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KOSS > SEC Filings for KOSS > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for KOSS CORP


10-May-2013

Quarterly Report


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

Overview

The Company markets a complete line of high-fidelity stereo headphones, speaker-phones, computer headsets, telecommunications headsets, active noise canceling stereo headphones, wireless stereo headphones and compact disc recordings of American Symphony Orchestras on the Koss Classics label. The Company operates as one business segment.

In 2009, the Company learned of significant unauthorized transactions, details of which have been disclosed in depth in the Company's previous periodic reports filed with the SEC. References to unauthorized transactions below should be read in conjunction with those reports.

Results of Operations Summary

Net sales increased 0.8% in the quarter to $8,302,113 with increased sales in export markets and education markets being partially offset by reduced sales to certain U.S. based retailers. Export sales were lower than last year through nine months.

Gross profit as a percent of sales increased 1.5% to 39.8% for the quarter ended March 31, 2013 due to improved product mix and favorable pricing. The amortization of software development costs during the quarter offset a portion of this improvement.

Selling, general and administrative spending was higher primarily due to costs of new product introductions and marketing, as well as product development expenses. These were partially offset by decreased insurance premiums and lower profit based compensation expense.

Resolution of the lawsuits in which the Company was the defendant, as well as completion of the SEC investigation, caused a significant decline in legal expenses related to the unauthorized transactions. In the quarter ended March 31, 2013, unauthorized transaction related legal fees were higher due to costs relating to discovery and preparing for trial in one case in which Koss is the plaintiff.

Unauthorized transaction related recoveries decreased as a result of no significant recoveries being received in the quarter.

                               Financial Results

The following table presents selected financial data for the three and nine
months ended March 31, 2013 and 2012:

                                                Three Months Ended                  Nine Months Ended
                                                     March 31                           March 31
Financial Performance Summary                  2013             2012             2013              2012
Net sales                                 $ 8,302,113      $ 8,232,526      $ 25,859,006      $ 26,978,082
Net sales gain / (loss) %                         0.8  %          (2.2 )%           (4.1 )%          (13.7 )%
Gross profit                              $ 3,303,992      $ 3,151,534      $  9,312,770      $ 10,279,281
Gross profit as % of net sales                   39.8  %          38.3  %           36.0  %           38.1  %
Selling, general and administrative
expenses                                  $ 3,111,919      $ 3,017,502      $  9,134,158      $  8,827,422
Selling, general and administrative
expenses as % of net sales                       37.5  %          36.7  %           35.3  %           32.7  %
Unauthorized transaction related costs    $   180,295      $   136,972      $    332,608      $    814,145
Unauthorized transaction related
recoveries                                $   (28,294 )    $  (754,075 )    $ (1,375,678 )    $ (1,951,181 )
Unauthorized transaction related
recoveries, net                           $   152,001      $  (617,103 )    $ (1,043,070 )    $ (1,137,036 )
Income from operations                    $    40,072      $   751,135      $  1,221,682      $  2,588,895
Income from operations as % of net
sales                                             0.5  %           9.1  %            4.7  %            9.6  %
Other expense                             $    16,786      $   242,021      $    (39,719 )    $    177,483
Income tax provision                      $   (58,583 )    $    96,441      $    361,681      $    757,854
Income tax provision as % of income
before income tax provision                    (103.0 )%           9.7  %           30.6  %           27.4  %

2013 Results Compared with 2012 (comments refer to both the three and nine month periods unless otherwise stated)

Net sales increased marginally for the three month period ended March 31, 2013 but decreased for the nine month period. In the quarter ended March 31, 2013, the Company saw some improvement in sales to certain export distributors after


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experiencing weakness in the first and second quarters. However, sales to export customers were still well below last year through the first nine months. The current quarter benefited from certain export orders for approximately $240,000 that were disrupted and not shipped at the end of December 2012 due to the threatened dockworker strike on the Eastern Seaboard. These orders shipped early in the quarter ended March 31, 2013. In addition, sales to education related markets have been very strong through the first nine months of this year, particularly in the most recent quarter. Sales to customers added late in the year ended June 30, 2012 helped improve sales. However, declining sales to certain large U.S. retailers offset most of these gains.

Gross profit as a percent of sales was higher than last year for the quarter ended March 31, 2013, but lower for the first nine months. The improved gross profit margin for the quarter was primarily the result of improved product mix and benefits from favorable pricing in certain markets. The amortization of software development product costs, which started late in the year ended June 30, 2012 when the Striva product was launched, offset a portion of these improvements. There was approximately $398,000 of software amortization in the third quarter and approximately $1,160,000 of software amortization in the first nine months of fiscal 2013. These amortization costs, combined with a sale at low margin to close out a product during the quarter ended September 30, 2012, and a charge of approximately $124,000 during the quarter ended December 31, 2012 to write off tooling that is not expected to be used in the launch of future Striva products, have caused gross profit margin to be lower for the first nine months of this year compared to the same period last year.

Selling, general and administrative expenses were higher than the same periods last year. The majority of this increase was driven by costs for new product introductions and new product development. These increased costs were partially offset by a reduction in insurance premiums and lower profit-based compensation expense.

Unauthorized transaction related costs increased in the quarter because the Company incurred costs for preparation of one case in anticipation of a trial. These costs were lower in the nine months ended March 31, 2013 because the derivative lawsuit, SEC investigation, and class action lawsuit were resolved during the last year, causing a decrease to the legal fees associated with these matters. Unauthorized transaction related recoveries in the current fiscal year were primarily from asset forfeitures and sale of items at auction. The unauthorized transaction related recoveries last year were primarily from insurance proceeds.

The income from operations decreased primarily due to the amortization of software costs, decreased unauthorized transaction related recoveries and the increase in selling, general and administrative expenses. For the nine months, decreased sales also contributed to the decline in income from operations.

The effective income tax rate for the nine months ended March 31, 2013 varied from the U.S. federal statutory rate of 34% due to recognizing benefits from the federal tax return for the year ended June 30, 2012 and the effect of state income taxes. It is anticipated that the effective income tax rate will be between 20 - 31% in the year ended June 30, 2013 due to an anticipated decrease of the unrecognized tax benefits.

                        Liquidity and Capital Resources

Cash Flows

The following table summarizes our cash flows from operating, investing and
financing activities for the nine months ended March 31, 2013 and 2012:

Total cash provided by (used in):                          2013            2012
Operating activities                                   $ 2,543,954     $ 2,877,763
Investing activities                                      (759,126 )    (1,690,027 )
Financing activities                                    (1,328,887 )    (1,228,887 )
Net increase (decrease) in cash and cash equivalents   $   455,941     $   (41,151 )

Operating Activities

During the nine months ended March 31, 2013, cash provided by operations decreased primarily due to the lower net income and payments to contract manufacturers, causing a $1,464,943 reduction in accounts payable. Inventory increased to $9,989,401 at March 31, 2013 as compared to $9,396,350 as of June 30, 2012. This increase was largely due to purchases of inventory to support the Striva products. Prepaid assets increased to $798,873 at March 31, 2013 from $387,066 as of June 30,


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2012 primarily due to prepayment of insurance premiums, advance payment of a product placement program at a U.S. retailer, and advance payments to a vendor.

Investing Activities

Cash used in investing activities was lower for the nine months ended March 31, 2013 as the Company had lower capitalized software development expenditures. The capitalized software development expenditures decreased as a result of expensing on-going costs for the Striva products since the technology was launched during the year ended June 30, 2012. The Company anticipates it will incur approximately $600,000 for tooling and leasehold improvements during the fiscal year ended June 30, 2013. The Company expects to generate sufficient funds through operations to fund these expenditures.

Financing Activities

The regular quarterly dividends resulted in a net use of cash in the nine months ended March 31, 2013 and 2012. The Company intends to continue to pay quarterly dividends of $0.06 per share for the foreseeable future. As of March 31, 2013, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in 2013 or 2012 under the stock repurchase program. No stock options were exercised in 2013 or 2012.

Liquidity

In addition to capital expenditures for tooling and continued investment in software and new product development, the Company has interest payments on its line of credit facility borrowings, and planned normal quarterly dividend payments. The Company believes that cash generated from operations, together with borrowings available under its credit facility, provide it with adequate liquidity to meet operating requirements, debt service requirements, planned capital expenditures, and dividend payments. The long-term outlook for the business remains positive, however, 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 Facility

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. On May 21, 2012, the Credit Agreement was amended to extend the expiration to July 31, 2014. The Company and the Lender also entered into a Pledge and Security Agreement dated May 12, 2010 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. There were no borrowings outstanding on the facility as of March 31, 2013 and June 30, 2012, respectively.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements other than the lease for the facility in Milwaukee, Wisconsin, which it leases from its Chairman. On May 15, 2012, the lease was renewed for a period of five years, ending June 30, 2018, and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per year. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership. The facility is in good repair and, in the opinion of management, is suitable and adequate for the Company's business purposes.


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