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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 March 27,2004
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
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 April 28, 2004
- ---------------------------- -----------------------------
Common Stock, $.25 par value 1,918,300
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)
March 27, December 27,
2004 2003
-----------------------
ASSETS
Current Assets
Cash and cash equivalents ................................... $ 3,999 $ 4,479
Accounts receivable, net .................................... 6,181 6,254
Inventories ................................................. 10,738 10,759
Prepaid expenses and other .................................. 349 426
-------------------
Total current assets .................................. 21,267 21,918
Property and Equipment, net ................................... 3,108 3,043
Net Assets Held for Sale ...................................... 1,694 1,694
Other Assets .................................................. 194 143
-------------------
$26,263 $26,798
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ............................................ $ 659 $ 798
Current portion of long-term debt ........................... 340 383
Accrued payroll and related expenses ........................ 427 538
Accrued liabilities ......................................... 1,083 1,309
-------------------
Total current liabilities ............................. 2,509 3,028
Long-Term Debt, Net of Current Portion ........................ 2,767 2,800
Deferred Compensation ......................................... 165 114
Stockholder's Equity
Common stock, $.25 par value; 10,000,000
shares authorized ......................................... 483 488
Additional paid-in capital .................................. 67,375 67,471
Accumulated deficit ......................................... (45,161) (45,237)
Accumulated other comprehensive deficit ..................... (125) (116)
-------------------
22,572 22,606
Less: 13,654 treasury shares - at cost ..................... 1,750 1,750
-------------------
Total stockholders' equity ............................ 20,822 20,856
-------------------
$26,263 $26,798
===================
The accompanying notes are an integral part of these statements.
2
BOSS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Quarter Ended Quarter Ended
March 27, 2004 March 29, 2003
-------------------------------
Net sales .................................. $ 10,182 $ 9,243
Cost of sales .............................. 6,381 5,657
-----------------------------
Gross profit ............................... 3,801 3,586
Operating expenses ......................... 3,706 3,625
-----------------------------
Operating income (loss) .................... 95 (39)
Other income and (expense):
Interest income .......................... 11 16
Interest expense ......................... (46) (25)
Other .................................... 16 96
-----------------------------
Income before income tax ................... 76 48
Income tax expense ......................... -- --
-----------------------------
Net income ................................. $ 76 $ 48
=============================
Comprehensive income ....................... $ 67 $ 48
=============================
Weighted average shares outstanding ........ 1,936,425 1,938,750
Basic earnings per common share ............ $ 0.04 $ 0.02
=============================
Diluted earnings per common share .......... $ 0.03 $ 0.02
=============================
3
BOSS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Quarter Ended Quarter Ended
March 27, 2004 March 29, 2003
------------------------------
Cash Flows From Operating Activities:
Net income .............................................. $ 76 $ 48
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ......................... 92 84
(Increase) decrease in operating assets:
Accounts receivable ................................. 73 973
Inventories ......................................... 21 (874)
Prepaied expenses and other current assets .......... 77 (33)
Deferred charges and other assets ................... -- (43)
Increase (decrease) in operating liabilities:
Accounts payable .................................... (139) (330)
Accrued liabilities ................................. (337) 91
-----------------------
Net cash used in operating activities ............. (137) (84)
-----------------------
Cash Flows From Investing Activities:
Purchases of property and equipment ..................... (157) (14)
-----------------------
Net cash used in investing activities ............. (157) (14)
-----------------------
Cash Flows From Financing Activities:
Net borrowings (payments) on long-term obligtations ..... (76) 4
Purchase and retirement of stock ........................ (101) --
-----------------------
Net cash provided by (used in) financing activities (177) 4
-----------------------
Effect of exchange rates on cash and cash equivalents ..... (9) --
-----------------------
Net decrease in cash during period ................ (480) (94)
Cash and cash equivalents at the beginning of the period .. 4,479 4,874
-----------------------
Cash and cash equivalents at the end of the period ........ $ 3,999 $ 4,780
=======================
The accompanying notes are an integral part of these statements.
4
BOSS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
March 27, 2004
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 make the information presented not 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 27, 2003. The financial data for the
interim periods presented may not necessarily reflect the results to be
anticipated for the complete year.
Note 2. Stock Options
At March 27, 2004, 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.
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. No options were granted during the first quarter of 2004.
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.
Three Months Ended
---------------------
March 27, March 29,
2004 2003
---------------------
Net income, as reported ............................ $ 76 $ 48
Less: Stock-based compensation expense
determined under fair value based method
net of related tax effects ....................... (11) (15)
--------------------
Pro forma net income ............................... $ 65 $ 33
====================
Basic net earnings per common share:
As reported ...................................... $ 0.04 $ 0.02
Pro forma ........................................ $ 0.03 $ 0.02
Diluted net earnings per common share:
As reported ...................................... $ 0.03 $ 0.02
Pro forma ........................................ $ 0.03 $ 0.02
4
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
March 27, March 29,
2004 2003
-------------------------
Numerator for basic and diluted net earnings
per common share - earnings attributable
to common stockholders ......................... $ 76 $ 48
=========================
Denominator for basic net earnings per
common share - weighted average
shares outstanding ............................. 1,936,425 1,938,750
Effect of dilutive securities:
Stock options .................................. 235,294 140,963
-------------------------
Demonator for diluted earnings per
common share ................................... 2,171,719 2,079,713
=========================
Basic earnings per common share .................. $ 0.04 $ 0.02
=========================
Diluted earnings per common share ................ $ 0.03 $ 0.02
=========================
Note 4. Reclassifications
Certain expenses in the consolidated statements of operations have been
reclassified, with no effect on net income or earnings per common share, to be
consistent with the classifications adopted for the quarter ended March 27,
2004.
5
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. 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 $(000) 2004 2003
- --------------------------------------------------------------------------------
Work Gloves & Protective Wear ........................ 8,144 7,451
Pet Supplies ......................................... 1,770 1,392
Corporate & Other .................................... 268 400
-------------------
Total Sales .......................................... 10,182 9,243
===================
Consolidated revenues for the three months ended March 27, 2004 totaled
$10,182,000, up $939,000, or 10.2%, from the comparable quarter in 2003. This
sales increase was due in large part to higher sales in the work gloves and
protective wear segment, with pet supplies sales also up compared to the
previous year.
The growth in work gloves and protective wear sales was primarily attributable
to the domestic industrial market, in which sales increased 16.7% on unit volume
growth of 26%. The Company has gained market share in this segment through the
employment of manufacturer's representative groups, utilization of west coast
warehouse facilities, and emphasis on large accounts, including various buying
groups and coops. Domestic consumer market sales increased 4.4% on a comparable
increase in unit volume. Sales of CAT(R) branded products offset the loss of
certain customers in the consumer market. The trend in the domestic industrial
market favors continued sales growth, while the sales outlook in the consumer
market is uncertain due to recent customer losses and consolidation in the
retail industry. However, management anticipates increased sales of CAT(R)
licensed products, which should have a favorable impact on consumer market sales
in the coming months.
Sales of work gloves and protective wear have historically exhibited significant
seasonality. During warm weather months, sales tend to be lower than during
colder periods. Consequently, management anticipates lower sales during the
second and third quarters in this segment.
First quarter 2004 sales of $1,770 in the pet supplies segment increased 27%
compared to the same period in 2003. The Company's Boss Pet subsidiary accounted
for this increase in sales. The increased financial and corporate administrative
support provided by Boss have enabled the Boss Pet subsidiary to grow its
customer base through expanded sales efforts and utilization of working capital
to support customer shipping requirements. Sales in the Company's Warren Pet
subsidiary were essentially unchanged from the prior year.
6
Cost of Sales
Cost of Sales by Segment $(000) 2004 2003
- --------------------------------------------------------------------------------
$ % $ %
---------------------------
Work Gloves & Protective Wear .................... 5,163 63.4 4,516 60.6
Pet Supplies ..................................... 1,110 62.7 951 68.3
Corporate & Other ................................ 108 40.3 190 47.5
---------------------------
Total Cost of Sales .............................. 6,381 62.7 5,657 61.2
===========================
Cost of sales for the three months ended March 27, 2004 totaled $6,381,000
compared to $5,657,000 in the corresponding period of 2003. On a percentage of
sales basis, consolidated cost of sales increased 1.5% from the previous year.
In the work gloves and protective wear segment, cost of sales increased by 2.8%
of sales due to higher prices on imported finished goods and increased inbound
freight cost on these goods. In addition, bulk sales and sales to certain
customers on a net basis with no promotional allowances reduced the gross margin
realized in this segment.
The cost of sales percentage in the Company's pet supplies segment decreased
compared with last year. This was attributable to higher margins on increased
sales of imported goods in the Boss Pet subsidiary. The increase in sales of
imported goods resulted in lower cost of goods sold, which was partially offset
by increased warehousing and other operating expenses.
Operating Expenses
Operating Expenses by Segment $(000) 2004 2003
- --------------------------------------------------------------------------------
$ % $ %
---------------------------
Work Gloves & Protective Wear .................... 2,748 33.7 2,900 38.9
Pet Supplies ..................................... 606 34.2 387 27.8
Corporate & Other ................................ 352 -- 338 --
---------------------------
Total Operating Expenses ......................... 3,706 36.4 3,625 39.2
===========================
Operating expenses totaled $3,706,000 for the three months ended March 27, 2004,
compared to $3,625,000 for the corresponding period in 2003. This increase was
attributable to the pet supplies segment. In this segment, the Company increased
sales of imported finished goods and reduced its Boss Pet manufacturing
operations. Certain warehousing and other inventory related expenses included in
cost of goods sold during the first half of 2003, were subsequently treated as
operating expenses upon cessation of manufacturing operations. In addition, due
to its growth in sales Boss Pet incurred increased freight, commission and other
sales related expenses.
Operating expenses in the work gloves and protective wear segment decreased
$152,000 in the first quarter of 2004 compared to the prior year due primarily
to the warehouse closing expense of $170,000 accrued in the first quarter of
2003. In the corporate and other segment, operating expenses increased $14,000
due to higher corporate expenses which were partially offset by lower operating
expenses in the Company's balloon operations attributable to lower sales.
Earnings (Loss) From Operations
Earnings (Loss) From Operations by Segment
$(000) 2004 2003
- --------------------------------------------------------------------------------
$ % $ %
--------------------------
Work Gloves & Protective Wear ..................... 233 2.9 35 0.5
Pet Supplies ...................................... 54 3.1 54 3.9
Corporate & Other ................................. (192) -- (128) --
--------------------------
Total Earnings (Loss) From Operations ............. 95 0.9 (39) (0.4)
==========================
7
On a consolidated basis, the Company's operating earnings totaled $95,000 for
the quarter ended March 27, 2004, compared to a loss of $39,000 for the
comparable period in 2003. The increase in earnings compared to the previous
year was primarily attributable to the work gloves and protective wear segment.
Higher sales and reduced operating expenses in this segment more than offset the
impact of lower margins. The operating loss in the corporate and other segment
increased $64,000 on lower balloon sales and increased corporate administrative
expenses.
Other Income and (Expense)
First quarter 2004 interest income of $11,000 declined from 2003 due primarily
to lower interest rates in 2004. Interest expense of $46,000 in the first
quarter increased $21,000 from the prior year due in large part to additional
debt incurred in connection with the Company's acquisition of additional
warehouse facilities during 2003. The Company continues to market its unused
Springfield, Illinois warehouse. The Company's other income of $96,000 during
the first quarter of 2003 consisted primarily of a foreign exchange gain
associated with the Company's Canadian operation and a gain on marketable
securities held by the Company.
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.
Liquidity and Capital Resources
Operating activities used $137,000 in cash through March 2004, substantially
unchanged from the $84,000 use in the prior year. Working capital at March 27,
2004 totaled $18,758,000 up $833,000 from one year ago due primarily to higher
inventory. Inventory levels increased due to purchases in anticipation of price
increases, the build-up of new CAT(R) product inventory and increased Boss Pet
inventory attributable to importing rather than manufacturing finished goods.
Investing activities used $157,000 in the first quarter of 2004, compared to
$14,000 during the comparable period in 2003. Investing activities consisted of
purchases associated with a new warehouse management system and warehouse
facility improvements. In addition, the Company purchased certain updated
information technology equipment during the first quarter.
Cash flows from financing activities used $177,000 in the first quarter of 2004,
compared to providing $4,000 in 2003. The Company paid $76,000 in scheduled
principal payments on long-term debt. In addition, the Company repurchased
approximately 20,000 shares of its common stock through an odd-lot tender offer
during the first quarter at a cost of $101,000.
At March 27, 2004, the Company had $3,999,000 in cash with no borrowings under
its $5 million revolving line of credit. The Company's cash on hand and
availability under the credit facility should provide ample liquidity for
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.
8
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
(d) Maximum
(c) Total Number (or
Number of Approximate
Shares (or Dollar Value)
Units) or Shares (or
Purchased as Units) that
(a) Total Part of May Yet Be
Number of (b) Average Publicly Purchased
Shares (or Price Paid per Announced Under
Units) Share (or Plans or the Plans
Period Purchased Unit) Programs (1) or Programs
- --------------------------------------------------------------------------------
1/13 - 1/30/2004 17,752 $ 5.00 17,752 N/A
2/18/2004 1,694 5.00 1,694 N/A
-------------------------------------------
19,446 $ 5.00 19,446
(1) All shares reported were purchased pursuant to a voluntary repurchase
program for holders of less than 100 shares of the Company's common stock.
The program was announced December 1, 2003, with an initial expiration date
of January 23, 2004, and subsequently extended to February 27, 2004. The
program did not contain any pre-determined limit on the number of shares
repurchased or the amount to be expended for repurchase.
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
10.3.4 Fourth Amendment to Loan Agreement among Boss Holdings,
Inc., Boss Manufacturing Company and Bank One, N.A.,
dated March 17, 2004.
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
None.
9
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: May 11, 2004 By: /s/ J. Bruce Lancaster
------------ -----------------------------
J. Bruce Lancaster
Chief Financial Officer
(principal financial officer)
10