10-Q/A 1 a10-13223_210qa.htm AMENDMENT TO QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q/A

 

Amendment No. 1

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the quarterly period ended September 30, 2009

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 0-3295

 

KOSS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

A DELAWARE CORPORATION

 

39-1168275

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

4129 North Port Washington Avenue, Milwaukee, Wisconsin

 

53212

(Address of principal executive offices)

 

(Zip Code)

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).  Yes o  No x

 

At June 30, 2010, there were 7,382,706 shares outstanding of the registrant’s common stock.

 

 

 



Table of Contents

 

KOSS CORPORATION AND SUBSIDIARY

FORM 10-Q/A

September 30, 2009

 

INDEX

 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) Three months ended September 30, 2009 and 2008

4

 

 

 

 

 

 

Condensed Consolidated Balance Sheets September 30, 2009 (Unaudited) and June 30, 2009

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended September 30, 2009 and 2008

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

 

 

Item 5.

Exhibits

36

 

2



Table of Contents

 

EXPLANATORY NOTE

 

This Quarterly Report on Form 10-Q/A for the three months ended September 30, 2009 includes the unaudited restated condensed consolidated statements of operations for the three months ended September 30, 2009 and 2008, unaudited restated condensed consolidated balance sheet as of September 30, 2009 and unaudited restated condensed consolidated statements of cash flows for the three months ended September 30, 2009 and 2008.  The comparative consolidated balance sheet as of June 30, 2009 has been restated.

 

On December 18, 2009, the Company learned of certain unauthorized transactions made by Sujata Sachdeva, its former Vice President of Finance and Principal Accounting Officer.  The Company subsequently learned that Ms. Sachdeva colluded with two other employees of the accounting department in the misappropriation and circumvention of the Company’s existing internal controls and established operating procedures.  In carrying out the unauthorized transactions, these three former employees failed to adhere to the Company’s existing procedures for processing payments and concealed the misappropriations from management, including the directors and remaining officers of the Company.  Ms. Sachdeva and these other former employees were terminated shortly after the Company learned of the unauthorized transactions. On January 20, 2010, Ms. Sachdeva was indicted in connection with these misappropriations from the Company.

 

Koss Corporation and its wholly-owned subsidiary (the “Company” or “Koss Corporation”) is restating its previously issued condensed consolidated financial statements and related notes to the condensed consolidated financial statements primarily to reflect adjustments relating to the unauthorized transactions previously disclosed in Form 8-K Current Reports filed on December 21 and 24, 2009 and January 4, 7, 11 and 20, 2010.  These adjustments are more fully described in Note 2 to the restated condensed consolidated financial statements in this Form 10-Q/A and in our recently filed Annual Report on Form 10-K/A for the year ended June 30, 2009.

 

The Company has also amended its Quarterly Reports on Form 10-Q/A for the three months ended December 31, 2009 and March 31, 2010 to include financial information.  This Quarterly Report on Form 10-Q/A should be read in conjunction with those filings on Form 10-Q/A.

 

The following items of the Form 10-Q have been modified or revised in this Amendment No. 1 to Form 10-Q/A to reflect these restatements and related events:

 

Part I, Item 1.

Financial Statements

 

 

Part I, Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Part I, Item 4.

Controls and Procedures

 

 

Part II, Item 1.

Legal Proceedings

 

 

Part II, Item 5.

Exhibits

 

3



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

KOSS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

Three Months Ended September 30,

 

2009

 

2008

 

 

 

(Restated, See Note 2)

 

(Restated, See Note 2)

 

 

 

 

 

 

 

Net sales

 

$

11,614,645

 

$

12,498,036

 

Cost of goods sold

 

5,964,673

 

6,916,661

 

Gross profit

 

5,649,972

 

5,581,375

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

Selling, general and administrative expenses

 

2,739,298

 

2,652,794

 

Unauthorized transactions

 

5,324,164

 

1,689,052

 

Total Operating Expenses

 

8,063,462

 

4,341,846

 

 

 

 

 

 

 

(Loss) income from operations

 

(2,413,490

)

1,239,529

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

Royalty income

 

 

87,500

 

Interest income

 

3

 

14,053

 

Interest expense

 

(58,978

)

(41,349

)

Total Other (Expense) Income, net

 

(58,975

)

60,204

 

 

 

 

 

 

 

(Loss) income before income tax (benefit) provision

 

(2,472,465

)

1,299,733

 

 

 

 

 

 

 

Income tax (benefit) provision

 

(878,715

)

457,888

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,593,750

)

$

841,845

 

 

 

 

 

 

 

(Loss) earnings per common share:

 

 

 

 

 

Basic

 

$

(0.22

)

$

0.11

 

Diluted

 

$

(0.22

)

$

0.11

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.065

 

$

0.065

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



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KOSS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

(Unaudited)

 

 

 

 

 

September 30, 2009

 

June 30, 2009

 

 

 

(Restated, See Note 2)

 

(Restated, See Note 2)

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,103

 

$

1,498,876

 

Accounts receivable, less allowance for doubtful accounts of $1,830,035 and $1,588,923, respectively

 

7,152,565

 

4,660,727

 

Inventories

 

9,034,710

 

8,708,835

 

Prepaid expenses

 

439,283

 

151,337

 

Deferred income taxes

 

1,385,570

 

1,385,497

 

Total Current Assets

 

18,015,231

 

16,405,272

 

 

 

 

 

 

 

Equipment and leasehold improvements, net

 

2,423,341

 

2,240,572

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

Product software development costs

 

1,867,976

 

1,727,040

 

Deferred income taxes

 

8,219,664

 

6,311,282

 

Cash surrender value of life insurance

 

3,194,546

 

2,917,223

 

Other assets

 

 

25,000

 

Total Other Assets

 

13,282,186

 

10,980,545

 

Total Assets

 

$

33,720,758

 

$

29,626,389

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

4,927,411

 

$

3,122,721

 

Outstanding checks in excess of funds on deposit

 

621,393

 

 

Accrued liabilities

 

2,137,230

 

2,090,054

 

Dividends payable

 

479,876

 

479,876

 

Income taxes payable

 

5,184,123

 

4,404,382

 

Line of credit

 

2,750,000

 

 

Total Current Liabilities

 

16,100,033

 

10,097,033

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

Deferred compensation

 

1,594,045

 

1,541,240

 

Derivative liability

 

125,000

 

125,000

 

Other liabilities

 

725,000

 

725,000

 

Total Long-Term Liabilities

 

2,444,045

 

2,391,240

 

 

 

 

 

 

 

Total Liabilities

 

18,544,078

 

12,488,273

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 7,382,706 shares

 

36,914

 

36,914

 

Paid in capital

 

1,169,165

 

1,056,975

 

Retained earnings

 

13,970,601

 

16,044,227

 

Total Stockholders’ Equity

 

15,176,680

 

17,138,116

 

Total Liabilities and Stockholders’ Equity

 

$

33,720,758

 

$

29,626,389

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



Table of Contents

 

KOSS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

Three Months Ended September 30,

 

2009

 

2008

 

 

 

(Restated, See Note 2)

 

(Restated, See Note 2)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net (loss) income

 

$

(1,593,750

)

$

841,845

 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

Provision for doubtful accounts

 

241,112

 

102,097

 

Provision (provision reversal) for obsolete inventories

 

65,437

 

(28,733

)

Loss on disposals of equipment and leasehold improvements

 

961

 

5,074

 

Depreciation of equipment and leasehold improvements

 

172,088

 

229,813

 

Stock-based compensation expense

 

112,190

 

110,665

 

Provision for deferred income taxes

 

(1,908,455

)

(271,202

)

Change in cash surrender value of life insurance

 

71,180

 

5,823

 

Deferred compensation

 

52,805

 

53,635

 

Net changes in operating assets and liabilities

 

(780,601

)

720,770

 

Net cash (used in) provided by operating activities

 

(3,567,033

)

1,769,787

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturity of investments

 

25,000

 

 

Life insurance premiums paid

 

(348,503

)

(348,503

)

Purchase of equipment and leasehold improvements

 

(355,818

)

(685,343

)

Product software development expenditures

 

(140,936

)

(157,137

)

Net cash used in investing activities

 

(820,257

)

(1,190,983

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net proceeds from line of credit

 

2,750,000

 

 

Net increase in outstanding checks in excess of funds on deposit

 

621,393

 

 

Dividends paid to stockholders

 

(479,876

)

(480,395

)

Net cash provided by (used in) financing activities

 

2,891,517

 

(480,395

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(1,495,773

)

98,409

 

Cash and cash equivalents at beginning of period

 

1,498,876

 

3,162,233

 

Cash and cash equivalents at end of period

 

$

3,103

 

$

3,260,642

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6



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KOSS CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

1.             CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

On June 30, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).  This pronouncement establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied in preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”).  The adoption of this standard had no impact on the Company’s condensed consolidated financial statements.

 

The unaudited condensed consolidated financial statements presented herein are based on interim amounts.  In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows as of and for the three months ended September 30, 2009 and for all periods presented have been made.  All significant intercompany accounts and transactions have been eliminated.  The results of operations for the quarter ended September 30, 2009 are not necessarily indicative of the operating results for the full year.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant’s June 30, 2009 Annual Report on Form 10-K/A.

 

2.             RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

 

On December 24, 2009 and January 4, 2010, the Company announced that the audited consolidated financial statements included in our Annual Reports on Form 10-K since fiscal year 2005 and the unaudited condensed consolidated financial statements included in our Quarterly Report on Form 10-Q for the three months ended September 30, 2009 should no longer be relied upon.

 

As previously disclosed in Form 8-K Current Reports filed on December 21 and 24, 2009 and January 4, 7, 11 and 20, 2010, Koss Corporation learned of certain unauthorized transactions from at least its fiscal year ended June 30, 2005 and through December 2009.  The Company has determined that its previously issued consolidated financial statements contained errors resulting from these unauthorized transactions.

 

As part of the financial statement review to isolate the unauthorized transactions, it was determined that certain accounting policies had not been applied properly in the current and prior periods.  As a result, the restatements also include certain accounting adjustments related to the correction of errors resulting from the noncompliance with the Company’s accounting policies.

 

All share and per-share data have been adjusted to give effect to the stock split on December 1, 2009.

 

7



Table of Contents

 

The following table summarizes the changes to previously reported earnings.  The amounts listed as previously recorded in the income statement were recorded as reductions to net sales, increases to cost of goods sold or as increases to selling, general and administrative expenses in the previously issued condensed consolidated financial statements for the three months ended September 30, 2009 and 2008.

 

 

 

Three Months ended September 30, 2009

 

Three Months ended September 30, 2008

 

 

 

Restatement

 

Per Share

 

Restatement

 

Per Share

 

 

 

 

 

 

 

 

 

 

 

Unauthorized transaction losses

 

$

(5,324,164

)

$

(0.72

)

$

(1,689,052

)

$

(0.22

)

Unauthorized transaction losses previously recorded in the income statement:

 

 

 

 

 

 

 

 

 

Net sales

 

692,556

 

0.09

 

758,237

 

0.10

 

Cost of goods sold

 

412,327

 

0.05

 

472,912

 

0.06

 

Selling, general and administrative expenses

 

(146,771

)

(0.02

)

166,918

 

0.03

 

Additional restatement adjustments:

 

 

 

 

 

 

 

 

 

Net sales

 

125,236

 

0.02

 

253,765

 

0.03

 

Cost of goods sold

 

302,562

 

0.04

 

(303,999

)

(0.04

)

Selling, general and administrative expenses

 

596,273

 

0.08

 

178,815

 

0.02

 

Royalty income

 

 

 

29,167

 

0.00

 

Interest income

 

3

 

0.00

 

 

 

Interest expense

 

(58,978

)

(0.01

)

(41,349

)

(0.01

)

 

 

 

 

 

 

 

 

 

 

Loss before income tax benefit

 

(3,400,956

)

(0.47

)

(174,586

)

(0.03

)

Income tax effect of restatement

 

(1,240,827

)

(0.17

)

(102,667

)

(0.01

)

Total reduction in net income

 

$

(2,160,129

)

$

(0.30

)

$

(71,919

)

$

(0.02

)

 

The condensed consolidated statements of operations, condensed consolidated balance sheets and condensed consolidated statements of cash flows detailed below reconcile the previously reported amounts to the restated amounts being reported on in this Quarterly Report on Form 10-Q/A.  The restatement adjustments reflected in the financial statement line items are further described below the reconciling consolidated financial statements in the applicable section to which they pertain.

 

8



Table of Contents

 

KOSS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION

 

Three Months Ended September 30,

 

2009
(as previously
reported)

 

Adjustments

 

2009
(as restated)

 

 

 

 

 

 

 

 

 

Net sales

 

$

10,796,853

 

$

817,792

 

$

11,614,645

 

Cost of goods sold

 

6,679,562

 

(714,889

)

5,964,673

 

Gross profit

 

4,117,291

 

1,532,681

 

5,649,972

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

3,188,800

 

(449,502

)

2,739,298

 

Unauthorized transactions

 

 

5,324,164

 

5,324,164

 

Total Operating Expenses

 

3,188,800

 

4,874,662

 

8,063,462

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

928,491

 

(3,341,981

)

(2,413,490

)

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

Royalty income

 

 

 

 

Interest income

 

 

3

 

3

 

Interest expense

 

 

(58,978

)

(58,978

)

Total Other (Expense), net

 

 

(58,975

)

(58,975

)

 

 

 

 

 

 

 

 

Income (loss) before income tax

 

928,491

 

(3,400,956

)

(2,472,465

)

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

362,112

 

(1,240,827

)

(878,715

)

 

 

 

 

 

 

 

 

Net income (loss)

 

$

566,379

 

$

(2,160,129

)

$

(1,593,750

)

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

Basic

 

$

0.08

 

$

(0.30

)

$

(0.22

)

Diluted

 

$

0.08

 

$

(0.30

)

$

(0.22

)

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.065

 

$

 

$

0.065

 

 

9



Table of Contents

 

KOSS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF INCOME INFORMATION

 

Three Months Ended September 30,

 

2008
(as previously
reported)

 

Adjustments

 

2008
(as restated)

 

 

 

 

 

 

 

 

 

Net sales

 

$

11,486,034

 

$

1,012,002

 

$

12,498,036

 

Cost of goods sold

 

7,085,574

 

(168,913

)

6,916,661

 

Gross profit

 

4,400,460

 

1,180,915

 

5,581,375

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

2,998,527

 

(345,733

)

2,652,794

 

Unauthorized transactions

 

 

1,689,052

 

1,689,052

 

Total Operating Expenses

 

2,998,527

 

1,343,319

 

4,341,846

 

 

 

 

 

 

 

 

 

Income from operations

 

1,401,933

 

(162,404

)

1,239,529

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

Royalty income

 

58,333

 

29,167

 

87,500

 

Interest income

 

14,053

 

 

14,053

 

Interest expense

 

 

(41,349

)

(41,349

)

Total Other Income, net

 

72,386

 

(12,182

)

60,204

 

 

 

 

 

 

 

 

 

Income before income tax provision

 

1,474,319

 

(174,586

)

1,299,733

 

 

 

 

 

 

 

 

 

Income tax provision

 

560,555

 

(102,667

)

457,888

 

 

 

 

 

 

 

 

 

Net income

 

$

913,764

 

$

(71,919

)

$

841,845

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

(0.02

)

$

0.11

 

Diluted

 

$

0.13

 

$

(0.02

)

$

0.11

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.065

 

$

 

$

0.065

 

 

10



Table of Contents

 

KOSS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION

 

As of September 30,

 

2009
(as previously
reported)

 

Adjustments

 

2009
(as restated)

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,847,643

 

$

(2,844,540

)

$

3,103

 

Accounts receivable, less allowance for doubtful accounts of $1,830,035

 

10,280,462

 

(3,127,897

)

7,152,565

 

Inventories

 

10,371,604

 

(1,336,894

)

9,034,710

 

Prepaid expenses

 

 

439,283

 

439,283

 

Deferred income taxes

 

720,121

 

665,449

 

1,385,570

 

Other current assets

 

920,153

 

(920,153

)

 

Total Current Assets

 

25,139,983

 

(7,124,752

)

18,015,231

 

 

 

 

 

 

 

 

 

Equipment and leasehold improvements, net

 

4,364,028

 

(1,940,687

)

2,423,341

 

 

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

 

 

Product software development costs

 

 

1,867,976

 

1,867,976

 

Deferred income taxes

 

1,237,727

 

6,981,937

 

8,219,664

 

Cash surrender value of life insurance

 

 

3,194,546

 

3,194,546

 

Other Assets

 

2,160,586

 

(2,160,586

)

 

Total Other Assets

 

3,398,313

 

9,883,873

 

13,282,186

 

Total Assets

 

$

32,902,324

 

$

818,434

 

$

33,720,758

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,428,020

 

$

2,499,391

 

$

4,927,411

 

Outstanding checks in excess of funds on deposit

 

 

621,393

 

621,393

 

Accrued liabilities

 

1,935,695

 

201,535

 

2,137,230

 

Dividends payable

 

479,876

 

 

479,876

 

Income taxes payable

 

287,681

 

4,896,442

 

5,184,123

 

Line of credit

 

2,750,000

 

 

2,750,000

 

Total Current Liabilities

 

7,881,272

 

8,218,761

 

16,100,033

 

 

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

 

 

Deferred compensation

 

1,095,961

 

498,084

 

1,594,045

 

Derivative liability

 

125,000

 

 

125,000

 

Other liabilities

 

 

725,000

 

725,000

 

Total Long-Term Liabilities

 

1,220,961

 

1,223,084

 

2,444,045

 

 

 

 

 

 

 

 

 

Total Liabilities

 

9,102,233

 

9,441,845

 

18,544,078

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 7,382,706 shares

 

 

36,914

 

36,914

 

Paid in capital

 

 

1,169,165

 

1,169,165

 

Retained earnings

 

 

13,970,601

 

13,970,601

 

Stockholders’ investment

 

23,800,091

 

(23,800,091

)

 

Total Stockholders’ Equity

 

23,800,091

 

(8,623,411

)

15,176,680

 

Total Liabilities and Stockholders’ Equity

 

$

32,902,324

 

$

818,434

 

$

33,720,758

 

 

11



Table of Contents

 

KOSS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION

 

As of June 30,

 

2009
(as previously
reported)

 

Adjustments

 

2009
(as restated)

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,664,407

 

$

(165,531

)

$

1,498,876

 

Accounts receivable, less allowance for doubtful accounts of $1,588,923

 

8,679,606

 

(4,018,879

)

4,660,727

 

Inventories

 

9,763,158

 

(1,054,323

)

8,708,835

 

Prepaid expenses

 

179,549

 

(28,212

)

151,337

 

Deferred income taxes

 

720,121

 

665,376

 

1,385,497

 

Total Current Assets

 

21,006,841

 

(4,601,569

)

16,405,272

 

 

 

 

 

 

 

 

 

Equipment and leasehold improvements, net

 

4,076,198

 

(1,835,626

)

2,240,572

 

 

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

 

 

Product software development costs

 

 

1,727,040

 

1,727,040

 

Deferred income taxes

 

1,237,727

 

5,073,555

 

6,311,282

 

Cash surrender value of life insurance

 

 

2,917,223

 

2,917,223

 

Other assets

 

2,149,586

 

(2,124,586

)

25,000

 

Total Other Assets

 

3,387,313

 

7,593,232

 

10,980,545

 

 

 

 

 

 

 

 

 

Total Assets

 

$

28,470,352

 

$

1,156,037

 

$

29,626,389

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,810,466

 

$

1,312,255

 

$

3,122,721

 

Accrued liabilities

 

1,153,089

 

936,965

 

2,090,054

 

Dividends payable

 

479,876

 

 

479,876

 

Income taxes payable

 

175,568

 

4,228,814

 

4,404,382

 

Total Current Liabilities

 

3,618,999

 

6,478,034

 

10,097,033

 

 

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

 

 

Deferred compensation

 

1,095,961

 

445,279

 

1,541,240

 

Derivative liability

 

125,000

 

 

125,000

 

Other Liabilities

 

 

725,000

 

725,000

 

Total Long-Term Liabilities

 

1,220,961

 

1,170,279

 

2,391,240

 

 

 

 

 

 

 

 

 

Total Liabilities

 

4,839,960

 

7,648,313

 

12,488,273

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 7,382,706 shares

 

2,049,384

 

(2,012,470

)

36,914

 

Paid in capital

 

 

1,056,975

 

1,056,975

 

Retained earnings

 

21,581,008

 

(5,536,781

)

16,044,227

 

Total Stockholders’ Equity

 

23,630,392

 

(6,492,276

)

17,138,116

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

28,470,352

 

$

1,156,037

 

$

29,626,389

 

 

12



Table of Contents

 

KOSS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW INFORMATION

 

Three Months Ended September 30,

 

2009
(as previously
reported)

 

Adjustments

 

2009
(as restated)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

566,379

 

$

(2,160,129

)

$

(1,593,750

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

241,112

 

241,112

 

Provision for obsolete inventories

 

 

65,437

 

65,437

 

Loss on disposals of equipment and leasehold improvements

 

 

961

 

961

 

Depreciation of equipment and leasehold improvements

 

252,107

 

(80,019

)

172,088

 

Stock-based compensation expense

 

 

112,190

 

112,190

 

Provision for deferred income taxes

 

 

(1,908,455

)

(1,908,455

)

Change in cash surrender value of life insurance

 

 

71,180

 

71,180

 

Deferred compensation

 

 

52,805

 

52,805

 

Net changes in operating assets and liabilities

 

(1,363,103

)

582,502

 

(780,601

)

Net cash used in operating activities

 

(544,617

)

(3,022,416

)

(3,567,033

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Maturity of investments

 

 

25,000

 

25,000

 

Life insurance premiums paid

 

 

(348,503

)

(348,503

)

Purchase of equipment and leasehold improvements

 

(542,271

)

186,453

 

(355,818

)

Product software development expenditures

 

 

(140,936

)

(140,936

)

Net cash used in investing activities

 

(542,271

)

(277,986

)

(820,257

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net proceeds from line of credit

 

2,750,000

 

 

2,750,000

 

Net increase in outstanding checks in excess of funds on deposit

 

 

621,393

 

621,393

 

Dividends paid to stockholders

 

(479,876

)

 

(479,876

)

Net cash provided by financing activities

 

2,270,124

 

621,393

 

2,891,517

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

1,183,236

 

(2,679,009

)

(1,495,773

)

Cash and cash equivalents at beginning of period

 

1,664,407

 

(165,531

)

1,498,876

 

Cash and cash equivalents at end of period

 

$

2,847,643

 

$

(2,844,540

)

$

3,103

 

 

13



Table of Contents

 

KOSS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW INFORMATION

 

Three Months Ended September 30,

 

2008
(as previously
reported)

 

Adjustments

 

2008
(as restated)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

913,764

 

$

(71,919

)

$

841,845

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

102,097

 

102,097

 

Reversal of provision for obsolete inventories

 

 

(28,733

)

(28,733

)

Loss on disposals of equipment and leasehold improvements

 

 

5,074

 

5,074

 

Depreciation of equipment and leasehold improvements

 

289,899

 

(60,086

)

229,813

 

Stock-based compensation expense

 

 

110,665

 

110,665

 

Provision for deferred income taxes

 

 

(271,202

)

(271,202

)

Change in cash surrender value of life insurance

 

 

5,823

 

5,823

 

Deferred compensation

 

 

53,635

 

53,635

 

Net changes in operating assets and liabilities

 

980,370

 

(259,600

)

720,770

 

Net cash provided by operating activities

 

2,184,033

 

(414,246

)

1,769,787

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Life insurance premiums paid

 

 

(348,503

)

(348,503

)

Purchase of equipment and leasehold improvements

 

(941,493

)

256,150

 

(685,343

)

Product software development expenditures

 

 

(157,137

)

(157,137

)

Net cash used in investing activities

 

(941,493

)

(249,490

)

(1,190,983

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Dividends paid to stockholders

 

(480,395

)

 

(480,395

)

Net cash used in financing activities

 

(480,395

)

 

(480,395

)

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

762,145

 

(663,736

)

98,409

 

Cash and cash equivalents at beginning of period

 

3,322,873

 

(160,640

)

3,162,233

 

Cash and cash equivalents at end of period

 

$

4,085,018

 

$

(824,376

)

$

3,260,642

 

 

14



Table of Contents

 

The financial accounts and transactions that were affected and a description of matters that were discovered in the restatement process are summarized as follows:

 

Net Sales

 

The Company has determined that its previously filed condensed consolidated financial statements contained errors for understatement of revenue because of the unauthorized transactions.  Certain unauthorized transactions improperly reduced various sales accounts through the use of manual journal entries or system transactions.  In the three months ended September 30, 2009 and September 30, 2008, net sales were understated by the amounts set forth in Table A, below.

 

Table A

Restatement Adjustments Related to Net Sales

 

 

 

September 30,
2009

 

September 30,
2008

 

Restatement adjustments to increase gross sales

 

$

700,140

 

$

696,560

 

Restatement adjustments to sales allowances

 

117,652

 

315,442

 

Total

 

$

817,792

 

$

1,012,002

 

 

Cost of Goods Sold

 

Cost of goods sold was overstated in the reporting periods as a result of various entries made in connection with the unauthorized transactions.  Portions of the unauthorized transactions were improperly charged to cost of goods sold.  The majority of the erroneous charges were made to materials, fringe benefit overhead accounts, engineering and depreciation for the three months ended September 30 as set forth in Table B, below.

 

Table B

Restatement Adjustments Related to Cost of Goods Sold

 

 

 

September 30,
2009

 

September 30,
2008

 

Material and all other

 

$

(496,576

)

$

(126,145

)

Labor

 

(183,153

)

(49,967

)

Freight

 

53,701

 

134,459

 

Fringe benefits

 

 

(49,582

)

Engineering

 

(30,000

)

(119,161

)

Depreciation

 

(58,861

)

41,483

 

Total

 

$

(714,889

)

$

(168,913

)

 

Selling, General and Administrative Expenses

 

The financial statement review included an evaluation of various balance sheet accounts along with their corresponding income statement items that are included in selling, general and administrative expenses.  It was determined that the items listed below were misstated.

 

·                  Provision for doubtful accounts was understated as was the allowance for doubtful accounts.

 

·                  Accounting for the cash surrender value of life insurance was improperly stated because of not including all of the related life insurance policies.

 

15



Table of Contents

 

·                  Deferred compensation expense was understated for the three months ended September 30, 2009 and 2008 as a result of not properly applying the assumptions for mortality and years of service as well as using a discount rate that was too high.

 

·                  Costs for professional fees and product development expense were overstated as a result of erroneous manual journal entries.  The erroneous charges were recorded to these line items in both periods.

 

The amounts related to the above misstatements for the three months ended September 30 are summarized in Table C, below.

 

Table C

Restatement Adjustments Related to Selling,

General and Administrative Expenses

 

 

 

September 30,
2009

 

September 30,
2008

 

Provision for doubtful accounts

 

$

121,112

 

$

(24,412

)

Stock-based compensation expense

 

112,190

 

110,665

 

Change in miscellaneous income

 

(277,323

)

(342,681

)

Deferred compensation expense

 

52,805

 

53,635

 

Professional fees

 

16,961

 

(21,601

)

Fringe benefits

 

 

(39,893

)

Officers’ life insurance

 

260,947

 

264,463

 

Bonuses

 

 

37,000

 

Koss Employee Stock Ownership Trust/401(k)

 

 

(26,092

)

Donations

 

(7,500

)

(1,628

)

Financial public relations

 

(30,000

)

(59,999

)

Gain/loss on fixed asset disposals

 

961

 

5,074

 

New product development, sales, marketing and commissions

 

(498,722

)

(37,159

)

Depreciation

 

(21,158

)

(101,569

)

Miscellaneous expense

 

(84,341

)

(13,093

)

Other selling, general and administrative

 

(95,434

)

(148,443

)

Total

 

$

(449,502

)

$

(345,733

)

 

Income Tax Provision

 

The impact of the various account adjustments for the three months ended September 30 on the income tax provision is detailed in Table D, below.

 

Table D

Restatement Adjustments Related to Income Tax Provision

 

 

 

September 30,
2009

 

September 30,
2008

 

Federal income tax provision

 

$

(1,143,448

)

$

(144,299

)

State income tax provision

 

(98,177

)

18,907

 

Foreign income tax provision

 

798

 

22,725

 

Income tax provision

 

$

(1,240,827

)

$

(102,667

)

 

16



Table of Contents

 

Cash and Cash Equivalents

 

Cash was improperly overstated because of the unauthorized transactions.  The impact on cash is shown in Table E, below.

 

Table E

Restatement Adjustments Related to Cash

 

 

 

September 30,
2009

 

June 30, 2009

 

Correction of cash balance

 

$

(2,844,540

)

$

(165,531

)

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable was overstated because of not properly applying cash received against the outstanding invoices.

 

The allowance for doubtful accounts was understated.  It has been restated to provide for amounts that are expected to not be collected because of bankruptcies and accounts showing slow payment.  The impact of accounts receivable and allowance for doubtful accounts is provided in Table F, below.

 

Table F

Restatement Adjustments Related to Accounts Receivable,

and Allowance for Doubtful Accounts

 

 

 

September 30,
2009

 

June 30, 2009

 

Accounts receivable because of delayed cash posting

 

$

(2,395,573

)

$

(3,407,667

)

Allowance for doubtful accounts

 

(732,324

)

(611,212

)

Total

 

$

(3,127,897

)

$

(4,018,879

)

 

Inventories

 

Inventories were overstated as a result of not properly accounting for the inventory in transit, insufficient provision for obsolete or slow-moving inventory and treating advance payments as inventory.  The impact of these items is provided in Table G, below.

 

Table G

Restatement Adjustments Related to Inventory

 

 

 

September 30,
2009

 

June 30, 2009

 

Inventory in transit

 

$

1,310

 

$

289,622

 

Obsolete and slow-moving inventory

 

(846,666

)

(901,229

)

Prepaid inventory

 

(549,039

)

(402,642

)

LIFO reserve

 

9,071

 

9,071

 

Freight on inventory

 

54,497

 

25,614

 

Other

 

(6,067

)

(74,759

)

Total

 

$

(1,336,894

)

$

(1,054,323

)

 

17



Table of Contents

 

Equipment and Leasehold Improvements

 

Assets no longer used in the business were not removed from equipment and leasehold improvements.  As part of the restatement, the Company reviewed the assets and wrote off assets that  were no longer being used in the business.  Almost all of the assets which were written off had been fully depreciated prior to these adjustments.  Loss on disposal was $961 for the three months ended September 30, 2009 and $5,074 for the three months ended September 30, 2008.  Product software development costs were reclassified and reported separately in the restated consolidated balance sheets.   The impact of the equipment and leasehold improvements is provided in Table H below.

 

Table H

Restatement Adjustments Related to Equipment and Leasehold Improvements

 

 

 

September 30,
2009

 

June 30, 2009

 

Leasehold improvements

 

$

(77,468

)

$

(77,468

)

Machinery, equipment, furniture and fixtures

 

(508,083

)

(511,937

)

Tools, dies, molds and patterns

 

(6,727,610

)

(6,534,676

)

 

 

(7,313,161

)

(7,124,081

)

Accumulated depreciation

 

5,372,474

 

5,288,455

 

Total

 

$

 (1,940,687

)

$

 (1,835,626

)

 

Product Software Development Costs

 

The cost of purchased software technology is capitalized and stated at the lower of unamortized cost or expected net realizable value.  These amounts were included in equipment and leasehold improvements in the previous filings and have been reclassified to a separate line item in the consolidated balance sheets in the restatement.  The balance sheet impact of the restatement to product software development costs is as shown in Table I, below.

 

Table I

Restatement Adjustments Related to Product Software Development Costs

 

 

 

September 30,
2009

 

June 30, 2009

 

Reclassification from equipment and leasehold improvements

 

$

 1,867,976

 

$

 1,727,040

 

 

Cash Surrender Value of Life Insurance

 

Cash surrender value of life insurance has been restated because of an error in the previously calculated amounts.  In addition, it was previously reported in “Other assets” but has now been classified separately in the restated consolidated balance sheets.  The balance sheet impact of the restatement to cash surrender value is as shown in Table J, below.

 

Table J

Restatement Adjustments Related to Cash Surrender Value

 

 

 

September 30,
2009

 

June 30, 2009

 

Correction of error

 

$

1,033,960

 

$

 792,637

 

 

18



Table of Contents

 

Liabilities

 

Various current liabilities were not properly stated due to the unauthorized transactions or as a result of different estimates at the time the statements were prepared.  The following accounts were affected:

 

·                        Accounts payable was understated on the June 30, 2009 consolidated balance sheet because of an erroneous transaction for approximately $1,290,000.  Other changes to accounts payable are for reclassification of deposits to an asset account and to include accounts receivable credit balances in accounts payable.

 

·                        Accrued liabilities have been revised to:

 

·                  Include proper cutoff of professional fees at each period end;

 

·                  Adjust accrued returns based on detailed analysis of returns, price adjustments and shipping adjustments;

 

·                  Increase accrued product warranty obligations to reflect the estimated costs of future returns of product based on an analysis of annual returns and the cost of replacing the returned items.  The Company believes this properly values the potential liability based on annual returns and cost of replacing the returned items.

 

The liability for deferred compensation was understated as a result of not properly applying the assumptions for mortality and years of service as well as using a discount rate that was too high.

 

The balance sheet impact of the restatement of liabilities is as shown in Table K, below.

 

Table K

Restatement Adjustments Related to Accounts Payable,

Accrued Liabilities and Long-Term Liabilities

 

 

 

September 30,
2009

 

June 30, 2009

 

Erroneous transactions

 

$

 —

 

$

 1,290,011

 

Reclassification of advance payments to deposits

 

47,729

 

110,263

 

Accounts receivable credit balances

 

15,504

 

25,573

 

Erroneous adjustments to accounts payable

 

2,782,890

 

167,083

 

Other accounts payable

 

(346,732

)

(280,675

)

Accounts payable

 

$

 2,499,391

 

$

 1,312,255

 

 

19



Table of Contents

 

 

 

September 30,
2009

 

June 30, 2009

 

Legal and professional fees

 

$

90,683

 

$

166,939

 

Accrued returns

 

219,773

 

219,773

 

Product warranty obligations

 

312,420

 

312,420

 

Cooperative advertising and promotion allowances

 

(267,653

)

(250,000

)

Accrued interest

 

413,363

 

354,644

 

Accrued product development

 

(396,354

)

5,877

 

Fringe benefits

 

(131,518

)

4,467

 

Other accrued liabilities

 

(39,179

)

122,845

 

Accrued liabilities

 

$

201,535

 

$

936,965

 

 

 

 

September 30,
2009

 

June 30, 2009

 

Long-term product warranty obligations

 

$

725,000

 

$

725,000

 

Deferred compensation liability

 

498,084

 

445,279

 

Long-term liabilities

 

$

1,223,084

 

$

1,170,279

 

 

Income Taxes Payable

 

The impact of the various account adjustments on income taxes payable is detailed below in Table L, below.

 

Table L

Restatement Adjustments Related to Income Taxes Payable

 

 

 

September 30,
2009

 

June 30, 2009

 

Accrued federal income tax

 

$

3,988,565

 

$

3,428,169

 

Accrued state income tax

 

1,109,317

 

1,002,085

 

Other

 

(201,440

)

(201,440

)

Income taxes payable

 

$

4,896,442

 

$

4,228,814

 

 

3.                                       EARNINGS (LOSS) PER COMMON AND COMMON STOCK EQUIVALENT SHARE

 

Basic earnings (loss) per common share are computed based on the weighted average number of common shares outstanding.  The weighted average number of common shares outstanding for the quarters ending September 30, 2009 and 2008 were 7,382,706 and 7,390,702, respectively.  When dilutive, stock options are included in earnings per share as share equivalents using the treasury stock method.  For the quarter ended September 30, 2009 there were no common stock equivalents related to stock option grants that were included in the computation of the weighted-average number of shares outstanding for diluted (loss) per share.  Shares under option of 1,203,308 were excluded from diluted weighted average common shares outstanding for the quarter ended September 30, 2009 as they would be anti-dilutive due to the Company’s net loss for the quarter.  Common stock equivalents of 23,308, related to stock option grants, were included in the computation of the weighted-average number of shares outstanding for diluted earnings per share for the quarter ended September 30, 2008.  The dilutive effect of stock options of 1,100,000 for which the exercise price was higher than the average market price for the quarter ended September 30, 2008 were excluded from the calculation of diluted earnings per share.

 

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4.                                       INCOME TAXES

 

The Company files income tax returns in the United States (Federal), Wisconsin (state) and various other state jurisdictions.  The Company is not currently subject to income tax examinations in any of our significant tax jurisdictions.  Tax years open to examination by tax authorities under the statute of limitations include fiscal 2007 through 2009 for Federal and fiscal 2005 through 2009 for most state jurisdictions.

 

The total liability for unrecognized tax benefits was $300,000 as of September 30, 2009 and June 30, 2009.  The liability does not include an amount for accrued penalties.  The Company recognizes penalties related to unrecognized tax benefits in the provision for income taxes.  The Company recognizes interest related to unrecognized tax benefits as interest expense.  As part of the unauthorized transactions, the Company has accrued interest of $413,363 and $354,644 at September 30, 2009 and June 30, 2009, respectively.  The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits within the next 12 months.  There was no change in the amount of unrecognized tax benefits during the three months ended September 30, 2009.

 

5.                                       INVENTORIES

 

The classification of inventories is as follows:

 

 

 

September 30 2009

 

June 30, 2009

 

 

 

(Restated)

 

(Restated)

 

Raw materials and work in process

 

$

2,996,591

 

$

2,609,313

 

Finished goods

 

7,036,921

 

7,032,887

 

 

 

10,033,512

 

9,642,200

 

Allowance for obsolete and slow-moving inventory

 

998,802

 

933,365

 

 

 

$

9,034,710

 

$

8,708,835

 

 

6.                                       STOCK PURCHASE AGREEMENT

 

The Company has an agreement with its Chairman, John C. Koss, in the event of his death, at the request of the executor of the estate, to repurchase his Company common stock from his estate.  The Company does not have the right to require the estate to sell stock to the Company.  As such, this arrangement is accounted for as a written put option with the fair value of the put option recorded as a derivative liability.

 

The fair value of the option at September 30, 2009 and June 30, 2009 was $125,000.  The repurchase price is 95% of the fair market value of the common stock on the date that notice to repurchase is provided to the Company.  The total number of shares to be repurchased will be sufficient to provide proceeds which are the lesser of $2,500,000 or the amount of estate taxes and administrative expenses incurred by the Chairman’s estate.  The Company may elect to pay the purchase price in cash or may elect to pay cash equal to 25% of the total amount due and to execute a promissory note for the balance, payable over four years, at the prime rate of interest.  The Company maintains a $1,150,000 life insurance policy to fund a substantial portion of this obligation.

 

7.                                        DIVIDENDS DECLARED

 

On September 16, 2009, the Company declared a quarterly cash dividend of $0.065 per share for the stockholders of record on September 30, 2009 to be paid October 15, 2009.  Such dividend payable has been recorded at September 30, 2009.

 

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8.                                       STOCK OPTIONS

 

In 1990, pursuant to the recommendation of the Board of Directors, the stockholders ratified the creation of the Company’s 1990 Flexible Incentive Plan (the “1990 Plan”).  The 1990 Plan is administered by a committee of the Board of Directors and provides for the granting of various stock-based awards including stock options to eligible participants, primarily officers and certain key employees.  A total of 225,000 shares of common stock were available in the first year of the 1990 Plan’s existence.  Each year thereafter additional shares equal to 0.25% of the shares outstanding as of the first day of the applicable fiscal year were reserved for issuance pursuant to the 1990 Plan.  On July 22, 1992, the Board of Directors authorized the reservation of an additional 250,000 shares for the 1990 Plan, which was approved by the stockholders.  In 1993, the Board of Directors authorized the reservation of an additional 300,000 shares for the 1990 Plan, which was approved by the stockholders.  In 1997, the Board of Directors authorized the reservation of an additional 300,000 shares for the 1990 Plan, which was approved by the stockholders.  In 2001, the Board of Directors authorized the reservation of an additional 300,000 shares for the 1990 Plan, which was also approved by the stockholders.  Options vest over a four or five year period, with a maximum term of five to ten years.

 

The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model.  The resulting compensation cost for fixed awards with graded vesting schedules is amortized on a straight-line basis over the vesting period for the entire award.  The expected term of awards granted is determined based on historical experience with similar awards, giving consideration to the expected term and vesting schedules.  The expected volatility is determined based on the Company’s historical stock prices over the most recent period commensurate with the expected term of the award.  The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected term of the award.  Expected pre-vesting option forfeitures are based on historical data.

 

A summary of stock option activity under the plan for the three months ended September 30, 2009 is as follows and is adjusted for the two-for-one stock split on December 1, 2009:

 

 

 

Number
of Shares

 

Stock
Options
Price
Range

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Life - Years

 

Aggregate
Intrinsic
Value of In-
The-Money
Options

 

Shares under option at June 30, 2009

 

863,308

 

$7.76 - $14.40

 

$

10.35

 

3.99

 

$

 

Granted

 

340,000

 

$6.275 - $6.905

 

$

6.76

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

Shares under option at September 30, 2009

 

1,203,308

 

$6.275 - $14.40

 

$

9.34

 

4.38

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable as of June 30, 2009

 

532,808

 

$7.76 - $14.40

 

$

10.72

 

 

 

 

 

Exercisable as of September 30, 2009

 

559,108

 

$6.275 - $14.40

 

$

10.66

 

 

 

 

 

 

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A summary of intrinsic value and cash received from stock option exercises and fair value of vested stock options for the three months ended September 30, 2009 and 2008 is as follows:

 

 

 

Three Months
Ended
September 30, 2009

 

Three Months
Ended
September 30, 2008

 

Total intrinsic value of stock options exercised

 

$

 

$

 

Cash received from stock option exercises

 

$

 

$

 

Total fair value of stock options vested

 

$

45,772

 

$

45,772

 

 

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9.                                       ADDITIONAL CASH FLOW INFORMATION

 

The net changes in cash as a result of changes in operating assets and liabilities consist of the following for the three months ended:

 

 

 

September 30,
2009

 

September 30,
2008

 

 

 

(Restated)

 

(Restated)

 

Accounts receivable

 

$

(2,732,950

)

$

1,968,456

 

Inventories

 

(391,312

)

227,069

 

Prepaid expenses and other assets

 

(287,946

)

(458,771

)

Income taxes payable

 

779,741

 

(35,911

)

Accounts payable

 

1,804,690

 

(648,737

)

Accrued liabilities

 

47,176

 

(331,336

)

Net change

 

$

(780,601

)

$

720,770

 

 

 

 

 

 

 

Net cash paid during the year for:

 

 

 

 

 

Income taxes

 

$

250,000

 

$

750,000

 

Interest

 

$

 

$

 

 

10.                                 CREDIT FACILITIES

 

On February 16, 2009, the Company entered into a credit facility with Harris N.A. for an unsecured line of credit for up to a maximum of $10,000,000 through January 29, 2010.  On October 9, 2009 the credit facility was extended to December 31, 2010.  The Company could use the credit facility for working capital, to refinance existing indebtedness, for stock repurchase and for general corporate purposes.  Borrowings under this credit facility bore interest at either the bank’s most recently publicly announced prime rate or at a London Interbank Offered Rate (“LIBOR”) based rate plus 1.25% determined in accordance with the loan agreement. The credit facility included financial covenants that require the Company to maintain a minimum tangible net worth, liabilities to tangible net worth ratios and interest coverage ratios.  The outstanding balance on this credit facility at September 30, 2009 amounted to $2,750,000.  There was no balance outstanding on this credit facility at June 30, 2009.  The weighted-average interest rate for the three months ended September 30, 2009 was 3.25%.

 

On May 12, 2010, the Company entered into a new 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 with interest rates either ranging from 0.0% to 0.75% over the Lender’s most recently publicly announced prime rate or 2.0% to 3.0% over LIBOR, depending on the Company’s leverage ratio.  The Credit Agreement expires on July 31, 2013. In addition to the revolving loans, the Credit Agreement also provides that the Company may, from time to time, request the Lender to issue letters of credit for the benefit of the Company of up to a sublimit of $2,000,000, and subject to certain other limitations.  The loans may be used only for general corporate purposes of the Company.

 

The Credit Agreement contains certain affirmative, negative and financial covenants customary for financings of this type.  The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, asset sales, sale and leaseback transactions, and transactions with affiliates, among other restrictions.  The financial covenants include a minimum current ratio, minimum tangible net worth and maximum leverage ratio requirements.  The Company and the Lender also entered into the 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

 

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Company’s obligations under the Credit Agreement.  On May 12, 2010, the Company also terminated its loan agreement with Harris N.A. and repaid the entire $5,863,349 balance outstanding as of that date.

 

11.                                 STOCKHOLDERS’ EQUITY

 

The following table summarizes the changes in stockholders’ equity for the three month periods ended September 30, 2009 and 2008.

 

 

 

2009

 

2008

 

 

 

(as restated)

 

(as restated)

 

Net (loss) income (as restated)

 

$

(1,593,750

)

$

841,845

 

Dividends declared

 

(479,876

)

(480,395

)

Stock-based compensation expense (as restated)

 

112,190

 

110,665

 

 

 

$

(1,961,436

)

$

472,115

 

 

12.                                 RECENT ACCOUNTING PRONOUNCEMENTS

 

In August 2009, the FASB issued an update regarding measurement of liabilities at fair value (Accounting Standards Codification 820) which provides additional guidance on how companies should measure liabilities.  The update provides clarification on the techniques for measurement of fair value required of a reporting entity when a quoted price in an active market for an identical liability is not available.  This update had no impact on the Company’s consolidated financial statements.

 

13.                                 LEGAL MATTERS

 

Since learning of the unauthorized transactions in December 2009, the Company has been named in the matters described below.  The Company has also initiated certain actions against third parties, which are also described below, and may bring additional claims against other third parties.

 

·                  On January 11, 2010, the Company received a letter from a law firm stating that it represented a shareholder and demanding that the Company’s Board of Directors investigate and take legal action against all responsible parties to ensure compensation for the Company’s losses stemming from the unauthorized transactions.  The Company’s legal counsel has responded preliminarily to the letter indicating that the Board of Directors will determine the appropriate course of action after the Independent Investigation is completed.

 

·                  On January 15, 2010, a class action complaint was filed in federal court in Wisconsin against the Company, Michael Koss and Sujata Sachdeva. The suit alleges violations of Section 10(b), Rule 10b-5 and Section 20(a) of the Exchange Act relating to the unauthorized transactions and requests an award of compensatory damages in an amount to be proven at trial.  See David A. Puskala v. Koss Corporation, et al., United States District Court, Eastern District of Wisconsin, Case No. 2:2010cv00041.

 

·                  On January 26, 2010, the SEC’s Division of Enforcement advised the Company that it obtained a formal order of investigation in connection with the unauthorized transactions. The Company voluntarily brought the unauthorized transactions to the SEC staff’s attention when they were discovered in December 2009, and is cooperating with the ongoing SEC investigation.

 

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·                      On February 16 and 18, 2010, separate shareholder derivative suits were filed in Milwaukee County Circuit Court in connection with the previously disclosed unauthorized transactions. The first suit names as defendants Michael Koss, John Koss Sr., the other Koss directors, Sujata Sachdeva, Grant Thornton LLP, and Koss Corporation (as a nominal defendant); the second suit names the same parties except Grant Thornton LLP. Among other things, both suits allege various breaches of fiduciary and other duties, and seek recovery of unspecified damages and other relief. See Ruiz v. Koss, et al., Circuit Court, Milwaukee County, Wisconsin, No. 10CV002422 (February 16, 2010) and Mentkowski v. Koss, et al., Circuit Court, Milwaukee County, Wisconsin, No. 10CV002290 (February 18, 2010).  These two shareholder derivative suits have been consolidated under Master File No. 10CV002422.

 

·                      On February 18, 2010, the Company filed an action against American Express Company, American Express Travel Related Services Company, Inc., AMEX Card Services Company, Decision Science, and Pamela S. Hopkins in Superior Court of Maricopa County, Arizona, case no. CV2010-006631, alleging various claims of aiding and abetting breach of fiduciary duty, aiding and abetting fraud, conversion, and negligence relating to the unauthorized transactions.

 

·                      On June 24, 2010, the Company filed an action against its former independent auditor, Grant Thornton, LLP, and Ms. Sachdeva, in Circuit Court of Cook County, Illinois, alleging various claims of accounting malpractice, negligent misrepresentation, and fraud relating to the unauthorized transactions.

 

The ultimate resolution of these matters is not determinable.

 

14.                                 OTHER

 

As more fully described in the Explanatory Note and Note 2 to the consolidated financial statements in the Company’s Form 10-K/A filed on June 30, 2010, and in Note 2 to these condensed consolidated financial statements, the Company learned of certain unauthorized transacti