Saturday 11/12/2011: I suspect that the lower earnings for this last quarter were a result of the bonus expense paid out for the 'temporarily higher earnings' of the prior quarter. The company appears to be waiting for insurance, auction, lawsuit and other recoveries to save their earnings bacon - instead of making operations more efficient by getting rid of deadwood - especially the deadwood that stood by while their almost decade long embezzler was walking out the door with wheelbarrows full of money.
Tuesday 9/6/2011: The latest Annual Report and Proxy statements were issued and available online by Saturday - the next annual meeting is again at the Hilton on Port Washington just south of Hampton at 9:00 am October 5th. Significant items from the annual report [ my editing or emphasis - Suffice it to say that being able to comment on anything in the Annual Report is a vast improvement over the uninformative reports of prior years. This is undoubtedly due to the new CFO, David Smith. All in all, it looks like the company is slowly getting back to a good operating position but the 'reported' upward trendline is still based more upon recoveries than from normal core business operations. ]:
- In March and April 2011, the U.S. Marshals Service conducted auctions of jewelry and certain other items that were seized, and the Company believes that the gross proceeds from these auctions amounted to approximately $1.1 million. ... The consolidated financial statements ... do not include any estimates of the [net] proceeds that the Company expects to receive from the auctions ... [ In other words, the earnings and resultant cash available to the company will look better when these proceeds are in hand. ]
- The amount expensed on engineering and research activities ... was approximately $900,000 during fiscal 2011 as compared with $766,000 during fiscal 2010. ... The Company ... is planning to introduce a new product offering during the first half of fiscal 2012. [ A similar prediction was made (for FY 2011) at last year's annual meeting. ]
- The Company's internal controls as of June 30, 2009 were not effective ... The Company ... is in the process of implementing a new computer system ... a sufficient amount of time has not elapsed to fully implement ... and permit testing of the overall controls to confirm their effectiveness. Thus, there is no assurance that these deficiencies have been adequately addressed or that the Company has discovered all of the deficiencies that may exist in the internal controls over financial reporting. [ Let's hope there's also a good old fashioned and redundant telephone or online checking of bank balances each week by a family member with a dog in the race, so to speak. ]
- The Company issued restated consolidated financial statements ... [which have] subjected the Company to significant costs in the form of accounting, legal and similar professional fees, in addition to the substantial diversion of time and attention of the Company's Chief Financial Officer and members of its accounting department in preparing the restatement. Although the restatement is complete, no assurance can be given that the Company will not incur additional costs associated with the restatement. [ Earnings should increase from the reduction in these 'extra' expenses. ]
- As of June 30, 2011, the Company is party to the matters related to
the unauthorized transactions described below:
. On January 15, 2010, a class action complaint ... relating to the unauthorized transactions and requests an award of compensatory damages in an amount to be proven at trial. ... On July 28, 2011, the Court ... ruled that the ... claim against Koss Corporation and ... against Michael Koss survive ... [a] motion to dismiss. See David A. Puskala v. Koss Corporation, et al., United States District Court, Eastern District of Wisconsin, Case No. 2:2010c. [ See my comments at Aug. 4th, below. ]
. On January 26, 2010, the SEC's Division of Enforcement advised the Company that it obtained a formal order of investigation ... The Company voluntarily brought the unauthorized transactions to the SEC staff's attention when they were discovered ... and is cooperating with the ongoing SEC investigation.
. On February 16 and 18, 2010, separate shareholder derivative suits were filed ... [and] have been consolidated under Master File No. 10CV002422. ... At a hearing held on August 26, 2011, the Circuit Court granted the motion for final approval of the settlement of the claims alleged by plaintiffs against the Koss director defendants. Aug. 4th, below.
. On February 18, 2010, the Company filed an action against American Express Company, ... [et al] alleging various claims of aiding and abetting breach of fiduciary duty, aiding and abetting fraud, conversion, and negligence relating to the unauthorized transactions. American Express filed a Motion to Dismiss the claims that the Company filed, and the Court granted the Motion to Dismiss. The Company filed a Motion for New Trial requesting that the Court reconsider its prior ruling that granted the Motion to Dismiss, and the Court denied the Motion for New Trial. The Company plans to file an appeal.
. 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 ... and Grant Thornton filed a Motion to Dismiss the action ... [which] has now been denied. Grant Thornton also filed a Motion to Dismiss based on Forum Non Conveniens. The hearing date for this second motion has been set by the Court for October 18, 2011. [ In my opinion, this and the following suit are the only ones that may result in a benefit to the company. ]
. On December 17, 2010, the Company filed an action against Park Bank in Circuit Court of Milwaukee County, Wisconsin alleging a claim of negligence relating to the unauthorized transactions. Although Park Bank filed a Motion to Dismiss the action, the Circuit Court declined to consider the Motion and ordered that discovery proceed in the case.
- Operations ... Operating income, excluding the unauthorized transactions and related costs and recoveries, was $5,425,135 in 2011 or 13.1% of net sales compared to $6,998,207 or 17.2% of net sales in 2010. [ It's difficult to consider that very large 4.1% difference without looking at the detail of the expenses involved - it hints at a very large marginal profit point at this level of sales. ]
- Sales and Gross Profit ... significant increases in the sales through internet retailers, and new customers in various market segments ... were partially offset by the loss of a U.S. based retailer in early 2010 ... [ It's heartening to see INTERNET mentioned anywhere, especially regarding sales - that's where a whole lot of other companies are finding a very profitable future. ]
- Selling, General and Administrative Expenses ... The increase in selling, general and administrative expenses was the result of increases in profit-based compensation, outside professional services, new product development, and insurance. The Company has bonus and profit-sharing plans which are based on pretax profit. These plans resulted in expenses in 2011 that were approximately $724,000 higher in 2011 than in 2010. The outside professional services were higher in 2011 as a result of implementing an outsourced internal audit function and increased costs for information technology support. ... [ If these extra costs were included when arriving at operating income, then they may explain part (or all) of the 4.1% decrease from 2010 to 2011. If any case, the elimination or minimization of these 'extra' costs cannot but help the bottom line. ]
- Unauthorized Transactions In the year ended June 30, 2011, the
Company incurred a net benefit of $826,183 for the defense of legal actions
related to the unauthorized transactions and related to certain claims
initiated against third parties. Included in the net benefit for the year
ended June 30, 2011 was $2,398,202 of insurance proceeds and $1,463,250 of
other recoveries. Included in the other recoveries is a payment of $208,895 that the Company received from Michael
Koss, who voluntarily reimbursed the Company for the excess portion
of the bonus that he received during the restatement periods; $850,000 of anticipated proceeds from settlement of the shareholder
derivative suit; and $401,456 of anticipated proceeds from garnishment of
the 401(k) and Koss Employee Stock Ownership Trust (KESOT) balances held by
Ms. Sachdeva, ... In the year ended June 30, 2010, the Company
incurred a net cost of $1,666,986 for legal and professional fees to
investigate the unauthorized transactions. [ This
appears to be the area making FY 2011 results look more like those of FY
2008 than FY 2009 in the quick and dirty 'going firm' analysis chart (pop-up) just
updated by me to reflect FY 2011 annual results. ]
In 2010, the unauthorized transactions totaled $10,286,988. [ These occurred primarily during the last several months of the year. ]
- Liquidity and Capital Resources Operating Activities ... The net increase in working capital of $2,571,418 from June 30, 2010 to June 30, 2011 represents primarily the increase in accounts receivable and the decrease in accounts payable and accrued liabilities. ...
- Financing Activities ... There were no purchases of common stock in 2011 or 2010 under the stock repurchase program. No stock options were exercised in 2011 or 2010.
- Credit Facilities On May 12, 2010, the Company entered into a new secured credit facility with JPMorgan Chase Bank, N.A. ... for an $8,000,000 revolving secured credit facility ... [which] expires on July 31, 2013. 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. The balance on this facility was $1,400,000 and $1,250,000 as of June 30, 2011 and 2010, respectively.
Wednesday 8/31/2011: Annual and 4th quarter earnings finally came out today - along with the normal, next quarterly dividend announcement. No mention is made of the ongoing auction proceeds monies or results but they could be in the "recoveries" figure of $921k for the 4th quarter - a similar amount should show up from insurance proceeds in this 1st quarter of the 2011/12 fiscal year.
The odd-ball adjustments being made to normal income and expense, such as legal fees, extra interest income/expense, insurance proceeds and who knows what else has made the reported financials difficult to comprehend when trying to look at the firm as an ongoing entity. Subtracting out the extra interest income (from idle cash pending capital asset growth) and recoveries (from insurance proceeds & garnishments) brings the 2010/11 4th quarter results more in line with those of the 2008/09 results than the much better 2007/08 results. I'm sure it's just a coincidence that this past 4th quarter's results are exactly the same of those from 3 years ago.
In any case, the extra earnings from 'non-embezzlement' operations still do not seem to be evident. The marginal profit appears to increase dramatically beyond the current level of sales, so sales will have to increase dramatically before those extra earnings become evident. In the meantime, extra earnings will seemingly continue to come from auction, insurance and lawsuit proceeds instead of from more efficient and productive operations and/or increased sales.
Friday 8/26/2011: Judge Maroney approved the derivative settlement after specifying that wording be added to paragraph 8 of the Koss Corp. amendment (not seen by me) to focus in on the fact that this settlement only applies to 'this settlement' and not to any other actions. Much of the discussion had to do with the Pierringer [ v. Hoger, 21 Wis.2d 182, 124 N.W.2d 106 (1963) ] release aspects of the agreement.
The most notable comment, to me, was the judge's regarding saving the trees by getting this lawsuit off the table - there were 14 lawyers, 2 clerks, Judge Maroney and me in the courtroom. The judge probably figured I was a shareholder and probably would have loved to ask me some questions about how I felt but knew that would open up a can of worms only another couple dozen lawyers could get anybody out of. Any questions I or any other shareholder had were to have been asked in the appropriate legal way (a lot more dead trees) before the August 1st deadline.
The only litigation worthy of respect and attention for now is that regarding the auditor's liability toward discovering the $34 million in stolen funds some time during that several year long process - all other litigation is just making a lot of lawyers richer and wasting everyone else's time. The Koss versus Grant Thornton (auditor) lawsuit may begin in earnest next year in Illinois.
Thursday 8/4/2011: The lawsuit
filed on behalf of PRE-EMBEZZLEMENT NOTIFICATION shareholders by
David A. Puskala, individually and on behalf of all others
similarly situated goes forward as to the "control person"
liability under para 20(a) of the Act, 15 U.S.C. para 78t(a) against CEO
Michael J. Koss and as to the securities fraud in violation of para
10(b) of the Securities Exchange Act of 1934, 15 U.S.C. para 78j(b), and
Securities and Exchange Commission ("SEC") Rule 10b-5 against Koss
Corporation. [ The latter charge against the CEO,
individually, is dismissed - probably because the "SEC" violation couldn't
have been accomplished by one person, alone. In addition, the portion
of the suit filed against the auditor, Grant Thornton LLP, was dismissed -
maybe because only the Corporation has the standing to bring that suit
against the auditor and has done so. ]
Sujata ("Sue") Sachdeva, the third Defendent in the suit, "has not moved to dismiss the complaint" and is, therefore, not
mentioned in any dismissal actions.
This lawsuit should become moot once the price of the stock rises above that price which forms the basis for the various shareholders harmed when it was below that price due to the mismanagement that allowed the embezzlement - it may still apply to those who sold their shares at a loss. A lawsuit for the lost appreciation over the years due to mismanagement is probably impossible to file or we'd be hearing about them hourly against thousands of corporations. [ See more on this suit above. ]
The Mentkowski/Ruiz derivative lawsuit settlement hearing that appears to give all the responsible parties a free pass against future shareholder lawsuits in exchange for giving shareholders rights they should already have is next week - the filing deadline to file notice of opposition to this settlement was Monday, August 1st - no official opposition has been noticed to date. [ See the disposition of this suit above. ]
Monday 7/5/2011: The settlement hearing on the shareholder (James Mentkowski & Myriam Ruiz & ALL OTHERS) derivative lawsuit is scheduled to be held in Courtroom 403 of Milwaukee County Courthouse (901 N. 9th - adjacent to I-43) at 1:30 pm on August 11th, 2011. To me, the most significant portion of the filing is (coloring by me):
-
"On April 26, 2011, Plaintiffs' counsel, as well as counsel for the
Koss Directors, Koss, and counsel for the Koss Defendants' insurance
carrier, participated in a formal in-person mediation (the "Mediation")
before the Honorable Howard B. Wiener (Ret.), a former Associate Justice of
the California Court of Appeal. After several months of arms-length
negotiations, including the April 26, 2011 mediation, the parties reached an
agreement in principle to settle the Action. "
"Plaintiffs, Koss and the Koss Directors agree that it is in the best interests of Koss and its shareholders to settle the Action on the terms described below, and that the Settlement, taken as a whole, including payment of attorneys' fees and expenses of $1.3 million to Plaintiffs' counsel, is fair and reasonable and in the best interests of Koss and its shareholders. "
In short, everyone has decided to stop wasting Koss' money (higher future insurance premiums as a result of these wasted funds) and time (although it doesn't appear existing management is willing to admit that any of 'their ways' need changing) throwing expensive rocks at each other over what did and did not happen in the past and what should and should not happen in the future. Rather, everyone's energies are to be concentrated upon going after the few entities other than those responsible within Koss Corporation (auditor, banks, thief, ???) that did not provide the services that their 'presumably high' fees should have warranted.
Monday 6/27/2011: Another online auction has been underway since Thursday (purses & ???) - it runs until Wednesday July 7th. End of week selling by those buying recently merely to get the next 6 cent dividend (7/15) brought the share price down to $5.98 Friday. Shareholder lawsuits were settled with the attorneys seemingly getting the most out of it all - one Business Journal article mentioned the company getting a little over 11 cents a share from the insurance company also paying the shareholder attorney fee - maybe to cover the attorney fees borne by Koss.
Friday 5/20/2011: Rich Kirchen has
reported (in The Business Journal) that Koss CEO Michael Koss has given back
some of the bonus he received while his personally chosen CFO was stealing
him blind. (No mention of him giving back any of his salary was
made.) The latest full financial report for the 3/31/11 quarter show
that the line of credit is now up to $3.6 million - increased inventories
and receivables are probably the reason more borrowing has been
needed.
The stock is down more than $2 (26%) since the end of that
quarter, but volume has been very low - there may not be many short term
shareholders left.
None of the $1 million plus 'net' auction proceeds have
been turned over to the company, so far.
Friday 4/29/2011: Doris Hajewski reported that Koss' lawyers have filed for a new trial against American Express - arguing for 'common law' (vs Uniform Commercial Code) status - if this new strategy fails and Koss management continues to willingly throw money down this particular legal rat hole, I'm guessing the next step is to argue 'Nigerian Law' status, whatever that may be. The lawyers appear to be more than willing to waste as much time and money as Koss management desires.
Wednesday 4/27/2011: Although the latest earnings show more than enough to cover the dividend, it came about this quarter with an extra $377k in recovery proceeds (presumably from the $1.5 million in auction proceeds, so far) which was offset by additional $335k in unexplained (so far) overhead costs. In other words, the firm is plodding along pretty much without any of the extra income from the funds no longer being stolen by the former CFO - THEY WERE DOING BETTER WHEN SHE WAS STEALING THE MONEY! Hopefully, whatever is happening that's preventing them from operating more profitably will be explained before we discover that someone else is now stealing the money. (It's not the fault of the economy.)
Sunday 4/10/2011: The past two week initial clothing auction brought in $75,000 (a penny per share before taxes) - maybe for $375,000 worth of items at retail per my guestimate of this being one-eightyith (1/80th) of the $30 million worth of such stuff purchased. Twenty percent (20%) of retail may be the best that could be expected, meaning the total auction proceeds, including the $1.2 million for the jewelry and other hard goods would come to around $7 million - leaving another $23 to $27 million to be compensated from lawsuits against the auditing firm and whomsoever other 3rd parties can be adjudicated to be at fault before the board of directors and top management face their ultimate liability for NOT DOING THEIR JOBS of managing the company.
Thursday 3/24/2011: Online clothing auction link and auction begins today - thanks to Doris Hajewski at JSOnline for the heads up and link. Only 88 lots in the first group - there'll have to be at least 30 more like that to come up with $30 million worth of goods.
Wednesday 3/23/2011: $1.2 million was received at Saturday's auction of high priced jewelry - those 'hard goods' probably being the ones having the highest value to buyers. The 'soft goods' of clothing, shoes, purses and accessories are supposed to be sold ONLINE ONLY this week but I've yet to discover and link to a page where they can be viewed. The jewelry was supposed to be around ten percent (10%) of the items bought with the embezzled funds or $3 millon, so the soft goods should represent around $30 million. That's a lot of clothes! I'll be surprised if the proceeds for them are above $5 million but then, I haven't been into expensive clothing in over three decades.
Began creating a 10stocks.htm page - detailing my suggestions, based upon 50 years of experience in the market, for those just beginning to buy their own stock portfolios - including some of my best current stock picks from which to choose.
Friday 3/3/2011: Go to G&S Auction site to see what information has been released regarding the preview two weeks from today and the online/in person auction 2 weeks from tomorrow - this first auction for the jewelry items - clothing to follow by the end of this month or so.
Monday 2/28/2011: Founder John C. Koss has been buying stock since the 9th of February - most recent buy on March 2nd.
Tuesday 2/22/2011: Koss Corp., along with so many others as to make it meaningless, is on a 'Boycott List' at www.scottwalkerwatch.com for having contributed $5,000 or more to his election campaign. (I'm sure many of them gave a similar amount to his opponent's campaign - that being normal in the 'covering all contigencies' world of political campaigns.)
Tuesday 2/15/2011: The latest run-up is most likely in anticipation of the recognition that earnings will allow the dividend to be doubled (at least) for the next fiscal year - July 15th payment - that being due to the last quarter's earnings being 18 cents and around 3 cents lower for having ongoing legal expenses associated with the various lawsuits. Given a prior base price of around $5.50, that means this run-up could settle at around $11.00 per share. [ My $20 per share estimate is based upon the dividend eventually rising to 25 cents a quarter or $1 per annum and keeping the return on investment for dividend purposes at 5%. ]
Friday 2/4/2011: Sachdeva goes to prison - in Connecticut is the latest lead
by Rich Kirchen of The Business
Journal this past Tuesday. So, now on to the recovered
items auction and its proceeds so that the damage amounts from
the various lawsuits BY KOSS** against third party theft
facilitators can be determined so that the net loss to the
corporation from managerial incompetence can be determined and the lawsuits
AGAINST KOSS, and their damage amounts, can be
determined - all subject to actual proceeds (versus rhetorical
amounts of money) into the corporate treasury, of course. In any case,
I still anticipate Koss eventually becoming a $20 per share
company within the next several years - or sooner. [ Have yet to hear about any book and/or movie deals about all
this - the value of same rising in proportion to the amount recovered during
the auction. In other words, if there are enough people out there
interested in bidding up the prices of the items in order to obtain a
personal souvenir of this Historic Small Company Embezzlement
Event, then there may be plenty of others interested in reading a book
or watching a movie about it all. ]
**Rich Kirchen of The Business Journal reported (5:00 am CST)
that the suit against American Express was dismissed by a county judge in
Arizona on Jan. 31. Koss has 30 days to appeal. No other media
outlet report OF THAT MAJOR NEWS was emailed to me via my Google Alerts
processs as of 4:15 pm CST Friday. That suit is not as important
(for cash recovery purposes) as the one against the auditors,
since the latter's primary function is to report on situations where these
thefts ARE OCCURRING and/or conditions which would help to facilitate
them. Recipients of payments, such as American Express, would seem to
have a much lower, if any, responsibility and would never have one greater
than that of the organization authorizing the payments.
Monday 1/24/2011: Updated the Koss earnings analysis image to reflect the 12/31/10 2nd quarter results - those improved results and the simultaneous April 15th regular quarterly dividend announcement undoubtedly motivating the 51k shares traded Friday. A new high of $6.13 per share (for 4,700 shares) was hit during the day. A 14,900 transaction at $5.75 began the relative frenzy of trading at 9:50. Another, probably greater frenzy is anticipated when an announcement is made regarding recovery of any stolen funds due to auction proceeds and/or various lawsuits filed by the company - or maybe even a book/movie deal covering this very interesting scandal.
In any case, it looks as though the company is getting back on the very favorable earnings track that was happening before the thefts and almost simultaneous decline in our economy due to the housing bubble bursting - that alone makes the shares look very good at these prices.
Wednesday 10/27/2010: The Koss Corp.
annual meeting at the Milwaukee River Hilton Hotel went off without a hitch
- the board was re-elected by a little over 91% and the accountants approved
by a little over 99% of the shares outstanding. I didn't vote my
shares. A brief summary of events preceded the formal meeting with CEO
Michael Koss stating he doesn't know how The Milwaukee Magazine reporter
arrived at her $50 million theft figure. He also indicated that the
status of the various lawsuits would be better presented at next year's
annual meeting. No mention was made of the upcoming auction of the
thousands of 'stolen money purchased' and recovered items.
John Koss, founder, also confirmed to me that the concrete block building at 37th & Garfield was
his first 'commercial' location - they moving from the basement of the house
around the corner into that 'rented' building in the 1960s. That
explaining why I've been aware of and watching Koss since then - it was just
5 blocks away from what was our family
homestead at 40th & Meinecke from 1950 until it was sold (at the height
of the latest real estate bubble) in 2005.
I got my souvenir copy of the 'glossy' Koss Annual Report
for FY 2010 and was on my way home within 30 minutes after the start of the
meeting at 9:00 am sharp.
Wednesday 12/15/2010: Sold enough the past two days to eliminate my margin position and avoid another sudden and unexpectedly high margin call from my discount broker. I am still very long Koss. [ Would have done this a month or more ago had I been aware that the leverage allowed could go as low as 10% - would never risk as much as I did with that possibility extant. ]
Friday 10/22/2010: Updated the Koss FY 2008~2011 quarterly earnings chart to reflect the June 30th FY 2010 year end adjusted to remove theft related expenses and this latest FY 2011 9/30 quarterly results. I'd anticipated better results than what's being reported but management may still be adding extra expenses (legal, maybe) that are keeping profits abnormally low. Maybe "Sue" Sachdeva should be brought back as a consultant to show them where to find all the cash she had no trouble stealing over the past half-dozen years. In any case, I'm holding for the long term and 'hoping' the next 3 quarterly reports will finally begin reflecting a $20 rather than $6 per share company.
Tuesday 9/28/2010: The Koss balance sheet and other financials have been released - they still don't look as good as they could with a more forward looking perspective but are better than many people may realize. The line of credit has been paid down from $5.9 million to $1.3 million, with $3.3 million of that from delayed payments to suppliers and $1.3 from cash. The cash balance was drawn down to a mere $125,496 - probably with the knowledge that cash is accumulating at this time of year from Christmas sales and by not being stolen. The next quarter, FY 2011 quarter #1 ending on 9/30/10, should show a significant improvement in cash, earnings and profits - all of which will most likely be reported to stockholders at the next meeting on October 27th - maybe also with an indication of what, if any, a normal biennial special dividend will look like this coming December or January.
Wednesday 8/18/2010: Seven thousand shares of Koss traded in the last hour yesterday afternoon - there were no other trades all day long - they began 10 cents above Monday's close at $5.50 and ended up 30 cents at $5.80. If the first trade this morning is above that for a thousand or more shares and the price rises by the end of the day, then I suspect there are Pacific area traders with an inkling that the FY 2010 annual results to be announced any day will be more than substantial and more than offsetting previous operations even before the theft losses making the prior year financials look so bad by comparison. I suspect the China segment is continuing to come in far better than in the past because the Chinese have offset the loss of sales in the USA by increased sales to their own, nascently disposable income earning citizens - an upward trend that will be making a whole lot of people inside and outside of China a lot wealthier.
Saturday 7/17/2010 (updated 7/19): Just as the market closed Friday, it was announced on the radio that the PLEA AGREEMENT [ 17 pages, 51 specifications, case #10-CR-006(LSA) ] signed by Sujata Sachdeva and her attorney on July 12th and by the U S Attorney (Plaintiff) the next day had been officially filed. In it, she plead guilty to all six (6) charges against her. BUT, the BIGGER news was that she also agreed to repay $34 million to Koss, including $3 million for their 'extra' expenses related to her thefts. While this is standard legalese, and the same agreement specifies that the amount to be repaid may exceed her net worth, it does obligate her and her heirs (estate) to the repayment until the debt is satisfied.
Movie rights deal!? Swiss bank account?! Family wealth back in India?! High-end shoe boxes filled with cash buried in the back yard?! The next BREAKING NEWS will be where the money, if any, comes from. Some will come from the federal auction sale of the stolen items (pre-book/movie historical souvenirs, anyone?!), various insurance policies and/or third party lawsuits against those who looking the other way while the extravagant purchases in so short a time span were transacted. Regardless of those 'nebulous' considerations, Koss Corp. is still making more money from continuing operations than it knew about AND WILL ALSO GET additional windfalls of RECOVERED MONEY whenever they happen - the insurance company will, of course, be repaid their policy payouts to the extent they are eligible for same.
- Specifications 48 & 49 on page 15 of the PLEA AGREEMENT indicate that
the IRS is not constrained from taking its own actions - probably regarding
unreported theft income - but that seems to imply that they are in line
behind Koss Corp. regarding assets already at hand.
Whatever the case, my previously prepared financial analysis (pop-up), updated to reflected the 'extremely conservative' (more income tax than operational results related) restated financials filed by Koss at the end of June, still reflects the probability that some 'extra dividends' may be issued to shareholders - either later this year in order to take advantage of expiring tax breaks for the wealthy or in January of next year according to long established practice. The amount and timing of any extraordinary dividends depends on how much and when any of the $31 million auction sale proceeds, insurance payments, lawsuit recoveries and/or repayments from Sujata Sachdeva are received by Koss Corporation. One item of leverage in the lawsuit against the former auditors is on page 5 in the last paragraph of specification 5 in the PLEA AGREEMENT:
- "... To avoid detection, Sachdeva
would not engage in fraudulent transfers from Koss' account at Park Bank
during the month June, which was reviewed by Koss' outside
accountants."
In any case, this is still a $20 to $200 per share company being run by $5 per share manager-owners - that won't change until the family comes forward to fess up and admit their mistakes AND hires management that is capable of running the $200 per share company OR sells to someone who can take it there, probably at a minimum of $20 per share. In situations like this, I always pull for the family (What don't kill me just makes me stronger!, eh?!), primarily because it is one of the strongest CHARACTER BUILDING experiences anyone (or any family) can encounter, BUT that is almost impossible for some individuals and some families to realize.
Friday 7/2/2010: Spent all morning preparing an addition to the prior Koss Income Analysis image - this one eliminating all the confusion associated with the embezzlements reflected on the just released, restated financials in order to get a better picture of this ONGOING BUSINESS. As anticipated, the picture does look good BUT WILL NOT BE CONFIRMED to actually be good until the next 10-K annual report due in August and the 10-Q quarterly report for the first (9/30/10) quarter of the next (2011) fiscal year. I'll be looking for a reduction in amounts being spent (wasted, really) on outsiders in favor of getting back to business type of expenses.
Thursday 7/1/2010: FINALLY, after the market closed yesterday afternoon, Koss filed several amended financials with the SEC - they reflecting losses due to the thefts but also indicating that ongoing operations based upon no longer hidden sales, no longer increased costs and no longer stolen cash are looking VERRRRY good. Having perused 1/3 of the amended March 31st, 2010 quarterly 10-Q filing (so far) it appears that the prior financial filings at least got the name and address of the company right.
At first glance, it appears that at least two-thirds of the stolen $31 million came out of unrecognized profits and that much of the last $10 million from the last 6 months of calendar year 2009 (first two quarters of the 2010 fiscal year) came out of cash and profits - it being the reason the line of credit was suddenly required to cover unanticipated cash underages by December 2009 - because top management was NOT looking at (or managing) the inner workings of the accounting process. The proof of the pudding regarding the highly profitable future picture of the firm should come out in the last quarter and full year report as of June 30, 2010 - last year's annual 10-k was filed on August 24th, 2009.
What appears to be lacking is any provision for recoveries of stolen goods - meaning that those will appear as sudden and unanticipated items on future financial statements. I'd estimate that the entire $31 million will be recovered one way or the other, with the net benefit to shareholders to be around $20 million after taxes or about $2.70 per post-split share. Looking at it another way, that is the amount the top management of the company is on the hook for due to their fiduciary negligence. Owning 70% of the firm and not having to pay themselves a penalty, the Koss family could eliminate all the suits against the firm by paying the minority shareholders $6 million ($2.70 per share) as penance and as an apology and move on from there. In any case, and hoping for the best, I plan to hang on to my stock merely for the fantastic, regular dividends that should now be forthcoming - it's much better than any money market account.
Tuesday 6/29/2010: Koss Corp should be releasing their restated financials tomorrow. Here's my comments regarding the truly ASTOUNDING highlights in the lawsuits Koss Corp. filed last week. ( complaint discussion )
- one of her techniques was to have CASHIER'S CHECKS made out to various high end vendors where she shopped [ CASHIER'S CHECKS would imply that Koss had such a poor 'cash flow' and had lied so much about paying on time in the past that some of their suppliers would only accept cash in advance before releasing needed supplies. Were that the case, the person in charge of production who needed those supplies in order to keep workers from sitting around doing nothing for lack of supplies would have been in daily contact with the supplier and would have known about the cash requirement - and might even have insisted upon witnessing the 'cash payment'. That would also have meant that everyone in top management would have known about such dire circumstances threatening the survival of the firm. That NOT being the case, the CASHIER'S CHECKS were just one of the UNSOPHISTICATED EMBEZZLEMENT TECHNIQUES not noticed by top management because top management didn't (and still don't) think it's part of their responsibility to 'manage' those in charge of the money, the most important part of any 'money making' organization after sales. ]
- even though nobody was looking at the checks themselves, other than accounting employees who were part of the fraud, the Finance VP had the 'embezzlement' checks made out to the initials of the high end vendors instead of to their full names - the first CASHIER'S CHECK dated 7/11/2003 to M.F. Corp in the amount of $20,182.12 was to Marshall Fields, supposedly for the VP's personal expenses (the pages and pages of checks and other financial instruments listed in the complaint boggles the mind - did she do any work at all for the company?!); [ Initials! Initials! Unless the initials were IBM, MMM, 3M, shouldn't someone at the bank handling these large FINANCIAL INSTRUMENTS have asked questions about the identity of these payees?! Or, are the banks just as uncaring ... (ooops, already know that ...) Aside from that, it's obvious NOBODY IN TOP MANAGEMENT (outside those 'entrusted' with the money) LOOKED AT ANY BANK STATEMENTS in order to double-check (called management by many) the work of those entrusted with the second-most important aspect of any business - the money. ]
- the lawsuit implies that top management is not responsible for making
sure that the second-most important aspect of the business - the money - in
being managed properly - rather that responsibility is left to the auditors
who come in once a year to do a quick and cursory examination of the books
to make sure all the Is are dotted and the Ts
crossed, financially speaking. [ DUH, the business
could be wiped-out and broke by the time the auditors got around to
discovering what happened. That this is top management's
responsibility is such a no-brainer that one wonders what other managerial
responsibilities they are oblivious to - like inventory and its
double-checking, quality control and adherence to specifications or various
legal and tax requirements and ...
What this really indicates is that the Koss Corporation accountants are no more than very small business bookkeepers - a business so small that controls are unnecessary. In other words, management did not grow its attitude toward controls as the business expanded. This may also be a Wisconsin phenomenon. One of the first things I noticed upon coming back here in 1987 from almost 2 decades in New Mexico was the prevalence of embezzlement around here - with much of the embezzlement being accomplished by bookkeepers. The mere fact that hardly any of the hundreds of NOT-FOR-PROFIT organizations in Milwaukee PUBLICLY publish their financial statements is just one of the aspects making them easy pickings for even the most unsophisticated embezzler. ]
In case nobody has already told Koss top management, I'll do so now.
YOU ARE VERY LUCKY TO STILL BE OPEN FOR BUSINESS!
Since I'm still a significant shareholder, I do have faith in the outlook for this firm, if only for it being bought-out by someone with a better sense of how to keep it alive and growing into the future. I'd rather see the existing management grow and take on those responsibilities; have been thoroughly engrossed in this once in a lifetime experience since last December; will never forget it; and look forward to the book and movie about it all. (If any of the top managers read this, you should be copyrighting the story and begin negotiations for the ghost-written book and eventual movie rights - all to the benefit of the firm and its stockholders, of course.)
Friday 6/25/2010: Koss Corporation notified the world, via Press Release yesterday, that it was filing lawsuits against their former auditor and Financial VP - with the fresh news of the name of their new attorney included. I figure this release is the first among many to be released in the coming days preparing everyone for the surprising news (to everyone but us accountants) regarding their past and future earnings - maybe the huge amount of information to be released in the coming days designed to flood us with so much information that we'll not notice how badly the former and still extant management was (and still are while they're in the ongoing state of denial regarding the 'complexity of numbers' and how someone outside the company should have discovered it) in preventing all this from happening in the first place.
Monday 6/14/2010: Koss Corp.'s restated financials (and anticipated doubling, plus, of the share price thereafter) should be promulgated within the next 16 days. 26 thousand shares were traded last Thursday by seemingly still uninformed and skittish shareowners panicking over the latest (very routine) warning from NASDAQ about delisting due to the absence of financials in their latest quarterly 10-K filed with the SEC. No shares traded Friday - a first since trading was halted for a few days in December. Those non-panicked owners like me, many new ones probably also very knowledgeable in the area of accounting, are awaiting the restated financials and this once in a lifetime opportunity to be part of a significant share price run-up - much like what used to happen with the DotCom stocks during their IPOs (Initial Public Offerings) back in the 1990s - participation in those IPOs (at the offering price) usually restricted to only the millionaire or other 'best customers' of the brokers handling the IPO on behalf of the latest DotCom going public.
Tuesday 6/1/2010: The most significant quote from Saturday's Milwaukee Journal-Sentinel interview with founder, former CEO and 79 year old Chairman of the Board John C. Koss is in the very last line of the article:
"Yeah, now that we get to use all the money, we're going to do very well."
I'm predicting Koss shares will close above $6 today for the first time since December - how far they trade toward $20 per share (or above) depends upon the details of the restated financials to be sent to the SEC sometime before the end of this month. He may be in a good enough mood to subject himself to that interview due to the realization (from his insider information) that his 'paper' net worth may increase another $60 million or more this month - he presumably owning at least 4 million of the 7.38 million shares outstanding. [ There was only one trade of 280 shares at $5.49 all day. ]The rest of the article points out the reason why Koss Corp. needs to find a trustwothy, experienced and highly competent manager/teacher who can show the rest of the management team how internal accountability controls work and just who should be double checking whose work LONG BEFORE the "numbers" are prepared for presentation to the "audit committee" of the board. Those missing controls are what allowed such a gigantic embezzlement scheme to be carried out for so long. Those controls work and do prevent this type of theft from happening at millions of other organizations throughout the world.
There's no doubt John Koss is an engineering genius who has created a fantastic company with world recognized fantastic products, thereby ensuring the future financial security for his extended family. But there is also no doubt that he's in denial about what it takes to manage an organization that has become so large and prosperous - the sooner the key decision makers recognize their own limitations, as well as their own abilities, the sooner the company will transcend beyond the fast approaching (and historic) $20 per share value to one approaching the 21st century $200 per share possibility. The lower value would already be extant had the thefts not occurred, but the higher value may only be attainable because this embarassing situation might force owners to recognize what it takes to run a communication related company in the high-tech, superspeed, instantly communicating 21st century. As a shareholder, I can settle for the lower price but would really be excited to see Koss Corp. become the leader in personal communication devices (or accouterments) that are developing as fast as computer chips did at the end of the last century - the excitement of being involved in such an enterprise is much more valuable than the money - don't enjoy spending the money I already have - more isn't going to change that.
I'm still trying to confirm whether the concrete block building at 37th & Garfield was the first, formal structure built for Koss Corp. production half a century ago.
Thursday 5/20/2010: Trading in Koss was suspended by NASDAQ from 1:00 pm Tuesday to 1:00 pm Wednesday PROBABLY to give traders time to read and interpret the 3rd quarter 10q (3/31/10 FY 2010) filed late Monday evening - this the second straight 'required' filing that doesn't include the 'required' financial statements. They also filed an 8k announcing a change in financier relationship as of 5/12/10. Snippets from those filings and my comments follow:
- ... The Company expects to file an amended Form 10-K for the year ended June 30, 2009, and amended 10-Qs for the quarters ended September 30, 2009 and December 31, 2009, no later than June 30, 2010. Hopefully, they'll be released ASAP and by the mid-June.
- ... will pay a quarterly dividend of $.06 per share on July 15, 2010 to shareholders of record as of June 30, 2010. Still too soon for an increase but does indicate continued prosperity.
- "The unauthorized transactions over-extended our accounts payables and increased borrowing. As of May 14, we have reduced our accounts payable liabilities by over four million dollars and reduced the Company's borrowing to $3.4 million," Koss said. The prior borrowing (line of credit with Harris, N.A.) amounted to $5.9 million - meaning that $6.5 million (four million + $5.9 - $3.4 million) in EXTRA internally generated (no longer being diverted to embezzlement) funds were available to the firm since December. (my 2009~2003 analysis)
- ... The Company received $1 million of insurance proceeds during the quarter. These proceeds probably helped cover immediate, EXTRA payroll and other 'cash in advance' costs associated with investigations and restated financials - ergo, they are probably in addition to the EXTRA $6.5 million indicated above.
Saturday 5/1/2010: Thursday's afternoon run-up with higher volume, numerous trades and higher prices was not repeated yesterday. So, am still awaiting the Koss restated financials and anticipated doubling, plus, of the current price.
Friday 4/30/2010: Other than a very positive article about the 38 year old Koss billboard on I-43 next to their Glendale plant, there's still no news regarding their restated financials. BUT, the volume, number and higher price of trading after 2 PM yesterday indicates something may be in the wind. Today's trading should tell the tale - if volume is higher and continues yesterday's trend toward $6 per share, then some mini-insider trading regarding the very positive outlook may be happening. Pricing more than 10% above $6 per share will indicate that Koss has refiled their 12/31/09 8Q with the SEC.
Wednesday 4/14/2010: Still no word from Koss regarding their restated financials - the quarterly dividend is due and should be paid tomorrow - they most likely having 10 times the dividend amount in cash on hand now that it's no longer being stolen. Trading in the stock has almost ceased - most likely because there are few among the million or so shares on the open market not in family hands willing to be sold until the announcements are made and the hoped for $20 per share price is within sight.
Tuesday 4/6/2010: My quickie analysis (pop-up) of Koss' old 10-Ks, along with their most recent 10-Q for 12/31/09 submitted to the SEC (Securities & Exchange Commission) on 2/16/2010, indicates that merely recovering the $31 million could result in an extra dividend of around $2.55 per share. That's assuming all the misappropriated funds were profits and the net income tax on same would be 40%. (There's no requirement for those funds to be issued as an extra dividend.)
But, that's not the real story and not the reason I bought stock in the company AFTER LEARNING about the fraud. Even assuming that only half the $10 million misappropriated in the first two quarters of this fiscal year were profits, that would still mean an extra $10 million in profits for the full 2010 fiscal year or $6 million in after-tax cash available to be issued as dividends - that's four times the present amount! Meaning that the share price should be quadruple the present amount of around $5.50 or at least $22.00 per share. And, that's not considering any possible special dividends issued from recovered funds.
Another thing that stands out is that the misappropriated funds could not have involved Cost of Goods Sold expenses by themselves (phony accounts) but must have also involved hiding sales receipts corresponding to those product expenses - making it all much more complicated in scope but maybe relatively easy to accomplish without the routine internal controls or oversight in the accounting office. For example, in a vast and unlikely oversimplification, all the sales and costs associated with products manufactured overseas could have been tweaked to make them look a lot worse than they actually were.
Monday 4/5/2010: Am sitting on
pins & needles awaiting restated financials from Koss and an explanation of
how their former CFO stole $31 million. My inclination is to believe
she did it by creating phony accounts tied to one or more 'major' products
that were a percentage of the total production of that product - she taking
advantage of the lack of cost accounting detail sheets (or quality control
design specification sheets with unit costs) for the products
involved. Then, demand and/or production for those products
dramatically increased during late 2009 to the point where the amounts
having to be paid into those phony accounts was more than could be handled
without notice and she just 'jumped the shark' and started paying
exhorbitant amounts directly into her own 'real', personal accounts,
American Express being one of them.
[ Noteworthy in all this is the apparent fact
that my unique resume, especially with IMS
Corporation in 1973~1974 (Warehouse Supervisor, Production Supervisor and
Data Processing Manager); ATL
Engineering in 1985 (temporary CEO for 90 days to reverse their slide
into bankruptcy - more) and various accounting
positions/tasks during the 1970s and 1980s make me the right person for the
right job in the right place at the right time to help Koss get out of this
mess into a much higher level of efficient operations and into the rest of
the 21st century - too bad I don't know anybody at Koss or, more
importantly, nobody at Koss knows me. (Walking in the front door and
selling myself would be absurd, especially given their recent awakening
thanks to Sue Sachdeva's abuse of their trust.) And, more
coincidentally [and verified at the annual meeting in a chat with the
founder], Koss' first non-garage/basement manufacturing facility at 37th & Garfield was a few blocks from our 55 year
long (1950 ~ 2005) family homestead at 40th & Meinecke
- the neighborhood which helped developed much of my character - and the
primary reason why I've watched Koss Corporation's development from a
distance since the 1960s. ]
Saturday 4/3/2010: Discovered a link to the Koss Corp. 10-Q for the 12/31/09 quarter filed in mid-February after uploading Friday's posting. Although not including the still required financial updates, that 10-Q did have the following:
... On January 11, 2010, the Company released preliminary and unaudited estimates of the total amounts of the unauthorized transactions since fiscal year 2005 as follows: (reported sales)
- FY 2005: $2,195,477 $40,287,000
- FY 2006: $2,227,669 $50,892,000
- FY 2007: $3,160,310 $46,202,000
- FY 2008: $5,040,968 $46,943,000
- FY 2009: $8,485,937 $38,184,000
- Q1 FY 2010: $5,326,305 $NotYetReported
- Q2 FY 2010: $4,917,005 $NotYetReported
Allowing for the higher Christmas season sales in the first two quarters of Koss Corporation's June 30 Fiscal Year, the $10.2 million misappropriated by the end of the 2nz quarter - just before the embezzlement was discovered - may mean that the lastest fiscal year will reflect profits of around $15 million more than anticipated or reflected in the current stock price. In other words, instead of $1.772 million in dividends currently being paid at a quarterly rate of six cents per share, the company should have enough to pay at least $16 million or fifty-four cents per quarter - NINE TIMES the current rate. Adjusting the stock price to reflect that potentiality means that instead of around $5.50 per share, it should be selling at around $50 per share!
Were this fiasco enough to motivate the company to gets its management act together and recognize where it sits in the new instant communications era of the 21st century, I see the stock price reaching $200 per share within a few years. I'll probably be buying and selling during that run-up should it occur - will also (finally) be paying a lot of taxes that can no longer be (legally) avoided, too - without complaint, eh.
Friday 4/2/2010: Still no revised financials from Koss Corp. - I guess the accountants they hired to fix the problem are as incompetent as those who caused it. It's been close to 4 months since the years long embezzlement was discovered.
Friday 2/26/2010: Koss Corp. stock made its initial $1 per share jump this past week and is heading toward its $5.78 ~ 6.33 pre-split daily range just after the latest 2 for 1 split was announced 11/20/09. It should make a much more significant jump when the restated financials come out within the next 45 days - they reflecting a much more profitable company than was previously reported. Other jumps could come when significant recoveries of embezzled funds are announced (via sale or insurance) or when the family owners man-up and promise to make good on all unrecovered losses - they able to do so merely from a fraction of the value of the rise in their stock holdings. The ultimate jump/rise will come when operational results show that management has learned its lesson and is charging ahead with a much more efficient and profitable level of operations typical of the best growth companies/stocks one can own. (This may be where G. Heileman Brewing Co. was at 'before' I began watching 'GHB' four decades ago - one share of GHB back around 1960 became more than several hundred by the time it was sold in 1987. Although I did make thousands off GHB, I could have made millions had I bought and held for a couple decades. I also watched Bill Gates even before Microsoft was formed but didn't buy and hold it when it eventually went public, either.
Tuesday 2/23/2010: Yesterday, Koss Corporation filed suit against American Express for the millions of dollars Koss' CFO had paid into her personal AmEx account via Koss Corporation funds. Other news reports during the day indicated that those payments (some or many at $1 million) went as far back as August of 2008. While that still shows no oversight over one of the most important aspects of any business - DUH, the MONEY!! -, the company may have a leg to stand on depending upon what laws govern credit card companies when it comes to suspicious account activity. I'd look for similar suits against some of the retailers who allowed the former CFO to charge such large purchases (individually and/or cumulatively) without checking further into her credit status - those charges would come back to them should the credit card company reject the charge. In other words, it's hard to imagine some of those retailers not being too eager to profit off the 'highly probably' illegal activity by one of their 'best' customers.
Monday 2/22/2010: Some significant portions from the Press Release issued by the Koss Corporation (KOSS) last Monday -
- "The Company has continued to operate in the normal course of business despite the disruption resulting from the discovery of the unauthorized transactions," Michael J. Koss, President and CEO said today. "We believe that the elimination of these unauthorized transactions will enhance our future operating results."
- "Over 25,000 items have now been seized by law enforcement authorities," Michael Koss continued. "The Company intends to vigorously pursue proceeds from the sale of these items as well as from insurance coverage, potential claims against third parties, and tax refunds."
There's still the possibility that the majority shareholding family will sell out to someone more capable of growing the firm into the high tech audio/internet/communication networking future without employees stealing them blind in the process. But, even that price should be at least three times its present $4.50 plus or minus trading price. What I'm anticipating, though, and the primary reason for my increased investment after the embezzlement announcement is that this has been a character building experience for the founding family that will motivate them to take the steps to jump start the company into an entirely new and much higher plateau of operating efficiency - one that will allow for an annual dividend of $1.04 merely from the funds no longer being stolen. Combined with a more explosively growing outlook for future acquisitions/operations, the stock price could reach $50 per share within the next several years.
The next indicator will be the upcoming April dividend announcement - with anything above the previous 6 cents being great news. After that, the ongoing financial restatements and increased profitability from (non-theft) normal operations in a more positive economy should point to what type of future is ahead for the firm.
Monday 3/1 and Tuesday 3/2/2010: Bought back all of the shares at a couple percentage points less than their selling price the prior week.
Friday 2/26/2010: Took some profits by selling several thousand shares and discovered the importance of the 'all or none' option when one batch of 5 shares ended my one day only limit order - ridiculous number compared with the other volumes transacted.
Monday 2/22 thru Friday 2/26/2010: The initial $1+ run-up from around $4.50 began after Koss filed is lawsuit against American Express and others. The price settled at $5.70 at the end of the week or 40% higher than my initial purchases a month ago.
Wednesday 2/17/2010: Bought another batch of stock while it was still hovering at around $4.50 per share.
Monday 1/11 thru Thursday 1/21/2010: Began buying more shares of Koss - couldn't do it online, becasue the price was below $5.00 per share - had to call the Scottrade office each time - one block handled by Rick, the manager, was at a price 10% higher than the others.
Tuesday 1/5/2010: Former Koss auditor Grant Thornton fires back at Koss Corp. is the headline in The Business Journal of Milwaukee.
Tuesday 12/29/2009: First of many ambulance chasing type 'investigations' by lawyers wanting to represent damaged shareholders is announced. I don't figure there are going to be any damanaged shareholders based upon stock value over time - only those who missed out on a share of those stolen funds - don't think these lawyers are looking for that, here.
Sunday 12/27/2009: Koss family owns 73.1 percent of the common stock.
Tuesday 12/22/2009: Criminal complaint filed against Sachdeva - some details of her spending in the JSonline story by Rick Romell.
Monday 12/21/2009:
Trading in Koss stock halted;
company suspends executive
By Rick Romell of the Journal Sentinel
Updated: Dec. 21, 2009 2:41 p.m.
Friday 11/20/2009: Bought 140 shares of Koss Corporation at 12.8599 (post-split=$6.43) for my IRA account based soley on yesterday's announcement of a 2 for 1 split on December 1st and the fact that I've been interested in this company for about 50 years - since it was located at 37th & Garfield (2200 North) 5 blocks away from what was our family homestead at 40th & Meinecke from 1950 until it was sold in 2005. This is the first time I ever bought KOSS stock.
Friday 4/20/2007: Koss Corporation founder John Koss is honored by the Wisconsin Historical Society as one among five state "history makers".
Friday 7/19/2004: Took a picture of the block building along Garfield as part of capturing the intersection of 37th & Garfield where a 60+- person mob beating took place on June 26th, 2004.
