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| KOSS > SEC Filings for KOSS > Form 10-Q on 3-Feb-2012 | All Recent SEC Filings |
3-Feb-2012
Quarterly Report
Operations - Net sales for the three months ended December 31 decreased to $9,990,771 in 2011 compared with $12,800,806 in 2010. This $2,810,035 decrease in net sales was primarily caused by lower sales to several European distributors and continued lower sales to a large mass retailer in the United States. Including the unauthorized transaction related costs and recoveries, net of expenses, the Company had income from operations of $1,344,291 for the three months ended December 31, 2011, compared to income from operations of $2,417,298 for the three months ended December 31, 2010. The decreased income from operations was primarily driven by the decline in sales, a decrease in the gross profit percentage from 40.7% to 38.0% and higher selling, general and administrative expenses. These negative effects were partially offset by insurance and other unauthorized transaction related recoveries exceeding legal fees by $469,519 during the three months ended December 31, 2011 compared to a net cost of $204,900 for the three months ended December 31, 2010. Operating income, excluding the unauthorized transactions and related costs and recoveries, was $874,772 or 8.8% of net sales for the three months ended December 31, 2011 compared to $2,622,198 or 20.5% of net sales for the three months ended December 31, 2010.
For the six months ended December 31, net sales decreased to $18,745,556 in 2011 compared with $22,832,940 in 2010. This $4,087,384 decrease in net sales was primarily driven by lower sales to several overseas distributors and to a large mass retailer in the United States. Including the unauthorized transaction related costs and recoveries, net of expenses, the Company had income from operations of $1,837,761 for the six months ended December 31, 2011, compared to income from operations of $3,407,959 for the six months ended December 31, 2010. The decreased income from operations was primarily driven by the decline in sales, a decrease in the gross profit percentage from 41.9% to 38.0%, and higher selling, general and administrative expenses. These negative effects were partially offset by insurance and other unauthorized transaction related recoveries exceeding legal fees by $519,933 during the six months ended December 31, 2011 compared to a net cost of $471,184 for the six months ended December 31, 2010. Operating income, excluding the unauthorized transactions and related costs and recoveries, was $1,317,828 or 7.0% of net sales for the six months ended December 31, 2011 compared to $3,879,143 or 17.0% of net sales for the six months ended December 31, 2010.
Three Months Ended December 31, 2011 to Three Months Ended December 31, 2010
Net Sales and Gross Profit
Net sales for the three months ended December 31, 2011 totaled $9,990,771 compared with $12,800,806 in the three months ended December 31, 2010. This $2,810,035 or 22.0% decrease in net sales was primarily driven by lower sales to several overseas distributors and to a large mass retailer in the United States. The decrease in sales to the overseas distributors appears to be caused by the difficult economy in Europe as well as stock balancing by these distributors. The decline in sales to the U.S. retail market reflects the increased number of competitors in this space and product placement within key retailers. Additions of new customers have not yet offset these declines. The Company is introducing new products in the second half of the fiscal year. It is uncertain if these sales declines will continue or if new customer sales and products will offset the declines in the future.
Gross profit for the three months ended December 31, 2011 was $3,799,505 or 38.0% of net sales compared to $5,210,963 or 40.7% of net sales for the three months ended December 31, 2010. The decreased gross margin percentage was primarily due to increased costs from suppliers based in China. These increased costs from China suppliers were triggered by wage increases in March 2011. For the three months ended December 31, 2011, the Company incurred approximately $309,000 of increased costs related to the products purchased from China. The Company is working to offset the cost increases through less expensive sources, selective price increases, and new product introductions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended December 31, 2011 were $2,924,733 as compared to $2,588,765 for the three months ended December 31, 2010. The increase in selling, general and administrative expenses was primarily due to spending on new product development related to products planned for release starting in the three months ending March 31, 2012, and spending on preparation for attendance at a major industry trade show in January 2012. The Company spent $272,000 more on new product development in the three months ended December 31, 2011 than in the same
period last year. These increased costs were partially offset by $141,000 less in profit-based compensation expense and $89,000 less in expenses for outside professional services.
Unauthorized Transactions
For the three months ended December 31, 2011, the Company incurred a net benefit of $469,519 for the defense of legal actions related to the unauthorized transactions and related to certain claims initiated against third parties. Included in the net benefit for the three months ended December 31, 2011 was $279,840 of insurance recoveries and a $242,419 bonus repayment by Michael J. Koss. The recoveries also included $175,528 of additional proceeds from the forfeiture of Ms. Sachdeva's 401(k) account over the amount recorded in the year ended June 30, 2011. For the three months ended December 31, 2010, the Company incurred a net cost of $204,900 for legal and professional fees related to the unauthorized transactions. Included in the net cost for the three months ended December 31, 2010 was $575,825 of insurance recoveries.
Operating Income
For the three months ended December 31, 2011, the Company had operating income, including the unauthorized transaction related costs and recoveries, of $1,344,291 compared to an operating income, including the unauthorized transaction related costs and recoveries, of $2,417,298 for the three months ended December 31, 2010. The decrease in operating income was primarily the result of lower sales and a decrease in gross profit percentage, caused by higher costs for products manufactured in China. Increased spending on new product development also resulted in lower operating income in the quarter. Operating income, excluding the unauthorized transactions and related costs and recoveries, was $874,772 for the three months ended December 31, 2011 or 8.8% of net sales, compared to $2,622,198 or 20.5% of net sales for the three months ended December 31, 2010.
Income tax provision for the three months ended December 31, 2011 was $489,067 as compared to a tax provision of $927,841 for the three months ended December 31, 2010. The effective income tax rate was 37.0% and 40.2% for the three months ended December 31, 2011 and 2010, respectively. The effective tax rate was lower for the three months ended December 31, 2011 due to the impact of state taxes.
Six Months Ended December 31, 2011 to Six Months Ended December 31, 2010
Net Sales and Gross Profit
Net sales for the six months ended December 31, 2011 totaled $18,745,556 compared with $22,832,940 in the six months ended December 31, 2010. This $4,087,384 or 17.9% decrease in net sales was primarily driven by lower sales to several overseas distributors and to a large mass retailer in the United States. The decrease in sales to the overseas distributors appears to be caused by the difficult economy in Europe. The decline in sales to the U.S. retail market reflects the increased number of competitors in this space. Additions of new customers have not yet offset these declines. The Company is introducing new products in the second half of the fiscal year. It is uncertain if these sales declines will continue or if new customer sales and products will offset the declines in the future.
Gross profit for the six months ended December 31, 2011 was $7,127,747 or 38.0% of net sales compared to $9,572,572 or 41.9% of net sales for the six months ended December 31, 2010. The decreased gross margin percentage was primarily due to increased costs from suppliers based in China. For the six months ended December 31, 2011, the Company incurred approximately $587,000 of increased costs related to the products purchased from China. The Company is working to offset the cost increases through less expensive sources, selective price increases, and new product introductions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended December 31, 2011 were $5,809,919 as compared to $5,693,429 for the six months ended December 31, 2010. The increase in selling, general and administrative expenses was primarily the result of increased new product development expenses, in preparation for product launches. The first of these new products will be launched in the quarter ended March 31, 2012. The Company spent $549,000 more on new product development in the six months ended December 31, 2011 than in the same period last year. These costs were partially offset by a $221,000 decline in profit-based compensation expense in the six months ended December 31, 2011.
Unauthorized Transactions
For the six months ended December 31, 2011, the Company incurred a net benefit of $519,933 for the defense of legal actions related to the unauthorized transactions and related to certain claims initiated against third parties. Included in the net benefit for the six months ended December 31, 2011 was $779,160 of insurance recoveries and a $242,419 bonus repayment by Michael J. Koss. The recoveries also included $175,528 of additional proceeds from the forfeiture of Ms. Sachdeva's 401(k) account over the amount recorded in the year ended June 30, 2011. For the six months ended December 31, 2010, the Company incurred a net cost of $471,184 for legal and professional fees related to the unauthorized transactions. Included in the net cost for the six months ended December 31, 2010, was $938,962 of insurance recoveries.
Operating Income
For the six months ended December 31, 2011, the Company had operating income, including the unauthorized transaction related costs and recoveries, of $1,837,761 compared to an operating income, including the unauthorized transaction related costs and recoveries, of $3,407,959 for the six months ended December 31, 2010. The decrease in operating income was primarily the result of lower sales, a decrease in gross profit percentage, caused by higher costs for products manufactured in China, and costs related to new product development. Operating income, excluding the unauthorized transactions and related costs and recoveries, was $1,317,828 for the six months ended December 31, 2011 or 7.0% of net sales, compared to $3,879,143 or 17.0% of net sales for the six months ended December 31, 2010.
Income tax provision for the six months ended December 31, 2011 was $661,414 as compared to a tax provision of $1,251,003 for the six months ended December 31, 2010. The effective income tax rate was 37.3% and 39.1% for the six months ended December 31, 2011 and 2010, respectively. The effective tax rate was higher for the six months ended December 31, 2011 was lower due to the impact of state taxes.
Operating Activities
For the six months ended December 31, 2011, cash provided by operations was $1,438,994, as compared to $949,813 for the six months ended December 31, 2010. This change was primarily due to a smaller increase in working capital in the six months ended December 31, 2011 and the impact of deferred taxes. These impacts were partially offset by $1,111,809 of net income for the six months ended December 31, 2011 compared to income of $1,944,972 for the six months ended December 31, 2010.
Working capital was $9,130,247 at December 31, 2011 and $7,942,576 at June 30, 2011. The net increase in working capital of $1,187,671 from June 30, 2011 primarily represents the increase in inventory and prepaid expenses as well as a decrease in accrued liabilities. These increases to working capital were offset by decreased account receivable. Inventory increased $1,745,219 for the six months ended December 31, 2011 primarily due to the decline in sales that caused some product overstock and stocking of product for new product introductions. Prepaid expenses increased as a result of annual insurance premium payments made in the six months ended December 31, 2011. The decrease in accrued liabilities primarily was driven by payment of volume rebates and lower accruals for profit-based compensation in the six months ended December 31, 2011. Other accounts receivable decreased primarily due to collecting $850,000 from settlement of the shareholder derivative suit and $509,000 from the garnishment of the 401(k) balance held by Ms. Sachdeva, the former Vice President of Finance. In addition, accounts receivable declined primarily due to the decrease in sales for the three months ended December 31, 2011 compared to the three months ended June 30, 2011. As of December 31, 2011, the Company had open commitments of approximately $1,105,000 for software and new product development.
Investing Activities
Cash used in investing activities for the six months ended December 31, 2011 was $1,431,553 as compared to $1,225,045 for the six months ended December 31, 2010. Cash used in investing activities for both periods was largely due to life insurance premiums paid and expenditures for product software development costs, leasehold improvements and tooling to support production.
Financing Activities
Net cash provided by financing activities was $14,075 for the six months ended December 31, 2011 and $364,076 for the six months ended December 31, 2010. For the six months ended December 31, 2011, the Company received $900,000 from borrowing on its line of credit facility offset by $885,925 of dividend payments. For the six months ended December 31, 2010, there was borrowing of $1,250,000 on the line of credit facility offset by dividend payments of $885,924. The Company intends to continue to pay its regular quarterly dividends for the foreseeable future.
For the six months ended December 31, 2011 and 2010, there were no purchases of common stock and no stock options were exercised.
Liquidity
In addition to capital expenditures for tooling and completion of the software development, the Company has interest payments on its line of credit facility and planned normal quarterly dividend payments. The Company believes that cash generated from operations, together with borrowings available under its line of credit facility, provide it with adequate liquidity to meet operating requirements, debt service requirements, planned capital expenditures, and dividend payments. The Company continually reevaluates new product offerings, inventory levels and capital expenditures to ensure that it is effectively allocating resources in line with current market conditions.
Credit Facilities
On May 12, 2010, the Company entered into a secured credit facility with JPMorgan Chase Bank, N.A. ("Lender"). The Credit Agreement dated May 12, 2010 between the Company and the Lender ("Credit Agreement") provides for an $8,000,000 revolving secured credit facility and for letters of credit for the benefit of the Company of up to a sublimit of $2,000,000. The Credit Agreement expires on July 31, 2013. The Company and the Lender also entered into the Pledge and Security Agreement under which the Company granted the Lender a security interest in substantially all of the Company's assets in connection with the Company's obligations under the Credit Agreement. The balance outstanding on this facility was $2,300,000 as of December 31, 2011.
Off-Balance Sheet Arrangements
The Company has no other off-balance sheet arrangements other than the lease for the facility in Milwaukee, Wisconsin, which it leases from its Chairman, John C. Koss. On August 15, 2007, the lease was renewed for a period of five years, and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per year. Management believes the lease is on terms no less favorable to the Company than those that could be obtained from an independent party. The Company is responsible for all property maintenance, insurance, taxes, and other normal expenses related to ownership. All facilities are in good repair and, in the opinion of management, are suitable and adequate for the Company's business purposes.
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