claimants have declined dramatically since 2003 as courts andlegislatures have tightened the rules on when and where the silica claims canbe pursued in an effort to reduce the large number of unmeritorious claims. Thenew rules make bringing silica cases on a mass level much less attractive tothe plaintiffs’ bar. Plaintiffs’ attorneys in many jurisdictions can no longer(1) find a worker with some stated exposure to silica, (2) take an X-ray of hischest, (3) have it interpreted as demonstrating lung shadows by a radiologist,(4) then file a single lawsuit in a dangerous venue with hundreds of otherplaintiffs against hundreds of defendants with the pleading containing littlemore than the parties’ names and some standard pleading language. Morespecifically, the legislatures of at least seven states — including formerhotbeds of silica litigation such as Texas, Florida and Ohio — passedimpairment-criteria legislation that redefined injury. These acts force plaintiffsto prove impairment as a result of their exposure to qualify for judicialtreatment. The same legislation requires that each silica claimant be triedindividually, and not in the multiple plaintiff format in which the potentialfor large verdicts resulted from increased plaintiffs and where a fewmeritorious claims could increase the value of unmeritorious ones. Further tortreform in Texas created a state-wide multi-district litigation (“MDL”) whereinone judge presides over the pretrial of all Texas-silica cases. In Mississippi,the Supreme Court changed the venue rules making it much more difficult to fileout-of-state plaintiffs there. The Mississippi court also changed the pleadingrequirements making the plaintiffs’ attorneys include plaintiff-specificallegations against each defendant sued, instead of the vague allegationsagainst hundreds of defendants.

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

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

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Norcross recorded a $1.25 million reserve forrespiratory claims during the year ended December 31, 2004. We re-evaluatedthis reserve in its first and second quarter 2005 financial statements andconcluded the $1.25 million recorded reserve continued to be its best estimateof the probable loss for the respiratory contingency.

In the July 2005 acquisition purchase accounting (asfirst reported in the Form 10-Q for the third quarter of 2005), we carriedforward the $1.25 million liability for this pre-acquisition contingency.Although management concluded that it was likely their estimate of thispre-acquisition contingent liability would be increased during the purchaseaccounting allocation period as the new ownership finalized their strategy foraddressing the liability and gathered information (primarily related to caseinformation and the working relationship among the prior owners of North), itwas unlikely the amount would be lower than the $1.25 million. Thus, the $1.25million amount represented the low end of a probable loss range, subject tofurther adjustment during the allocation period.

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

As discussed above, we entered into the JDA effectiveJuly 1, 2006 and completed our evaluation of the reserve. After all informationwas obtained, we adjusted the reserve to $7.0 million as part of the purchaseprice allocation process during the permitted “allocation period”. As of June30, 2007, the reserve balance was $6.8 million.

The final estimated amount recorded in purchaseaccounting related entirely to losses incurred before the July 2005acquisition. Our final estimate of the probable loss for the respiratorycontingency incorporated the new ownerships’ decision to enter into the JDA.The decision represented a significantly different plan as new ownership agreedto assume losses related to claims with unknown years of exposure. In addition,the decision to enter the JDA was being considered from the date of theacquisition and the ultimate decision was made during the allocation period.

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

It is possible that we may incur liabilities 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.

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

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

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**Item 1A.Risk Factors**

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

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

 

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, Safety Products Holdings,Inc. has duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|                 |  SAFETY  PRODUCTS HOLDINGS, INC.. |
|-----------------|----------------------------------------|
|            |                                   |
|            |                                   |
| August 13, 2007 | By:                                    | /s/ ROBERT A. PETERSON |
|            |                                   | Robert A. Peterson |
|            |                                   | President, Chief Executive Officer and Director |
|            |                                   | (Principal Executive Officer) |
|            |                                   |   |
|            |                                   |   |
| August 13, 2007 | By:                                    | /s/ DAVID F. MYERS, JR. |
|            |                                   | David F. Myers, Jr. |
|            |                                   | Executive Vice President, Chief Financial Officer, |
|            |                                   | Secretary and Director |
|            |                                   | (Principal Financial and Accounting Officer) |

 

 

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**SAFETY PRODUCTS HOLDINGS, INC.**

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

 

 

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