þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
A DELAWARE CORPORATION | 39-1168275 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
4129 North Port Washington Avenue, Milwaukee, Wisconsin | 53212 | |
(Address of principal executive offices) | (Zip Code) |
Page | ||||||||
December 31, 2005 (Unaudited) and June 30, 2005 |
3 | |||||||
Three months and six months ended
December 31, 2005 and 2004 |
4 | |||||||
Six months ended December 31, 2005 and 2004 |
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6-9 | ||||||||
9-11 | ||||||||
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11-12 | ||||||||
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Rule 13a-14(a)/15d-14(a) Certification of CEO/CFO | ||||||||
Section 1350 Certification of CEO/CFO |
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(Unaudited) | ||||||||
December 31, 2005 | June 30, 2005 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash |
$ | 4,839,303 | $ | 5,218,698 | ||||
Accounts Receivable |
11,597,999 | 8,763,968 | ||||||
Inventories |
9,362,126 | 7,595,803 | ||||||
Other current assets |
1,368,833 | 1,987,779 | ||||||
Total current assets |
27,168,261 | 23,566,248 | ||||||
Property and equipment, net |
3,226,977 | 2,993,700 | ||||||
Deferred income taxes |
315,531 | 315,531 | ||||||
Other assets |
2,327,320 | 2,365,982 | ||||||
$ | 33,038,089 | $ | 29,241,461 | |||||
LIABILITIES AND STOCKHOLDERS INVESTMENT |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 4,391,957 | $ | 3,012,736 | ||||
Accrued liabilities |
2,660,477 | 1,841,862 | ||||||
Income taxes |
1,023,999 | 692,538 | ||||||
Dividends payable |
479,385 | 486,918 | ||||||
Total current liabilities |
8,555,818 | 6,034,054 | ||||||
Deferred compensation |
961,165 | 961,165 | ||||||
Derivative liability |
125,000 | 125,000 | ||||||
Stockholders investment |
23,396,106 | 22,121,242 | ||||||
$ | 33,038,089 | $ | 29,241,461 | |||||
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Three Months | Six Months | |||||||||||||||
Period Ended December 31 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Net Sales |
$ | 15,435,597 | $ | 10,225,079 | $ | 27,385,438 | $ | 19,197,659 | ||||||||
Cost of goods sold |
9,397,027 | 6,266,461 | 16,671,989 | 11,816,068 | ||||||||||||
Gross Profit |
6,038,570 | 3,958,618 | 10,713,449 | 7,381,591 | ||||||||||||
Selling general and
administrative expense |
2,849,784 | 2,456,825 | 5,297,401 | 4,576,346 | ||||||||||||
Income from operations |
3,188,786 | 1,501,793 | 5,416,048 | 2,805,245 | ||||||||||||
Other income (expense) |
||||||||||||||||
Royalty income |
100,307 | 484,614 | 201,918 | 636,070 | ||||||||||||
Interest income |
40,825 | 12,678 | 75,470 | 16,876 | ||||||||||||
Interest expense |
0 | 0 | 0 | 0 | ||||||||||||
Income before income tax provision |
3,329,918 | 1,999,085 | 5,693,436 | 3,458,191 | ||||||||||||
Provision for income taxes |
1,298,672 | 779,643 | 2,220,972 | 1,348,838 | ||||||||||||
Net Income |
$ | 2,031,246 | $ | 1,219,442 | $ | 3,472,464 | $ | 2,109,353 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.55 | $ | 0.33 | $ | 0.93 | $ | 0.57 | ||||||||
Diluted |
$ | 0.53 | $ | 0.31 | $ | 0.92 | $ | 0.55 | ||||||||
Dividends per common share |
$ | 0.13 | $ | 0.13 | $ | 0.26 | $ | 0.26 | ||||||||
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Six Months Ended December 31, | 2005 | 2004 | ||||||
CASH FLOWS FROM OPERATING
ACTIVITIES: |
||||||||
Net income |
$ | 3,472,464 | $ | 2,109,353 | ||||
Adjustments to reconcile net
income to net cash provided
by operating activities: |
||||||||
Depreciation and amortization |
503,061 | 401,975 | ||||||
Increase in
allowance for doubtful accounts |
193,000 | | ||||||
Net changes in operating assets and
liabilities |
(1,652,645 | ) | 2,760,271 | |||||
Net cash provided by operating activities |
2,515,880 | 5,271,599 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Acquisition of equipment |
(697,675 | ) | (818,116 | ) | ||||
Net cash used in investing activities |
(697,675 | ) | (818,116 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Dividends paid |
(966,173 | ) | (960,121 | ) | ||||
Purchase of common stock |
(1,231,427 | ) | (2,130,625 | ) | ||||
Exercise of stock options |
| 123,400 | ||||||
Net cash used in financing
activities |
(2,197,600 | ) | (2,967,346 | ) | ||||
Net increase (decrease) in cash |
(379,395 | ) | 1,486,137 | |||||
Cash at beginning of period |
5,218,698 | 2,110,917 | ||||||
Cash at end of period |
$ | 4,839,303 | $ | 3,597,054 | ||||
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1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | |
The 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 at December 31, 2005 and for all periods presented have been made. All significant intercompany transactions have been eliminated. The income from operations for the quarter and six months ended December 31, 2005 is 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 accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Registrants June 30, 2005 Annual Report on Form 10-K. | ||
2. | EARNINGS PER COMMON SHARE | |
Basic earnings 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 December 31, 2005 and 2004 were 3,696,796 and 3,692,970, respectively. For the six months ended December 31, 2005 and 2004, weighted average number of common shares outstanding were 3,716,337 and 3,856,895, respectively. When dilutive, stock options are included as share equivalents using the treasury stock method. Common stock equivalents of 124,450 and 132,392 related to stock option grants were included in the computation of the average number of shares outstanding for diluted earnings per common share for the quarters ended December 31, 2005 and 2004, respectively. Common stock equivalents of 72,180 and 147,380 related to stock option grants were included in the computation of the average number of shares outstanding for diluted earnings per common share for the six months ended December 31, 2005 and 2004, respectively. | ||
3. | INVENTORIES | |
The classification of inventories is as follows: |
December 31, 2005 | June 30, 2005 | |||||||
Raw materials and work in process |
$ | 4,962,789 | $ | 3,649,069 | ||||
Finished goods |
5,272,730 | 4,820,127 | ||||||
10,235,519 | 8,469,196 | |||||||
LIFO reserve |
(873,393 | ) | (873,393 | ) | ||||
$ | 9,362,126 | $ | 7,595,803 | |||||
4. | STOCK PURCHASE AGREEMENT | |
The Company has an agreement with its Chairman, John C. Koss, to, at the request of the executor of the estate, repurchase Company common stock from his estate in the event of his death. The Company does not have the right to require the estate to sell stock to the Company. |
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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 December 31, 2005 was $125,000. The repurchase price is 95% of the fair market value of the common stock on the date that notice, if the estate elects, to repurchase is provided to the Company. Under the agreement, 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 Chairmans 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. At December 31, 2005 and June 30, 2005, $125,000 has been classified as a derivative liability on the Companys financial statements. | ||
5. | DIVIDENDS DECLARED | |
On December 20, 2005, the Company declared a quarterly cash dividend of $0.13 per share for stockholders of record on December 31, 2005 to be paid January 13, 2006. Such dividend payable has been recorded at December 31, 2005. | ||
6. | STOCK-BASED COMPENSATION | |
In 1990, pursuant to the recommendation of the Board of Directors, the stockholders ratified the creation of the Companys 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 Plans existence. Each year thereafter additional shares equal to .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 generally vest at 25% each anniversary date after grant, with a maximum term of five to ten years. | ||
During December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, Shared-Based Payments (SFAS 123R), which changed the accounting for equity compensation programs. 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 (APB 25) in accounting for its stock option plan until the effective date of SFAS 123R. The accounting as provided by SFAS 123R was effective for the Company beginning July 1, 2005, which was the beginning of the Companys current fiscal year. The adoption of SFAS 123Rs fair value method has an impact on the Companys results of operations, although it does not have an impact on the overall financial position. | ||
The effect of applying the expense recognition provisions of SFAS 123R on income before provision for income taxes, net income and basic and diluted earnings per share for the three months ended December 31, 2005 is presented below: |
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Change | ||||||||||||
from SFAS | ||||||||||||
Three months ended December 31, 2005 | As Reported | 123R | Pro Forma | |||||||||
Income before income tax provision |
$ | 3,329,918 | $ | 98,992 | $ | 3,428,910 | ||||||
Provision for income taxes |
1,298,672 | 38,607 | 1,337,279 | |||||||||
Net income |
2,031,246 | 60,385 | 2,091,631 | |||||||||
Earnings per share: |
||||||||||||
Basic earnings per share |
$ | 0.55 | $ | 0.02 | $ | 0.57 | ||||||
Diluted earnings per share |
$ | 0.53 | $ | 0.02 | $ | 0.55 |
The fair value of each 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 was amortized on a straight line basis over the vesting period for the entire award. | ||
As of December 31, 2005, there was approximately $1,088,000 of total unrecognized compensation cost related to nonvested options granted under the plan. This cost is expected to be recognized over a weighted average period of 4.83 years. | ||
SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as financing cash flow, rather than as operating cash flow as required under the current standards. This requirement reduces the net cash provided by operation activities and increase the net cash from financing activities in periods after adoption. The Company cannot estimate what these amounts will be in the future because it will depend on, among other things, when employees exercise stock options. The effect of applying the provisions of SFAS 123R on cash flow from operations and cash flow from financing activities was not material for the three months or the six months ended December 31, 2005. | ||
Prior to fiscal 2006, the Company accounted for its stock-based employee compensation plan under the recognition and measurement principles of APB 25. All options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based employee compensation, for the three months ended December 31, 2004: |
Three Months Ended December 31, | 2004 | |||
Net income, as reported |
$ | 1,219,442 | ||
Add: Total stock-based employee compensation recorded |
26,187 | |||
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
outstanding |
85,298 | |||
Pro forma net income |
$ | 1,160,331 | ||
Earnings per share: |
||||
Basic-as reported |
$ | 0.33 | ||
Basic-pro forma |
$ | 0.31 | ||
Diluted-as reported |
$ | 0.31 | ||
Diluted-pro forma |
$ | 0.30 |
7. | SUBSEQUENT EVENT | |
On January 12, 2006, a customer of the Company, Musicland Holding Corp., declared bankruptcy. As a result, the Company has recorded a reserve for the amounts due from |
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Musicland of $193,000 at December 31, 2005. This amount is reflected in the condensed consolidated statements of income for the periods ending December 31, 2005. |
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(a) | Evaluation of Disclosure Controls and Procedures. The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to |
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management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer/Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report, has concluded that the Companys disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. | ||
(b) | Changes in Internal Controls. The Companys internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Companys internal control over financial reporting that occurred during the Companys most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. |
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KOSS CORPORATION | ||||||
Date: February 14, 2006
|
/s/ Michael J. Koss | |||||
Michael J. Koss | ||||||
Vice Chairman, President, | ||||||
Chief Executive Officer, | ||||||
Chief Financial Officer | ||||||
Date: February 14, 2006
|
/s/ Sue Sachdeva | |||||
Sue Sachdeva | ||||||
Vice PresidentFinance, Secretary |
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Exhibit No. | Exhibit Description | |
3.1
|
Certificate of Incorporation of Koss Corporation. Filed as Exhibit 3.1 to the Companys Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference. | |
3.2
|
By-Laws of Koss Corporation, as in effect on September 25, 1996. Filed as Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference. | |
10.1
|
Death Benefit Agreement with John C. Koss. Filed as Exhibit 10.4 to the Companys Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference. | |
10.2
|
Stock Purchase Agreement with John C. Koss. Filed as Exhibit 10.5 to the Companys Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference. | |
10.3
|
Salary Continuation Resolution for John C . Koss. Filed as Exhibit 10.6 to the Companys Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference. | |
10.4
|
1983 Incentive Stock Option Plan. Filed as Exhibit 10.7 to the Companys Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference. | |
10.5
|
Assignment of Lease to John C. Koss. Filed as Exhibit 10.7 to the Companys Annual Report on Form 10-K for the year ended June 30, 1988 and incorporated herein by reference. | |
10.6
|
Addendum to Lease. Filed as Exhibit 10.8 to the Companys Annual Report on Form 10-K for the year ended June 30, 1988 and incorporated herein by reference. | |
10.7
|
Amendment to Lease. Filed as Exhibit 10.22 to the Companys Annual Report on Form 10-K for the year ended June 30, 2000 and incorporated herein by reference. | |
10.8
|
Partial Assignment, Termination and Modification of Lease. Filed as Exhibit 10.25 to the Companys Annual Report on Form 10-K for the year ended June 30, 2001 and incorporated herein by reference. | |
10.9
|
Restated Lease. Filed as Exhibit 10.26 to the Companys Annual Report on Form 10-K for the year ended June 30, 2001 and incorporated herein by reference. | |
10.10
|
1990 Flexible Incentive Plan. Filed as Exhibit 25 to the Companys Annual Report on Form 10-K for the year ended June 30, 1990 and incorporated herein by reference. | |
10.11
|
Consent of Directors (Supplemental Executive Retirement Plan for Michael J. Koss dated March 7, 1997). Filed as Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference. |
Exhibit No. | Exhibit Description | |
10.12
|
Loan Agreement, effective as of February 17, 1995. Filed as Exhibit 10 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference. | |
10.13
|
Amendment to Loan Agreement dated June 15, 1995, effective as of February 17, 1995. Filed as Exhibit 10.13 to the Companys Annual Report on Form 10-K for the year ended June 30, 1995 and incorporated herein by reference. | |
10.14
|
Amendment to Loan Agreement dated April 29, 1999. Filed as Exhibit 10.14 to the Companys Annual Report on Form 10-K for the year ended June 30, 1999 and incorporated herein by reference. | |
10.15
|
Amendment to Loan Agreement dated December 15, 1999. Filed as Exhibit 10.15 to the Companys Annual Report on Form 10-K for the year ended June 30, 2000 and incorporated herein by reference. | |
10.16
|
Amendment to Loan Agreement dated October 10, 2001. Filed as Exhibit 10.16 to the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 and incorporated herein by reference. | |
10.17
|
License Agreement dated June 30, 1998 between Koss Corporation and Logitech Electronics Inc. (including Addendum to License Agreement dated June 30, 1998). Filed as Exhibit 10.18 to the Companys Annual Report on Form 10-K for the year ended June 30, 1998 and incorporated herein by reference. | |
10.18
|
Amendment and Extension Agreement between Koss Corporation and Logitech Electronics Inc. dated May 1, 2001. Filed as Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference. | |
10.19
|
License Agreement dated June 30, 2003 between Koss Corporation and Sonigem Products, Inc. Filed as Exhibit 10.19 to the Companys Annual Report on Form 10-K for the year ended June 30, 2005 and incorporated herein by reference. | |
10.20
|
Amendment to License Agreement dated August 1, 2005, between Koss Corporation and Sonigem Products, Inc. Filed as Exhibit 10.20 to the Companys Annual Report on Form 10-K for the year ended June 30, 2005 and incorporated herein by reference. | |
31
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer/Chief Financial Officer * | |
32
|
Section 1350 Certification of Chief Executive Officer/Chief Financial Officer ** | |
| ||
* Filed herewith
|
||
** Furnished herewith
|
1. | I have reviewed this quarterly report on Form 10-Q of Koss Corporation; | |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
b) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | ||
c) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 14, 2006 |
||
/s/ Michael J. Koss
|
||
Michael J. Koss |
||
Chief Executive Officer, President and | ||
Chief Financial Officer |
* | Since Michael J. Koss is both the principal executive officer and the principal financial officer of the registrant, only one certification is provided. |
/s/ Michael J. Koss | ||||
Michael J. Koss | ||||
Chief Executive Officer and | ||||
Chief Financial Officer | ||||
Date: February 14, 2006 |