UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2003
Commission File No. 0-23204
BOSS HOLDINGS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-1972066
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
221 West First Street
Kewanee, Illinois 61443
----------------------------------------
(Address of principal executive offices)
(309) 852-2131
---------------------------
(Issuer's telephone number)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for at least
the past 90 days. Yes [ X ] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at October 31, 2003
- --------------------------------------------------------------------------------
Common Stock, $.25 par value 1,952,404
1
PART I.- FINANCIAL INFORMATION
Item 1. Financial Statements
BOSS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
(Unaudited)
September 27, December 28,
2003 2002
ASSETS ---------------------------
Current Assets
Cash and cash equivalents ....................... $ 3,881 $ 4,874
Accounts receivable, net ........................ 5,240 7,105
Inventories ..................................... 11,455 8,603
Prepaid expenses and other ...................... 304 531
----------------------
Total current assets ...................... 20,880 21,113
----------------------
Property and Equipment, net ....................... 2,972 3,331
Assets Held for Sale .............................. 1,694 --
Other Assets ...................................... 115 37
----------------------
$ 25,661 $ 24,481
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................ $ 495 $ 978
Current portion of long term obligations ........ 243 155
Accrued payroll and related expenses ............ 494 551
Accrued liabilities & other ..................... 1,392 1,263
----------------------
Total current liabilities ................. 2,624 2,947
----------------------
Long-Term Debt, Net of Current Portion ............ 2,936 1,306
Other Long-Term Obligations ....................... 87 8
Stockholders' Equity
Common stock, $.25 par value; 10,000,000
shares authorized; shares issued and
outstanding 1,952,404 ......................... 488 488
Additional paid-in capital ...................... 67,463 67,463
Accumulated deficit ............................. (46,063) (45,865)
Accumulated other comprehensive deficit ......... (124) (116)
----------------------
21,764 21,970
Less: treasury shares - at cost ................ 1,750 1,750
----------------------
Total stockholders' equity ................ 20,014 20,220
----------------------
$ 25,661 $ 24,481
======================
The accompanying notes are an integral part of these statements.
2
BOSS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLDIATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Nine Months Nine Months
Quarter Ended Quarter Ended Ended Ended
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
---------------------------------------------------------
Net sales ............................ $ 8,017 $ 7,734 $ 25,684 $ 23,179
Cost of sales ........................ 5,027 4,900 15,998 14,748
--------------------------------------------------------
Gross profit ......................... 2,990 2,834 9,686 8,431
Operating expenses ................... 3,235 2,905 10,079 8,475
--------------------------------------------------------
Loss from operations ................. (245) (71) (393) (44)
--------------------------------------------------------
Other income and (expenses):
Interest income .................... 14 25 51 65
Interest expense ................... (44) (32) (104) (79)
Other .............................. 3 (55) 248 719
--------------------------------------------------------
(Loss) earnings before income tax .... (272) (133) (198) 661
Income tax expense ................... -- -- -- --
--------------------------------------------------------
Net (loss) earnings .................. $ (272) $ (133) $ (198) $ 661
========================================================
Weighted average shares outstanding .. 1,952,404 1,940,674 1,952,404 1,936,821
Basic (loss) earnings per common share $ (0.14) $ (0.07) $ (0.10) $ 0.34
========================================================
Diluted (loss) earnings per common
share .............................. $ (0.14) $ (0.07) $ (0.10) $ 0.33
========================================================
Comprehensive (loss) earnings:
Net (loss) earnings ................ $ (272) $ (133) $ (198) $ 661
Unrealized loss on interest
rate swap ........................ (8) -- (8) --
--------------------------------------------------------
Comprehensive (loss) earnings ........ $ (280) $ (133) $ (206) $ 661
========================================================
The accompanying notes are an integral part of these statements.
3
BOSS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLDIATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Nine Months
Ended Ended
September 27, September 28,
2003 2002
-----------------------------
Cash Flows (Used) Provided by Operating Activities:
Net (loss) earnings .................................... $ (198) $ 661
Adjustments to reconcile net (loss) earnings to
net cash (used) provided by operations:
Depreciation and amortization ........................ 235 249
Gain on sale of available-for-sale securities ........ -- (238)
(Increase) decrease in operating assets:
Accounts receivable ................................ 1,865 843
Inventories ........................................ (2,852) 1,794
Prepaid expenses and other current assets .......... 227 230
Other assets ....................................... (78) --
Increase (decrease) in operating liabilities:
Accounts payable ................................... (483) (96)
Accrued liabilities ................................ 64 61
Other liabilities .................................. 79 --
-----------------------
Net cash (used) provided by operating activities . (1,141) 3,504
-----------------------
Cash Flows (Used) Provided by Investing Activities:
Purchases of property and equipment .................... (1,320) (170)
Proceeds from sale of operating assets ................. -- 644
-----------------------
Net cash (used) provided by investing activities . (1,320) 474
-----------------------
Cash Flows Provided (Used) by Financing Activities:
Net repayments on revolving line of credit ............. -- (762)
Borrowings on long-term debt ........................... 1,640 --
Repayment of long-term debt ............................ (172) (116)
Proceeds from exercise of stock options and warrants ... -- 30
---------------------
Net cash provided (used) by financing activities . 1,468 (848)
---------------------
Effect of exchange rates on cash and cash equivalents .... -- 1
---------------------
Net (decrease) increase in cash during period ............ (993) 3,131
Cash and cash equivalents at the beginning of the period . 4,874 2,039
---------------------
Cash and cash equivalents at the end of the period ....... $3,881 $5,170
=====================
The accompanying notes are an integral part of these statements.
4
BOSS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 2003
Note 1. Basis of Presentation
The consolidated financial statements included in this report have been prepared
by Boss Holdings, Inc. (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission for interim reporting and include all
normal and recurring adjustments which are, in the opinion of management,
necessary for a fair presentation. These financial statements have not been
audited by an independent accountant. The consolidated financial statements
include the accounts of the Company and its subsidiaries.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes that the
disclosures are adequate to prevent the information from being misleading.
However, these financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K, for the year ended December 28, 2002. The financial data for the
interim periods presented may not necessarily reflect the results to be
anticipated for the complete year.
Note 2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Quarter Ended Nine Months Ended
------------------------ -------------------------
27-Sep 28-Sep 27-Sep 28-Sep
2003 2002 2003 2002
---------------------------------------------------------
Numerator for basic and diluted net earnings
(loss) per common share - earnings (loss)
attributable to common stockholders $ (272) $ (133) $ (198) $ 661
=========================================================
Denominator for basic net earnings (loss)
per common share - weighted average
shares outstanding 1,952 1,941 1,952 1,937
Effect of dilutive securities:
Employee stock options -- -- -- 93
---------------------------------------------------------
Denominator for diluted earnings (loss)
per common share 1,952 1,941 1,952 2,030
=========================================================
Basic earnings (loss) per common share $ (0.14) $ (0.07) $ (0.10) $ 0.34
=========================================================
Diluted earnings (loss) per common share $ (0.14) $ (0.07) $ (0.10) $ 0.33
=========================================================
Note 3. Inventories
Inventories consist of the following (in thousands):
27-Sep 28-Dec
2003 2002
---------------------------
Raw materials .......................... $ 116 $ 139
Finished goods ......................... 11,339 8,464
---------------------------
$11,455 $ 8,603
===========================
5
Note 4. Springfield Warehouse Disposal
On April 15, 2003, the Company purchased certain buildings located in Kewanee,
IL. After renovating these buildings, the Company closed its Springfield, IL
distribution center and consolidated its Boss Manufacturing regional warehouse
operations in Kewanee as of September 27, 2003. During the first quarter of
2003, the Company recorded a charge of $170,000 in its operating expenses for
estimated exit and disposal costs associated with the closing of its Springfield
facility. Based on expenditures incurred through September 27, 2003, the Company
reduced this charge by $60,000 at the end of the third quarter. The following
schedule provides an analysis of the initial cost estimate, costs incurred and
the remaining balance of the accrued liability for exit and disposal costs as of
September 27, 2003:
29-Mar-03 27-Sep-03
Beginning Costs Estimate Ending
Balance Incurred Reduction Balance
--------------------------------------------
Termination benefits ........... $ 50,000 $ 35,000 $ -- $ 15,000
Relocation of inventory
and equipment ................ 81,000 6,000 60,000 15,000
Contract termination and
other relocation costs ....... 39,000 13,000 -- 26,000
--------------------------------------------
Total .................. $170,000 $ 54,000 $ 60,000 $ 56,000
============================================
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", the Springfield facility was
classified as an asset held for sale as of March 29, 2003. Effective with the
beginning of the second quarter 2003, the Company stopped recording depreciation
on this asset. SFAS 121 requires assets held for sale to be valued at the lower
of carrying value or fair value less cost to sell. Based on previous property
appraisals and analysis of real estate values with commercial realtors in the
Springfield area, management estimates the fair value less disposition costs of
the Springfield facility to equal or exceed the property's carrying value.
Accordingly, the accompanying financial statements report the Springfield
facility at its carrying value.
Note 5. Interest Rate Swap Agreement
In July 2003, the Company entered into an interest rate swap agreement related
to its $1.04 million mortgage note. The swap is utilized to effectively fix the
interest rate on the debt at 5.83%. The differential to be paid or received on
the swap agreement is accrued as interest rates change and is recognized over
the life of the loan as interest expense. Included in accumulated other
comprehensive deficit is a loss of approximately $8,000 relating to the fair
value of the swap agreement as of September 27, 2003.
Note 6. Reclassifications
Certain expenses in the consolidated statements of operations have been
reclassified, with no effect on net earnings (loss) or earnings (loss) per
common share, to be consistent with the classifications adopted for the quarter
ended September 27, 2003.
Note 7. Stock Options
At September 27, 2003, the Company had two stock option plans providing for the
issuance of options covering up to 425,000 shares of common stock to be issued
to officers, directors, or consultants to the Company. Prior to 2003, the
Company elected to follow the intrinsic value method under APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), in accounting for its stock
options. Under the provisions of APB 25, no stock-based employee compensation
was recorded in years prior to 2003 because all options granted had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
Effective December 29, 2002, the Company adopted the fair value recognition
provisions of FASB Statement No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure ("SFAS 148"), on a prospective basis for all employee
awards granted, modified, or settled after December 29, 2002. Awards under the
Company's plans generally vest over a three to four year period. The cost
related to stock-based compensation included in the determination of net income
for the periods presented is less than that which would have been recognized if
the fair value based method had been applied to awards issued during prior
periods.
6
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied. This pro forma presentation
utilizes fair values developed by Company management with the Black-Scholes
options-pricing model using the following weighted average assumptions for 2003
and 2002, respectively: expected volatility 53% and 53%, expected dividend yield
of 0% and 0%, weighted average risk-free rate of return of 4.6% and 2.6%, and
expected lives of 5 and 5 years. The Company amortizes the estimated fair value
of the options over their vesting period for purposes of pro forma disclosure
and recording stock-based compensation expense under SFAS 148.
Quarter Ended Nine Months Ended
---------------------------------------------
27-Sep 28-Sep 27-Sep 28-Sep
$(000) Except Per Share Data 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------
Net (loss) earnings, as reported ....... $ (272) $ (133) $ (198) $ 661
Less: stock-based compensation expense
determined under fair value based
method net of related tax effects .... (15) (18) (45) (53)
---------------------------------------------
Pro forma net (loss) earnings .......... $ 287 $ (151) $ (243) $ 608
=============================================
(Loss) earnings per share - as reported:
Basic ................................ $ (0.14) $ (0.07) $ (0.10) $ 0.34
=============================================
Diluted .............................. (0.14) (0.07) (0.10) $ 0.33
=============================================
(Loss) earnings per share - pro forma:
Basic ................................ $ (0.15) $ (0.08) $ (0.12) $ 0.31
=============================================
Diluted .............................. $ (0.15) $ (0.08) $ (0.12) $ 0.30
=============================================
Stock option transactions are summarized as follows:
Nine Months Ended Year Ended
27-Sep-03 28-Dec-02
------------------ --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-----------------------------------------
Outstanding, beginning of period ........ 341,080 $ 2.19 208,580 $ 2.28
Granted ................................. 20,000 3.20 150,000 2.02
Exercised ............................... -- -- (17,500) 1.75
-----------------------------------------
Outstanding, end of period .............. 361,080 $ 2.25 341,080 $ 2.19
=========================================
7
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,
unusual weather patterns which could affect domestic demand for the registrant's
products, pricing policies of competitors, investment results on funds invested
in marketable securities by management, 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
Quarter Year-to-Date
Sales by Segment --------------------------------------
$(000) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Work Gloves & Protective Wear ...... 6,989 7,086 21,072 20,673
Pet Supplies ....................... 972 516 3,941 1,809
Corporate & Other .................. 56 132 671 697
--------------------------------------
Total Sales ........................ 8,017 7,734 25,684 23,179
======================================
Consolidated revenues for the three months ended September 27, 2003 totaled
$8,017,000, up $283,000 or 3.7% from the comparable quarter in 2002. Sales
increased in the Company's pet supplies segment due to sales associated with the
Boss Pet operation acquired in the fourth quarter of 2002. Sales in the pet
supplies segment increased $456,000, or 88%, compared to the previous year.
Revenues at the Boss Pet operation totaled $497,000 while Warren Pet sales
declined slightly during the third quarter. The Company anticipates lower sales
in this segment during the fourth quarter, which is historically a weak quarter
for pet supplies. Sales in the Boss Pet operation are generally in line with
expectation and the Company believes sales in this segment should increase in
the coming year based on customer response to date.
In the Company's primary work gloves and protective wear segment, third quarter
sales of $6,989 declined 1.4% from 2002. Revenues in the Company's consumer
market declined approximately 6% due in part to temporary delays in shipping
resulting from the consolidation of warehouses at the end of the quarter.
Industrial market revenues increased 6% on a comparable increase in unit volume.
The Company has increased its utilization of manufacturer's representatives in
the industrial market to improve market coverage. Management expects sales in
the work gloves and protective wear segment to increase during the fourth
quarter as demand increases for cold weather products, though warmer than normal
weather could negatively impact seasonal sales. In addition, the consolidation
of warehouses may cause shipping delays during the fourth quarter. The Company
has been advised that one of its consumer accounts, representing 2.3% of 2002
consolidated sales, will utilize a competitive glove supplier in 2004.
Management plans to offset this loss with sales of CAT(R) branded products in
the year ahead.
8
On a year-to-date basis, consolidated sales were up $2,505,000, or 10.8%, in
2003 with the bulk of this increase attributable to the pet supplies segment.
Sales in the Company's new Boss Pet operation accounted for this increase while
Warren Pet sales declined slightly for the year. In addition, sales increased in
the work gloves and protective wear segment on 7% revenue growth in the
industrial market. This growth resulted from higher unit sales attributable to
customer additions resulting in part from increased use of certain
manufacturer's representative groups.
Cost of Sales
Quarter Year-to-Date
-------------------------------- ---------------------------------
2003 2002 2003 2002
Cost of Sales by --------------------------------------------------------------------
Segment $(000) $ % $ % $ % $ %
- -----------------------------------------------------------------------------------------------------
Work Gloves & Protective Wear 4,349 62.2 4.479 63.2 13,011 61.7 13,223 64.0
Pet Supplies ................ 647 66.6 350 67.8 2,664 67.6 1,166 64.5
Corporate & Other ........... 31 55.4 71 53.8 323 48.1 359 51.5
--------------------------------------------------------------------
Total Cost of Sales ......... 5,027 62.7 4,900 63.4 15,998 62.3 14,748 63.6
====================================================================
Cost of sales for the three months ended September 27, 2003 totaled $5,027,000
compared to $4,900,000 in the corresponding period of 2002. As a percentage of
sales, consolidated cost of sales declined .7% due primarily to improved margins
in the Company's work gloves and protective wear segment. Costs have continued
to decline during 2003, though at a much slower rate than in recent years.
Management anticipates cost increases on certain products in coming months due
to the reduction of certain foreign government subsidies and increased raw
material costs.
For the nine-month period, cost of sales increased $1,250,000, while declining
1.3% as a percentage of sales. Cost of sales increased in dollars due to higher
sales during the year, but decreased as percentage of sales due to improved
margins in the work gloves and protective wear segment. Despite lower selling
prices in this segment, the Company increased margin through aggressive
purchasing efforts, including advance purchases of certain styles in
anticipation of future price increases.
Operating Expenses
Quarter Year-to-Date
------------------------------------------------------------------
2003 2002 2003 2002
Operating Expenses by ------------------------------------------------------------------
Segment $(000) $ % $ % $ % $ %
- -------------------------------------------------------------------------------------------------------------
Work Gloves & Protective Wear 2,517 36.0 2,327 32.8 7,909 37.5 6,758 32.7
Pet Supplies 421 43.3 229 44.4 1,216 30.9 675 37.3
Corporate & Other 297 - 349 - 954 - 1,042 -
------------------------------------------------------------------
Total Operating Expenses 3,235 40.4 2,905 37.6 10,079 39.2 8,475 36.6
==================================================================
Operating expenses totaled $3,235,000 during the third quarter of 2003, up
$330,000 from the corresponding period in 2002. The increase in the pet supplies
segment was primarily attributable to the new Boss Pet operations. In addition,
operating expenses in the work gloves and protective wear segment increased due
to the following factors:
o Administrative and other - Expenses in this area increased $79,000 for the
quarter due in part to higher administrative payroll expenses attributable
to staff additions and general salary increases. In addition, outbound
freight expense increased primarily as a result of higher freight rates and
increased unit volume.
o Selling expenses - During the third quarter of 2003, selling expenses
increased $46,000 due in large part to expenses associated with launching
CAT(R) branded products, higher trade show expenses and increased
commissions. The Company anticipates start-up expenses in connection with
CAT(R) branded work gloves and rainwear to continue through the end of
2003, though product sales may be modest during this period. Management
believes the CAT(R) brand will provide significant future sales
opportunities in the consumer market.
9
The Company incurred increased costs associated with expanding its presence
at certain trade shows. Such shows play an important role in the Company's
success in improving market penetration in various channels of
distribution. Commissions increased due to the retention of certain new
manufacturer's representative groups, particularly in the industrial
market, in an effort to increase penetration in certain regions of the
country.
o Warehouse consolidation - Warehouse expense increased a net $25,000 during
the third quarter of 2003 compared to the comparable period in 2002. The
Company hired additional staff in Kewanee and incurred additional
warehousing consolidation expenses prior to the close of the Springfield
distribution center. These increased expenses were largely offset by a
reduction in the Springfield closing and disposition estimate. After
reviewing costs incurred through the third quarter, management concluded
its 1st quarter Springfield closing estimate of $170,000 was overstated by
approximately $60,000 due primarily to lower than expected cost to relocate
inventory and certain equipment.
For the nine-month period ended September 27, 2003, operating expenses increased
$1,604,000 compared to the prior year. This increase was primarily attributable
to the following factors in the work gloves and protective wear segment:
o Selling expenses increased $450,000, due in part to the introduction of
CAT(R) branded products with trade show and commission expenses also up
from 2002.
o Administrative and other expenses rose $304,000 due to several factors
including higher outbound freight and increased administrative payroll as
noted in the second quarter discussion.
o Warehousing expenses increased $245,000 because of expenses associated with
the consolidation of warehouse facilities in Kewanee.
In addition, operating expenses in the pet supplies segment increased as a
result of expenses at the Company's new Boss Pet operations.
Earnings (Loss) From Operations
Quarter Year-to-Date
Earnings (Loss) ------------------------------------------------------------
From Operations 2003 2002 2003 2002
by Segment $(000) $ % $ % $ % $ %
- --------------------------------------------------------------------------------------------
Work Gloves & Protective Wear 123 1.7 280 3.5 152 1.4 691 3.4
Pet Supplies ................ (96) (9.9) (63) (12.2) 61 1.6 (32) (1.8)
Corporate & Other ........... (272) -- (288) -- (606) -- (703) --
-------------------------------------------------------------
Total Operating Loss ........ (245) (3.1) (71) (1.3) (393) (1.0) (44) (0.2)
=============================================================
On a consolidated basis, the Company's operating loss for the third quarter of
2003 increased to $245,000 from $71,000 during the same period in 2002. The
Company typically operates at a loss during warm weather months. The increased
loss in the third quarter was primarily attributable to lower earnings in the
work gloves and protective wear segment, which resulted primarily from increased
operating expenses in this segment.
The loss from operations for the nine months through September 2003 totaled
$393,000, an increase of $349,000 from the comparable period in 2002. Higher
operating expenses in the work gloves and protective wear segment led to reduced
earnings in this segment. Improved earnings in the pet supplies segment
attributable in large part to the new Boss Pet operations partially offset the
lower earnings in the work gloves and protective wear segment.
Other Income and (Expense)
The Company incurred $44,000 in interest expense during the third quarter of
2003, an increase of $12,000 from the comparable period in 2002 due to increased
borrowings in connection with the acquisition of new warehouse facilities.
Interest income decreased from $25,000 in the third quarter of 2002 to $14,000
in the third quarter of 2003 due in large part to lower interest rates.
Interest expense for the nine months ended September 27, 2003 increased $25,000
from the comparable period in 2002 due to increased borrowings in connection
with the acquisition of new warehouse facilities during the second quarter.
Other income during the first nine months of 2003 included foreign exchange
gains on the Company's Canadian operation and gains on marketable securities.
The Company held no marketable securities at the end of the third quarter of
2003. Other income during the comparable period in 2002 included gains of
$500,000 from a settlement concerning a former officer and $238,000 from the
sale of certain stock received in connection with the demutualization of
Principal Financial Group, Inc.
10
Taxes
Because of losses in prior years, the Company recorded no federal income tax
expense during the periods presented and has available substantial net operating
loss carryforwards for federal income tax purposes. These carryforwards have
certain limitations due to a change in control experienced in 1996.
Liquidity and Capital Resources
Operating activities used $1,141,000 in cash for the nine months ended September
27, 2003, compared to providing cash of $3,504,000 in the previous year. The
primary changes from the prior year were in inventories, accounts receivable and
net earnings. Inventories used $2,852,000 in 2003 as opposed to providing cash
in the prior year. During 2003, the Company increased inventories of various key
items in anticipation of increasing prices. In addition, the Company built
inventory levels in the pet supplies segment due to the new Boss Pet operation.
Accounts receivable declined compared to the previous year due in large part to
improved collection efforts.
Investing activities used $1,320,000 through September 27, 2003, compared to
providing $474,000 during the comparable period in 2002. In 2003, the purchase
of warehouse facilities in Kewanee and related improvements represented the bulk
of the Company's investing activities. Improvements on these facilities were
substantially complete by the end of the third quarter. During 2002, purchases
of property and equipment totaled $170,000, incurred primarily in connection
with certain headquarters improvements, warehouse facility improvements and
computer system networking enhancements. Also during 2002, the Company sold its
holding of Principal Financial Group, Inc. stock realizing gross proceeds from
this sale of $644,000.
Cash flows provided by financing activities totaled $1,468,000 during the first
nine months of 2003 due primarily to borrowings obtained in connection with the
purchase of new warehouse facilities. The Company borrowed sufficient funds to
accommodate planned capital improvements on these facilities. During 2002, the
Company paid down debt by $878,000 with cash provided by operations.
At September 27, 2003, the Company had $3,881,000 in cash with no borrowings
under its $8 million revolving line of credit. Due to certain collateral
limitations, the Company's availability under this line totaled $7,557,000 as of
September 27, 2003. 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.
During July 2003, the Company entered into an interest rate swap agreement
related to its $1.04 million mortgage note on Kewanee warehouse facilities. The
swap is utilized to effectively fix the interest rate on this debt at 5.83%.
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 manufactured or
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. Changes in Securities
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 and Reports on Form 8-K
(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.
(b) Reports on Form 8-K
The Company filed an 8-K report dated September 2, 2003 announcing
that the Audit Committee of the Company's Board of Directors
engaged McGladrey & Pullen, LLP as the Registrant's independent
accountants. In addition, the Audit Committee of the Board of
Directors dismissed Grant Thornton LLP as the Registrant's
independent accountants.
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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 11, 2003 By: /s/ J. Bruce Lancaster
------------------- -----------------------------
J. Bruce Lancaster
Chief Financial Officer
(principal financial officer)
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