KOSS CORP - Quarter Report: 2004 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number 0-3295

KOSS CORPORATION

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]    NO [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES [   ]     NO [X]

At September 30, 2004, there were 3,696,525 shares outstanding of the registrant’s common stock, $0.005 par value per share.

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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 2004

INDEX

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PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See accompanying notes.

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KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes.

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KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes.

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KOSS CORPORATION AND SUBSIDIARIES
September 30, 2004

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities during the three months ended September 30, 2004 amounted to $3,100,975. This was a result of net income for the period adjusted for changes in operating assets and liabilities, primarily related to increases in accounts receivable, accounts payable, accrued liabilities and income taxes payable.

Capital expenditures for new equipment (including production tooling) were $394,722 for the quarter. Budgeted capital expenditures for fiscal year 2005 are 1,611,860. The Company expects to generate sufficient funds through operations to fund these expenditures.

Stockholders’ investment decreased to $19,649,925 at September 30, 2004, from $21,089,787 at June 30, 2004. The decrease reflects the effect of the exercise of stock options, purchase and retirement of common stock, offset by net income and dividends declared.

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The Company amended its existing credit facility in November 2004, extending the maturity date of the unsecured line of credit to November 1, 2005. This credit facility provides for borrowings up to a maximum of $10,000,000. The Company can use this credit facility for working capital purposes or for the purchase of its own common stock pursuant to the Company’s common stock repurchase program. Borrowings under this credit facility bear interest at the bank’s prime rate, or LIBOR plus 1.75%. This credit facility includes financial covenants that require the Company to maintain a minimum tangible net worth and specified current, interest coverage, and leverage ratios. The Company uses its credit facility from time to time, although there was no utilization of this credit facility at September 30, 2004 or June 30, 2004. The Company did not utilize the credit facility during the quarter ended September 30, 2004.

In April of 1995, the Board of Directors approved a stock repurchase program authorizing the Company to purchase from time to time up to $2,000,000 of its common stock for its own account. Subsequently, the Board of Directors periodically has approved increases in the stock repurchase program. The most recent increase was for an additional $1,000,000 in July 2003, for a maximum of $38,500,000. The Company intends to effectuate all stock purchases either on the open market or through privately negotiated transactions, and intends to finance all stock purchases through its own cash flow or by borrowing for such purchases.

For the quarter ended September 30, 2004, the Company purchased 84,250 shares of its common stock at an average net price of $22.92 per share, for a total net purchase price of $1,930,625.

From the commencement of the Company’s stock repurchase program through September 30, 2004, the Company has purchased a total of 5,059,084 shares for a total gross purchase price of $42,586,170, (representing an average gross purchase price of $8.42 per share) and a total net purchase price of $37,960,685 (representing an average net purchase price of $7.51 per share). The difference between the total gross purchase price and the total net purchase price is the result of the Company purchasing from employees shares of the Company’s stock acquired by such employees pursuant to the Company’s stock option program. In determining the dollar amount available for additional purchases under the stock repurchase program, the Company uses the total net purchase price paid by the Company for all stock purchases, as authorized by the Board of Directors.

The Company also has an Employee Stock Ownership Plan and Trust (“ESOP”) pursuant to which shares of the Company’s stock are purchased by the ESOP for allocation to the accounts of ESOP participants. There were no ESOP purchases for the quarter ended September 30, 2004.

On September 16, 2004, the Company declared a quarterly cash dividend of $0.13 per share payable on October 15, 2004 to stockholders of record on September 30, 2004, which is recorded as dividends payable.

Results of Operations

Net sales for the first quarter ended September 30, 2004 were $8,972,580 compared with $9,164,691 for the same period in 2003, a decrease of $192,111. The decrease is primarily due to BiAudio experiencing lower sales compared to last year.

Gross profit as a percent of net sales was 38% for the quarters ended September 30, 2004 and 2003.

Selling, general and administrative expenses for the quarter ended September 30, 2004 were $2,119,521 or 24% of net sales, compared to $2,029,734 or 22% of net sales for the same period in 2003. This was due to the Company experiencing higher marketing expenses in preparation for the Consumer Electronics Show in January 2005.

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For the first quarter ended September 30, 2004, income from operations was $1,303,452 versus $1,467,911 for the same period in the prior year.

Royalty income for the quarter ended September 30, 2004 was $151,456, compared to $190,325 for the quarter ended September 30, 2003.

Interest income for the quarter was $4,198 as compared to $4,420 for the same quarter in 2003.

The provision for income taxes was $569,195 and $642,152 for the quarter ended September 30, 2004 and 2003, respectively. The effective tax rate was 39% for each quarter.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

In management’s opinion, the Company does not engage in any material risk sensitive activities and does not have any market risk sensitive instruments, other than the Company’s commercial credit facility used for working capital purposes and stock repurchases.

Item 4. Controls and Procedures.

The Company’s management, including the Chief Executive Officer/Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) of the end of the period covered by this report and concluded that the Company’s disclosure controls and procedures were effective. During the past fiscal year, management became aware that a provision in the Company’s stock repurchase agreement with its Chairman required adjustments to the Company’s financial statements upon a change of accounting principles mandated subsequent to the date of the agreement. Our management has now subscribed to additional publications in order to keep current on applicable accounting issues and our new independent auditors will brief us on new accounting pronouncements and releases to attempt to avoid any similar errors in the future. Our financial reporting process with respect to preparation and review of regulatory filings have also been enhanced to include the utilization of a checklist by the preparer and reviewer to ensure that new accounting pronouncements and regulatory requirements are incorporated in the filing.

The discovery of the error in the recording of the cumulative effect of the change in account principle has affected, to some extent, the Company’s conclusion about the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Management is of the view that this error does not constitute a “material weakness” in the Company’s internal control over financial reporting identified by management. A “material weakness” is defined, in the relevant accounting literature, as a “reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.” Although this error could constitute a “significant deficiency,” management has considered the significance of the error (together with other reported errors) in light of the financial statements taken as whole and believes that the error does not evidence or constitute a “material weakness” in the Company’s disclosure controls and procedures.

Therefore, based on an overall evaluation of the Company’s disclosure controls and procedures, including an evaluation of any possible significant deficiencies and the corrective actions taken by the management in response to the discovery of the accounting error, the Company’s management concludes that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the

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Exchange Act is accumulated and communicated to management, including the Chief Executive Officer/Chief Financial Officer, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

There has been no change in the Company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and possible litigation, and assumptions relating to the foregoing. In addition, when used in this Form 10-Q, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and variations thereof and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this Form 10-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, but are not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, the receptivity of consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition, pricing, the number and nature of customers and their product orders, production by third party vendors, foreign manufacturing, sourcing and sales (including foreign government regulation, trade and importation concerns), borrowing costs, changes in tax rates, pending or threatened litigation and investigations, fluctuations in currency exchange rates and other risk factors which may be detailed from time to time in the Company’s Securities and Exchange Commission filings.

Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.

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PART II
OTHER INFORMATION

Item 5 Submission of Matters to Vote of Security-Holders

Item 6 Exhibits and Reports on Form 8-K

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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.

KOSS CORPORATION

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EXHIBIT INDEX

The Company will furnish a copy of any exhibit described below upon request and upon reimbursement to the Company of its reasonable expenses of furnishing such exhibit, which shall be limited to a photocopying charge of $0.25 per page and, if mailed to the requesting party, the cost of first-class postage.

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