<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-3295
KOSS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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 office) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
At September 30, 1997, there were 3,333,141 shares outstanding of the
Registrant's common stock, $0.01 par value per share.
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<PAGE> 2
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1997
INDEX
<TABLE>
Page
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997 (Unaudited) and June 30, 1997 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Three months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) September 30, 1997 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security-Holders 10
Item 6 Exhibits and Reports on Form 8-K 11
</TABLE>
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<PAGE> 3
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
(Unaudited) (*)
---------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash $98,776 $32,551
Accounts receivable 9,341,500 6,992,513
Inventories 13,107,903 14,547,653
Prepaid expenses 891,170 603,997
Income taxes receivable -- 65,493
Deferred income taxes 756,946 756,946
- ------------------------------------------------------------------------------------
Total current assets 24,196,295 22,999,153
Property and Equipment, net 2,295,149 2,477,529
Deferred Income Taxes 258,135 258,135
Intangible and Other Assets 586,794 598,106
$27,336,373 $26,332,923
====================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $1,335,539 $741,646
Accrued liabilities 1,190,305 994,877
Deferred revenue 303,176 473,482
Income taxes payable 813,035 --
- ------------------------------------------------------------------------------------
Total current liabilities 3,642,055 2,210,005
Long-Term Debt 1,445,000 1,221,000
Deferred Compensation and Other Liabilities 1,166,194 1,137,424
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 19,593,124 20,274,494
- ------------------------------------------------------------------------------------
$27,336,373 $26,332,923
====================================================================================
</TABLE>
* The balance sheet at June 30, 1997, has been prepared from the audited
financial statements at that date.
See accompanying notes.
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<PAGE> 4
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Net sales $11,755,125 $9,862,803
Cost of goods sold 7,330,668 6,575,125
- ------------------------------------------------------------
Gross profit 4,424,457 3,287,678
Selling, general and
administrative expense 2,201,168 2,096,669
- ------------------------------------------------------------
Income from operations 2,223,289 1,191,009
Other income (expense)
Royalty income 170,296 268,485
Interest income 3,938 4,034
Interest expense (20,356) (42,279)
- ------------------------------------------------------------
Income before income tax provision 2,377,167 1,421,249
Provision for income taxes 975,744 582,259
- ------------------------------------------------------------
Net income $1,401,423 $838,990
- ------------------------------------------------------------
Number of common and common
equivalent shares used in
computing earnings per share 3,453,995 3,350,768
============================================================
Earnings per common and common
equivalent share $0.41 $0.25
============================================================
Dividends per common share None None
============================================================
</TABLE>
See accompanying notes.
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<PAGE> 5
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $1,401,423 $838,990
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Depreciation and amortization 216,312 225,290
Deferred compensation 28,770 28,770
Net changes in operating assets and
liabilities 301,133 (3,310,497)
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 1,947,638 (2,217,447)
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (22,619) (277,673)
- --------------------------------------------------------------------------------
Net cash used in
investing activities (22,619) (277,673)
- --------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (4,716,000) (3,395,000)
Borrowings under line of credit agreements 4,940,000 6,545,000
Purchase and retirement of common stock (4,763,844) (260,320)
Exercise of stock options 2,681,050 18,750
- --------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (1,858,794) 2,908,430
- --------------------------------------------------------------------------------
Net increase in cash 66,225 413,310
Cash at beginning of year 32,551 27,001
- --------------------------------------------------------------------------------
Cash at end of quarter $98,776 $440,311
================================================================================
</TABLE>
See accompanying notes.
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<PAGE> 6
KOSS CORPORATION AND SUBSIDIARIES
September 30, 1997
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements presented herein are based on interim amounts
and are subject to audit. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows at
September 30, 1997 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles 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 Registrant's June 30, 1997, Annual Report on Form 10-K. The income
from operations for the quarter ended September 30, 1997 is not
necessarily indicative of the operating results for the full year.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per share are computed based on the average number of common and
common share equivalents outstanding. When dilutive, stock options are
included as share equivalents using the Treasury stock method. Common
stock equivalents of 111,510 and 45,919 related to stock option grants
were included in the computation of the average number of shares
outstanding in 1997 and 1996, respectively.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share," (SFAS 128). This Statement
establishes new standards for computing and presenting earnings per
share. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997 and requires restatement of all
prior-period earnings per share data. Early application of SFAS 128 is
not permitted. The Company's adoption of the provisions of SFAS 128 will
result in the dual presentation of basic and diluted per share amounts on
the Company's income statement. Diluted per share amounts as calculated
under SFAS 128 are not expected to materially differ from per share
amounts previously presented.
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<PAGE> 7
3. INVENTORIES
The classification of inventories is as follows:
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
<S> <C> <C>
Raw materials and
work in process $ 7,327,039 $ 7,485,887
Finished goods 6,238,348 7,519,250
- --------------------------------------------------------
13,565,387 15,005,137
LIFO Reserve (457,484) (457,484)
- --------------------------------------------------------
$13,107,903 $14,547,653
========================================================
</TABLE>
4. STOCK PURCHASE AGREEMENT
The Company has an agreement with its Chairman to repurchase stock from
his estate in the event of his death. The repurchase price is 95% of the
fair market value of the common stock on the date that notice to
repurchase is provided to the Company. The total number of shares to be
repurchased shall be sufficient to provide proceeds which are the lesser
of $2,500,000 or the amount of estate taxes and administrative expenses
incurred by his estate. The Company is obligated to pay in cash 25% of
the total amount due and to execute a promissory note at the prime rate
of interest for the balance. The Company maintains a $1,150,000 life
insurance policy to fund a substantial portion of this obligation. At
September 30, 1997 and June 30, 1997, $1,490,000 has been classified as a
Contingently Redeemable Equity Interest reflecting the estimated
obligation in the event of execution of the agreement.
5. DEFERRED COMPENSATION
In 1991, the Board of Directors agreed to continue John C. Koss' current
base salary in the event he becomes disabled prior to age 70. After age
70, Mr. Koss shall receive his current base salary for the remainder of
his life, whether or not he becomes disabled. The Company is currently
recognizing an annual expense of $115,080 in connection with this
agreement, which represents the present value of the anticipated future
payments. At September 30, 1997 and June 30, 1997, respectively, the
related liabilities in the amounts of $680,070 and $651,300 have been
included in deferred compensation on the accompanying balance sheets.
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<PAGE> 8
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash generated by operating activities during the three months ended September
30, 1997 amounted to $1,947,638. Working capital was $20,554,240 at September
30, 1997. The decrease of $234,908 from the balance at June 30, 1997 consists
primarily of an increase in receivables and payables. The increase in
receivables and payables is a result of higher sales in September. The cash
necessary to fund the Company's operating activities fluctuates from time to
time; however, as a general rule, the Company expects to generate adequate
amounts of cash to meet future operating needs. The Company maintains
sufficient borrowing capacity to fund any shortfall.
Capital expenditures for new property and equipment (including production
tooling) were $22,619 for the quarter. For the fiscal year ending June 30,
1998, the Company expects its capital expenditures to be approximately
$1,252,000. The Company expects to generate sufficient operating funds to
fulfill these expenditures.
Stockholders' investment decreased to $19,593,124 at September 30, 1997, from
$20,274,494 at June 30, 1997. The decrease reflects primarily the net effect
of income, shares purchased and retired and stock options exercised.
The Company has an unsecured working capital line of credit with a bank which
is in the process of being extended through November 1, 1999. This credit
facility provides for borrowings up to a maximum of $8,000,000. Borrowings
under this credit facility bear interest at the bank's prime rate, or LIBOR
plus 2.25%. This credit facility includes certain covenants that require the
Company to maintain a minimum tangible net worth and specified current,
interest coverage, and leverage ratios. Utilization of this credit facility as
of September 30, 1997 totaled $1,445,000, consisting solely of borrowings.
Utilization of this credit facility as of June 30, 1997 was $1,274,386,
consisting of $1,221,000 in borrowings of $53,386 in foreign letters of credit.
The increase as of September 30, 1997 is the result of increased purchases due
to anticipated higher sales volume.
The Company also is in the process of reinstating a $2,000,000 credit facility
which can be used by the Company in the event the Company desires to purchase
shares of its own stock. This credit facility will also extend through
November 1, 1999.
In April, 1995 the Board of Directors authorized the Company's purchase from
time to time of up to $2,000,000 of its common stock for its own account. In
January, 1996 the Board of Directors approved an increase in the total amount
of potential stock purchases for the Company's own account from $2,000,000 to
$3,000,000. In July of 1997, the Board of Directors again approved an increase
in the total amount of potential stock purchases for the Company's own account
from $3,000,000 to $5,000,000. The Company intends to effectuate all stock
purchases either on the open market or through privately negotiated
transactions, and intends to finance all stock purchases through its
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<PAGE> 9
own cash flow or by borrowing for such purchases. For the quarter ended
September 30, 1997, the Company purchased 353,150 shares of its common stock at
an average price of $13.49 per share, and retired all such shares. The Company
also purchased 3,250 shares of its common stock for allocation to the Company's
Employee Stock Ownership Plan and Trust ("ESOP") for the quarter ended
September 30, 1997, at an average price of $9.00 per share.
From the commencement of the Company's stock repurchase program through
September 30, 1997, the Company has purchased and retired a total of 696,726
shares for a total gross price of $6,888,858 and a total net price of
$4,413,858, representing an average gross purchase price of $9.89 per share
and an average net purchase price of $6.34 per share. The difference between
the total gross purchase price and the total net purchase price is the result
of the Company repurchasing certain shares acquired by employees through the
Company's stock option program.
Results of Operations
Net sales for the quarter ended September 30, 1997 were $11,755,125 compared
with $9,862,803 for the same period in 1996, an increase of $1,892,322. Strong
orders primarily in September resulted in the increase for the quarter.
Gross profit as a percent of net sales was 38% for the quarter ended September
30, 1997 compared with 33% in the prior year. This improvement is primarily
due to a change in product mix.
Selling, general and administrative expenses were $2,201,168 or 19% as against
$2,096,669 or 21% in 1996.
For the quarter ended September 30, 1997, income from operations was $2,223,289
versus $1,191,009 in 1996. The $1,032,280 increase is primarily related to the
increased sales volume.
Net interest expense amounted to $20,356 for the quarter as compared to $42,279
for the same period in the prior year. This decrease is a result of decreased
borrowing for the quarter as compared to the same period last year.
The Company had a License Agreement with Trabelco N.V., a Netherlands, Antilles
company and a subsidiary of Hagemeyer, N.V., a diverse international trading
company based in the Netherlands. This License Agreement covered North
America, Central America, and South America. Effective as of March 31, 1997,
the Company assigned this License Agreement with Trabelco N.V. to Jiangsu
Electronics Industries Limited ("Jiangsu"), a subsidiary of Orient Power
Holdings Limited. Orient Power is based in Hong Kong and has an extensive
portfolio of audio and video products. Pursuant to this assignment, Jiangsu
has agreed to make royalty payments through December 31, 2000, subject to
certain minimum royalty amounts due for the years 1998, 1999, and 2000. The
Company and Jiangsu are currently negotiating the possibility of expanding the
products covered by this License Agreement to include mobile electronics and to
increase the minimum royalties due for the years 1998, 1999, and 2000. This
License Agreement is subject to renewal for additional 3 year periods.
Royalty income earned in connection with this License Agreement for the quarter
ended September 30, 1997 was $170,296 as compared to $268,485 for the same
period in 1996. The decrease in royalty income for the quarter is the result of
lower sales.
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<PAGE> 10
The License Agreement with Trabelco N.V. covering many European countries
remains in place. Although no sales have been reported under this License
Agreement to date, certain minimum royalties are due for calendar years 1997
and 1998. This License Agreement expires on December 31, 1998; however,
Trabelco N.V. has the option to renew this License Agreement for additional 3
year periods.
PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security-Holders
(a) On October 22, 1997 an Annual Meeting of Stockholders was held.
(b) Proxies for the election of directors were
solicited pursuant to Regulation 14. There was no
solicitation in opposition to management's nominees, and all
such nominees were elected.
(c) There were 3,333,141 shares of common stock
eligible to vote at the Annual Meeting, of which 2,946,135
shares were present at the Annual Meeting in person or by
proxy, which constituted a quorum. The following is a summary
of the results of the voting:
<TABLE>
<CAPTION>
Number of Votes Broker
--------------- ---------
For Withheld Non-Votes
--- -------- ---------
<S> <C> <C>
Nominees for 1-year
terms ending in 1998:
John C. Koss 2,906,708 39,427 0
Thomas L. Doerr 2,905,038 41,097 0
Victor L. Hunter 2,904,813 41,322 0
Michael J. Koss 2,907,008 39,127 0
Lawrence S. Mattson 2,905,038 41,097 0
Martin F. Stein 2,905,233 40,902 0
John J. Stollenwerk 2,905,233 40,902 0
Number of Votes Broker
------------------ ------
For Against Abstain Non-Votes
--- ------- ------- ---------
Amendment to Flexible
Incentive Plan to Increase
Number of Shares in
Plan by 300,000 2,045,087 469,888 24,217 406,943
Number of Votes Broker
--------------- ------
For Against Abstain Non-Votes
--- ------- ------- ---------
Appointment of Price
Waterhouse L.L.P.
as independent auditors
for the year ended
June 30, 1998 2,910,122 12,920 23,093 0
</TABLE>
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Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits Filed
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
period covered by this report.
Signatures
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto authorized.
KOSS CORPORATION
Dated: 11/13/97 /s/ Michael J. Koss
--------------- ---------------------------
Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 11/13/97 /s/ Sue Sachdeva
--------------- ---------------------------
Sue Sachdeva
Vice President--Finance
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<PAGE> 12
Item 6 Exhibits and Reports on Form 8-K
(b) Exhibits Filed
27 Financial Data Schedule
(c) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during
the period covered by this report.
Signatures
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto authorized.
KOSS CORPORATION
Dated:
------------ ---------------------------
Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated:
------------ ---------------------------
Sue Sachdeva
Vice President--Finance
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 98,776
<SECURITIES> 0
<RECEIVABLES> 9,341,500
<ALLOWANCES> 0
<INVENTORY> 13,107,903
<CURRENT-ASSETS> 24,196,295
<PP&E> 13,482,668
<DEPRECIATION> (11,187,519)
<TOTAL-ASSETS> 27,336,373
<CURRENT-LIABILITIES> 3,642,055
<BONDS> 0
0
0
<COMMON> 33,238
<OTHER-SE> 27,303,335
<TOTAL-LIABILITY-AND-EQUITY> 27,336,373
<SALES> 11,755,125
<TOTAL-REVENUES> 11,925,421
<CGS> 7,330,668
<TOTAL-COSTS> 7,330,668
<OTHER-EXPENSES> 2,201,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,356
<INCOME-PRETAX> 2,377,167
<INCOME-TAX> 975,744
<INCOME-CONTINUING> 1,401,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,401,423
<EPS-PRIMARY> .41
<EPS-DILUTED> 0
</TABLE>
