Back to GetFilings.com



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 25, 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 October 25, 2004
- --------------------------------------------------------------------------------
Common Stock, $.25 par value 1,936,957


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 25, December 27,
Assets 2004 2003
- ------------------------------------------------------------------------------------

Current Assets:
Cash and cash equivalents .......................... $ 1,246 $ 4,479
Accounts receivable, net ........................... 6,799 6,254
Inventories ........................................ 14,847 10,759
Deferred income taxes .............................. 928 --
Prepaid expenses and other ......................... 528 426
-----------------------
Total current assets ......................... 24,348 21,918

Property and Equipment, net .......................... 3,911 3,043

Assets Held for Sale ................................. 1,694 1,694

Other assets ......................................... 209 143
Intangibles, primarily goodwill ...................... 2,630 --
Deferred income taxes ................................ 1,984 --
-----------------------
$ 34,776 $ 26,798
=======================

Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable ................................... $ 1,466 $ 798
Current portion of long-term obligations ........... 784 383
Accrued payroll and related expenses ............... 641 538
Accrued liabilities and other ...................... 1,243 1,309
-----------------------
Total current liabilities .................... 4,134 3,028
-----------------------

Long-Term Obligations, net of current portion ........ 6,464 2,800
-----------------------

Deferred Compensation ................................ 188 114
-----------------------

Stockholders' Equity:
Common stock, $.25 par value; 10,000,000 shares .... 488 488
Additional paid-in capital ......................... 67,388 67,471
Accumulated (deficit) .............................. (42,050) (45,237)
Accumulated other comprehensive (deficit) .......... (86) (116)
-----------------------
25,740 22,606
Less treasury shares, at cost ...................... 1,750 1,750
-----------------------
Total stockholders' equity ................... 23,990 20,856
-----------------------
$ 34,776 $ 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 Nine Months Ended
---------------------------- ----------------------------
September 25, September 27, September 25, September 27,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------

Net sales ............................... $ 10,363 $ 8,131 $ 29,674 $ 25,951

Cost of sales ........................... 7,131 5,629 20,298 17,771
--------------------------------------------------------

Gross profit .................... 3,232 2,502 9,376 8,180

Operating expenses ...................... 3,119 2,747 9,147 8,573
--------------------------------------------------------

Earnings (loss) from operations . 113 (245) 229 (393)
--------------------------------------------------------

Other income (expense):
Interest income ....................... 4 14 24 51
Interest expense ...................... (75) (44) (170) (104)
Other ................................. 3 3 18 248
--------------------------------------------------------
(68) (27) (128) 195
--------------------------------------------------------

Earnings (loss) before income tax 45 (272) 101 (198)

Income tax benefit ...................... 3,086 -- 3,086 --
--------------------------------------------------------
Net earnings (loss) ............. $ 3,131 $ (272) $ 3,187 $ (198)
========================================================


Comprehensive Income .................... $ 3,195 $ (280) $ 3,217 $ (206)
========================================================

Weighted average shares outstanding ..... 1,936,957 1,952,404 1,930,798 1,952,404

Basic earnings per common share ......... $ 1.62 $ (0.14) $ 1.65 $ (0.10)
========================================================

Diluted earnings per common share ....... $ 1.45 $ (0.14) $ 1.47 $ (0.10)
========================================================

The accompanying notes are an integral part of these statements.

3


Boss Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)

Nine Months Ended
------------------------
Sept 25, Sept 27,
2004 2003
- -----------------------------------------------------------------------------------------------

Cash Flows from Operating Activities:
Net earnings (loss) ................................................ $ 3,187 $ (198)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization .................................... 307 235
Stock based compensation ......................................... 19 --
Deferred tax benefit ............................................. (3,091) --
Changes in assets and liabilities, net of acquisition:
Decrease in accounts receivable ................................ 227 1,865
(Increase) in inventories ...................................... (3,410) (2,852)
(Increase) decrease in prepaid expenses and other current assets (198) 227
(Increase) in deferred charges and other assets ................ (173) (78)
Increase (decrease) in accounts payable ........................ 298 (483)
Increase (decrease) in accrued liabilities ..................... (199) 64
Increase in other liabilities .................................. -- 79
--------------------
Net cash used in operating activities ........................ (3,033) (1,141)
--------------------

Cash Flows from Investing Activities:
Acquisition of stock in new subsidiary ............................. (3,418) --
Purchases of property and equipment ................................ (122) (1,320)
--------------------
Net cash used in investing activities ........................ (3,540) (1,320)
--------------------

Cash Flows from Financing Activities:
Net borrowings on long-term obligations ............................ 3,412 1,468
Proceeds from exercise of stock options ............................ 33 --
Purchase and retirement of stock ................................... (135) --
--------------------
Net cash provided by financing activities .................... 3,310 1,468
--------------------

Effect of exchange rates on cash and cash equivalents ................ 30 --
--------------------

(Decrease) in cash and cash equivalents ...................... (3,233) (993)

Cash and cash equivalents:
Beginning of period ................................................ 4,479 4,874
--------------------
End of period ...................................................... $ 1,246 $ 3,881
====================

The accompanying notes are an integral part of these statements.

4


Boss Holdings, Inc.
and Subsidiaries

Notes to Unaudited Consolidated Financial Statements
- --------------------------------------------------------------------------------

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 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. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings
(loss) per share:

(In Thousands, Except Per Share Data)

Quarter Ended Nine Months Ended
------------------ ------------------
Sept 25, Sept 27, Sept 25, Sept 27,
2004 2003 2004 2003
---------------------------------------

Numerator for basic and diluted net earnings
(loss) per common share, earnings (loss)
attributable to common stockholders ...... $ 3,131 $ (272) $ 3,187 $ (198)
======================================

Denominator for basic net earnings
(loss) per common share, weighted
average shares outstanding ............... 1,937 1,952 1,931 1,952
Effective of dilutive securities,
employee stock options ................... 225 -- 231 --
--------------------------------------
Denominator for diluted earnings
(loss) per common share ............ 2,162 1,952 2,162 1,952
======================================

Basic earnings (loss) per common share ..... $ 1.62 $ (0.14) $ 1.65 $ (0.10)
======================================

Diluted earnings (loss) per common share ... $ 1.45 $ (0.14) $ 1.47 $ (0.10)
======================================


Note 3. Stock Options

At September 25, 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. In addition, during the
second quarter of 2004 the Company adopted an equity-based incentive program
allowing the issuance of some or all of the following: stock options, stock
appreciation rights, performance based stock awards and restricted stock units.
The 2004 plan provides for the issuance of up to 150,000 shares of common stock.

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.

5


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 (loss) and earnings
(loss) 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. 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
-------------------- --------------------
Sept 25, Sept 27, Sept 25, Sept 27,
2004 2003 2004 2003
---------------------------------------------
(Dollars in Thousands, Except Per Share Data)

Net earnings (loss), as reported ......... $ 3,131 $ (272) $ 3,187 $ (198)
Less stock-based compensation expense
determined under fair value based method
net of related tax effects ............. (11) (15) (33) (45)
--------------------------------------------
Pro forma net earnings (loss) .... $ 3,120 $ (287) $ 3,154 $ (243)
============================================

Earnings (loss) per share, as reported:
Basic .................................. $ 1.62 $ (0.14) $ 1.65 $ (0.10)
============================================

Diluted ................................ $ 1.45 $ (0.14) $ 1.47 $ (0.10)
============================================

Earnings (loss) per share, pro forma:
Basic .................................... $ 1.61 $ (0.15) $ 1.63 $ (0.12)
============================================

Diluted .................................. $ 1.44 $ (0.15) $ 1.46 $ (0.12)
============================================


Stock option transactions are summarized as follows:

Nine Months Ended Year Ended
Sept 25, 2004 December 27, 2003
------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------------------------------

Outstanding, beginning of period ........ 361,080 $ 2.25 341,080 $ 2.19
Granted ............................... 20,000 7.00 20,000 3.20
Exercised ............................. (18,666) 1.82 -- --
-----------------------------------------
Outstanding, end of period .............. 362,414 $ 2.53 361,080 $ 2.25
=========================================


Note 4. Reclassifications

Certain income and expense items 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 September 25, 2004. Such reclassifications include
the treatment of shipping costs as cost of goods sold rather than operating
expenses.

6


Note 5. Acquisition

On July 30, 2004, the Company purchased all outstanding shares of common stock
of privately-held Galaxy Balloons, Incorporated, an Ohio corporation ("Galaxy").
Galaxy is a Cleveland, Ohio based manufacturer and distributor of imprinted and
personalized balloons, balls, toys, inflatable goods and other products sold
primarily in the advertising specialties industry. The base purchase price for
the Galaxy shares was $3,300,000, with certain additional earn-out payments if
Galaxy's future financial performance exceeds specified benchmarks. The Company
utilized a combination of cash reserves, additional borrowings under its primary
line of credit and a term loan of approximately $1,750,000 provided by the
Company's primary lender to fund the acquisition of Galaxy. In connection with
this transaction, the Company's maximum availability under its revolving line of
credit was increased from $5,000,000 to $6,000,000 as of July 30, 2004.

This transaction was accounted for using purchase accounting and has been
included in the Company's operations since the date of acquisition. The
allocation of purchase price is as follows (in thousands):

Acquisition cost:
Base purchase price .......................................... $ 3,300
Tangible net worth adjustment and closing costs .............. 318
Covenant not to compete ...................................... 50
-------
Total .................................................. 3,668

Less term note ............................................... (200)
Less covenant not-to-compete ................................. (50)
-------
Net cash price ......................................... $ 3,418
=======

Allocation of purchase cost:
Current assets ............................................... $ 1,517
Property and equipment ....................................... 728
Identified intangibles and other assets ...................... 241
Goodwill ..................................................... 2,416
Accounts payable assumed ..................................... (370)
Accrued liabilities assumed .................................. (236)
Bank debt assumed ............................................ (390)
Deferred tax liability ....................................... (238)
-------
$ 3,668
=======

The following unaudited pro forma financial information reflects the
consolidated results of the Company as if the acquisition of Galaxy had occurred
at the beginning of each fiscal period presented:

(In Thousands, Except Per Share Data)

Quarter Ended Nine Months Ended
--------------------- --------------------
Sept 25, Sept 27, Sept 25, Sept 27,
2004 2003 2004 2003
--------------------------------------------

Net sales $ 12,719 $ 10,348 $ 35,568 $ 31,259
Net earnings before income tax 465 35 756 125
Income tax benefit (See Note 6) 3,052 -- 3,033 --
Net earnings 3,517 35 3,789 125
Diluted earnings per common share 1.63 0.02 1.75 0.06


Note 6. Income Taxes

The Company accounts for income taxes using the asset and liability method,
recognizing the tax consequences of temporary differences between the financial
statement carrying values and the tax basis of assets and liabilities as
deferred taxes utilizing current statutory tax rates. Further, the Company
records future tax benefits to the extent that such benefits are more likely
than not to be realized. Prior to the third quarter of 2004, management reduced
the Company's net deferred income tax asset by a related valuation allowance of
100%.

As of September 25, 2004, the Company had available for U.S. income tax purposes
operating loss carryforwards of approximately $33,726,000. Based on improved
profitability in recent years, which are anticipated to continue, and projected
earnings from the Galaxy acquisition completed during the third quarter,
management believes it is more likely than not that the Company will utilize
approximately 25% of its available operating loss carryforwards. Accordingly,
the Company reduced its valuation allowance by $3,125,000 during the third
quarter and recognized a commensurate tax benefit. In future periods, the
Company will record income tax expense on earnings at normal rates and reduce
the deferred tax asset accordingly.

7


Note 7. Long-Term Obligations

In connection with the Galaxy acquisition, the Company borrowed $1,750,000 under
a term loan from a commercial bank. This loan requires monthly principal
payments of $21,000 plus interest at LIBOR plus 2.1% adjusted monthly (effective
rate of 4.0% at September 25, 2004). The Company's accounts receivable and
inventory, as well as certain property and equipment of Galaxy, secure this
loan.

During the third quarter, the Company entered into an interest rate swap
agreement related to its $1,750,000 term loan. The swap is utilized to
effectively fix the interest rate on approximately $1,000,000 of the term loan
at 6.32%. 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.

Also in connection with the Galaxy acquisition, the Company increased the
revolving credit facility with its primary lender from $5,000,000 to $6,000,000.
This facility was further modified to include Galaxy's accounts receivable and
inventory as security. Borrowings under this facility totaled $2,036,000 as of
September 25, 2004 at an average effective rate of 4.75%.

Note 8. Operating Segments and Related Information

The Company operates primarily in the work gloves and protective wear segment.
Through its Boss Manufacturing Company subsidiary, the Company imports, markets
and distributes gloves, boots and rainwear 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 recently acquired 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."

(In Thousands)

Work Gloves and Promotional and Corporate
Protective Wear Pet Supplies Specialty Products and Other Total
---------------------------------------------------------------------------------------------
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
---------------------------------------------------------------------------------------------

Quarter:
Revenue $ 7,437 $ 7,099 $ 1,146 $ 976 $ 1,780 $ 56 $ -- $ -- $ 10,363 $ 8,131
Earnings (loss) from operations 23 123 (31) (96) 348 (42) (227) (230) 113 (245)
Total assets 22,426 18,633 2,925 2,511 5,438 319 3,987 4,198 34,776 25,661
Intangibles -- -- -- -- 2,630 -- -- -- 2,630 --

Year-to-Date
Revenue $22,640 $21,325 $ 4,831 $ 3,949 $ 2,203 $677 $ -- $ -- $ 29,674 $ 25,951
Earnings (loss) from operations 304 153 192 59 406 56 (673) (661) 229 (393)



8


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, performance of recently completed
acquisitions, 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

Sales by Segment Quarter Year-to-Date
------------------------------------
$(000) 2004 2003 2004 2003
- --------------------------------------------------------------------------------

Work gloves and protective wear ........ 7,437 7,099 22,640 21,325
Pet supplies ........................... 1,146 976 4,831 3,949
Promotional and specialty products ..... 1,780 56 2,203 677
Totals sales ........................... 10,363 8,131 29,674 25,951

Consolidated revenues for the three months ended September 25, 2004 totaled
$10,363,000 up $2,232,000 or 27.5% from the comparable quarter in 2003. Sales
increased in each of the Company's business segments with the largest increase
occurring in the promotional and specialty products segment due to the July 30,
2004 acquisition of Galaxy Balloons, Inc. ("Galaxy").

The acquisition of Galaxy moves the Company into a new product line and a new
distribution channel. Galaxy provides custom imprinted balloons, balls and
inflatable goods that are sold primarily into the advertising specialties
industry through approximately 4,000 distributors. This industry has exhibited
significant growth in recent years and affords the Company the opportunity for
future growth both through expected industry expansion as well as through
potential cross selling and product line extension opportunities. With the
acquisition of Galaxy, sales in the promotional and specialty products segment
totaled $1,780,000, or 17.2% of consolidated sales, for the third quarter. Sales
in this segment reached their seasonal peak during the third quarter and are
expected to decline during the fourth quarter. Historically, sales in the
promotional and specialty products segment reach a low point during the holiday
season through January and peak in late summer.

In the Company's primary work gloves and protective wear segment, sales
increased $338,000, or 4.8%, during the third quarter of 2004 compared to 2003.
This increase was due primarily to sales growth in the domestic industrial
market where sales were up approximately 12% on a volume increase of 16.7% as a
shift in sales mix to lower cost items more than offset price increases on
certain goods. Several factors have contributed to the industrial market sales
increase including employment of manufacturer's representative groups in certain
areas, utilization of west coast warehouse facilities, product line expansion
and selected price increases due to increasing costs on imported finished goods.
Sales in the domestic consumer market were essentially unchanged as sales of
CAT(R) branded gloves and rainwear offset the loss of other consumer accounts.
Sales in this segment generally increase during the fourth quarter due to colder
weather conditions. The Company anticipates the sales growth trend in the
industrial market to continue, while growing CAT(R) brand sales should continue
to offset lower sales in the Company's traditional consumer markets. The Company
has increased its presence in the hardware distributor channel, but faces
challenges as a growing number of major retailers import products directly.

9


In the pet supplies segment, sales growth of $170,000 during the third quarter
was attributable to the Company's Boss Pet operations. Boss Pet sales increased
due to the addition of new customers in 2004, development of new shampoo
products and higher sales to this operation's largest customer attributable in
large part to the sale of additional products to this customer. Warren Pet sales
were essentially unchanged from the prior year.

On a year-to-date basis, consolidated sales increased $3,723,000, or 14.3%, in
2004 compared to the prior year. In the work gloves and protective wear segment,
sales increased $1,315,000 on 11.5% sales growth in the industrial market. Sales
in the consumer market increased 2.4% on growth of CAT (R) branded products.
Sales in the promotional and specialty products segment increased $1,526,000 due
to the third quarter acquisition of Galaxy as discussed above. In the pet
supplies segment, sales increased 22.3% on increased revenues from Boss Pet
attributable to new product sales and the addition of new customers.

Cost of Sales

- -----------------------------------------------------------------------------------------------------
Cost of Sales by Segment Quarter Year-to-Date
$(000) -------------------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------
$ % $ % $ % $ %
- -----------------------------------------------------------------------------------------------------

Work gloves and protective wear .. 5,249 70.6% 4,910 69.2% 15,807 69.8% 14,638 68.6%
Pet supplies ..................... 775 67.6% 683 70.0% 3,189 66.0% 2,780 70.4%
Promotional and specialty products 1,107 62.2% 36 64.3% 1,302 59.1% 353 52.1%
Totals cost of sales ............. 7,131 68.8% 5,629 69.2% 20,298 68.4% 17,771 68.5%


Cost of sales for the three months ended September 25, 2004 totaled $7,131,000,
up $1,502,000 from the corresponding period of 2003 due to the higher sales
discussed above. As a percentage of sales, cost of sales increased by 1.4% in
the work gloves and protective wear segment reflecting cost increases on certain
imported products and competitive pressure on selling prices. Margins improved
in the pet supplies segment due to lower cost on products that the Company began
importing during the second half of 2003. In the promotional and specialty
products segment, the Galaxy acquisition significantly increased cost of sales
for the quarter, though margins were little changed. Due to fixed costs
associated with printing operations, margins at this operation tend to be higher
during the summer and early fall, then decline slightly when sales volume slows.

Management expects the cost of many imported goods to further increase in future
periods, particularly in the work gloves and protective wear segment. Petroleum
based products such as PVC and polyurethane are likely to increase based on
higher crude oil prices. In addition, shortages of certain types of leather are
likely to result in increased cost for a number of products. Should product cost
continue to increase as expected, management believes margins could decline
further in the months ahead as selling price increases tend to lag product cost
escalation due to competitive pressure in the markets served by the Company.

For the nine-month period, as a percentage of sales cost of sales increased in
the work gloves and protective wear segment by 1.2% due to cost increases and
competitive pressure on selling prices. Margins improved in the pet supplies
segment due to the transition to imported goods during 2003. In the promotional
and specialty products segment, cost of sales increased 7% as a percentage of
sales because of the Galaxy acquisition. Margins at this operation are lower
than those in the Company's Boss Balloon operation due to the markets served,
though operating expenses are also lower providing improved overall
profitability.


Operating Expenses

- ---------------------------------------------------------------------------------------------------
Operating Expenses
by Segment $(000) Quarter Year-to-Date
------------------------------------------------------------
2004 2003 2004 2003
------------------------------------------------------------
$ % $ % $ % $ %
- ---------------------------------------------------------------------------------------------------

Work gloves and protective wear .. 2,165 29.1% 2,066 29.1% 6,529 28.8% 6,534 30.6%
Pet supplies ..................... 402 35.1% 389 39.9% 1,450 30.0% 1,110 28.1%
Promotional and specialty products 325 18.3% 62 110.7% 495 22.5% 268 39.6%
Corporate and other .............. 227 -- 230 -- 673 -- 661 --
Total operating expenses ......... 3,119 30.1% 2,747 33.8% 9,147 30.8% 8,573 33.0%


10


Operating expenses totaled $3,119,000 during the third quarter of 2004, up
$372,000 compared to the corresponding period in 2003. The bulk of this increase
occurred in the promotional and specialty products segment and was attributable
to the Galaxy acquisition. Operating expenses increased $99,000 in the work
gloves and protective wear segment due to higher sales related expenses,
including commissions, royalties on licensed products and certain product
development expenses.

For the nine-month period ended September 25, 2004, operating expenses increased
$574,000 compared to the prior year. This increase was primarily attributable to
the pet supplies segment, with higher operating expenses at Boss Pet
representing the bulk of the increase. Certain facility costs at Boss Pet have
been charged to warehousing expense since the cessation of certain manufacturing
activities at this operation during the third quarter of 2003. In addition,
operating expenses increased in the promotional and specialty products segment
due to the Galaxy acquisition.

Earnings (Loss) From Operations

- -------------------------------------------------------------------------------------------------
Operating Income by Segment
$(000) Quarter Year-to-Date
------------------------------------------------------------
2004 2003 2004 2003
------------------------------------------------------------
$ % $ % $ % $ %
- -------------------------------------------------------------------------------------------------

Work gloves and protective wear .. 23 0.3% 123 1.7% 304 1.3% 153 0.7%
Pet supplies ..................... (31) (2.7%) (96) (9.8%) 192 4.0% 59 1.5%
Promotional and specialty products 348 19.6% (42) (75.0%) 406 18.4% 56 8.3%
Corporate and other .............. (227) -- (230) -- (673) -- (661) --
Total operating income (loss) .... 113 1.1% (245) (3.0%) 229 0.8% (393) (1.5%)


On a consolidated basis, the Company's operating earnings for the third quarter
of 2004 increased to $113,000 from a loss of $245,000 during the same period in
2003. The Company has historically operated at a loss during warm weather
months. However, earnings generated in the promotional and specialty products
segment by the new Galaxy subsidiary were instrumental in reversing this trend.
Operating earnings declined $100,000 in the work gloves and protective wear
segment due primarily to reduced margins and increased operating expenses.

Through September 2004, earnings from operations of $229,000 increased $622,000
from 2003. Each of the Company's operating segments showed significant
improvement for the year. The most substantial improvement occurred in the
promotional and specialty products segment and was attributable to the Galaxy
acquisition. In addition, the work gloves and protective wear segment generated
increased earnings of $151,000 due primarily to higher revenues which more than
offset reduced margins. Earnings in the pet supplies segment were up $133,000 on
higher sales at the Company's Boss Pet operation.

Other Income and (Expense)

The Company incurred $75,000 in interest expense during the third quarter of
2004, an increase of $31,000 from the comparable period in 2003 due to increased
borrowings in connection with the acquisition of new warehouse facilities and
the Galaxy acquisition. Interest income decreased from $14,000 in the third
quarter of 2003 to $4,000 in 2004. Cash holdings declined compared to the
previous year due to the Company's investment in Galaxy and higher working
capital during 2004.

Interest expense for the nine months ended September 25, 2004 increased $66,000
from the comparable period in 2003 due to increased borrowings as noted above.
Interest income declined $27,000 due primarily to lower cash holdings as well as
lower interest rates. Other income during the first nine months of 2003
consisted primarily of foreign exchange gains associated with the Company's
Canadian operation and a gain on the sale of certain marketable securities.

Taxes

Because of losses in prior years, the Company has available for U.S. income tax
purposes operating loss carryforwards ("NOL") of approximately $33,726,000. In
prior periods, management has recorded a 100% valuation allowance offsetting
this tax benefit due to uncertainty regarding the Company's likelihood of
realizing a material portion of the NOL available. In view of the Company's
profitability during the past several years and projected earnings from the
Galaxy operation acquired during the third quarter, management has concluded it
is more likely than not that the Company will utilize approximately 25% of its
available NOL. Based on this conclusion, during the third quarter of 2004 the
Company reduced the valuation allowance offsetting its deferred tax asset and
recognized a tax benefit of $3,125,000. This non-cash tax adjustment
significantly increased reported earnings during the third quarter of 2004. In
future periods, the Company will record income tax expense on earnings at normal
rates and reduce the deferred tax asset accordingly to reflect the fact that no
federal tax will be payable on such earnings.

11


Shareholders and other users of the Company's financial statements should
carefully consider the non-cash tax entries when comparing current results with
past or future financial statements of the Company.

Liquidity and Capital Resources

Operating activities used $3,033,000 in cash through the nine months ended
September 25, 2004, compared to a use of $1,141,000 for the same period in 2003.
After adjusting for the non-cash tax benefit recorded in 2004, earnings totaled
$96,000, an increase of $294,000 from 2003. Despite improved earnings, operating
activities used more cash in 2004 than in the prior year due to working capital
investments, particularly in inventory. During 2004, inventory increased
$3,410,000 through September due primarily to higher inventory levels in the
work gloves and protective wear segment. Because of seasonal requirements, the
Company's work gloves and protective wear inventory typically peaks in
September. Compared to last year's September seasonal peak, inventory in the
work gloves and protective wear segment has increased approximately $2,250,000.
Several factors led to this increase including higher levels of CAT (R) branded
inventory to support sales in this new line, increased cost on various styles,
particularly leather and petroleum based goods, and expanded product offerings
in the Company's industrial line.

Investing activities used $3,540,000 through September 2004, compared to
$1,320,000 during the comparable period in 2003. The Galaxy acquisition used
$3,418,000 and represented the primary use of funds in investing activities
during 2004. In addition, the Company used $122,000 to fund capital
expenditures. These expenditures consisted primarily of a new warehouse
management system and the purchase of a new computer to run the Company's
enterprise software. In 2003, capital expenditures consisted primarily of
warehouse acquisitions and improvements in conjunction with warehouse
consolidation activities.

Cash flows provided by financing activities totaled $3,310,000 through September
25, 2004. The Company borrowed $1,750,000 on July 30, 2004 under a term loan
from its primary lender in connection with the Galaxy acquisition. The balance
of the funds provided by financing activities consisted primarily of borrowings
under the Company's revolving credit facility in connection with the Galaxy
acquisition and to support seasonal working capital requirements. In connection
with the Galaxy acquisition, the Company increased its revolving credit facility
from $5,000,000 to $6,000,000.

The Company used $135,000 to purchase stock pursuant to a voluntary repurchase
program for holders of less than 100 shares of the Company's common stock.
During 2003, the Company's net borrowing totaled $1,468,000 due primarily to
mortgages obtained in connection with the Company's purchase of warehouses in
Kewanee.

At September 25, 2004, the Company had borrowings of $2,036,000 under its $6
million revolving line of credit. The Company's remaining availability under
this line totaled $3,964,000 as of September 25, 2004. The Company has a
contract for the sale of its Springfield, Illinois warehouse facility carried as
an asset held for sale in the financial statements. Net proceeds from the
expected November 2004 closing should approximately equal the carrying value.
Proceeds from this transaction should improve the Company's liquidity, allowing
the Company to pay off its $1,130,000 mortgage on this facility and pay down its
revolving line of credit by approximately $550,000. 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 interest rate swap agreements with notional values
totaling $1,955,000 related to a mortgage note on certain Kewanee warehouse
facilities and the term loan related to the Galaxy acquisition. These swap
agreements are utilized to effectively fix the interest rate on this debt at an
average rate of approximately 6.1%. Fluctuations in interest rates are not
expected to have a material impact on the interest expense incurred under the
Company's revolving credit facility, or the floating rate portion of its term
loan.

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.

12


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

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.

13



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 9, 2004 By: /s/ J. Bruce Lancaster
---------------- -----------------------
J. Bruce Lancaster
Chief Financial Officer
(principal financial officer)



14