On January 30, 2006 the Company modified its loan and security agreement (the “Credit Agreement”) with a commercial bank. The revised credit agreement expires in January 2009 and provides a revolving credit facility of up to $7,000,000 based on a formula that includes eligible accounts receivable and inventories. Interest is payable monthly at rates varying from the bank’s prime rate less .75% to 1.5% or LIBOR plus 1.0% to 1.75% at the Company’s option, based on the Company’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization. The Company incurs an unused line fee of 1/8% per annum on the unused portion of the credit facility. There was no borrowing under the credit agreement as of March 31, 2007 compared to $2,742,000 as of April 1, 2006.
The Credit Agreement includes certain restrictive covenants and requires maintenance of certain financial ratios including a debt service coverage and debt to tangible net worth. Substantially all the Company’s accounts receivable and inventories secure the credit facility. As of March 31, 2007 the Company was in compliance with all financial covenants of the Credit Agreement.
The Company operates in the work gloves and protective wear segment through its Boss Manufacturing Company subsidiary, which imports, markets and distributes gloves, boots and rainwear products and hands-free lighting products. In addition, through Boss Pet and the Warren Pet Products division of BMHI, the Company imports and markets a line of pet supplies including dog and cat toys, collars, leads, chains and rawhide products. Through its Galaxy Balloons subsidiary, the Company also markets custom imprinted balloons, balls and other primarily inflatable products.
The following table provides summarized information concerning the Company’s reportable segments (in thousands). In this table, the Company’s corporate operations are grouped into a miscellaneous column entitled, “Corporate and Other.”
Item 1A. RISK FACTORS
There have been no material changes in the risk factors described in Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Certain statements, other than statements of historical fact, included in this Quarterly Report including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are, or may be deemed to be, forward-looking statements that involve significant risks and uncertainties, and accordingly, there is no assurance that these expectations will be correct. These expectations are based upon many assumptions that the registrant believes to be reasonable, but such assumptions ultimately may prove to be materially inaccurate or incomplete, in whole or in part and, therefore, undue reliance should not be placed on them. Several factors which could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to: availability and pricing of goods purchased from international suppliers, successful integration of acquired companies, unusual weather patterns which could affect domestic demand for the registrant’s products, pricing policies of competitors, the ability to attract and retain employees in key positions and uncertainties and changes in general economic conditions. The words “believe,” “expect”, “anticipate”, “should”, “could” and other expressions that indicate future events and trends identify forward-looking statements. All subsequent forward-looking statements attributable to the registrant or persons acting on its behalf are expressly qualified in their entirety.
Sales
| Sales by Segment | Quarter |
| $(000) | 2007 | 2006 |
| Work gloves and protective wear | 9,103 | 9,462 |
| Pet supplies | 2,218 | 2,277 |
| Promotional & specialty products | 2,048 | 1,937 |
| Total sales | 13,369 | 13,676 |
Total revenues for the three months ended March 31, 2007 decreased $307,000 or 2.2% from the comparable quarter in 2006. Sales declines in the Company’s work gloves and protective wear and pet supplies segments were partially offset by an increase in the promotional and specialty products segment.
In the Company’s work gloves and protective wear segment, sales decreased $359,000, or 3.8%, during the first quarter of 2007 compared to 2006. A warm fourth quarter of 2006 stopped customers from re-ordering gloves for delivery in the first quarter of 2007. In addition, the first quarter of 2006 included a large shipment to a major customer that was not repeated in 2007. Sales in the work gloves and protective wear segment are historically lower during warm weather months.
Sales in the promotional and specialty products segment increased $111,000, or 5.7%, during the first quarter of 2007, compared to the first quarter of 2006. This increase was from non-balloon products as the company continues its efforts to expand its product line. Galaxy sales have historically exhibited significant seasonality, with sales reaching a seasonal low during the holiday season through January, then building to a seasonal peak in late summer.
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In the pet supplies segment, sales decreased $59,000, or 2.6%, during the first quarter of 2007 compared to 2006. During the past year, the largest customer in this segment has initiated a direct import program on high volume styles under which the Company acts as agent in the purchase of goods. This arrangement is beneficial in maintaining an important customer relationship, but has resulted in lower selling prices and margins in the pet supplies segment.
Cost of Sales
Cost of Sales by Segment
$(000) | Quarter |
| 2007 | 2006 |
| $ | % | $ | % |
| Work gloves and protective wear | 6,937 | 76.2% | 7,345 | 77.6% |
| Pet supplies | 1,658 | 74.8% | 1,816 | 79.8% |
| Promotional & specialty products | 1,570 | 76.7% | 1,448 | 74.8% |
| Total cost of sales | 10,165 | 76.0% | 10,609 | 77.6% |
Cost of sales for the three months ended March 31, 2007 totaled $10,165,000, down $444,000 from the corresponding period of 2006, with cost of sales as a percentage of sales down 1.6 % from the prior year. In the work gloves and protective wear segment, margins improved by 1.4% due primarily to price increases put into place at the end of last year and strategic volume purchases of certain key styles at lower costs.
Margins in the pet supplies segment improved by 5.0% due mainly to lower freight and warehousing costs. During the first quarter of 2007, the Company consolidated its two pet businesses, Warren Pet and Boss Pet, into a single facility in Cleveland, Ohio. The Company anticipates that this facility consolidation will produce cost savings for the pet supplies segment. Margins in the promotional and specialty products decreased 1.9% as a result of the product mix.
Costs in the work gloves and protective wear segment remain volatile with the Company expecting significant cost increases on certain goods, particularly leather gloves and those constructed of petroleum based and latex raw materials. Management will attempt to pass such cost increases through to customers to maintain margins, though competitive pressures could make this difficult.
Operating Expenses
Operating Expenses
by Segment $(000) | Quarter |
| 2007 | 2006 |
| $ | % | $ | % |
| Work gloves and protective wear | 1,822 | 20.0% | 1,940 | 20.5% |
| Pet supplies | 319 | 14.4% | 349 | 15.3% |
| Promotional & specialty products | 537 | 26.2% | 496 | 25.6% |
| Corporate and other | 268 | - | 252 | - |
| Total operating expenses | 2,946 | 22.0% | 3,037 | 22.2% |
Total operating expenses decreased $91,000 during the first quarter of 2007 compared to the corresponding period in 2006. Savings in commissions and selling expenses at the work glove and protective wear and pet supplies segments were partially offset by increases at promotional and specialty products, which incurred additional administrative expenses over the prior year.
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Earnings (Loss) From Operations
Operating Income (Loss) by Segment
$(000) | Quarter |
| 2007 | 2006 |
| $ | % | $ | % |
| Work gloves and protective wear | 344 | | 3.8% | 177 | | 1.9% |
| Pet supplies | 241 | | 10.9% | 112 | | 4.9% |
| Promotional & specialty products | (59 | ) | -2.9% | (7 | ) | -0.4% |
| Corporate and other | (268 | ) | - | (252 | ) | - |
| Total operating income | 258 | | 1.9% | 30 | | 0.2% |
On a consolidated basis, the Company’s operating income for the first quarter of 2007 increased by $228,000 compared to 2006 due to improved margins and lower operating expenses. The work gloves and protective wear and pet supplies segments, provided improved margins, lower freight and warehousing costs and operating expense savings. Promotional and specialty products earnings declined from lower margins as a result of the product mix for the first quarter.
Other Income and (Expense)
The Company incurred $69,000 in interest expense during the first quarter of 2007, a decrease of $55,000 from the comparable period in 2006. This was a result of having enough cash to fund working capital without borrowing on the line of credit.
Taxes
In the first quarter of 2007, the Company recorded an income tax expense of $81,000 based on current federal and estimated average state income tax rates. The federal income tax portion of the tax provision is a non-cash expense, because the Company has substantial net operating loss carryforwards for federal income tax purposes resulting from losses in prior years.
Liquidity and Capital Resources
Operating activities provided $773,000 in cash during the first quarter of 2007, compared to $114,000 in 2006. This favorable cash performance was primarily attributable to reduced inventory and accounts receivable.
Investing activities used $129,000 in the first quarter of 2007, compared to $65,000 during the comparable period in 2006. The increased level of capital expenditures in 2007 consisted primarily of facility improvements resulting from consolidation of the pet supplies segment into its new facilities in Cleveland and some information technology enhancements at the promotional and specialty products segment. The Company expects to make information technology enhancements at the corporate office in the second quarter at a cost of approximately $117,000. The Company currently has no other material commitments for capital expenditures.
Financing activities used $68,000 for the first quarter of 2007. The Company paid down long-term term loans by $134,000 and received $66,000 from the exercise of stock options. There are currently no borrowings against the line of credit.
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At March 31, 2007 the Company had $1,573,000 in cash with zero borrowings against its $7,000,000 revolving line of credit. The Company was in compliance with its credit facility loan covenants as of March 31, 2007. Management believes the Company’s cash on hand and availability under the credit facility should provide ample liquidity for the Company’s expected working capital and operating needs.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company has minimal exposure to market risks such as changes in foreign currency exchange rates and interest rates. The value of the Company’s financial instruments is generally not materially impacted by changes in interest rates. The Company has entered into two interest rate swap agreements. The first effectively fixes at 5.83% the interest rate on its mortgage note with a current value of approximately $888,000 related to Kewanee warehouse facilities. The second swap fixes at 6.32% the rate on approximately $774,000 of the Company’s term loan related to the Galaxy acquisition. Fluctuations in interest rates are not expected to have a material impact on the interest expense incurred under the Company’s revolving credit facility.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. --OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various legal actions incident to the normal operation of its business. These lawsuits primarily involve claims for damages arising out of commercial disputes. The Company has been named as a defendant in several lawsuits alleging past exposure to asbestos contained in gloves sold by one of the Company’s predecessors-in-interest, all of which actions are being defended by one or more of the Company’s products liability insurers. Management believes the ultimate disposition of these matters should not materially impact the Company’s consolidated financial position or liquidity.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
(a)Exhibits
| | 31.1 | | Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.2 | | Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | BOSS HOLDINGS, INC. |
| |
| |
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| Dated: | May 15, 2007 | | By: | /s/ Steven G. Pont | |
| | | | Steven G. Pont |
| | | | Vice President of Finance |
| | | | (Principal financial officer) |
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