Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Certain statements, other than
statements of historical fact, included in this Quarterly Report including,
without limitation, the statements under Managements Discussion and Analysis
of Financial Condition and Results of Operations are, or may be deemed to be,
forward-looking statements that involve significant risks and uncertainties, and
accordingly, there is no assurance that these expectations will be correct.
These expectations are based upon many assumptions that the registrant believes
to be reasonable, but such assumptions ultimately may prove to be materially
inaccurate or incomplete, in whole or in part and, therefore, undue reliance
should not be placed on them. Several factors which could cause actual results
to differ materially from those discussed in such forward-looking statements
include, but are not limited to: continuing effects of the current global
financial and economic crisis on demand for both consumer and industrial
products, pricing and availability of goods purchased from international
suppliers, unusual weather patterns which could affect domestic demand for the
registrants products, pricing policies of competitors, the ability to attract
and retain employees in key positions, trends in the advertising and specialties
industry and uncertainties and changes in general economic conditions. The words
believe, expect, anticipate, should, could and other expressions that
indicate future events and trends identify forward-looking statements. All
subsequent forward-looking statements attributable to the registrant or persons
acting on its behalf are expressly qualified in their entirety.
| Work gloves
and protective wear
& specialty products
revenues for the three months ended September 26, 2009 decreased $1,812,000 or
12.9% from the comparable quarter in 2008 as the national and worldwide economic
recession continued. The Companys pet supplies segment was the only segment to
equal or surpass last years third quarter revenues.
quarter sales in the work gloves and protective wear segment were $2,137,000, or
23.2% below the comparable period in 2008. Industrial sales decreased $1,270,000
or 29.9% due to the decline in industrial activity in the United States.
Decreased consumer spending has lead to a $661,000 decrease in the Consumer
sales portion of this segment. CAT® branded product sales declined
$123,000 as the weak economy affected the sales of premium products. Boss Canada
sales declined $83,000 and were significantly adversely affected by
manufacturing cutbacks in the auto industry in Canada.
Pets third quarter resulted in an increase in sales of $733,000 over the third
quarter of 2008 as the pet supply segment continued to grow. The addition of new
accounts, combined with expanded sales to existing accounts and increased pet
toy sales generated by the Companys new propriety line of plush toys, the Fat
Hedz, allowed the pet supplies segment to surpass last years
the promotional and specialty products segment decreased $408,000, or 12.2%,
compared to the prior year. Promotional items to schools and banks have declined
with the economy along with real estate/construction and automotive promotions.
Traditionally these have been significant end markets for the promotional and
specialty products segment.
Consolidated revenues for the nine months ended September 26, 2009,
decreased $5,982,000 or 14.7% compared to the same period in 2008. The recession
has had a major impact on both the work gloves and protective wear and
promotional and specialty products segment which have experienced decreases in
sales of 20.9% and 14.5% respectively. The pet supplies segment has increased
sales 19.5% during the first nine months of 2009 with the addition of several
new accounts, expanded sales to existing accounts and new product offerings.
Cost of Sales
|Cost of Sales by Segment
|Work gloves and
|Total cost of
sales for the three months ended September 26, 2009 totaled $8,949,000, down
$1,442,000 from the corresponding period of 2008, and represents a 13.9%
reduction from the prior year. Cost of sales for the period declined with the
reduction in sales volume and as a result of cost-cutting initiatives put in
place at all three segments. Gross margin for the third quarter of 2009
increased slightly to 27.0% from 26.1% for the third quarter of 2008, but
overall gross profit dollars have fallen $370,000 as a result of the volume loss
compared to the third quarter of 2008.
margin dollars in the work glove and protective wear segment decreased $423,000
during the third quarter of 2009 compared to the third quarter of 2008. This
decrease was related to the volume decline and was partially offset by cost
reduction from reduced labor, freight and warehouse expenses.
products segment increased its gross margin to $561,000 for the third quarter of
2009. This was $228,000 above the third quarter of 2008 and was caused by the
increase in volume and improved pricing from vendors.
margin for the promotional and specialty products segment declined $175,000 to
$1,008,000 for the third quarter of 2009 compared to the third quarter of 2008.
Cost savings at the factory/warehouse offset a portion of the margin loss
created by the 12.2% reduction in the sales volume during the third quarter of
result of reduced volume and cost savings, cost of sales for the nine months
ended September 26, 2009 decreased $4,759,000 from the same period in 2008. Cost
savings from vendors, freight rates and warehouse expenses were enough to
increase the gross margin percentage to 24.6% from 24.0%, but not enough to
offset the total gross margin dollar loss from volume of $1,223,000.
by Segment $(000)
|Work gloves and protective
|Promotional & specialty
|Corporate and other
expenses during the third quarter of 2009 decreased $292,000 compared to the
corresponding period in 2008. Cost reductions in salaries, benefits and
commissions, along with expense controls put in place in all areas account for
the expense savings at work gloves and protective wear and promotional and
specialty products. Pet supplies operating expenses have increased from
salaries, commissions, trade shows and travel, all a result of the increase in
nine month period ended September 26, 2009, consolidated operating expenses have
decreased $955,000 compared to the same nine month period in 2008. Cost savings
programs put in place during the first quarter to bring spending in line with
sales activity at the work gloves and protective wear and promotional and
specialty products segments have generated a reduction for the first nine months
of 2009 of $1,254,000. Pet supplies operating expenses have increased as a
result of having a full administrative staff and costs related to the increased
sales volume. Corporate expenses have increased in legal and consulting costs.
(Loss) From Operations
|Operating Income (Loss)
|Work gloves and
consolidated basis, the Company generated $710,000 in operating income during
the third quarter of 2009, compared to $788,000 of operating income for the same
period in 2008. Cost reductions and expense savings initiatives help to offset a
12.9% decline in revenue during the third quarter of 2009.
year-to-date basis the Company generated income from operations of $852,000
through September 26, 2009, compared to $1,120,000 for the comparable period in
2008. Earning reductions created by the 14.7% reduction in sales volume has been
partially offset by cost savings.
Other Income and (Expense)
The Company incurred
$68,000 in interest expense during the third quarter of 2009, a decrease of
$9,000 from the third quarter of 2008. Interest income for the third quarter of
2009 was $5,000, down $2,000 from the third quarter of 2008. Because bank
interest rates have fallen, interest earned on overnight investments is down
substantially compared to last year. For the nine months ended September 26,
2009 interest expense was $201,000 compared to $229,000 for the same period last
In the third quarter of 2009, the
Company recorded an income tax expense of $268,000 based on current federal and
estimated state income tax rates. During the third quarter management
reevaluated its profitability trends. Based upon its current and projected
profitability management determined that it would more likely than not be able
to utilize more of the NOL available then previously projected. Based on this
conclusion, the Company decreased the valuation allowance and recognized a
$242,000 tax benefit.
The tax benefit and tax expenses recorded for book purposes have no effect on the Company’s actual tax liability. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although the Company’s cash tax payments would remain unaffected until complete utilization of the NOL benefit. Shareholders and other users of the Company’s financial statements should carefully consider the effect of non-cash tax entries (such as adjustments to the deferred tax assets) when comparing current results with past or future financial statements of the Company.
The current ongoing downturn in the
national and world economies has caused the Company to consider cost reductions
in all aspects of its operations in order to offset lost revenue. Total sales
for the nine months of 2009 were down by 14.7% compared with the prior year
(20.9% in the work gloves, boots and rainwear segment). Industrial sales of work
gloves, boots and rainwear are being especially adversely affected by the
ongoing recession, down over 27.4% year-to-date. Based on disruption in the U.S.
automobile manufacturing sector and related industrial businesses including the
restructuring of the Chrysler Corporation and General Motors, management anticipates that a portion of the
Companys industrial sales base is not likely to regenerate even if the economy
rebounds. The Company already has reduced its work force, both in warehousing
and office staff. Inventory has been reduced and capital expenditures are being
closely evaluated. Management will continue to closely monitor operating costs
and attempt to keep them in line with current and projected revenues.
Liquidity and Capital Resources
Operating activities provided
$5,162,000 in cash during the nine months ended September 26, 2009, compared to
$1,171,000 used in 2008. This favorable cash performance in 2009 was
attributable to reduced inventory in the work gloves, boots and rainwear segment
and accounts receivable, which was partially offset by decreases in payables and
accrued liabilities. Inventory levels are being reduced to correspond with
current sales projections. The reduction in accounts receivable is a result of
the 14.7% decline in sales during the nine months.
Investing activities used $200,000
during the nine months ended September 26, 2009, compared to $333,000 during the
comparable period in 2008. Approximately $163,000 was spent on a new shipping
software system at the work gloves and protective wear segment. The remaining
amount was spent on material handling equipment at the pet supply segment and
technology improvements at the promotional and specialty products segment. There
are no additional capital expenditures planned for the rest of the year.
activities used $257,000 during the nine months ended September 26, 2009. Pay
down of long-term debt used $374,000 and Boss Canada used $23,000 for repayment
on their revolving line of credit. These amounts were partially offset by
proceeds from exercised stock options of $140,000. As of September 26, 2009
there were outstanding options for 231,000 shares of the Companys common stock.
There are currently no borrowings against the Companys primary line of
September 26, 2009 the Company had $5,641,000 in cash with zero borrowings
against its $7,000,000 revolving line of credit. The Company was in compliance
with its credit facility loan covenants as of September 26, 2009. Management
believes the Companys cash on hand and availability under the credit facility
should provide ample liquidity for the Companys expected working capital and
On August 26, 2009, the Company
announced that its Board of Directors had approved a plan to deregister the
Companys common stock under the Securities Exchange Act of 1934, as amended,
and as a result thereof, terminate its periodic reporting obligations with the
Securities and Exchange Commission. The proposed plan is expected to permit the
Company to forgo many of the expenses associated with operating as a public
company, including the substantial costs associated with the compliance and
auditing requirements of the Sarbanes-Oxley Act of 2002.
The deregistration will be
accomplished by a reverse 1:100 stock split of the Companys common shares. All
shareholders owning fewer than 100 shares prior to the reverse stock split would
be cashed out by the Company at a price of $7.65 per pre-split share. The
reverse split will be followed immediately by a 100:1 forward split of the
Companys common shares, which will return all shareholders owning more than 100
shares to the same number of shares they owned prior to the reverse and forward
split transactions. If, after completion of the reverse and forward stock
splits, the Company has fewer than 300 shareholders of record, the Company
intends to terminate the registration of its common stock under the Securities
Exchange Act of 1934, as amended. If that occurs, the Company will be relieved
of its requirements to comply with the Sarbanes-Oxley Act of 2002 and to file
periodic reports with the SEC, including annual reports on Form 10-K and
quarterly reports on Form 10-Q.
The Companys Board of Directors
received a fairness opinion from an independent financial advisor, TM Capital
Corp., which provides that the price of $7.65 per share on a pre-split basis to
be received by shareholders owning less than 100 shares is fair to such holders
from a financial point of view. All shareholders will have a chance to vote on
the proposed transaction pursuant to proxy materials which will be filed by the
Company with the SEC. The Company will file a preliminary proxy statement and
Schedule 13E-3 with the SEC outlining the plan.
Item 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISKS
Company has minimal exposure to market risks such as changes in foreign currency
exchange rates and interest rates. The value of the Companys financial
instruments is generally not materially impacted by changes in interest rates.
The Company has entered into two interest rate swap agreements. The first
effectively fixes at 5.83% the interest rate on its mortgage note with a current
value of approximately $706,000 related to Kewanee warehouse facilities. The
second swap fixes at 6.32% the rate on approximately $479,000 of the Companys
term loan related to the Galaxy acquisition. Fluctuations in interest rates are
not expected to have a material impact on the interest expense incurred under
the Companys revolving credit facility.
Item 4T. CONTROLS AND PROCEDURES
As of the
end of the period covered by this report, the Company conducted an evaluation,
under the supervision and with the participation of the principal executive
officer and principal financial officer, of the Companys disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, the
principal executive officer and principal financial officer concluded that the
Companys disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Companys internal control over financial
reporting during the Companys most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
PART II. --OTHER INFORMATION
Item 1. Legal Proceedings
Company is a party to various legal actions incident to the normal operation of
its business. These lawsuits primarily involve claims for damages arising out of
commercial disputes. The Company has been named as a defendant in several
lawsuits alleging past exposure to asbestos contained in gloves sold by one of
the Companys predecessors-in-interest, all of which actions are being defended
by one or more of the Companys products liability insurers. Management believes
the ultimate disposition of these matters should not materially impact the
Companys consolidated financial position or liquidity.
Item 2. Unregistered Sale of Equity
Securities and Use of Proceeds
Item 3. Defaults Upon Senior
Item 4. Submission of Matters to a
Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Certification of Principal
Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of
Certification of Principal
Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of
Certification of Chief Executive
Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
HOLDINGS, INC. |
|Dated: November 10, 2009
||By: /s/ Steven G.
of Finance |
financial officer) |