Koss - 10-Q quarterly report FY

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.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer o       Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).

At February 7, 2006, there were 3,686,275 shares outstanding of the registrant’s common stock, $0.005 par value per share.

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to the condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Unaudited)

Cash provided by operating activities during the six months ended December 31, 2005 amounted to $2,515,880. This was a result of net income for the period adjusted for changes in operating assets and liabilities, which arose primarily out of increases in accounts receivable, accrued liabilities and income taxes payable.

Capital expenditures for new equipment (including production tooling) were $697,675 for the quarter. Capital expenditures for fiscal year 2006 are expected to be approximately $1.7 million. The Company expects to generate sufficient funds through operations to fund these expenditures.

Stockholders’ investment increased to $23,396,106 at December 31, 2005, from $22,121,242 at June 30, 2005. The increase reflects net income offset by the effect of the purchase and retirement of common stock and dividends declared and paid.

The Company amended its existing credit facility in November 2005, extending the maturity date of the unsecured line of credit to November 1, 2006. This credit facility provides for borrowings up to a maximum of $10,000,000. The Company can use this credit facility for working capital purposes or for the purchase of its own common stock pursuant to the Company’s common stock repurchase program. Borrowings under this credit facility bear interest at the bank’s prime rate, or LIBOR plus 1.75%. This credit facility includes financial covenants that require the Company to maintain a minimum tangible net worth and specified current, interest coverage and leverage ratios. The Company uses its credit facility from time to time, although there was no utilization of this credit facility at December 31, 2005 or June 30, 2005. The Company did not utilize the credit facility during the quarter ended December 31, 2005.

In April of 1995, the Board of Directors approved a stock repurchase program authorizing the Company to purchase from time to time up to $2,000,000 of its common stock for its own account. Subsequently, the Board of directors periodically has approved increases in the stock repurchase program. The most recent increase was for an additional $2,000,000 in January 2006, for a maximum of $42,500,000. The Company intends to effectuate all stock purchases either on the open market or through privately negotiated transactions, and intends to finance all stock purchases through its own cash flow or by borrowing for such purchases.

For the six months ended December 31, 2005, the Company purchased 57,948 shares of its common stock at an average net price of $21.25 per share, for a total net purchase price of $1,231,427.

From the commencement of the Company’s stock repurchase program through December 31, 2005, the Company has purchased a total of 5,357,952 shares for a total gross purchase price of $44,230,162, (representing an average gross purchase price of $8.26 per share) and a total net purchase price of $37,753,227 (representing an average net purchase price of $7.05 per share). The difference between the total gross purchase price and the total net purchase price is the result of the Company receiving from employees cash acquired from such employees pursuant to the Company’s stock option program. In determining the dollar amount available for additional purchases under the stock repurchase program, the Company uses the total net purchase price by the Company for all stock purchases, as authorized by the Board of Directors.

The Company also has an Employee Stock Ownership Plan and Trust (“ESOP”) pursuant to which shares of the Company’s common stock are purchased by the ESOP for allocation to the accounts of ESOP participants. There were no ESOP purchases of the Company’s common stock for the six months ended

December 31, 2005. However, during the quarter ended December 31, 2005, the Company did purchase 25,548 shares of the Company’s common stock from the ESOP at an average price of $23.16 per share for a total purchase price of $591,807.

Net sales for the second quarter ended December 31, 2005 rose 51% to $15,435,597 from $10,225,079 for the same period in 2004. Net sales for the six months ended December 31, 2005 were $27,385,438 up 43% compared with $19,197,659 during the same six months one year ago.

Net sales increased for the quarter and six months ended December 31, 2005, as a result of a number of factors. Seasonal holiday sales were strong for the Company, and retailers and distributors increased stock levels of Koss stereophones throughout the quarter. In addition, export sales, most notably to Europe, increased significantly. This quarter’s 120% increase in export sales brings the six month increase in export sales to 106% for the period ending December 31, 2005 and complements the 82% increase in export sales we reported for the year ending June 30, 2005, and the 72% increase in export sales we reported for the year ending June 30, 2004.

Gross profit as a percent of net sales was 39% for the quarter ended December 31, 2005 unchanged from the same period in the prior year. For the six month periods ended December 31, 2005 and 2004, the gross profit percentage was 39% and 38% respectively.

Selling, general and administrative expenses for the quarter ended December 31, 2005 were $2,849,784 or 18% of net sales, compared to $2,456,825 or 24% of net sales for the same period in 2004. For the six month period ended December 2005, these expenses were $5,297,401 or 19% of net sales, compared to $4,576,346 or 24% of net sales, for the same period in 2004.

For the second quarter ended December 31, 2005, income from operations was $3,188,786 versus $1,501,793 for the same period in the prior year, a 112% change. Income from operations for the six months ended December 31, 2005 was $5,416,048 as compared to $2,805,245 for the same period in 2004, a 93% change. Income from operations increased primarily as a result of increased net sales for the quarter and six months ended December 31, 2005.

Net income increased by 67%, from $1,219,442 to $2,031,246 for the same three months. Net income for the six months increased by 65% from $2,109,353 compared to $3,472,464 for the same six months ending December 31, 2004. Net income increased primarily as a result of increased net sales for the quarter and six months ended December 31, 2005.

Royalty income for the quarter ended December 31, 2005 was $100,307, compared to $484,614 for the quarter ended December 31, 2005. For the six month period ended December 31, 2005 royalty income was $201,918 compared to $636,070 for the period ending December 31, 2004. The decrease in royalty income was primarily a result of the terminated license agreement with Jiangsu Electronics Industries Limited (Jiangsu). Effective November 23, 2004, the Company terminated the License Agreement dated November 15, 1991, as subsequently amended, between the Company and Jiangsu (the “Jiangsu License Agreement”). As a result of the termination, other than Jiangsu’s post-termination right to sell Company-approved licensed products, as set forth in the Jiangsu License Agreement, Jiangsu no longer has the right to use certain Company trademarks in connection with the manufacture, marketing and distribution of Jiangsu’s products under the Jiangsu License Agreement. Royalty income on all previously approved products, which are already in the pipeline, is still owed to the Company.

Effective June 30, 2003, the Company entered into a License Agreement (the “License Agreement”) with Sonigem Products, Inc. (“Sonigem”) of Ontario, Canada whereby the Company licensed to Sonigem the

right to sell video and communications products under the Koss brand name. This License Agreement covers Canada, requiring royalty payments by Sonigem through June 30, 2010, subject to certain minimum annual royalty amounts. To further enhance the relationship between the Company and Sonigem, on June 30, 2005, the Company announced the extension of its licensing agreement for electronics products with Sonigem. The Amendment to the License Agreement with Sonigem was effective August 1, 2005 (the “Amendment”). The Amendment provides Sonigem with the exclusive right and license to use certain Company trademarks in Canada in connection with the manufacture, production, distribution and sale of an increased number of licensed products, with the prior approval of the Company. In consideration for these increased rights, the Amendment also provides for increased minimum royalty payments payable to the Company, which may partially offset the previously discussed reductions in royalty income from the terminated Jiangsu License Agreement.

Interest income for the quarter was $40,825 as compared to $12,678 for the same quarter in 2004. For the six month period interest income was $75,470 compared to $16,876. Interest income fluctuates in relation to cash balances on hand throughout the year and fluctuations in interest rates earned.

The provision for income taxes for the quarter ended December 31, 2005, was $1,298,672 compared with $779,643 for the same period last year. For the six months ended December 31, 2005, the provision for income taxes was $2,220,972 compared with $1,348,838 for the same period last year. The increases were due to significantly improved results of operations. The effective tax rate was 39% for each of the quarters.

During December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Shared-Based Payments”, which changed the accounting for equity compensation programs (“SFAS 123R”). Under SFAS 123R, companies that award share-based payments to employees, including stock options, must begin to recognize the expense of these awards in the financial statements at the time the employees receive the awards. As allowed by SFAS 123 and SFAS 148, the Company elected to follow APB Opinion No. 25 in accounting for its stock option plan until the effective date of SFAS 123R. The accounting as provided by SFAS 123R is effective for the Company beginning July 1, 2005, which was the beginning of the Company’s current fiscal year. For the quarter ended December 31, 2005, the impact of the adoption of SFAS 123R reduced pre-tax earnings by $98,992. For the six months ended December 31, 2005, the impact of the adoption of SFAS 123R reduced pre-tax earnings by $197,984. During the rest of fiscal 2006, the impact of the adoption of SFAS 123R is expected to reduce pre-tax earnings by approximately $132,000. For more information about SFAS 123R, see Note 6, “Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial Statements.

In management’s opinion, the Company does not engage in any material risk sensitive activities and does not have any market risk sensitive instruments, other than the Company’s commercial credit facility used for working capital purposes and stock repurchases as disclosed in the “Financial Condition, Liquidity and Capital Resources” section of the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” above.

This Form 10-Q contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and possible litigation, and assumptions relating to the foregoing. In addition, when used in this Form 10-Q, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “forecasts” and variations thereof and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this Form 10-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, but are not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, the receptivity of consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition, pricing, the number and nature of customers and their product orders, production by third party vendors, foreign

manufacturing, sourcing and sales (including foreign government regulation, trade and importation concerns), borrowing costs, changes in tax rates, pending or threatened litigation and investigations, and other risk factors which may be detailed from time to time in the Company’s Securities and Exchange Commission filings.

Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.

          See Exhibit Index attached hereto.

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.