KOSS CORP - Quarter Report: 2005 March (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Registrant’s telephone number, including area code: (414) 964-5000

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 þ          NO o

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

YES o          NO þ

At March 31, 2005, there were 3,691,525 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
March 31, 2005

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 to the condensed consolidated financial statements.

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KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

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KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

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KOSS CORPORATION AND SUBSIDIARIES
March 31, 2005

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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 nine months ended March 31, 2005 amounted to $7,000,663. This was primarily a result of net income for the period and changes in operating assets and liabilities, primarily related to decreases in accounts receivable and in vendors.

Capital expenditures for new property and equipment (including production tooling) were $1,026,626 for the nine months ending March 31, 2005. Budgeted capital expenditures for the fiscal year 2005 are $1,611,860. The Company expects to generate sufficient funds through operations to fund these expenditures.

Stockholders’ investment decreased to $20,654,864 at March 31, 2005, 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 paid, and a reclassification of contingently redeemable equity interest.

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 has been and is well within the requirements under the credit facility.

The Company uses its credit facility from time to time, although there was no utilization of this credit facility at March 31, 2005 or June 30, 2004. The Company did not utilize the credit facility during the quarter ended March 31, 2005.

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 have approved increases in the stock repurchase program. The most recent increase was for an additional $2,000,000 in October 2004, for a maximum of $40,500,000. 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 nine month period ended March 31, 2005, the Company purchased 94,250 shares of its common stock at a net price of $22.61 per share, for a total net purchase price of $2,130,625.

From the commencement of the Company’s stock repurchase program through March 31, 2005, the Company has purchased a total of 5,259,084 shares for a total gross purchase price of $42,786,170, (representing an average gross purchase price of $8.14 per share) and a total net purchase price of $38,160,685 (representing an average net purchase price of $7.26 per share). The difference between the total gross purchase price and the total net purchase price is the result of the Company purchasing from certain 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.

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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. For the nine months ended March 31, 2005, the ESOP purchased 3,443 shares of the Company’s stock.

Results of Operations

Net sales for the third quarter ended March 31, 2005 fell to $9,772,686 from $10,547,180, down 7% from the same period in 2004. Net sales for the nine months ended March 31, 2005 were down 2% at $28,970,345 compared with $29,551,443 during the nine months ended March 31, 2004. The decrease is due to slower sales experienced in the third quarter.

Gross profit as a percent of net sales was 37% for the quarter ended March 31, 2005, compared to 40% for the same period in the prior year. For the nine month period ended March 31, 2005, the gross profit percentage was 38% compared to 39% for the same period in 2004. The decrease is primarily due to increased freight costs and manufacturing overhead.

Selling, general and administrative expenses for the quarter ended March 31, 2005 were $2,220,546 or 23% of net sales, compared to $2,533,181, or 24% of net sales for the same period in 2004. For the nine month period ended March 31 2005, these expenses were $6,776,892 or 23% of net sales, compared to $6,535,030 or 22% of net sales for the same period in 2004.

For the third quarter ended March 31, 2005, income from operations was $1,412,935 versus $1,714,330 for the same period in the prior year. Income from operations for the nine months ended March 31, 2005 was $4,218,180 as compared to $4,952,126 for the same period in 2004.

Royalty income for the quarter ended March 31, 2005 was $21,921, compared to $183,750 for the quarter ended March 31, 2004. For the nine month period ended March 31, 2005, royalty income was $657,991 compared to $761,442 for the period ending March 31, 2004. Effective November 23, 2004, the Company terminated the License Agreement dated November 15, 1991, and as subsequently amended (the “License Agreement”) between the Company and Jiangsu Electronics Limited of Hong Kong (“Jiangsu”). As a result of the termination, other than Jiangsu’s post-termination right to sell Company-approved licensed products, as set forth in the License Agreement, Jiangsu no longer has the right to use certain Company trademarks in connection with the manufacture, marketing and distribution of Jiangsu’s products under the License Agreement. Royalty income on all previously approved products, which are already in the pipeline, will still be owed to the Company. The Company believes that the immediate impact on our current fiscal year will be a reduction of approximately $170,000 in net income or $0.05 per share. The Company also forecasts the possible reduction of its minimum royalty payments for fiscal year 2006 at approximately $300,000 in net income or $0.09 per share.

Interest income for the quarter was $17,563 as compared to $1,711 for the same quarter in 2004. For the nine month period interest income was $34,439 compared to $6,832.

The provision for income taxes for the quarter ended March 31, 2005, was $566,443 compared with $741,975 for the same period last year. For the nine months ended March 31, 2005, the provision for income taxes was $1,915,281 compared with $2,245,644 for the same period last year. The effective tax rate was 39% for each of the quarters.

Recently Issued Financial Accounting Pronouncements

During May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for the classification and

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measurement of certain financial instruments with characteristics of both liabilities and equity. The Company adopted SFAS No. 150 effective July 1, 2003. Upon adoption the Company recorded a derivative liability for the fair market value of a written put option of $125,000 and a cumulative effect of change in accounting principle of $75,875 (net of the tax effect equal to $49,125) in the income statement.

During December 2004, the FASB issued Revised SFAS No. 123, “Shared-Based Payment,” which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Revised SFAS No. 123 also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments and is effective for the first interim or annual reporting period beginning after June 15, 2005. We are in the process of determining the impact of Revised SFAS No. 123 on our consolidated financial statements.

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 as disclosed on page 8 of this Form 10-Q.

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)) as of the end of the period covered by this report and concluded 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 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 controls over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably 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 and 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,”

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“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, 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 6. Exhibits.

              See Exhibit Index attached hereto.

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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.

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EXHIBIT INDEX

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