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KOSS > SEC Filings for KOSS > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for KOSS CORP


Quarterly Report

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


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 December 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 decreased 23.4% in the quarter to $6,824,339 with decreased sales in export markets and certain U.S. based retailers.

Gross profit as a percent of sales decreased 3.5% to 33.0% for the quarter ended September 30, 2013 primarily due to the fixed costs on lower sales and from start up costs for manufacturing operations in Mexico.

Selling, general and administrative spending was lower primarily due to proceeds from a previously written off customer account and reduction of liabilities for deferred compensation.

Unauthorized transaction related recoveries increased as a result of proceeds from asset forfeitures.

                               Financial Results

The following table presents selected financial data for the three months ended
September 30, 2013 and 2012:

                                                            Three Months Ended
                                                               September 30
Financial Performance Summary                           2013                  2012
Net sales                                        $      6,824,339      $      8,914,862
Net sales gain / (loss) %                                   (23.4 )%                1.8 %
Gross profit                                     $      2,252,969      $      3,251,172
Gross profit as % of net sales                               33.0  %               36.5 %
Selling, general and administrative expenses     $      2,825,805      $      3,018,751
Selling, general and administrative expenses
as % of net sales                                            41.4  %               33.9 %
Unauthorized transaction related costs           $        107,813      $         71,304
Unauthorized transaction related recoveries      $       (816,529 )    $       (454,031 )
Unauthorized transaction related recoveries,
net                                              $       (708,716 )    $       (382,727 )
Income from operations                           $        135,880      $        615,148
Income from operations as % of net sales                      2.0  %                6.9 %
Other expense                                    $         (7,606 )    $        (29,299 )
Income tax provision                             $         48,872      $        219,696
Income tax provision as % of income before
income tax provision                                         38.1  %               37.5 %

2013 Results Compared with 2012

Net sales decreased for the three month period ended September 30, 2013 as sales to certain export markets were below last year by approximately $1.3 million. In addition, the Company experienced reduced sales to certain US retailers of approximately $500,000. Initial shipments of the Fit Series product line were offset by the load-in shipments to new customers, which occurred in the same quarter last year. There was also a $299,000 closeout of a product last year with no similar closeout in the current year.

The most significant declines in the export markets were with a couple key customers in Europe and Asia. Management believes that the lower sales in Europe are attributable to the slow economy and the impact that has had on sell through at the retail level and the distributor's' ability to properly balance inventories. Management believes that the decline in Asia is the result of a specialty product which had unusually high sales in the first quarter ended September 30, 2012.


Sales with the US retailers have been impacted by competitive positioning and loss of space at a couple of retailers. This appears to be changing with the introduction of the Fit Series product line but it is too early to tell how the sell through will impact future sales. The Fit Series has continued to gain placement at the retail level and new customers have been added to carry the line. These sales were offset by reduced sales to a couple of retailers, which were new last year and had significant load-in sales.

Gross profit as a percent of sales was lower than last year for the quarter ended September 30, 2013. The lower gross profit margin for the quarter was primarily the result of approximately $280,000 of start up costs for manufacturing operations in Mexico. This new manufacturing facility is scheduled to begin producing headphones in the quarter ended December 31, 2013. The gross profit margin in the current quarter was also negatively impacted by the fixed costs on a much lower sales base.

Selling, general and administrative expenses were lower for the quarter ended September 30, 2013 than the same period last year. The majority of this decrease was driven by receiving approximately $93,000 of proceeds from a customer account that had previously been written off. In addition, there was a credit in the quarter of approximately $100,000 related to the deferred compensation liabilities. These liabilities were decreased based on assumptions of retirement dates and an increase in the discount rate.

The Company has not reduced its spending on new product development directed at the STRIVA WiFi-based headphones and other WiFi based products as well as new product offerings in the traditional wired headphone space. The Fit series is an example of new product offerings with other new products scheduled for release over the remainder of the fiscal year.

Unauthorized transaction related recoveries in the first quarter ended 2013 and 2012 were primarily from asset forfeitures and sale of items at auction. The Company believes that most of the proceeds from asset forfeitures have been received as of September 30, 2013.

The income from operations for the quarter ended September 30, 2013 decreased primarily due to the decline in net sales and the impact of start up costs for manufacturing in Mexico. These impacts were partially offset by lower selling, general and administrative expenses and increased recoveries from asset forfeitures.

The effective income tax rate for the three months ended September 30, 2013 was approximately equal to the U.S. federal statutory rate of 34% and the effect of state income taxes. It is anticipated that the effective income tax rate will be between 10 - 20% in the year ended June 30, 2014 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 three months ended September 30, 2013 and 2012:

Total cash provided by (used in):               2013             2012
Operating activities                        $ 4,515,522     $ (1,037,688 )
Investing activities                           (477,217 )       (574,191 )
Financing activities                           (442,962 )      1,757,038
Net increase in cash and cash equivalents   $ 3,595,343     $    145,159

Operating Activities

During the three months ended September 30, 2013, cash provided by operations increased primarily due to receiving the proceeds of the settlement of the lawsuit against the Company's former auditors. Pursuant to the settlement, in July 2013, the Company received gross proceeds of $8,500,000, or $6,380,000 net of associated legal fees. During the quarter ended September 30, 2013, the Company paid approximately $2,000,000 of federal taxes.

Inventories were reduced by approximately $740,000 in the three months ended September 30, 2013 as the result of improvements to forecasting and inventory planning. Accounts payable and accrued liabilities, after adjusting for the legal fees related to the settlement, increased by approximately $400,000. This change reflects normal fluctuations in business.


Investing Activities

Cash used in investing activities was lower for the three months ended September 30, 2013 as the Company had lower capitalized software development expenditures as well as lower capital 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 expenditures of approximately $1,000,000 for tooling, leasehold capital expenditures for improvements and Mexico manufacturing equipment during the fiscal year ending June 30, 2014. The Company expects to generate sufficient cash flow through operations to fund these expenditures.

Financing Activities

The regular quarterly dividends resulted in a net use of cash in the three months ended September 30, 2013 and 2012. The Company intends to continue to pay quarterly dividends of $0.06 per share for the foreseeable future. As of September 30, 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.


In addition to capital expenditures for tooling and Mexico manufacturing as well as continued investment in software and new product development, the Company has interest payments on its borrowings when it uses its line of credit facility, and planned normal quarterly dividend payments. The Company believes that cash generated from operations, together with cash reserves and borrowings available under its credit facility, provide it with adequate liquidity to meet operating requirements, debt service requirements, planned capital expenditures, and dividend payments for the next twelve months and thereafter for the foreseeable future. Management believes 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 July 24, 2013, the Credit Agreement was amended to extend the expiration to July 31, 2015. 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 September 30, 2013 and June 30, 2013, 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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