Koss Corp. Reports Operating Results (10-Q/A)
Koss Corp. has a market cap of $38.8 million; its shares were traded at around $5.26 with a P/E ratio of 23.9 and P/S ratio of 1. The dividend yield of Koss Corp. stocks is 4.5%.KOSS is in the portfolios of Chuck Royce of Royce& Associates.
Highlight of Business Operations: Unauthorized Transactions In December 2009, Koss learned of significant unauthorized transactions made by Ms. Sachdeva which totaled approximately $31,500,000 from fiscal 2005 through December 2009. The volume of these unauthorized transactions increased significantly over time from $5,099,900 in 2008 to $8,498,434 in 2009 to $10,286,988 from July 1, 2009 until the unauthorized transactions were discovered in December 2009. The Company subsequently learned that Ms. Sachdeva colluded with two other employees of the accounting department in the misappropriation and circumvention of the Companys existing internal controls and established operating procedures. In carrying out the unauthorized transactions, these three former employees failed to adhere to the Companys existing procedures for processing payments and concealed the misappropriations from management, including the directors and remaining officers of the Company. Various accounting methods and accounting entries were used to conceal the unauthorized transactions. Ms. Sachdeva and these other former employees were terminated shortly after the Company learned of the unauthorized transactions. See the Explanatory Note to this Form 10-Q/A and Note 2 to the unaudited condensed consolidated financial statements for additional discussion of the unauthorized transactions and restatement.
The three months ended December 31, 2009 had an operating loss, including the unauthorized transactions as an expense, of $2,751,043 compared to operating income, including the unauthorized transactions as an expense, of $236,308 in the three months ended December 31, 2008. The decrease in operating income was the result of increased unauthorized transactions partially offset by higher volume and decreased spending on dealer shows and new product development. Operating income, excluding the unauthorized transactions and transaction related costs, was $2,451,781 in the three months ended December 31, 2009 or 20.1% of net sales compared to $2,339,128 or 21.4% of net sales in the three months ended December 31, 2008.
The six months ended December 31, 2009 had an operating loss, including the unauthorized transactions as an expense, of $5,164,533 compared to operating income of $1,475,837 in the six months ended December 31, 2008. The decrease in operating income was the result of increased unauthorized transactions partially offset by improved volume and decreased spending on dealer shows and new product development. Operating income, excluding the unauthorized transactions and transaction related costs, was $5,362,455 in the six months ended December 31, 2009 or 22.5% of net sales compared to $5,267,709 or 22.5% of net sales in the six months ended December 31, 2008.
During the six months ended December 31, 2009, cash used in operations was $4,602,116 and, during the six months ended December 31, 2008, cash provided by operations was $1,763,756. Working capital was $4,092,707 at December 31, 2009 and $6,308,239 at June 30, 2009. The net decrease in working capital of $2,215,532 from June 30, 2009 was caused primarily by the decreased cash, increased accounts payable and line of credit borrowings resulting from the increased amount of unauthorized transactions. These were partially offset by an increase in accounts receivable because of the increase in sales in the six months ended December 31, 2009 compared to the last quarter of fiscal 2009. As of December 31, 2009 the Company had open commitments of approximately $536,000 for software and new product development.
Net cash provided by financing activities was $4,903,597 in the six months ended December 31, 2009 compared to a use of $1,002,848 in the same period of fiscal 2009. In the six months ended December 31, 2009, the Company received $5,863,349 from borrowing on the line of credit offset by $959,752 of dividend payments. In the six months ended December 31, 2008 financing activities consisted of dividend payments of $960,790 and purchases of treasury shares of $42,058. The Company intends to continue its regular quarterly dividends for the foreseeable future.
· Petty cash, manual checks and travelers checks. The remaining misappropriations of approximately $600,000 or 1.9% from the total amount of $31,500,000 from fiscal year 2005 through December 2009 were carried out by circumventing the Companys internal controls and other standard operating procedures involving the Companys petty cash system, manual check system and policy for using travelers checks. In doing so, the Companys policy requiring that all expense reports be submitted and approved by the CEO was circumvented. Out of the estimated $600,000 of these types of transactions, approximately $83,000 and $110,000 occurred during fiscal years 2009 and 2008, respectively. Approximately $107,000 of misappropriations involving the use of the Companys petty cash system, manual check system and travelers checks policy occurred during fiscal year 2010. Remediation of these issues has been accomplished by: (1) eliminating the petty cash fund so all reimbursements run through normal controlled accounts payable channels; (2) eliminating the use of manual checks so all check disbursements are generated from the Companys accounts payable system check run; and (3) eliminating the use of travelers checks.
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