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 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 this table, the Company’s corporate operations are grouped into a miscellaneous column entitled, “Corporate and Other.”
The Company has performed an evaluation of subsequent events through November 10, 2009, which is the date the financial statements were issued.
On November 2, 2009, Galaxy Balloons purchased the balloon customer list, inventory, records, files and certain balloon manufacturing equipment of Ashland Graphic Arts, Inc. of Ashland, Ohio (“AGA”) pursuant to an Asset Purchase and Sale Agreement for a base purchase price of approximately $387,500. AGA manufactures, imprints, personalizes, markets and distributes a line of balloons and other inflatable products for the specialty advertising market.
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: continuing effects of the current global financial and economic crisis on demand for both consumer and industrial products, pricing and availability of goods purchased from international suppliers, 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, trends in the advertising and specialties industry 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 | Year-to-Date |
| $(000) | 2009 | 2008 | 2009 | 2008 |
| Work gloves and protective wear | 7,062 | | 9,199 | | 21,858 | | 27,646 | |
| Pet supplies | 2,250 | | 1,517 | | 5,982 | | 5,006 | |
| Promotional & specialty products | 2,946 | | 3,354 | | 6,889 | | 8,059 | |
| Total sales | 12,258 | | 14,070 | | 34,729 | | 40,711 | |
Total revenues for the three months ended September 26, 2009 decreased $1,812,000 or 12.9% from the comparable quarter in 2008 as the national and worldwide economic recession continued. The Company’s pet supplies segment was the only segment to equal or surpass last year’s third quarter revenues.
Third quarter sales in the work gloves and protective wear segment were $2,137,000, or 23.2% below the comparable period in 2008. Industrial sales decreased $1,270,000 or 29.9% due to the decline in industrial activity in the United States. Decreased consumer spending has lead to a $661,000 decrease in the Consumer sales portion of this segment. CAT® branded product sales declined $123,000 as the weak economy affected the sales of premium products. Boss Canada sales declined $83,000 and were significantly adversely affected by manufacturing cutbacks in the auto industry in Canada.
Boss Pet’s third quarter resulted in an increase in sales of $733,000 over the third quarter of 2008 as the pet supply segment continued to grow. The addition of new accounts, combined with expanded sales to existing accounts and increased pet toy sales generated by the Company’s new propriety line of plush toys, the “Fat Hedz”, allowed the pet supplies segment to surpass last year’s volume.
Sales in the promotional and specialty products segment decreased $408,000, or 12.2%, compared to the prior year. Promotional items to schools and banks have declined with the economy along with real estate/construction and automotive promotions. Traditionally these have been significant end markets for the promotional and specialty products segment.
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Consolidated revenues for the nine months ended September 26, 2009, decreased $5,982,000 or 14.7% compared to the same period in 2008. The recession has had a major impact on both the work gloves and protective wear and promotional and specialty products segment which have experienced decreases in sales of 20.9% and 14.5% respectively. The pet supplies segment has increased sales 19.5% during the first nine months of 2009 with the addition of several new accounts, expanded sales to existing accounts and new product offerings.
Cost of Sales
Cost of Sales by Segment
$(000) | Quarter | Year-to-Date |
| 2009 | 2008 | 2009 | 2008 |
| $ | % | $ | % | $ | % | $ | % |
| Work gloves and protective wear | 5,322 | 75.4% | 7,036 | 76.5% | 16,966 | 77.6% | 21,399 | 77.4% |
| Pet supplies | 1,689 | 75.1% | 1,184 | 78.0% | 4,471 | 74.7% | 3,957 | 79.0% |
| Promotional & specialty products | 1,938 | 65.8% | 2,171 | 64.7% | 4,755 | 69.0% | 5,595 | 69.4% |
| Total cost of sales | 8,949 | 73.0% | 10,391 | 73.9% | 26,192 | 75.4% | 30,951 | 76.0% |
Cost of sales for the three months ended September 26, 2009 totaled $8,949,000, down $1,442,000 from the corresponding period of 2008, and represents a 13.9% reduction from the prior year. Cost of sales for the period declined with the reduction in sales volume and as a result of cost-cutting initiatives put in place at all three segments. Gross margin for the third quarter of 2009 increased slightly to 27.0% from 26.1% for the third quarter of 2008, but overall gross profit dollars have fallen $370,000 as a result of the volume loss compared to the third quarter of 2008.
Gross margin dollars in the work glove and protective wear segment decreased $423,000 during the third quarter of 2009 compared to the third quarter of 2008. This decrease was related to the volume decline and was partially offset by cost reduction from reduced labor, freight and warehouse expenses.
The pet products segment increased its gross margin to $561,000 for the third quarter of 2009. This was $228,000 above the third quarter of 2008 and was caused by the increase in volume and improved pricing from vendors.
Gross margin for the promotional and specialty products segment declined $175,000 to $1,008,000 for the third quarter of 2009 compared to the third quarter of 2008. Cost savings at the factory/warehouse offset a portion of the margin loss created by the 12.2% reduction in the sales volume during the third quarter of 2009.
As a result of reduced volume and cost savings, cost of sales for the nine months ended September 26, 2009 decreased $4,759,000 from the same period in 2008. Cost savings from vendors, freight rates and warehouse expenses were enough to increase the gross margin percentage to 24.6% from 24.0%, but not enough to offset the total gross margin dollar loss from volume of $1,223,000.
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| Operating Expenses | | | | | | | | |
Operating Expenses
by Segment $(000) | Quarter | Year-to-Date |
| 2009 | 2008 | 2009 | 2008 |
| $ | % | $ | % | $ | % | $ | % |
| Work gloves and protective wear | 1,448 | 20.5% | 1,752 | 19.0% | 4,531 | 20.7% | 5,507 | 19.9% |
| Pet supplies | 408 | 18.1% | 208 | 13.7% | 928 | 15.5% | 670 | 13.4% |
| Promotional & specialty products | 494 | 16.8% | 612 | 18.2% | 1,406 | 20.4% | 1,684 | 20.9% |
| Corporate and other | 249 | - | 319 | - | 820 | - | 779 | - |
| Total operating expenses | 2,599 | 21.2% | 2,891 | 20.5% | 7,685 | 22.1% | 8,640 | 21.2% |
Operating expenses during the third quarter of 2009 decreased $292,000 compared to the corresponding period in 2008. Cost reductions in salaries, benefits and commissions, along with expense controls put in place in all areas account for the expense savings at work gloves and protective wear and promotional and specialty products. Pet supplies operating expenses have increased from salaries, commissions, trade shows and travel, all a result of the increase in sales activity.
For the nine month period ended September 26, 2009, consolidated operating expenses have decreased $955,000 compared to the same nine month period in 2008. Cost savings programs put in place during the first quarter to bring spending in line with sales activity at the work gloves and protective wear and promotional and specialty products segments have generated a reduction for the first nine months of 2009 of $1,254,000. Pet supplies operating expenses have increased as a result of having a full administrative staff and costs related to the increased sales volume. Corporate expenses have increased in legal and consulting costs.
| Earnings (Loss) From Operations | | | | | | | | |
Operating Income (Loss)
by Segment $(000) | Quarter | Year-to-Date |
| 2009 | 2008 | 2009 | 2008 |
| $ | % | $ | % | $ | % | $ | % |
| Work gloves and protective wear | 292 | 4.1% | 411 | 4.5% | 361 | 1.7% | 740 | 2.7% |
| Pet supplies | 153 | 6.8% | 125 | 8.2% | 583 | 9.7% | 379 | 7.6% |
| Promotional & specialty products | 514 | 17.4% | 571 | 17.0% | 728 | 10.6% | 780 | 9.7% |
| Corporate and other | (249) | - | (319) | - | (820) | - | (779) | - |
| Total operating income | 710 | 5.8% | 788 | 5.6% | 852 | 2.5% | 1,120 | 2.8% |
On a consolidated basis, the Company generated $710,000 in operating income during the third quarter of 2009, compared to $788,000 of operating income for the same period in 2008. Cost reductions and expense savings initiatives help to offset a 12.9% decline in revenue during the third quarter of 2009.
On a year-to-date basis the Company generated income from operations of $852,000 through September 26, 2009, compared to $1,120,000 for the comparable period in 2008. Earning reductions created by the 14.7% reduction in sales volume has been partially offset by cost savings.
Other Income and (Expense)
The Company incurred $68,000 in interest expense during the third quarter of 2009, a decrease of $9,000 from the third quarter of 2008. Interest income for the third quarter of 2009 was $5,000, down $2,000 from the third quarter of 2008. Because bank interest rates have fallen, interest earned on overnight investments is down substantially compared to last year. For the nine months ended September 26, 2009 interest expense was $201,000 compared to $229,000 for the same period last year.
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Taxes
In the third quarter of 2009, the Company recorded an income tax expense of $268,000 based on current federal and estimated state income tax rates. During the third quarter management reevaluated its profitability trends. Based upon its current and projected profitability management determined that it would more likely than not be able to utilize more of the NOL available then previously projected. Based on this conclusion, the Company decreased the valuation allowance and recognized a $242,000 tax benefit.
The tax benefit and tax expenses recorded for book purposes have no effect on the Company’s actual tax liability. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although the Company’s cash tax payments would remain unaffected until complete utilization of the NOL benefit. Shareholders and other users of the Company’s financial statements should carefully consider the effect of non-cash tax entries (such as adjustments to the deferred tax assets) when comparing current results with past or future financial statements of the Company.
Current Trends
The current ongoing downturn in the national and world economies has caused the Company to consider cost reductions in all aspects of its operations in order to offset lost revenue. Total sales for the nine months of 2009 were down by 14.7% compared with the prior year (20.9% in the work gloves, boots and rainwear segment). Industrial sales of work gloves, boots and rainwear are being especially adversely affected by the ongoing recession, down over 27.4% year-to-date. Based on disruption in the U.S. automobile manufacturing sector and related industrial businesses including the restructuring of the Chrysler Corporation and General Motors, management anticipates that a portion of the Company’s industrial sales base is not likely to regenerate even if the economy rebounds. The Company already has reduced its work force, both in warehousing and office staff. Inventory has been reduced and capital expenditures are being closely evaluated. Management will continue to closely monitor operating costs and attempt to keep them in line with current and projected revenues.
Liquidity and Capital Resources
Operating activities provided $5,162,000 in cash during the nine months ended September 26, 2009, compared to $1,171,000 used in 2008. This favorable cash performance in 2009 was attributable to reduced inventory in the work gloves, boots and rainwear segment and accounts receivable, which was partially offset by decreases in payables and accrued liabilities. Inventory levels are being reduced to correspond with current sales projections. The reduction in accounts receivable is a result of the 14.7% decline in sales during the nine months.
Investing activities used $200,000 during the nine months ended September 26, 2009, compared to $333,000 during the comparable period in 2008. Approximately $163,000 was spent on a new shipping software system at the work gloves and protective wear segment. The remaining amount was spent on material handling equipment at the pet supply segment and technology improvements at the promotional and specialty products segment. There are no additional capital expenditures planned for the rest of the year.
Financing activities used $257,000 during the nine months ended September 26, 2009. Pay down of long-term debt used $374,000 and Boss Canada used $23,000 for repayment on their revolving line of credit. These amounts were partially offset by proceeds from exercised stock options of $140,000. As of September 26, 2009 there were outstanding options for 231,000 shares of the Company’s common stock. There are currently no borrowings against the Company’s primary line of credit.
At September 26, 2009 the Company had $5,641,000 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 September 26, 2009. 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.
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Corporate Transactions
On August 26, 2009, the Company announced that its Board of Directors had approved a plan to deregister the Company’s common stock under the Securities Exchange Act of 1934, as amended, and as a result thereof, terminate its periodic reporting obligations with the Securities and Exchange Commission. The proposed plan is expected to permit the Company to forgo many of the expenses associated with operating as a public company, including the substantial costs associated with the compliance and auditing requirements of the Sarbanes-Oxley Act of 2002.
The deregistration will be accomplished by a reverse 1:100 stock split of the Company’s common shares. All shareholders owning fewer than 100 shares prior to the reverse stock split would be cashed out by the Company at a price of $7.65 per pre-split share. The reverse split will be followed immediately by a 100:1 forward split of the Company’s common shares, which will return all shareholders owning more than 100 shares to the same number of shares they owned prior to the reverse and forward split transactions. If, after completion of the reverse and forward stock splits, the Company has fewer than 300 shareholders of record, the Company intends to terminate the registration of its common stock under the Securities Exchange Act of 1934, as amended. If that occurs, the Company will be relieved of its requirements to comply with the Sarbanes-Oxley Act of 2002 and to file periodic reports with the SEC, including annual reports on Form 10-K and quarterly reports on Form 10-Q.
The Company’s Board of Directors received a fairness opinion from an independent financial advisor, TM Capital Corp., which provides that the price of $7.65 per share on a pre-split basis to be received by shareholders owning less than 100 shares is fair to such holders from a financial point of view. All shareholders will have a chance to vote on the proposed transaction pursuant to proxy materials which will be filed by the Company with the SEC. The Company will file a preliminary proxy statement and Schedule 13E-3 with the SEC outlining the plan.
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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 $706,000 related to Kewanee warehouse facilities. The second swap fixes at 6.32% the rate on approximately $479,000 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 4T. 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. |
| |
| |
| Dated: November 10, 2009 | By:/s/ Steven G. Pont |
| Steven G. Pont |
| | Vice President of Finance |
| (Principal financial officer) |
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