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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 1999
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File No. 0-23204
BOSS HOLDINGS, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 58-1972066
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
221 West First Street, Kewanee, Illinois 61443
---------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (309) 852-2131
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Common Stock $0.25 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
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 the past
90 days.Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates as of
March 13, 2000 was approximately $5.6 million.
There were 1,934,904 shares of the Registrant's common stock outstanding as of
March 13, 2000.
INCORPORATION BY REFERENCE
Specified portions of the registrant's definitive proxy statement for its
2000 Annual Meeting of Stockholders are incorporated by reference in Part III
hereof.
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements, other than statements of historical fact, included in
this Annual Report, including, without limitation, the statements under "Current
Developments", "Business" and "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: uncertainties and changes in general economic
conditions, unusual weather patterns which could affect domestic demand for the
registrant's products, performance and price issues with international
suppliers, pricing policies of competitors and the ability to attract and retain
employees in key positions. All subsequent forward-looking statements
attributable to the registrant or persons acting on its behalf are expressly
qualified in their entirety.
PART I
ITEM 1. BUSINESS
As used in this report, the terms "Boss" and "Company" refer to Boss
Holdings, Inc. (the Registrant) and its operating subsidiaries. Boss Holdings,
Inc., a Delaware corporation, is the successor by merger to Firearm Safety
Products, Inc., a Georgia corporation, organized in December, 1991, which
engaged in the development and sale of consumer products. In October 1994, under
prior management, the Company completed an initial public offering under the
name Vista 2000, Inc. On December 7, 1998, the Company changed its name from
Vista 2000, Inc. to Boss Holdings, Inc. reflecting the tradename of its primary
operating subsidiary, Boss Manufacturing Company, a Delaware corporation
("BMC").
During 1996 and 1997, the Company undertook a restructuring which included
the sale of a substantial portion of the Company's operating assets. As a result
of this restructuring, Boss now operates primarily in the work gloves and
protective wear business segment. In addition, the Company conducts operations
in the pet supply business segment.
Work Gloves and Protective Wear
Through BMC, the Company imports, manufactures and markets gloves, boots
and rainwear products serving two primary markets - consumer and industrial. The
consumer market represents approximately 60% of sales and consists of retailers
ranging from mass merchandisers to convenience stores as well as grocery and
hardware stores. The industrial market, which accounts for the balance of sales
in this segment, includes various commercial users of gloves and protective
wear. These customers include companies in the agricultural, automotive, energy,
lumber and construction industries.
BMC markets its products directly through its own sales force to major
retail stores and to industrial consumers as well as through distributors and
manufacturer representatives. BMC products are sold primarily to customers in
the United States, with certain products also marketed in Canada.
The work glove and protective wear market is intensely competitive with a
high degree of price competition. BMC competes on the basis of service, quality
and variety. Having participated in this segment for over 100 years, BMC and the
Boss tradename are well known in the industry. The market for work gloves and
protective wear is highly fragmented and served by a large number of domestic
and foreign competitors ranging in size from small sole proprietorships to
several companies substantially larger than BMC.
2
Sales in the work glove and protective wear segment have historically
exhibited seasonal fluctuations. Cold weather months generally provide increased
sales while warm weather historically results in slower sales activity. Because
of this seasonality, sales tend to be higher in the Company's first and fourth
quarters and lower during the second and third quarters.
BMC sells to a broad customer base approximating two thousand active
accounts. Accordingly, BMC has relatively little dependence on any one customer.
At the end of 1999, BMC had an open order backlog of approximately $1,500,000,
up about $600,000 from the previous year.
In recent years, the Company has increased its emphasis on importing
finished goods with sales of such products representing roughly 70% of the
Company's revenues. Finished goods in this segment are generally widely
available from a number of suppliers in various countries. However, the Company
has occasionally experienced limitations in the supply of certain imported
products. Availability of imported goods is further subject to interruptions in
shipping and quota constraints.
Raw materials used to manufacture products in the work glove and
protective wear segment have generally been readily available through a number
of sources. The Company does not anticipate shortages of either raw materials or
purchased goods for resale in 2000.
The Boss logo is an important trademark of the Company which it vigorously
defends in the market. In addition, BMC has various registered names and
trademarks for specific products which the Company believes add substantial
value in the sales and marketing efforts associated with this segment.
Additional financial information on the work gloves and protective wear segment
is included in the "Notes to Consolidated Financial Statements" and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Pet Supplies
The Warren Pet ("Warren") division of the Company's Boss Manufacturing
Holdings, Inc. subsidiary imports, manufactures and markets a line of pet
supplies to various retail outlets. Products in this line include dog and cat
toys, collars and leads, chains and rawhide products. Warren markets its product
line primarily to agricultural and hardware retailers utilizing a network of
regional distributors. Essentially all sales are within the United States.
The pet supplies industry is extremely competitive. A small group of
companies including Hartz Mountain Corporation and Sergeant's Pet Products
division of ConAgra dominate the industry. Warren competes primarily in selected
market niches by focusing on customer service and favorable pricing. In 1999,
Warren's three largest customers accounted for over 60% of sales in this
segment. Warren has expanded its distributor network and stepped up sales
promotional efforts in an effort to broaden its customer base.
Warren generally has multiple sources of supply for substantially all of
its product requirements. The purchased finished goods and raw materials
required to manufacture Warren's products have generally been readily available
in sufficient quantities. However, Warren is subject to the same potential for
product interruptions noted in the work gloves and protective wear segment.
Because of the nature and size of Warren's operations, the open order backlog
was not material at the end of 1999 or 1998.
Additional financial information on the pet supplies segment is included
in the "Notes to Consolidated Financial Statements" and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Environmental Matters
The Company is subject to various federal, state and local regulations
concerning the environment. Efforts to maintain compliance with such regulations
have not required expenditures material to the Company's overall operating
performance or financial condition. However, the Company can provide no
assurance that expenditures in this area will not become more significant in the
future.
3
Employees
As of December 25, 1999, Boss employed approximately 290 full-time
associates, down from 390 at the end of 1998. Of these, about 20 hourly
associates located at the BMC distribution facility in Springfield, Illinois
were represented by the UNITE labor organization under a collective bargaining
agreement. At year-end, about 210 associates were located in the United States
with 80 located in Mexico and Canada.
The Company's domestic employment declined in 1999 due primarily to
reduced production in the Company's Alabama manufacturing facilities. Because of
falling demand for domestic products, the Company expects to close its remaining
plant in Greenville, Alabama which should reduce domestic employment by an
additional 90 employees in 2000. The impact of this plant closing is further
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
The Company believes its employee relations are excellent as evidenced by
relatively low turnover rates at most facilities. However, attracting and
retaining employees has become more difficult because of continuing
low-unemployment economic conditions in the U.S. The Company's past success in
this area cannot assure attainment of future employment objectives.
ITEM 2. PROPERTIES
The following table shows the location, general character, square footage,
annual rent and lease expiration date of the principal operating facilities
owned or leased by the Company as of December 25, 1999. The principal executive
offices are located in Kewanee, Illinois.
Square Annual Lease
Location City General Character Feet Rent Expiration
- -------- ---- ---------------- ------- ------- ----------
Alabama Greenville Manufacturing 86,000 0 Owned
Br. Columbia, Vancouver Distribution 6,000 14,400 Month-to-
Canada month
Illinois Kewanee Administrative Office 10,200 0 Owned
Illinois Kewanee Manufacturing, 147,000 0 Owned
Distribution & Admin
Illinois Springfield Distribution 80,000 0 Owned
Mexico Juarez Manufacturing 35,400 0 Owned
Ontario, Concord Manufacturing, 18,400 65,000 6/30/2000
Canada Distribution & Admin
Texas El Paso Warehouse 1,770 11,664 Month-to-
month
The above properties are predominantly used in the work glove and
protective wear segment. The Company believes the above listed facilities
provide adequate productive and distribution capacity to provide for anticipated
demand. Utilization of the various facilities fluctuates significantly during
the year based on order and inventory levels. The Company considers its
properties to be generally well-maintained and in suitable condition to carry on
the Company's business.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal actions incident to the normal
operations of its business. These lawsuits primarily involve claims for damages
arising out of commercial disputes. Management believes the ultimate disposition
of these matters should not materially impair the Company's consolidated
financial position or liquidity.
4
In August, 1999, the Company concluded a settlement in the trademark
infringement litigation styled Boss Manufacturing Company v. Hugo Boss AG, et
al., which had been filed by the Company in the U.S. District Court for the
Southern District of New York in November, 1997. Under the terms of the
settlement, the Company received a lump sum cash payment of $2,000,000 from Hugo
Boss and the parties agreed to certain provisions concerning use of their
respective logos and trademarks.
Pursuant to the sale by the Company of its stock in Alabaster Industries,
Inc. ("Alabaster") in June, 1997, the Company received a $1.5 million note and
first mortgage on certain property of Alabaster located in Alabaster, Alabama.
Alabaster filed for Chapter 11 bankruptcy reorganization in April, 1998, and
subsequently initiated an adversary proceeding against the Company styled
Alabaster Industries, Inc. v. Boss Holdings, Inc. and W.R. Hill Co., Inc., filed
in the U.S. Bankruptcy Court for the Northern District of Alabama, Southern
Division. Alabaster's bankruptcy was converted to a Chapter 7 liquidation in
early 1999, and the bankruptcy trustee subsequently sold at auction the real
estate which was subject to the Company's first mortgage. Pursuant to a
court-approved settlement agreement with the bankruptcy trustee in October,
1999, the Company settled and released its note and mortgage on the Alabaster
property in exchange for a lump sum cash payment of $1,130,000 from the trustee
and a complete release of the Company from any liability or claims in connection
with the Alabaster transaction and bankruptcy.
In June, 1996, the Company sued its former president, Richard Smyth, in a
matter styled Boss Holdings, Inc. (formerly Vista 2000, Inc.) v. Richard Smyth,
filed in the Superior Court of Cobb County, Georgia. The Company alleged breach
of contract, conversion of company funds, unjust enrichment, breach of fiduciary
duty and fraud by Mr. Smyth, claiming damages and seeking recovery of funds
alleged to be converted by Mr. Smyth. In August, 1999, the Company successfully
concluded its action against Mr. Smyth pursuant to a consent judgment and
settlement agreement between the parties. Under the settlement agreement, the
Company received a consent judgment against Mr. Smyth in the principal sum of
$997,800 and Mr. Smyth agreed to dismiss with prejudice his pending counterclaim
against the Company. The Company agreed not to pursue collection of the judgment
in exchange for a $50,000 initial cash payment received from Mr. Smyth at the
time of settlement and timely receipt of future monthly and lump sum settlement
payments from Mr. Smyth totaling $435,000. The payment obligations of Mr. Smyth
under the settlement agreement are secured by a mortgage on his Florida home
residence. Mr. Smyth is current in the payment of his monthly settlement
payments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted no matters for security holder voting during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (symbol: BSHI) is currently listed on the
Over-the-Counter (OTC) Bulletin Board. Prior to December 8, 1998, the Company's
common stock symbol was VIST. The Company's common stock traded on NASDAQ under
the VIST symbol until May 31, 1996, when the Company's stock was delisted. From
June 1996 until June 1999, there was no established public trading market for
the Company's stock.
The Company's common stock is not listed on any national stock exchange or
on NASDAQ. The OTC Bulletin Board is a regulated quotation service that displays
real-time quotes, last-sale prices and volume information for non-listed
(over-the-counter) equity securities. The OTC Bulletin Board is a reporting
system for participating market makers, not an issuer listing service, and
should not be confused with the NASDAQ Stock Market. Participating market makers
in the bulletin board system enter quotes and trade reports on a closed computer
network and the information is made publicly available through numerous websites
and other locations. The OTC Bulletin Board is distinct from the "pink sheets"
published by the National Quotation Bureau which also report on transactions in
non-listed equity securities.
5
Stockholders of record at February 29, 2000 numbered approximately 2,500.
The Company has not paid cash dividends on its Common Stock in the past and
currently plans to retain earnings, if any, for business development and
expansion. The board of directors may review and modify the Company's dividend
policy in the future.
Quarterly Stock Prices
---------------------
Second* Third Fourth
------ ----- ------
1999 - High bid $2.50 $3.50 $5.00
1999 - Low bid $1.75 $2.50 $3.50
- ----------
* For this quarter the prices reflect high and low daily closing prices
because bid information was not available for the entire quarter.
Prior to the second quarter of 1999, there was no established public
trading market in the United States for the Company's stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table depicts selected consolidated financial data for the
five year period ended December 25, 1999 as derived from the consolidated
financial statements of the Company. This table should be read in conjunction
with Management's Discussion and Analysis of Results of Operations and Financial
Condition and the Company's audited Consolidated Financial Statements and Notes
thereto appearing elsewhere herein.
As of
-----------------------------------------------------------
12/25/99 12/26/98 12/27/97 12/28/96 12/30/95
-------- -------- -------- -------- --------
(Amounts in thousands, except per share)
Consolidated Balance Sheet Data
Working capital $14,332 $18,363 $17,438 $30,587 $30,393
Total assets 26,292 28,970 28,562 61,771 65,311
Long-term debt, including current 2,870 5,335 4,020 24,302 23,636
Stockholders' equity 17,690 19,835 19,123 24,161 21,125
Year Ended
-----------------------------------------------------------
12/25/99 12/26/98 12/27/97 12/28/96 12/30/95
-------- -------- -------- -------- --------
Consolidated Statement of
Operations Data
Net sales $36,024 $37,543 $78,400 $110,955 $ 32,422
Cost of sales 25,767 26,762 54,703 79,290 28,244
Gross profit 10,257 10,781 23,697 31,665 4,178
------- ------- ------- -------- --------
Operating expenses 12,047 10,739 24,396 37,508 17,318
Gain (Loss) from asset (1,100) 893 (3,792) (10,787) (1,147)
------- ------- ------- -------- --------
sales/writedowns
Operating earnings (loss) (2,890) 935 (4,491) (16,630) (14,287)
Interest income 103 151 115 -- --
Interest expense (515) (532) (1,914) (2,174) (649)
Other income (expense) 1,164 18 11 (351) 273
------- ------- ------- -------- --------
Net earnings (loss) before (2,138) 572 (6,279) (19,155) (14,663)
income taxes
Income tax benefit (expense) (18) 68 (256) (246) --
------- ------- ------- -------- --------
Net earnings (loss) $(2,156) $ 640 $(6,535) $(19,401) $(14,663)
======= ======= ======= ======== ========
Basic earnings (loss) per share $ (1.11) $ 0.34 $ (5.13) $ (30.08) $ (58.24)
======= ======= ======= ======== ========
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Sales
Sales by Segment $(000) 1999 1998 1997
- ----------------------- ------ ------ ------
Work Gloves & Protective Wear .............. 30,722 31,600 36,009
Pet Supplies ............................... 3,716 3,955 4,155
Keys, Letters, Numbers & Signs ............. 0 0 33,367
Corporate & Other .......................... 1,586 1,988 4,869
------ ------ ------
Total Sales ................................ 36,024 37,543 78,400
====== ====== ======
1999 Compared to 1998
The Company's sales totaled $36,024,000 in 1999, down 4% from 1998. Sales
declined in each of the Company's segments of business. In the Work Glove and
Protective Wear segment, sales fell $878,000, or 2.8% due to weakness in the
industrial market. Certain of the industries served in this market, in
particular the oil exploration and development industry, experienced slowdowns
during the year. In addition, selling prices continued to erode during the year
in response to falling costs on imported finished goods in this segment. Sales
in the consumer market increased slightly during the year as volume increases
more than offset the impact of lower selling prices.
The Work Glove and Protective Wear segment represented 85% of the
Company's total sales reflecting the restructuring efforts from prior years. The
Company plans to increase sales in this primary segment in the coming year
through restructuring its sales force and improving purchasing efforts to
provide better pricing and greater product diversity. In addition, the Company
expects to benefit from new product labeling introduced in 1999.
Sales in the Company's Pet Supplies segment fell $239,000, or 6%, due in
large part to the loss of direct sales representation covering independent
hardware stores. This channel of distribution was covered in previous years by a
sales group associated with the Keys, Letters, Numbers and Signs business
segment sold in 1997. Warren is in the process of improving sales representation
in this channel. In the fourth quarter of 1999, the Company was advised that the
second largest customer in the Pet Supplies segment will discontinue purchasing
from Warren Pet in the first quarter of 2000. This customer accounted for 19% of
1999 sales in the Pet Supplies segment. The Company has added and expects to add
additional accounts in this segment to offset the impact of this customer loss.
In 1999 and 1998, sales in the Company's Corporate and Other segment
consist primarily of the Company's Boss Balloon revenues. Sales declined in this
segment due to temporary inventory shortages when the Company stopped production
and began importing finished goods, the loss of a significant customer and a
slowdown in orders from another large customer during the development of new
product displays. The Company expects sales to increase in 2000 because of
improved inventory levels, increased distribution through an existing major
customer and more aggressive selling efforts.
1998 Compared to 1997
Consolidated 1998 sales declined $40,857,000, or 52.1%, from 1997 due
primarily to the Company's sale of assets associated with the Keys, Letters,
Numbers and Signs business segment (the "Keys and Letters Sale") in August 1997.
The Company's 1997 results of operations included $33,367,000 of sales in this
segment through the date of the Keys and Letters Sale. The Company's sale of its
interest in Alabaster Industries, Inc. (the "Alabaster Sale") during the second
quarter of 1997 also contributed to the difference in sales revenue in
comparison to the prior year. The Company's 1997 results of operations included
approximately $2,835,000 of sales from operations disposed of in the Alabaster
Sale. Alabaster sales are included in the Company's Corporate and Other segment
in the above table.
7
In addition to the Company's loss of sales due to the above restructuring
activities, 1998 sales in the Work Gloves and Protective Wear segment declined
$4,409,000, or 12.2%, from the prior year. Sales were down in both the Consumer
and Industrial markets in this segment on reduced volume and lower selling
prices.
Volume declined due to a number of factors including unusually warm winter
weather in the mid-western United States and historically low oil prices which
depressed sales to the oil exploration and development industry. The Company's
selling prices declined throughout 1998 because of lower pricing on imported
goods. Difficulties in Asian economies created an over-supply condition which
was further exacerbated by reduced domestic demand. This imbalance resulted in
strong price competition during 1998 which forced selling prices down.
Gross Margin
Gross Margin by Segment $(000) 1999 1998 1997
- ------------------------------ ------ ------ ------
Work Gloves & Protective Wear .............. 8,251 8,691 9,782
Pet Supplies ............................... 1,332 1,284 1,000
Keys, Letters, Numbers & Signs ............. 0 0 11,768
Corporate & Other .......................... 674 806 1,147
------ ------ ------
Total Gross Margin ......................... 10,257 10,781 23,697
====== ====== ======
1999 Compared to 1998
The Company's total gross margin declined by $524,000 in 1999 compared to
the previous year because of lower sales during the year. As a percentage of
sales, the 1999 gross margin was 28.5%, essentially unchanged from 1998.
In the Work Gloves and Protective Wear segment, gross margin declined as a
percentage of sales from 27.5% in 1998 to 26.8% in 1999. This decline was
attributable in large part to an increased loss from domestic manufacturing
operations during the year. In response to reduced customer demand for
domestically produced goods, the Company closed one manufacturing facility in
1999 and reduced production volume at its remaining plant. This substantial
decline in production volume coupled with continued fixed manufacturing costs
and competitive pricing pressure which kept selling prices down resulted in a
significant loss from manufacturing operations in 1999.
Gross margins in the Company's other segments improved in 1999. In the Pet
Supplies segment, gross margin improved to 35.8% of sales in 1999, up from 32.5%
the previous year. This improvement was primarily attributable to lower
operating costs attributable to the Warren relocation in 1999. Margins in the
Corporate and Other segment increased from 40.5% of sales in 1998 to 42.5% in
1999 because of the transition to importing balloons during 1999. Management
expects a larger impact in the coming year as the Company benefits from a full
year of the change to importing.
1998 Compared to 1997
The Company's total gross margin declined by $12,916,000 in 1998 compared
to 1997. This reduction was primarily attributable to the lower sales in 1998 as
previously discussed. On a percentage of sales basis, the 1998 gross margin
declined 1.5%, from 30.2% in 1997 to 28.7% in 1998.
The gross margin percentage declined in 1998 due principally to the change
in product mix subsequent to the Keys and Letters Sale. Margins in the Keys,
Letters, Numbers and Signs segment were 35.3% in 1997 while margins in the Work
Gloves and Protective Wear segment averaged 27.2% in 1997 and 27.5% in 1998. As
previously discussed, the sales mix shifted to a significantly higher
composition of Work Gloves and Protective Wear in 1998.
8
Selling, General & Administrative Expenses
S, G &A Expense by Segment $(000) 1999 1998 1997
- --------------------------------- ------ ------ ------
Work Gloves & Protective Wear .............. 9,368 7,731 7,984
Pet Supplies ............................... 913 1,120 1,184
Keys, Letters, Numbers & Signs ............. 0 0 11,372
Corporate & Other .......................... 1,766 1,888 3,856
------ ------ ------
Total S, G & A Expenses .................... 12,047 10,739 24,396
====== ====== ======
1999 Compared to 1998
Selling, General & Administrative ("S, G & A") expenses totaled
$12,047,000 in 1999, up $1,308,000 from 1998. This increase was attributable to
higher S, G & A expenses in the Work Gloves and Protective Wear segment. Several
factors contributed to the increased level of S, G & A expenses in this segment.
Consulting fees, primarily associated with Year 2000 readiness, increased
substantially during the year. The Company exceeded planned expenditures in this
area and expensed certain consulting fees incurred subsequent to the system
implementation. A portion of the increased consulting fees resulted from
consulting services provided under severance agreements.
The Company incurred increased sales and marketing expenses in the Work
Gloves and Protective Wear segment during 1999. The bulk of this increase
resulted from staff restructuring which caused above normal staffing levels for
a portion of the year. The restructuring process was completed before year-end
and should result in lower payroll and related expenses during the coming year.
Additional S, G & A expense increases in the Work Gloves and Protective
Wear segment occurred in warehousing, administrative payroll, depreciation and
product displays. Warehousing costs increased because of the full year of
operating in the new Kewanee facility and certain start-up costs incurred to
initiate operations. Administrative payroll increases were attributable to
increased staffing costs in support of the new system implementation and the
effect of a favorable benefit adjustment in 1998 not repeated in 1999.
Depreciation increased primarily as a result of Year 2000 capital expenditures
while product display expenses increased due to accelerated expense recognition
on certain items.
Management expects to reduce S, G & A expenses in the Work Gloves and
Protective Wear segment in 2000, particularly in the areas of consulting fees
and sales and marketing. However, expenses in certain areas such as information
systems are not expected to return to prior year levels.
S, G & A expenses in the Pet Supplies and Corporate and Other segments
declined in 1999 compared to 1998. In the Pet Supplies segment, S, G & A
expenses totaled $913,000 in 1999, down $207,000 from 1998 reflecting the lower
costs incurred after the relocation from Florida to Kewanee, Illinois of this
segment's primary operating facility. Corporate and Other S, G & A expenses were
down $122,000 due to in large part to reduced staffing expense at the corporate
headquarters.
1998 Compared to 1997
S, G & A expenses dropped $13,657,000 in 1998 compared to 1997. On a
percentage of sales basis, S, G & A expenses declined from 31.1% in 1997 to
28.6% in 1998. As in the case of sales and gross margin reductions, the primary
factor in the S, G & A expense decline was the Keys and Letters Sale. The
Alabaster Sale also reduced S, G & A expense by $862,000 in 1998 compared to the
previous year.
S, G & A expenses were down an additional $1,106,000 at the Company's
Corporate and Other segment in 1998 due in large part to reductions in staff,
legal and auditing expenses. The Company closed its corporate office in Atlanta,
Georgia during the second quarter of 1998. In the Work Gloves and Protective
Wear segment, 1998 S, G & A expenses declined 3.2% from 1997 because of certain
expenses incurred during 1997 in connection with the Company's consolidation of
facilities.
9
Operating Income Before Asset Sales and Writedowns
Operating Income (Loss) Before Asset Sales by Segment $(000) 1999 1998 1997
- ------------------------------------------------------------ ------ ------ ------
Work Gloves & Protective Wear .............................. (1,117) 960 1,798
Pet Supplies ............................................... 419 164 (184)
Keys, Letters, Numbers & Signs ............................. 0 0 396
Corporate & Other .......................................... (1,092) (1,082) (2,709)
------ ------ ------
Total Operating Income (Loss) .............................. (1,790) 42 (699)
====== ====== ======
1999 Compared to 1998
For 1999, the Company's operating loss before including the provision for
planned asset disposition costs totaled $1,790,000. This loss was larger than
expected due to unfavorable results in the Work Glove and Protective Wear
segment, the Company's primary line of business. Decreased sales and increased
S, G & A expenses were the primary factors in the loss for 1999. Management has
restructured the Company's sales force, enhanced product offerings and developed
a more aggressive pricing structure to promote sales growth in the coming year.
The sales restructuring and completion of systems implementation should lower S,
G & A expenses in 2000 and return this segment to profitability.
In the Pet Supplies segment, the Company experienced improved results for
1999. This segment benefited from reduced operating costs after the relocation
of operations during 1999. Corporate and Other results were essentially
unchanged from the prior year.
1998 Compared to 1997
The Company generated operating earnings of $42,000 in 1998, an
improvement of $741,000 over 1997. Although low, the 1998 earnings represent a
significant improvement in comparison to prior years due to the Company's
restructuring and consolidation activities.
Operating income in the Company's Work Gloves and Protective Wear segment
declined $838,000 from 1997 due to the reduced sales and resulting lower gross
margin in this segment previously discussed. The Company's operating loss in the
Corporate and Other segment declined substantially from 1997 due to the sale of
unprofitable operations and reduced corporate expenses.
Asset Sales and Writedowns
In response to declining demand for domestically produced gloves, the
Company developed a plan to dispose of its Greenville, Alabama production
facility during the fourth quarter of 1999. Management expects to cease
manufacturing operations during the second quarter of 2000 and dispose of all
assets associated with this operation. The Company recorded a charge of
$1,100,000 in the fourth quarter of 1999 to provide for estimated losses and
disposition costs in closing this operation.
During the third quarter of 1998, the Company recorded a gain of $893,000
on the final settlement of the Keys and Letters Sale. This settlement reflected
a payment received in August 1998 covering certain post-closing adjustments to
account for changes in assets and liabilities between the date of the sale
agreement and the closing of the sale.
In 1997, the Company recorded losses of $3,792,000 on the sale of certain
businesses and assets. Approximately $2,400,000 of this loss resulted from the
Keys and Letters Sale with the balance attributable to the Alabaster Sale.
Other Income (Expense)
The Company's interest income totaled $103,000 in 1999, down from $151,000
in 1998. Interest income declined primarily as a result of legal expenditures
incurred in connection with the Hugo Boss and Alabaster litigation which reduced
cash available for investment. The Company maintains a cash facility separate
from its
10
subsidiaries because of certain restrictions in the Company's bank credit
agreement regarding cash transfers among affiliates.
Interest expense in 1999 was essentially unchanged from 1998. Interest
expense declined to $532,000 in 1998, down from $1,914,000 in 1997 because of
debt reductions resulting from the Company's restructuring efforts.
Other income for 1999 totaled $1,165,000. The bulk of this income was
attributable to the Hugo Boss settlement recorded in the third quarter of 1999
(see Item 3, "Legal Proceedings" above). Gross proceeds were $2,000,000, with
this total offset by various legal and other compliance costs associated with
the settlement. The net gain recorded on the Hugo Boss settlement totaled
$1,135,000. The remainder of the other income recorded in 1999 resulted from the
Alabaster settlement 1999 (see Item 3, "Legal Proceedings" above). Proceeds, net
of associated legal expenses, exceeded the carrrying value on the Alabaster note
and mortgage by $30,000.
Income Tax Expense
In 1999, the Company recorded an income tax expense of $18,000. This
expense was attributable to state income taxes on certain of the Company's
subsidiaries. Because of losses in prior years, the Company had no federal
income tax expense in 1999 and has available substantial net operating loss
carryforwards for federal income tax purposes. These carryforwards have certain
limitations due to changes in control experienced in 1996 and 1997.
Liquidity and Capital Resources
1999 Compared to 1998
Operating activities generated cash of $4,158,000 in 1999, up $5,615,000
from 1998. This increase was primarily attributable to cash generated from
working capital as the Company reduced inventory levels and cash received in
connection with the Hugo Boss settlement.
Investing activities provided cash of $415,000 in 1999 as compared to
$79,000 in 1998. The Alabaster settlement resulted in sufficient proceeds to
retire the $1,038,000 note and mortgage receivable. This cash benefit was
partially offset by purchases of property and equipment, primarily in connection
with the Company's new, year 2000 compliant computer systems. In 1998, the
Company received a payment in final settlement of the sale of certain assets
from 1997. This payment slightly exceeded purchases of property and equipment
during the year.
The excess of cash generated by operating activities over cash used by
investing activities for 1999 enabled the Company to pay down its credit
facilities. This resulted in a use of cash by financing activities of
$2,736,000.
In addition to reducing debt, the Company ended 1999 with $3,997,000 in
cash. Borrowings on the Company's $10,000,000 revolving credit facility totaled
$823,000. Despite the loss recorded in 1999, the Company ended the year with
substantially improved liquidity and expects to have adequate liquidity to
provide for anticipated obligations during 2000. On a longer term basis, the
Company expects to generate sufficient cash from operations to meet the needs of
its existing business operations. However, certain potential growth and
expansion plans, if implemented, could require the Company to consider
additional funding sources such as increased bank lines of credit, the issuance
of additional capital stock, or the issuance of public or private debt. There
can be no assurance that any of these funding sources will be available to the
Company when and if required.
1998 Compared to 1997
During 1998, the Company's operating activities used $1,457,000 of cash,
down $2,512,000 from the $1,055,000 cash generated by operating activities in
1997. Despite significantly improved earnings in 1998, working capital changes
consumed $1,549,000 in 1998 as opposed to providing cash of $1,733,000 in 1997.
Because of reduced sales in 1998, accounts receivable declined, producing
a cash inflow of $1,245,000. However, the Company's inventory increased due to
the larger than anticipated sales decline using cash of $1,284,000. In addition,
during 1998 the Company paid certain liabilities incurred in prior years
including various
11
legal and professional fees, insurance claims, legal settlements, and income
taxes resulting in a $1,464,000 use of cash. In 1997, working capital provided
cash due primarily to reduced inventories and reductions of certain other
assets.
Cash provided by investing activities totaled $79,000 in 1998, down from
$20,092,000 in 1997. In 1998, the Company received net proceeds of $893,000 in
settlement of the Keys and Letters sale and expended $818,000 in purchases of
property and equipment. Major property and equipment expenditures included
approximately $540,000 for the renovation of a 147,000 square foot distribution
facility acquired in Kewanee, Illinois and $145,000 on new computer systems.
Essentially all purchases of property and equipment occurred in the Work Gloves
and Protective Wear segment, though certain of the facilities and computer
systems may also be utilized by other segments.
In 1997, the Company received $24,021,000 in cash from the sale of
operating assets, primarily from the Keys and Letters sale. These proceeds were
partially offset by $3,937,000 in purchases of property and equipment. Such
purchases included $2,000,000 for the purchase of a warehouse in Springfield,
Illinois used in the Work Gloves and Protective Wear segment. The bulk of the
remaining purchases of property and equipment consisted of capitalized costs
associated with the development of new key duplicating technology for the keys,
letters, numbers and signs segment.
Financing activities provided cash of $1,436,000 in 1998 due primarily to
increased borrowings. In addition, the Company received $121,000 from the
exercise of stock options. During 1997, financing activities represented a
$20,143,000 use of cash as the Company used proceeds from the sale of operating
assets to reduce borrowings.
Inflation
The Company does not believe that the moderate rates of inflation
experienced in the United States over the last three years have had a material
effect on its net sales or profitability. The Company obtains finished goods
from some foreign countries which have experienced deflationary conditions
during the last three years, thereby decreasing the Company's cost of goods sold
for many items, particularly in the Work Gloves and Protective Wear segment. The
Company believes such price changes have increased price competition in this
segment.
Year 2000
In the fourth quarter of 1999, the Company completed the implementation of
new, Year 2000 compliant enterprise software. Because of the Company's limited
internal information technology resources and the complexity of the
implementation, timely completion of this project required significantly greater
utilization of consulting resources than originally planned. As a result, the
system implementation cost was higher than expected, totaling approximately
$800,000. The bulk of this total has been capitalized. However, the Company
expensed approximately $150,000 relating to post-implementation consulting and
process re-engineering consulting.
While the implementation of hardware and software was completed in the
fourth quarter of 1999, the Company will continue to develop enhanced internal
reporting capabilities and obtain additional training to operate effectively
with the new system during 2000. These efforts will require the use of outside
consulting in some cases. Though well below the costs incurred in 1999,
consulting fees are expected to exceed $100,000 in 2000. Such fees will be
charged to expense as incurred during the year.
The Company incurred no significant downtime or loss of ability to conduct
business during the systems conversion process in 1999. However, the Company did
experience a temporary loss of informational reporting in certain areas. Such
difficulties caused short-term inventory outages of some products which have
continued into 2000.
The Company continues to rely on a limited number of legacy programs which
are not date sensitive, primarily in the manufacturing area. Management plans to
dispose of the Company's remaining domestic manufacturing facilities in 2000,
which should eliminate further reliance on the remaining legacy programs.
12
Market Risk
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 impacted by changes in interest rates and
the Company has no investments in derivatives. Fluctuations in interest rates
are not expected to have a material impact on the interest expense incurred
under the Company's revolving credit facility.
Outlook for 2000
While 1999 proved to be a difficult year for Boss from an operational
standpoint, the Company ended the year in an improved financial position with
substantially reduced long-term debt and cash on hand of almost $4 million. The
Company resolved a number of potentially difficult and costly litigation matters
outstanding from prior years. Most notably, the Company entered into settlement
agreements in both the Hugo Boss and Alabaster suits during the second half of
the year. These settlements resulted in cash proceeds to the Company of over $3
million and ended distractions and time commitments for management which
accompany complex commercial litigation.
Further, plans initiated during the year should position the Company for
improved future performance. These initiatives include the following:
o Domestic manufacturing elimination
o Sales force reorganization
o Management restructuring
o Information systems overhaul
Domestic Manufacturing Elimination - In recent years, the demand for
domestically manufactured products in the markets served by the Company has
continued to decline. In response, the Company has outsourced certain products
and plans to eliminate virtually all domestic production in 2000. While the
expected disposition expense from this plan resulted in a substantial
disposition charge for 1999, this change should favorably impact future
operations in three areas. First, elimination of domestic manufacturing is
expected to reduce losses from manufacturing operations which have totaled $1
million over the past two years. Second, margins on imported product to replace
the current domestic product should increase significantly. Third, with lower
priced goods available, the Company may have the opportunity to compete more
effectively in certain product categories and pursue new markets. Though this
change will increase reliance on foreign suppliers, products have been
abundantly available in recent years and management anticipates continued ready
availability.
Sales Force Reorganization - During the course of 1999, the Company
completely overhauled its sales management group. The sales team has been
strengthened by the addition of several experienced managers with substantial
industry experience. In addition, this team has been streamlined by eliminating
certain unnecessary sales managerial positions. Management anticipates improved
sales results from this aggressive new team with reduced selling expenses. Due
in part to these changes, fourth quarter 1999 sales were up from the previous
year and this trend has continued through the first quarter of 2000.
Management Restructuring - In an effort to reduce administrative expenses
and focus on the Company's core business, executive responsibilities were
streamlined during 1999. Two senior executives left the Company due to
retirement or resignation and the Company began utilizing the services of a
previous President of Boss Manufacturing Company on a consulting basis. This
change has brought renewed sales emphasis by adding a seasoned industry
executive with substantial sales and importing experience.
Information Systems Overhaul - As discussed in the Year 2000 section
above, the Company implemented a new enterprise system in 1999. This
implementation was a major effort, touching each functional area of the
business. While the cost has been significant, the Company should be well
positioned for future growth utilizing this new platform. As the Company's staff
becomes more knowledgeable and proficient in the use of this system, management
should benefit from improved access to key information.
13
Management intends to focus on improved sales and earnings during the
coming year. To do so, management plans to evaluate a number of alternatives, in
addition to those initiatives discussed above. Some of these alternatives
include expanded sales and marketing programs, product line expansion, licensing
opportunities, and potential acquisition and disposition opportunities. The
Company can provide no assurance as to the success of such alternatives, if
implemented, due to various risk factors including capital constraints faced by
the Company to maintain adequate liquidity and the market reaction from
competitors in the industry who are, in certain cases, larger than the Company
with greater capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The following consolidated financial statements of the Company and its
Accountants' Opinion are set forth in Part IV, Item 14, of this Report:
(i) Consolidated Statements of Operations, Cash Flows and
Shareholders' Equity for the year's ended December 25, 1999,
December 26, 1998 and December 27, 1997.
(ii) Consolidated Balance Sheets - as of December 25, 1999 and
December 26, 1998.
(iii) Notes to the Consolidated Financial Statements; and
Unqualified Opinion of Independent Accountants dated February
16, 2000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
Not applicable.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing in the Company's Definitive Proxy Statement
prepared in connection with its 2000 Annual Meeting of Stockholders (the "Proxy
Statement") under the captions "Election of Directors", "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein
by reference. The Proxy Statement is to be filed no later than 120 days after
the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing in the Proxy Statement under the caption
"Certain Relationships and Related Transactions" is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
The following consolidated financial statements of Boss Holdings,
Inc. and Report of Independent Accountants are attached as pages F-1
through F-31 to this report:
Consolidated Statements of Operations, Cash Flows and Shareholders'
Equity for the years ended December 25, 1999, December 26, 1998 and
December 27, 1997;
Consolidated Balance Sheets - as of December 25, 1999 and December
26, 1998;
Notes to the Consolidated Financial Statements; and
Report of Independent Accountants dated February 16, 2000.
(2) Financial Statement Schedules
The following financial statement schedules of Boss Holdings, Inc.
for the years ended December 25, 1999, December 26, 1998 and
December 27, 1997 are included pursuant to Item 8:
Report of Independent Certified Public Accountants on
Schedules ................................................. S-1
Valuation and Qualifying Accounts ........................... S-2
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Financial Statements or notes
thereto.
(b) Reports on Form 8-K:
None filed during the 4th Quarter of 1999.
(c) Exhibits:
The exhibits filed with or incorporated into this report are listed
in the Index to Exhibits which follows.
15
INDEX TO EXHIBITS
(3) (i) Articles of Incorporation
3.1 Certificate of Incorporation (see note A below)
3.1.1 Amendment to Certificate of Incorporation, dated December 7, 1998
(see note D below)
(ii) By-Laws
3.2 By-Laws (see note A below)
(10) Material Contracts
10.1 1993 Incentive Stock Option Plan (see note A below)
10.2 1993 Non-Employee Director Stock Option Plan, as amended. (see note
B below)
10.3 First Amendment to the Company's 1993 Incentive Stock Option Plan
(see note B below)
10.4 Loan and Security Agreement between American Consumer Products,
Inc., Products Merchandisers, Inc., Boss Manufacturing Company and
Fleet Capital Corporation dated May 7, 1997. (see note C below)
10.5 1998 Incentive Stock Option Plan (see note E below)
10.6 1998 Non-Employee Director Stock Option Plan (see note E below)
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
- ----------
A Incorporated herein by reference from the Company's Registration Statement
on Form SB-2 (Registration No. 33-73118-A).
B Incorporated herein by reference from the Company's Report on Form 8-K
dated June 9, 1996.
C Incorporated herein by reference from the Company's Report on Form 10-Q
for the quarter ended June 28, 1997.
D Incorporated herein by reference from the Company's Report on Form 10-K
for the year ended December 26, 1998.
E Incorporated herein by reference from the Company's Proxy Statement on
Schedule 14A dated August 20, 1998.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) Boss Holdings, Inc.
By (Signature and Title) /s/ J. Bruce Lancaster
---------------------------------------
J. Bruce Lancaster, Chief Financial
Officer
Date: April 7, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By (Signature and Title) /s/ G. Louis Graziadio, III
---------------------------------------
G. Louis Graziadio, III
Chairman of the Board and Chief
Executive Officer
Date: April 7, 2000
By (Signature and Title) /s/ Perry A. Lerner
---------------------------------------
Perry A. Lerner, Director
Date: April 7, 2000
By (Signature and Title) /s/ Lee E. Mikles
---------------------------------------
Lee E. Mikles, Director
Date: April 7, 2000
By (Signature and Title) /s/ Paul A. Novelly
---------------------------------------
Paul A. Novelly, Director
Date: April 7, 2000
By (Signature and Title) /s/ Richard D. Squires
---------------------------------------
Richard D. Squires, Director
Date: April 7, 2000
17
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOSS HOLDINGS, INC. AND SUBSIDIARIES
December 25, 1999 and December 26, 1998
Report of Independent Certified Public Accountants
Board of Directors
Boss Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Boss Holdings,
Inc. (formerly Vista 2000, Inc.) and Subsidiaries as of December 25, 1999 and
December 26, 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 25, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Boss Holdings,
Inc. and Subsidiaries as of December 25, 1999 and December 26, 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 25, 1999 in conformity with
generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Atlanta, Georgia
February 16, 2000
F-1
Boss Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
ASSETS
December 25, December 26,
1999 1998
------------ ------------
CURRENT ASSETS
Cash and cash equivalents ...................... $ 3,997 $ 2,131
Accounts receivable, net of allowance for
doubtful accounts and returns of $464
and $455, respectively ....................... 6,773 6,484
Inventories .................................... 9,700 13,777
Prepaid expenses ............................... 493 520
Other .......................................... 155 181
------- -------
Total current assets ......................... 21,118 23,093
PROPERTY AND EQUIPMENT, NET ...................... 5,145 4,743
OTHER ASSETS
Note receivable, net of allowance of $450
at December 26, 1998 ......................... -- 1,038
Other .......................................... 29 96
------- -------
29 1,134
------- -------
$26,292 $28,970
======= =======
The accompanying notes are an integral part of these statements.
F-2
Boss Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 25, December 26,
1999 1998
------------ ------------
CURRENT LIABILITIES
Current portion of long-term debt ................. $ 968 $ 840
Current portion of capital lease obligation ....... 86 --
Accounts payable .................................. 1,161 1,278
Accrued payroll and related expenses .............. 736 629
Accrued liabilities ............................... 3,835 1,893
-------- --------
Total current liabilities ..................... 6,786 4,640
LONG-TERM DEBT
Notes payable ..................................... 1,754 4,495
Capital lease obligation .......................... 62 --
-------- --------
Total long-term debt .......................... 1,816 4,495
STOCKHOLDERS' EQUITY
Common stock, $.25 par value, 50,000,000 shares
authorized, 1,934,904 and 1,942,489 shares issued
and outstanding, in 1999 and 1998, respectively . 484 486
Additional paid-in capital ........................ 67,437 67,453
Accumulated deficit ............................... (48,391) (46,235)
Accumulated other comprehensive deficit ........... (90) (119)
-------- --------
19,440 21,585
Less: 13,654 treasury shares - at cost .......... (1,750) (1,750)
-------- --------
Total stockholders' equity .................... 17,690 19,835
-------- --------
$ 26,292 $ 28,970
======== ========
The accompanying notes are an integral part of these statements.
F-3
Boss Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands except per share data)
Year ended Year ended Year ended
December 25, December 26, December 27,
1999 1998 1997
------------ ------------ ------------
Net sales .................................. $ 36,024 $ 37,543 $ 78,400
Cost of sales .............................. 25,767 26,762 54,703
-------- -------- --------
Gross profit ............................... 10,257 10,781 23,697
Operating expenses ......................... 12,047 10,739 24,396
-------- -------- --------
(1,790) 42 (699)
Gain (loss) on sale of business
and operating assets ..................... -- 893 (3,792)
Writedown of operating assets .............. (1,100) -- --
-------- -------- --------
(Loss) earnings from operations ............ (2,890) 935 (4,491)
Other income and (expense)
Interest income .......................... 103 151 115
Interest expense ......................... (515) (532) (1,914)
Gain on lawsuit settlement net
of settlement expenses ................. 1,135 -- --
Other .................................... 29 18 11
-------- -------- --------
Net (loss) earnings before income taxes (2,138) 572 (6,279)
Income tax (expense) benefit ............... (18) 68 (256)
-------- -------- --------
Net (loss) earnings .................... $ (2,156) $ 640 $ (6,535)
======== ======== ========
Net (loss) earnings per common share
Basic .................................... $ (1.11) $ 0.34 $ (5.13)
Diluted .................................. $ (1.11) $ 0.33 $ (5.13)
The accompanying notes are an integral part of these statements.
F-4
Boss Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 25, 1999, December 26, 1998 and December 27, 1997
(Dollars and share amounts in thousands)
Preferred Stock
---------------------------------------------------------------------------------------
Series A Series B Series C Series D
----------------- ------------------ ------------------ -----------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
------ ------- ------ ------- ------ ------- ------ -------
Balance at December 28, 1996 ............ -- $ 122 -- $ -- -- $ 1,098 3 $ 2,765
Purchase and retirement of
preferred stock ....................... -- -- -- -- -- -- -- (340)
Preferred stock conversions ............. -- (122) -- -- -- (1,098) (3) (2,425)
Common stock issued for
settlement of class action lawsuit .... -- -- -- -- -- -- -- --
Common stock issued in
settlement with preferred
shareholders .......................... -- -- -- -- -- -- -- --
Common stock issued for
untendered BMHI shares ................ -- -- -- -- -- -- -- --
Exercise of stock options ............... -- -- -- -- -- -- -- --
Compensatory stock options .............. -- -- -- -- -- -- --
Foreign currency translation
adjustment ............................ -- -- -- -- -- -- -- --
Net loss ................................ -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 27, 1997 ............ -- -- -- -- -- -- -- --
Exercise of stock options ............... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment ............................ -- -- -- -- -- -- -- --
Net earnings ............................ -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Balance, December 26, 1998 .............. -- -- -- -- -- -- -- --
Exercise of stock options ............... -- -- -- -- -- -- -- --
Purchase and retirement of
common stock .......................... -- -- -- -- -- -- -- --
Common stock cancelled .................. -- -- -- -- -- -- -- --
Foreign currency translation
adjustment ............................ -- -- -- -- -- -- -- --
Net loss ................................ -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Balance, December 25, 1999 .............. -- $ -- -- $ -- -- $ -- -- $ --
======= ======= ======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements.
F-5
Boss Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 25, 1999, December 26, 1998 and December 27, 1997
(Dollars and share amounts in thousands)
Accumulated
Common stock Additional Other Treasury stock Total
----------------- Paid-in Accumulated Comprehensive ---------------- Stockholders'
Shares Dollars Capital Deficit Earnings (Deficit) Shares Dollars Equity
------ ------- ------------ ------------ ----------------- ------- ------- ------------
Balance at December 28, 1996 ...... 723 $ 181 $ 62,108 $ (40,340) $ (23) (14) $(1,750) $24,161
Purchase and retirement of
preferred stock ................. -- -- 246 -- -- -- -- (94)
Preferred stock conversions ....... 124 31 3,614 -- -- -- -- --
Common stock issued for settlement
of class action lawsuit ......... 586 146 769 -- -- -- -- 915
Common stock issued in
settlement with preferred
shareholders .................... 232 58 304 -- -- -- -- 362
Common stock issued for
untendered BMHI shares .......... -- -- 159 -- -- -- -- 159
Exercise of stock options ......... 129 32 65 -- -- -- -- 97
Compensatory stock options ........ -- -- 105 -- -- -- -- 105
Foreign currency translation
adjustment ...................... -- -- -- -- (47) -- -- (47)
Net loss .......................... -- -- -- (6,535) -- -- -- (6,535)
------ ----- -------- -------- ----- --- ------ -------
Balance at December 27, 1997 ...... 1,794 448 67,370 (46,875) (70) (14) (1,750) 19,123
Exercise of stock options ......... 148 38 83 -- -- -- -- 121
Foreign currency translation
adjustment ...................... -- -- -- -- (49) -- -- (49)
Net earnings ...................... -- -- -- 640 -- -- -- 640
------ ----- -------- -------- ----- --- ------ -------
Balance, December 26, 1998 ........ 1,942 486 67,453 (46,235) (119) (14) (1,750) 19,835
Exercise of stock options ......... 32 8 16 -- -- -- -- 24
Purchase and retirement of
common stock .................... (25) (6) (36) -- -- -- -- (42)
Common stock cancelled ............ (14) (4) 4 -- -- -- -- --
Foreign currency translation
adjustment ...................... -- -- -- -- 29 -- -- 29
Net loss .......................... -- -- -- (2,156) -- -- -- (2,156)
------ ----- -------- -------- ----- --- ------ -------
Balance, December 25, 1999 ........ $1,935 $ 484 $67,437 $(48,391) $ (90) (14) $(1,750) $17,690
====== ===== ======== ======== ===== === ====== =======
The accompanying notes are an integral part of these statements.
F-6
Boss Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year ended Year ended Year ended
December 25, December 26, December 27,
1999 1998 1997
------------- ------------- --------------
Cash flows from operating activities:
Net (loss) earnings ........................................ $(2,156) $640 $(6,535)
Adjustments to reconcile net (loss) earnings
to net cash provided (used) by operations:
(Gain) loss on sale of operating assets ................ -- (893) 3,792
Writedown of operating assets .......................... 1,100 -- --
Write off of affiliate trade receivables ............... -- -- (429)
Depreciation ........................................... 474 343 1,910
Loss on disposal of property and equipment ............. -- 2 118
Stock based compensation expense ....................... -- -- 466
(Increase) decrease in operating assets:
Accounts receivable .................................. (289) 1,245 (229)
Inventories .......................................... 4,077 (1,284) 1,218
Prepaid expenses and other current assets ............ 53 39 572
Other assets ......................................... 67 70 1,208
Increase (decrease) in operating liabilities:
Accounts payable ..................................... (117) (155) (189)
Accrued liabilities .................................. 949 (1,464) (847)
------- ------- -------
Net cash provided (used)
by operating activities .......................... 4,158 (1,457) 1,055
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of operating assets ..................... -- 893 24,021
Purchases of property and equipment ........................ (623) (818) (3,937)
Proceeds from payments on note receivable .................. 1,038 4 8
------- ------- -------
Net cash provided by investing activities .......... 415 79 20,092
------- ------- -------
The accompanying notes are an integral part of these statements.
F-7
Boss Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollar amounts in thousands)
Year ended Year ended Year ended
December 25, December 26, December 27,
1999 1998 1997
------------- ------------- --------------
Cash flows from financing activities:
Net payment from short-term borrowings ..................... -- -- (908)
Net (repayments) borrowings on revolving
line of credit ........................................... (3,261) 973 1,330
Proceeds from long-term debt ............................... 1,500 512 1,985
Repayment of long-term debt and
capital lease obligation ................................. (957) (170) (22,147)
Other long-term liabilities ................................ -- -- (406)
Proceeds from exercise of stock options and warrants ....... 24 121 97
Retirement of common stock - limited tender ................ (42) -- --
Purchase of treasury stock and warrants .................... -- -- (94)
------- ------- -------
Net cash (used) provided by
financing activities ................................... (2,736) 1,436 (20,143)
------- ------- -------
Effect of exchange rate changes on cash ...................... 29 (49) (47)
------- ------- -------
Net increase in cash during period ........................... 1,866 9 957
Cash and cash equivalents at the
beginning of the period .................................... 2,131 2,122 1,165
------- ------- -------
Cash and cash equivalents at the
end of the period .......................................... $ 3,997 $ 2,131 $ 2,122
======= ======= =======
Supplemental disclosure:
Interest paid .............................................. $ 508 $ 528 $ 1,884
Income taxes (refunded) paid, net .......................... (15) 209 313
Noncash investing and financing activities:
Assets purchased under capital lease obligation ............ $ 253 $ -- $ --
The accompanying notes are an integral part of these statements.
F-8
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Boss Holdings, Inc. (formerly Vista 2000, Inc.) and its subsidiaries, (the
"Company"), are engaged primarily in the import, manufacture, distribution and
sale of consumer products including gloves, boots, rainwear, pet products and
balloons. The Company's customers include mass merchandisers, various other
retailers and commercial users located throughout North America. On December 7,
1998, the Company changed its name from Vista 2000, Inc. to Boss Holdings, Inc.
reflecting the trade name of its primary operating subsidiary, Boss
Manufacturing Company.
Reverse Stock Split
At the Company's annual meeting of shareholders on October 8, 1998, the
shareholders approved a 25-for-1 reverse stock split. The reverse stock split
became effective on December 7, 1998, at the same time as the Company's
corporate name change. All common stock amounts for the periods presented have
been restated to reflect the reverse split.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Boss Holdings, Inc. ("BHI"), and its wholly owned subsidiaries, Boss
Manufacturing Holdings, Inc. (formerly American Consumer Products, Inc.) and
subsidiaries ("BMHI"), and Family Safety Products, Inc. ("FSPI") (collectively,
the "Company"). All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
During 1997 and 1996, BHI disposed of substantially all of the operating
assets of all subsidiaries with the exception of Boss Manufacturing Company and
Subsidiaries, a subsidiary of BMHI and the Warren Pet Products division of BMHI.
Fiscal Year
The Company maintains a 52/53-week year ending on the last Saturday in the
calendar year. Fiscal years 1999, 1998 and 1997 each contained 52 weeks.
Cash and Cash Equivalents
Cash and equivalents consist of cash on hand, time deposits, and liquid
debt instruments such as commercial paper with maturities of three months or
less from the date of purchase.
Revenue Recognition
The Company recognizes revenue and provides for the estimated cost of
retu1rns and allowances in the period the products are shipped.
No single customer accounted for 10% or more of revenue in 1999, 1998 or
1997.
Inventories
Inventories are stated at the lower of average cost or market. Cost for
approximately 72% and 77% of inventories at December 25, 1999 and December 26,
1998, respectively, has been determined using the last-in, first-out (LIFO)
method. Cost for the remainder of the inventories has been determined primarily
using the first-in, first-out (FIFO) method.
Had the Company used the first-in, first-out (FIFO) method of accounting
for all inventories, gross profit would have been substantially the same for all
years presented, except for 1998 when the gross profit would have been $180
higher.
F-9
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(1) Nature of Business and Summary of Significant Accounting Policies -
Continued
Advertising Costs
The Company generally expenses the cost of advertising the first time
advertising takes place. Costs of trade shows and developing advertising
materials are expensed at the time of the trade shows or as the advertising
materials are produced and distributed to customers. Advertising expense for
1999, 1998 and 1997 was $807, $847, and $651, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities are
measured using enacted tax rates applied to taxable income. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is provided for deferred income tax assets when it is more likely than
not that the asset will not be realized.
Reclassification of Account Balances
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
Property, Equipment, Depreciation and Amortization
Property and equipment are recorded at historical cost. The Company
provides for depreciation and amortization using the straight-line method over
the following estimated useful lives:
Machinery and equipment 3 to 10 years
Office Furniture and equipment 3 to 8 years
Buildings 35 years
Depreciation expense was $474, $343, and $1,910 for 1999, 1998 and 1997,
respectively.
Warranty Costs and Returns
The Company provides for estimated warranty costs and returns at the time
of sale. Accrued costs of warranty obligations and returns are classified as
accrued liabilities and are immaterial.
Research and Development Costs
Research and development costs are charged to expense as incurred and
totaled $0, $0, and $396 for 1999, 1998 and 1997, respectively.
Foreign Currency Translation
Financial statements of the Company's Canadian subsidiary are translated
into U.S. dollars using fiscal year-end exchange rates for assets and
liabilities, and average exchange rates during the year for the results of
operations. Translation adjustments of the Canadian accounts are reported as a
separate component of other comprehensive earnings within stockholders' equity.
Translation adjustments of the Mexican subsidiary, for which the functional
currency is U.S. dollars, are included in the results of operations for the
year.
Exchange rate adjustments related to foreign currency transactions are
recognized in income as incurred and were not significant in any of the reported
periods.
F-10
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(1) Nature of Business and Summary of Significant Accounting Policies -
Continued
Systems Development Costs
In 1999, the Company adopted AICPA Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Systems Developed or Obtained for Internal
Use. Adoption of SOP 98-1 will require no significant changes to the Company's
systems development accounting methodology and will not have a material impact
on the results of operations.
The Company capitalizes certain systems development costs that meet
established criteria. Amounts capitalized are amortized to expense over three
years. In 1999, the Company capitalized systems development costs of $427.
Earnings Loss Per Share
Basic net earnings (loss) per common share is based upon the weighted
average number of common shares outstanding during the period. Diluted net
earnings (loss) per common share is based upon the weighted average number of
common shares outstanding plus dilutive potential common shares, including
options and warrants outstanding during the period.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The Company's financial instruments include cash, cash equivalents and
long-term debt. The carrying value of cash and cash equivalents approximates
fair value due to the relatively short period to maturity of the instruments.
The carrying value of the Company's long-term obligations approximates fair
value based upon borrowing rates currently available to the Company for
borrowings with comparable maturities.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
new accounting rules for hedging instruments.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133 an Amendment of FASB Statement No. 133. The statement defers
the effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000.
F-11
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(1) Nature of Business and Summary of Significant Accounting Policies -
Continued
Management does not expect the adoption of these new standards to have a
material impact on the Company's consolidated financial statements.
(2) Inventories
December 25, December 26,
1999 1998
------------ ------------
Raw Materials ............................... $1,390 $ 2,056
Work in Progress ............................ 335 433
Finished Goods .............................. 7,975 11,288
------ -------
$9,700 $13,777
====== =======
(3) Property and Equipment
December 25, December 26,
1999 1998
------------ ------------
Machinery and equipment ..................... $1,088 $1,073
Buildings and improvements .................. 3,969 3,827
Office furniture and equipment .............. 1,123 261
Construction in progress .................... -- 143
------ ------
Total property and equipment .............. 6,180 5,304
Less accumulated depreciation ............... 1,374 900
------ ------
4,806 4,404
Land ........................................ 339 339
------ ------
$5,145 $4,743
====== ======
F-12
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(4) Long-term Debt
Notes Payable
December 25, December 26,
1999 1998
------------ ------------
BMHI revolving line of credit .............................. $ 823 $4,083
Boss Manufacturing Real Estate, Inc. mortgage note
payable to a lender. All outstanding principal was
due and paid in June 1999 ................................ -- 773
Boss Manufacturing Real Estate, Inc. mortgage note
payable to a lender. Requires monthly principal
payments of $6. Interest is at LIBOR plus 2.1%,
adjusted monthly. All outstanding principal is due
in October 2004. Collateralized by all real and
personal property of Boss Manufacturing Real
Estate, Inc. located in Springfield, Illinois. ........... 1,488 --
Boss Manufacturing Company loan agreement with a local
governmental agency. Requires monthly payments of
$7, including interest at 3%, through June 2005.
Collateralized by all real property of Boss Manufacturing
Company's Kewanee, Illinois facilities. .................. 411 479
------- -------
Total long-term notes payable .......................... 2,722 5,335
Less current maturities .................................... 968 840
------- -------
Long-term notes payable .................................. $ 1,754 $ 4,495
======= =======
Scheduled principal payments of long-term notes payable are as follows:
Fiscal year:
2000 ................................................... $ 968
2001 ................................................... 147
2002 ................................................... 149
2003 ................................................... 151
2004 ................................................... 1,267
Thereafter ............................................. 40
-----
Total ................................................ $ 2,722
=====
In May 1997, the Company entered into a loan and security agreement (the
"1997 Agreement") with a bank. The 1997 Agreement, which expires in May 2000,
was amended in August 1997, concurrent with the sale of certain BMHI assets (see
Note 12). The 1997 Agreement, as amended, provides for a revolving credit
facility up to $10,000 based on a formula that includes eligible accounts
receivable and inventory. Interest is payable monthly at the bank's prime rate
plus .5% or, at the Company's option, LIBOR plus 2.50% (effective rate of 8.50%
at December 25, 1999). The Company incurs an annual facility fee of $33 payable
at the beginning of each contract year and a loan commitment fee of 3/8% per
annum on the unused portion of the credit facility. The 1997 Agreement provides
for certain restrictive covenants including, among others, limitations as to
intercompany transfers and capital expenditures and maintenance of certain
minimum financial ratios.
F-13
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(4) Long-term Debt - Continued
The credit facility is secured by essentially all personal property of
BMHI and its subsidiaries, including accounts receivable and inventories, and is
guaranteed by each of the BMHI subsidiaries. As part of the maximum borrowings,
the bank has also committed $3,500 in letters of credit. At December 25, 1999,
no letters of credit were outstanding under the 1997 Agreement.
At December 25, 1999, the Company was in violation of certain loan
covenants. The Company has not requested a waiver for such covenant violations
because it is in the process of negotiating loan refinancing with several
interested financial institutions. Shortly after year-end, the Company received
a letter of interest with proposed terms from a bank to replace the existing
credit facility on improved terms. Management is confident that an agreement can
be completed to replace the existing facility.
(5) Commitments and Contingencies
Leases
The Company leases certain office equipment under a noncancelable lease
expiring in 2001. For financial reporting purposes, minimum lease payments
relating to this lease have been capitalized. The related assets and obligation
have been recorded using the Company's incremental borrowing rate at the
inception of the lease. The equipment had a net book value of $214 at December
25, 1999.
The Company leases certain office and operating facilities and certain
equipment under operating lease agreements that expire on various dates through
2001 and require the Company to pay all maintenance costs. Rent expense under
these leases was approximately $137, $320 and $1,021 for 1999, 1998 and 1997,
respectively.
The following is a schedule by year of future minimum payments under
capital and operating lease agreements, and the present value of future minimum
rental payments under capitalized lease obligations at December 25, 1999:
Capital Operating Total
------- --------- ------
Year ended December 31,
2000 .................................................. $95 $33 $128
2001 .................................................. 64 9 73
--- --- ----
Total minimum lease payments .............................. 159 $42 $201
=== ====
Amount representing interest .............................. (11)
Current portion of capital
lease obligation ........................................ (86)
---
Present value of long-term capital lease obligation ....... $62
===
Class Action Lawsuit
During 1997, the Company issued approximately 586,160 common shares in
settlement of a class action lawsuit filed in April 1996. The settlement
satisfied all claims of the class action suit, and was approved by the district
court in 1997.
F-14
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(5) Commitments and Contingencies - Continued
Preferred Stockholders
During 1997, BHI settled all claims with its former preferred
stockholders. The former preferred stockholders agreed to release BHI from all
claims in exchange for the issuance of approximately 231,800 shares of common
stock. Approximately $362 was charged to 1997 operations related to this
settlement. Additionally, all outstanding preferred shares were exchanged for
approximately 123,800 common shares.
Sale of ACPI Assets
During 1997, certain assets of BMHI, consisting primarily of the Company's
keys, letters, numbers and signs business segment (the ACPI assets) were sold
(see Note 12). The sale agreement provided for certain post closing adjustments
to account for changes in assets and liabilities between the date of the
agreement and the closing of the sale. During 1998, the Company and the
purchaser reached an agreement on the post closing adjustments (see Note 12).
Planned Disposition of Certain Domestic Manufacturing Assets
During the fourth quarter of 1999, management decided to dispose of the
Company's Greenville, Alabama glove manufacturing facility. Accordingly, the
Company established a provision for the expected disposition costs associated
with this operation (see Note 11).
Other Litigation
In July 1996, the Company commenced an action against Richard P. Smyth, a
former officer and director, alleging that Mr. Smyth committed fraudulent and
unlawful acts resulting in substantial harm to the Company and its shareholders.
In September 1996, Mr. Smyth filed a counterclaim seeking, among other things,
indemnification in connection with the class action lawsuit described above. In
August 1999, the Company and Mr. Smyth reached a settlement agreement. Under the
terms of the settlement agreement, the Company received a consent judgment
against Mr. Smyth in the principal sum of $998 and Smyth agreed to dismiss with
prejudice his pending counterclaim against the Company. The Company agreed not
to pursue collection of the judgment in exchange for a $50 initial cash payment
received from Smyth at the time of the settlement and timely receipt of future
installment payments from Smyth totaling $435. The payment obligations of Smyth
under the settlement agreement are secured by a mortgage on his residence.
The Company was named a defendant in an adversary proceeding filed in the
United States Bankruptcy Court for the Northern District of Alabama in
connection with the Company's June 1997 sale of its stock in Alabaster
Industries, Inc. The suit sought to recover cash payments received by the
Company and to avoid a promissory note and mortgage held by the Company as a
result of the sale. Pursuant to a court-approved settlement agreement in October
1999, the Company settled and was completely released from any liability or
claims in connection with the Alabaster transaction and bankruptcy (see Note
12).
The Company is also a defendant or has been notified of claims in several
other actions against it. In the opinion of management, the ultimate outcome of
these actions will not have a material adverse effect on the financial position
of the Company.
SEC Investigation
During 1996, the Securities and Exchange Commission ("SEC") notified the
Company that it had commenced a formal investigation of the Company. The Company
has cooperated with the SEC in this matter and believes it is no longer a target
of the investigation.
F-15
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(6) Stockholder's Equity
Stock Options
The Company has adopted two stock option plans providing for the issuance
of options covering up to 300,000 shares of common stock to be issued to
officers, directors, or consultants to the Company. Various vesting conditions
apply to these options, based on either tenure or certain performance criteria.
For options granted to employees at strike prices less than the fair market
value of the underlying shares on the date of the grant, the difference in value
is recognized as compensation expense over the applicable vesting periods.
Options granted to nonemployees are recognized over the related service period
based on the estimated fair value of the options. This resulted in charges to
operations amounting to $0, $0 and $104 for 1999, 1998 and 1997 respectively.
Stock option transactions are summarized as follows:
Year ended Year ended Year ended
December 25, 1999 December 26, 1998 December 27, 1997
------------------- -------------------- --------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ -------- ------ -------- ------ --------
Outstanding,
beginning
of period 33,590 $1.30 183,630 $1.00 4,742 $112.75
Granted 158,000 1.80 -- -- 312,400 0.75
Exercised (32,000) 0.75 (150,000) 0.75 (129,000) 0.75
Cancelled -- -- (40) 98.25 (4,512) 113.50
------- ----- -------- ----- ------- -------
Outstanding,
end of period 159,590 $1.90 33,590 $1.30 183,630 $1.00
======= ===== ======== ===== ======= =======
The following table summarizes information about stock options outstanding
that are currently exercisable at December 25, 1999:
Options outstanding and exercisable
------------------------------------------------------------
Weighted
Number average
outstanding at remaining Weighted
Exercise December 25, contractual average
price 1999 life (years) exercise price
-------- ------------- ---------- ------------
$98.25 190 5.8 $98.25
0.75 1,400 7.0 0.75
1.75 66,000 9.2 1.75
------ --- ------
67,590 8.7 $ 2.00
====== === ======
F-16
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(6) Stockholder's Equity - Continued
The Company uses the intrinsic value method in accounting for its stock
options issued to employees. In applying this method, no compensation cost has
been recognized related to the granting of options to employees. Had
compensation cost for the Company's stock options plans been determined based on
the fair value at the grant dates for awards to employees under those plans, the
Company's net (loss) earnings and (loss) earnings per share would have resulted
in the pro forma amounts indicated below:
1999 1998 1997
-------- ------ --------
Net (loss) earnings As reported $(2,156) $ 640 $(6,535)
Pro forma (2,196) 640 (6,548)
Basic net (loss) earnings As reported $ (1.11) $ 0.34 $ (.21)
per common share Pro forma (1.13) 0.34 (.21)
Diluted net (loss) earnings As reported $ (1.11) $ 0.33 $ (.21)
per common share Pro forma (1.13) 0.33 (.21)
The fair values were estimated using the Black-Scholes options-pricing
model with the following weighted-average assumptions for 1999 and 1997,
respectively; expected volatility of 50% and 295%, expected dividend yield of
0.0% and 0.0%, risk-free rate of return of 6.6% and 5.9%; and expected lives of
5 and 2 years. The Company granted no options in 1998.
(7) Earnings Per Share
The following table sets forth the computation of basic and diluted (loss)
earnings per share:
1999 1998 1997
------- ------- -------
Numerator for basic and diluted net (loss)
earnings per common share - (loss) earnings
attributable to common stockholders .......... $(2,156) $ 640 $(6,535)
======= ======= =======
Denominator for basic net (loss) earnings per
common share - weighted average shares
outstanding .................................. 1,943 1,907 1,274
Effect of dilutive options and warrants ........ -- 19 --
------- ------- -------
Denominator for diluted net (loss) earnings
per common share - adjusted weighted
average shares outstanding ................... 1,943 1,926 1,274
======= ======= =======
Net (loss) earnings per common share
Basic ........................................ $ (1.11) $ 0.34 $ (5.13)
Diluted ...................................... $ (1.11) $ 0.33 $ (5.13)
F-17
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(8) Employee Retirement Savings Plan
The Company contributes to employee retirement plans covering
substantially all of its employees. Charges to consolidated operations for these
plans were as follows:
1999 1998 1997
------- ------- -------
Discretionary Contribution Profit
Sharing - 401(k) ............................. $ 90 $ 92 $ 183
Multi-Employer Pension Plan .................... -- -- 265
------- ------- -------
$ 90 $ 92 $ 448
======= ======= =======
The contributions to the union sponsored, multi-employer pension plan were
determined based upon the number of employees working per week. Participation in
the multi-employer pension plan was attributable to BMHI only, and was assumed
by the purchaser of the BMHI assets in August 1997 (see Note 12).
(9) Related Party Transactions
During 1999, 1998 and 1997, compensation and fees paid to directors or
their affiliates totaled approximately $518, $367 and $1,684, respectively.
(10) Income Taxes
The Company records income taxes based on its consolidated tax return.
Current federal and state tax expense (benefit) is as follows:
December 25, December 26, December 27,
1999 1998 1997
------------ ------------ ------------
Current income tax expense (benefit)
Federal ...................................... $ 18 $ -- $ --
State and local .............................. -- (68) 256
------- ------- -------
Total income tax expense (benefit) ............. $ 18 $ (68) $ 256
======= ======= =======
F-18
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(10) Income Taxes - Continued
The temporary differences result in a net deferred income tax asset that
is reduced to zero by a related valuation allowance, summarized as follows:
December 25, December 26,
1999 1998
------------ ------------
Deferred income tax assets:
Operating loss carryforwards ................. $ 13,720 $ 13,570
Accounts receivable .......................... 203 327
Accruals ..................................... 810 250
Compensation related ......................... 270 252
Tax credit carryforwards ..................... 236 236
Other ........................................ -- 1
-------- --------
Gross deferred tax assets .................. 15,239 14,636
Deferred tax asset valuation allowance ..... (12,978) (12,474)
-------- --------
Net deferred tax asset ....................... 2,261 2,162
-------- --------
Deferred income tax liabilities:
Inventories .................................. 1,713 1,670
Fixed assets ................................. 548 492
-------- --------
2,261 2,162
-------- --------
Net deferred income tax asset .................. $ -- $ --
======== ========
Included in the tax credit carryforward is approximately $236 of
alternative minimum tax credits and general business credits available to reduce
future income taxes payable.
Income tax expense and benefit for 1999, 1998 and 1997 consists primarily
of current state taxes attributable to BMHI and its subsidiaries. Included in
other current assets are approximately $155 and $181 of refundable income taxes
at December 25, 1999, and December 26, 1998, respectively.
At December 25, 1999, the Company had operating loss carryforwards for
U.S. income tax purposes of $40,353 available to reduce future taxable income,
which expire as follows:
Year of operating
expiration loss
---------- --------
2001 ........................... $ 1,834
2009 ........................... 1,646
2010 ........................... 8,120
2011 ........................... 2,038
2012 ........................... 16,549
2013 ........................... 8,730
2014 ........................... 535
2019 ........................... 901
--------
$ 40,353
========
Included in the operating loss carryforward is $1,834 of losses which
expire in 2001 and which can only be utilized by the Boss Manufacturing Company
subsidiary of BMHI.
F-19
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(10) Income Taxes - Continued
The Company experienced a change in control, as defined under Section 382
of the Internal Revenue Service Code, during 1997 and 1998. As a result, the
utilization of the net operating losses that originated in 1997 is limited to a
maximum of approximately $1,600 annually. As a result of these limitations, a
significant portion of the tax loss carryforwards could expire unused.
(11) Writedown of Operating Assets
During the fourth quarter of 1999, management decided to dispose of the
Company's Greenville, Alabama glove manufacturing facility. The facility has
incurred significant operating losses in recent years due to reduced demand for
domestically produced gloves. Management expects to cease manufacturing
operations in Greenville during the second quarter of 2000 and intends to
dispose of all assets associated with this operation.
The Company recorded a charge of $1,100 in the fourth quarter of 1999
representing management's estimate of the Greenville disposition costs.
Estimated disposition costs include expenses to sell the facilities, anticipated
loss on fixed asset sales, employee severance costs and liquidation of unused
raw materials. Actual disposition costs may vary from these estimates.
(12) Acquisitions and Dispositions
1998
During 1998, the Company reached an agreement with the purchaser of the
ACPI assets in connection with the sale of these assets in 1997. The agreement
related to the settlement of certain post closing adjustments and resulted in a
gain of approximately $893.
1997
In August, 1997, BHI sold substantially all of the assets of BMHI (the
ACPI assets), with the exception of its Warren Pet Division and Boss
Manufacturing Company, a BMHI subsidiary, for approximately $23,618 in cash, net
of transaction costs of approximately $1,186, plus the assumption of
approximately $3,260 of liabilities by the purchaser. BHI recorded a loss of
approximately $1,840 on the sale of BMHI, including expenses related to the
sale. Expenses related to the sale of BMHI included $1,044 paid to a stockholder
and an affiliate of a stockholder of BHI.
In June 1997, BHI sold all of the outstanding common stock of Alabaster
for $2,000, consisting of $500 cash and a $1,500 promissory note. BHI recorded a
loss on the sale of Alabaster of approximately $2,080, including expenses
related to the sale. The Company recorded an allowance of $450 against the note
as of December 26, 1998 and December 27, 1997. During 1999, the Company released
its first mortgage on the Alabaster property in exchange for a lump sum cash
payment of $1,130 in full satisfaction of the promissory note.
Pro forma Results of Operations (Unaudited)
The pro forma results of operations that follow assume that the
acquisition of Boss Manufacturing Company and the Warren Pet division of BMHI
occurred on January 1, 1995, and the disposition of all other subsidiaries and
divisions occurred on December 31, 1994. Accordingly, the pro forma results of
operations that follow include the results of operations of BHI, Boss
Manufacturing Company and Warren Pet Products. In addition to combining the
historical results of operations of the companies, the pro forma calculations
include adjustments for the estimated effects on the Company's historical
results of operations for depreciation, interest and other purchase accounting
adjustments related to the acquisitions. These results are not necessarily
indicative of the results that would have occurred if the transactions had
occurred at the beginning of each period presented nor are the results
indicative of future results.
F-20
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(12) Acquisitions and Dispositions - Continued
UNAUDITED
1999 1998 1997
---------- ---------- ----------
Sales ................................. $ 36,024 $ 37,514 $ 42,197
Net (loss) earnings ................... $ (2,156) $ 640 $ (646)
Net (loss) earnings per common share
Basic ............................... $ (1.11) $ 0.34 $ (0.51)
Diluted ............................. $ (1.11) $ 0.33 $ (0.51)
(13) Comprehensive Income
Accumulated other comprehensive income consists of the following:
December 25, December 26,
1999 1998
------------ ------------
Foreign currency translation adjustment ...... $(90) $(119)
A summary of the components of other comprehensive income for the years
ended December 25, 1999, December 26, 1998 and December 27, 1997 is as follows:
1999 1998 1997
---- ---- ----
Net change in foreign currency translation adjustment .. $29 $ (49) $(47)
(14) 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,
manufactures, and markets gloves, boots and rainwear products. In addition,
through its Warren Pet Products division of BMHI, the Company manufactures,
imports and markets a line of pet supplies including dog and cat toys, collars,
leads, chains and rawhide products.
Prior to 1998, the Company manufactured and sold keys, letters, numbers
and signs through a subsidiary, BMHI. All assets associated with this operation
were sold in 1997 (see Note 12).
F-21
Boss Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 25, 1999 and December 26, 1998
(Dollar amounts in thousands except per share data)
(14) Operating Segments and Related Information - Continued
The following table provides summarized information concerning the
Company's reportable segments. In this table, the Company's corporate and
certain smaller operations are grouped into a miscellaneous column entitled,
"Corporate and Other."
Work Gloves Keys, Letters,
and Protective Pet Number Corporate
Wear Supplies and Signs and Other Total
-------- --------- --------- --------- --------
1999
Revenues ................. $ 30,722 $ 3,716 $ -- $ 1,586 $ 36,024
Segment (loss) profit .... (1,117) 419 -- (1,092) (1,790)
Asset sales and writedowns (1,100) -- -- -- (1,100)
Operating (loss) income .. (2,217) 419 -- (1,092) (2,890)
Total assets ............. 18,735 1,306 -- 6,251 26,292
Capital expenditures ..... 623 -- -- -- 623
Depreciation ............. 406 38 -- 30 474
1998
Revenues ................. $ 31,600 $ 3,955 $ -- $ 1,988 $ 37,543
Segment profit (loss) .... 960 164 -- (1,082) 42
Asset sales and writedowns -- -- 893 -- 893
Operating income (loss) .. 960 164 893 (1,082) 935
Total assets ............. 21,666 1,393 -- 5,911 28,970
Capital expenditures ..... 770 27 -- 21 818
Depreciation ............. 279 38 -- 26 343
1997
Revenues ................. $ 36,009 $ 4,155 $ 33,367 $ 4,869 $ 78,400
Segment profit (loss) .... 1,798 (184) 396 (2,709) (699)
Asset sales and writedowns -- -- (2,354) (1,438) (3,792)
Operating income ......... 1,798 (184) (1,958) (4,147) (4,491)
Total assets ............. 21,590 1,037 -- 5,935 28,562
Capital expenditures ..... 2,039 5 1,167 726 3,937
Depreciation ............. 241 31 1,554 84 1,910
F-22
Report of Independent Certified Public Accountants
on Schedule
Board of Directors
Boss Holdings, Inc.
In connection with our audit of the consolidated financial statements of
Boss Holdings, Inc. and Subsidiaries referred to in our reported dated February
16, 2000, which is included in the annual report to security holders and
incorporated by reference in Part II of this form, we have also audited Schedule
II for the years ended December 25, 1999, December 26, 1998 and December 27,
1997. In our opinion, this schedule presents fairly, in all material respects,
the information required to be set forth therein.
Atlanta, Georgia
February 16, 2000
S-1
Boss Holdings, Inc., and Subsidiaries
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
--------- --------- --------- --------- ---------
Balance at Charged Balance
beginning to other at end
Description of period and expenses Deductions(1) of period
---------- --------- ------------ ------------ --------
Year ended December 25, 1999
Allowance for doubtful accounts
and returns $ 455 $ 81 $ 72 $ 464
Deferred income tax asset valuation
allowance 12,474 504 -- 12,978
Year ended December 26, 1998
Allowance for doubtful accounts
and returns $ 507 $ 59 $ 111 $ 455
Deferred income tax asset valuation
allowance 17,151 (4,677) -- 12,474
Year ended December 27, 1997
Allowance for doubtful accounts
and returns 1,405 131 1,029 507
Deferred income tax asset valuation
allowance 14,511 2,640 -- 17,151
- ----------
(1) - bad debt write offs and reduction in estimate of allowance requirements.
S-2