For Koss Corp., A Temporary Setback

Apr.18.10 | About: Koss Corporation (KOSS)

Koss Corp. is a company that has been scarred by a recent imbezzlement scandal involving its former vice president of finance for a reported sum of $31 million dollars. This was done using various fraudulent transactions and involving elaborate accounting wizardry and the help of subordinates in the accounting department.

At first glance, this seems to point out an ineffectual management that is laissez-faire in their running of the company. However, when you take a further look into this scandal, you can see that this was a somewhat elaborate scheme pulled off by a high ranking executive and other accomplices. Sure the Koss family could've been more stringent on poring over the financials themselves, but I think this very well could fall into the category of "fool me once, shame on you, fool me twice, shame on me."

The alleged criminal, Sujata “Sue” Sachdeva, had worked for the company since 1992, and the family viewed her as a trusted partner in the business. Additionally, the amount of embarassment and financial losses that have struck the Koss family personally should ensure that precautions are now in place to prevent such a reoccurence in the future.

The Koss Corp. is a profitable company that has been a steady earner throughout the years, staying focused on its core business and its channels of revenue. In addition, my back of the napkin homework suggests that normalized EPS for KOSS should be in the range of $0.60-$0.80, giving KOSS a very attractive Price-to-Earnings ratio once this scandal's full impact is accounted for. Revenues have been relatively stable in the past and the company has been run prudently for the most part by the management. You can feel confident that management is going to do their best to maximize shareholder value, as insiders (the Koss family) own 69.81% of the company stock. Koss offers a tiny float of 1.2 million shares, so there is not a huge supply of shares to meet potential demand if the company succeeds in rebounding from this freak occurence.

CEO Michael Koss:

Our business and cash flow have remained on a solid footing since the discovery of a number of unauthorized transactions in December,” Koss said. “We are working diligently to restate our financial statements for the reporting periods affected by the unauthorized transactions as required in order to satisfy the company’s NASDAQ listing obligations, and its SEC reporting requirements.

Also, with an effective current yield of 4%, KOSS offers a significant dividend to reward the patience of investors willing to wait for management to get the house in order.

Koss Corp. said it will pay a regular quarterly dividend of 6 cents per share on April 15 to shareholders of record as of March 31. The Milwaukee-based stereo headphone designer and marketer (NASDAQ: KOSS) said it has made regularly scheduled quarterly dividend payments to its shareholders since Oct. 15, 2001. The recent financial issues related to a former executive’s alleged embezzlement of millions from the company won’t change that policy, said president and CEO Michael Koss.'

About Koss:

Koss Corporation designs, manufactures, and sells stereo headphones and related accessory products. The company offers speaker-phones, computer headsets, telecommunications headsets, active noise canceling stereophones, wireless stereophones, and compact disc recordings of American Symphony Orchestras on the Koss Classics label. It markets its products under the ‘Koss’ brand name through audio specialty stores, the Internet, direct mail catalogs, regional department store chains, discount department stores, military exchanges, prisons, and national retailers. The company also sells its products to distributors for resale to school systems, and directly to other manufactures. Koss Corporation distributes its products internationally through sales representatives and independent distributors. The company was founded in 1953 and is based in Milwaukee,

There are a couple of Lawsuits involving Koss Corp. summarized below:

  • Class Action vs Koss

Bronstein, Gewirtz & Grossman, LLC announces that a class action has been filed in the United States District Court for the Eastern District of Wisconsin on behalf of those who purchased or otherwise acquired stock of Koss Corporation ("Koss" or the "Company") (Nasdaq:KOSS - News) during the period between July 12, 2005 through and including December 21, 2009 (the "Class Period").

The Complaint charges Koss and certain of the Company's current and former executive officers with violations of federal securities laws. Â The complaint alleges that throughout the Class Period defendants knew or disregarded that their public statements concerning Koss' financial performance were false and misleading. Â Specifically, defendants made false and/or misleading statements and/or failed to disclose: (1) that certain Company employees had devised and carried out a scheme to defraud investors and divert Company funds potentially exceeding $31 million; (2) that the Company's financial statements and corporate bank account balances had been manipulated to conceal the diversion of corporate funds; (3) that, as a result, the Company's financial results were overstated during the Class Period; (4) that the Company's financial results were not prepared in accordance with Generally Accepted Accounting Principles ("GAAP"); (5) that the Company lacked adequate internal and financial controls; and (6), as a result of the above, that the Company's financial statements were materially false and misleading at all relevant times.

  • Koss Vs. American Express

Koss filed the suit Thursday in Phoenix, where American Express has business operations for its credit card unit. Milwaukee-based Koss is seeking compensatory damages of up to $20 million and unspecified punitive damages.Koss alleges in the complaint that former Koss vice president of finance Sujata “Sue” Sachdeva paid bills on her personal American Express card with $16 million in wire transfers from Koss bank accounts and $4 million in cashiers checks drawn on a Koss account at Park Bank in Milwaukee.American Express failed to detect and report the suspicious activity by Sachdeva, the suit alleges.The suit alleges that American Express officials had determined by August 2009 that Sachdeva, who was paying bills at a rate of $1 million per month, was embezzling the money from Koss Corp. However, American Express didn’t inform Koss Corp. executives until December of Sachdeva’s activities.

In summary, despite the negative clouds that currently surround the Koss Corp., I feel that there is value to be found by investing in the company at this point in time. The future ability to return to normalized earnings and continue the company's successful business model of creating positive cashflow will cancel out all short-term problems hindering the share price. The sustained dividend policy as well as the family's committment to the success of the company are strong reasons for a higher future share price. This may very well represent a broken stock, but not a broken company, and with some patience, and faith in management, this investment could reward you handsomely.

Disclosure: Long KOSS