BSHI Boss Holdings Inc (PK)

Item 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

      Certain statements, other than statements of historical fact, included in this Quarterly Report including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are, or may be deemed to be, forward-looking statements that involve significant risks and uncertainties, and accordingly, there is no assurance that these expectations will be correct. These expectations are based upon many assumptions that the registrant believes to be reasonable, but such assumptions ultimately may prove to be materially inaccurate or incomplete, in whole or in part and, therefore, undue reliance should not be placed on them. Several factors which could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to: availability and pricing of goods purchased from international suppliers, foreign currency fluctuations, successful integration of acquired companies, unusual weather patterns which could affect domestic demand for the registrant’s products, pricing policies of competitors, the ability to attract and retain employees in key positions and uncertainties and changes in general economic conditions. The words “believe,” “expect”, “anticipate”, “should”, “could” and other expressions that indicate future events and trends identify forward-looking statements. All subsequent forward-looking statements attributable to the registrant or persons acting on its behalf are expressly qualified in their entirety.

Sales

      Total revenues for the three months ended September 27, 2008 increased $566,000 or 4.2 % from the comparable quarter in 2007. This sales increase during the third quarter was primarily attributable to the Company’s core work gloves and protective wear segment along with increases in the pet supplies segment. Sales in the promotional and specialty products segment were up slightly.

      Third quarter sales in the Company’s work gloves and protective wear segment were $361,000 or 4.1% ahead of the comparable period in 2007. Both consumer and industrial sales increased as a result of price increases, new customers and new business from existing customers.

      Sales in the pet supplies segment increased $194,000 or 14.7% during the third quarter of 2008 compared to 2007. Expanded sales to several existing accounts and the addition of some new customers more than made up for the loss of a major customer that started its own direct import program at the end of 2007.

      In the promotional and specialty products segment sales were up slightly for the third quarter of 2008, compared to the prior year. Balloon product sales remain lower than last year, but the shortfall has been made up by new products introduced within the last year.

      For the nine months ended September 27, 2008, consolidated revenues increased $875,000 or 2.2%, compared to the same period in 2007. The work gloves and protective wear segment is up 3.7% with increases in industrial, CAT® branded products and additional sales from Canada as a result of the Canadawide acquisition. Sales growth of 2.0% in the promotional and specialty products segment also contributed during the year, with increases coming from new product sales. Sales for the pet supplies segment have decreased $262,000 or 5.0% during the first nine months of 2008 compared to the same period in 2007. Most of the sales loss at Boss Pet is attributable to the major customer that started its own direct import program at the end of 2007.

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      Management anticipates seasonal sales increases during the upcoming quarter in the work gloves and protective wear segment with the approach of colder weather. The promotional and specialty products segment is also anticipated to increase due to fall sports related activity. Despite management’s projections, revenues may be adversely affected by the current economic conditions, especially in the consumer market. Sales in the pet supplies segment generally decline during the third and fourth quarters when pet owners reduce outside activities. The Company expects sales of CAT® branded goods to continue to grow over the balance of the year with new product offerings and the continued expansion of both domestic and foreign customers.

Cost of Sales

Cost of Sales by Segment $(000)	Quarter	Year-to-Date
2008	2007	2008	2007
$	%	$	%	$	%	$	%
Work gloves and protective wear	7,036	76.5%	6,677	75.5%	21,399	77.4%	20,368	76.4%
Pet supplies	1,184	78.0%	1,043	78.8%	3,957	79.0%	3,996	75.9%
Promotional & specialty products	2,171	64.7%	2,178	65.2%	5,595	69.4%	5,431	68.7%
Total cost of sales	10,391	73.9%	9,898	73.3%	30,951	76.0%	29,795	74.8%

      Cost of sales for the three months ended September 27, 2008 totaled $10,391,000, up $493,000 from the corresponding period in 2007. Most of this increase was related to additional sales volume, while the remaining portion is related to vendor cost increases in the work gloves and protective wear segment. All segments have been affected by cost increases from suppliers and the inability to pass these increases along to customers fast enough.

      During the third quarter of 2008 margins at both the pet supply segment and the promotional and specialty products segment improved slightly as a result of product mix compared to the third quarter of 2007.

      For the nine-month period ended September 27, 2008, cost of sales increased $1,156,000 from the prior year, increasing the cost of sales percentage by 1.2 percentage points. Approximately half of this increase is a result of the additional volume, while the remaining portion is due to cost increases from suppliers.

      Costs in the work gloves and protective wear segment remain volatile with the Company continuing to experience significant cost increases on all products because of the weakness of the U.S. dollar relative to the Chinese RMB, along with increases in labor and material costs. Management attempts to pass cost increases on to customers to maintain margins, but competitive pressures often make this difficult.

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Operating Expenses

Operating Expenses by Segment $(000)	Quarter	Year-to-Date
2008	2007	2008	2007
$	%	$	%	$	%	$	%
Work gloves and protective wear	1,752	19.0%	1,844	20.9%	5,507	19.9%	5,583	20.9%
Pet supplies	208	13.7%	209	15.8%	670	13.4%	728	13.8%
Promotional & specialty products	612	18.2%	562	16.8%	1,684	20.9%	1,648	20.9%
Corporate and other	319	-	262	-	779	-	792	-
Total operating expenses	2,891	20.5%	2,877	21.3%	8,640	21.2%	8,751	22.0%

      Operating expenses during the third quarter of 2008 remained mostly level with the corresponding period in 2007. The work glove and protective wear segment generated savings of $92,000 from lower selling expenses, but this was more than offset by increases in commissions and administration expense at the promotional and specialty products division and auditing fees at the corporate office.

      For the nine-month period ended September 27, 2008, consolidated operating expenses have decreased $111,000 compared to the same nine-month period for 2007. Commissions and selling expenses are down from last year at both the work gloves and protective wear and the pet supplies segments. Corporate administration expenses are also below last year with savings in insurance costs. These savings are partially offset by higher amortization expense at the promotional and specialty products segment.

Earnings (Loss) From Operations

Operating Income (Loss) by Segment $(000)	Quarter	Year-to-Date
2008	2007	2008	2007
$	%	$	%	$	%	$	%
Work gloves and protective wear	411	4.5%	317	3.6%	740	2.7%	716	2.7%
Pet supplies	125	8.2%	71	5.4%	379	7.6%	544	10.3%
Promotional & specialty products	571	17.0%	603	18.0%	780	9.7%	822	10.4%
Corporate and other	(319)	-	(262)	-	(779)	-	(792)	-
Total operating income	788	5.6%	729	5.4%	1,120	2.8%	1,290	3.2%

      On a consolidated basis, the Company generated $788,000 in operating income during the third quarter of 2008, compared to $729,000 of operating income for the same period in 2007. This increase in earnings is due to the increase in sales volume at both the work glove and protective wear segment and the pet supply segment.

      On a year-to-date basis, the Company generated income from operations of $1,120,000 through September 27, 2008, compared to $1,290,000 for the comparable period in 2007. Lower sales volume at the pet segment along with product cost increases at all segments account for the decline in earnings.

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Other Income and (Expense)

      The Company incurred $77,000 in interest expense during the third quarter of 2008, a decrease of $5,000 from the comparable period in 2007. For the nine months ended September 27, 2008, interest expense was $229,000 compared to $223,000 for the same period last year. This increase in interest expense was a result of the purchase of Canadawide Safety by Boss Canada at the end of May 2007.

Taxes

      During 2008, the Company recorded an income tax expense of $280,000 for the third quarter and $363,000 for the first 9 months of the year based on current federal and estimated average state income tax rates. In addition, another $15,000 of expense was recorded during the first quarter, which primarily related to the reduction of expected state income tax credits. The federal income tax portion of the tax provision is a non-cash expense, because the Company has substantial net operating loss carryforwards for federal income tax purposes resulting from losses in prior years.

Liquidity and Capital Resources

      Operating activities used $1,128,000 in cash during the nine months ended September 27, 2008, compared to generating $1,546,000 of cash during the same period in 2007. The unfavorable swing in cash performance between 2008 and 2007 resulted primarily from changes in inventory. In 2007, inventory increased $683,000 during the first nine months of the year and in 2008, inventory increased $2,931,000 during the same period. The increase in inventory is a result of additional inventory for new products and higher costs per item from cost increases. Also, aggressive inventory reductions last year left the work gloves and protective wear segment out-of-stock on some items. This year the Company has replenished safety stocks in an effort to reduce out-of-stock situations.

      Investing activities used $333,000 during the nine months ended September 27, 2008, compared to $625,000 during the comparable period in 2007. The promotional and specialty products segment has invested $97,000 in new production equipment, the pet supply segment invested $30,000 in material handling equipment and the work gloves and protective wear segment invested $206,000 in information technology enhancements and facility improvements at the corporate office. No major expenditures are planned for the fourth quarter of 2008. The larger investment activities during 2007 were mostly in connection with the Company’s acquisition of Canadawide Safety in May 2007.

      Financing activities used $368,000 to pay down long-term loans during the nine months ended September 27, 2008. There are currently no borrowings against the Company’s primary line of credit.

      At September 27, 2008 the Company had $431,000 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 27, 2008. Management believes the Company’s cash on hand and availability under the credit facility should provide ample liquidity for the Company’s expected working capital and operating needs.

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Item 2. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

      The value of the Company’s 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 $768,000 related to Kewanee warehouse facilities. The second swap fixes at 6.32% the rate on approximately $405,000 of the Company’s 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 Company’s revolving credit facility.

Item 3. CONTROLS AND PROCEDURES

      As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting .

PART II. --OTHER INFORMATION

Item 1. Legal Proceedings

      The Company is a party to various legal actions incident to the normal operation of its business. These lawsuits primarily involve claims for damages arising out of commercial disputes. The Company has been named as a defendant in several lawsuits alleging past exposure to asbestos contained in gloves sold by one of the Company’s predecessors-in-interest, all of which actions are being defended by one or more of the Company’s products liability insurers. Management believes the ultimate disposition of these matters should not materially impact the Company’s consolidated financial position or liquidity.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

      Not applicable.

Item 3. Defaults Upon Senior Securities

      Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

      Not applicable

Item 5. Other Information

      Not applicable.

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Item 6. Exhibits

	(a)	Exhibits
		31	.1		Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
		31	.2		Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
		32			Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			BOSS HOLDINGS, INC.
Dated:	November 11, 2008				By:	/s/ Steven G. Pont
					Steven G. Pont
					Vice President of Finance
					(principal financial officer)

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