<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 December 31, 1996
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 December 31, 1996, there were 3,273,791 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
December 31, 1996
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1996 (Unaudited) and June 30, 1996 3
Condensed Consolidated Statements
of Income (Unaudited)
Quarter and six months ended
December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Quarter and six months ended
December 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) December 31, 1996 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security Holders 10
Item 6 (a) Exhibits Filed 10
(b) Reports on Form 8-K 10
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<PAGE> 3
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
(Unaudited) (*)
----------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 12,407 $ 27,001
Accounts receivable 11,264,104 8,965,213
Inventories 12,199,585 8,777,216
Prepaid expenses 603,500 382,137
Deferred income taxes 517,946 517,946
----------- -----------
Total current assets 24,597,542 18,669,513
Property and Equipment, net 2,429,165 2,344,341
Deferred Income Taxes 422,603 422,603
Intangible and Other Assets 542,886 568,800
----------- -----------
$27,992,196 $22,005,257
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 2,166,611 $ 1,327,915
Accrued liabilities 1,064,802 786,353
Income taxes payable 389,626 361,855
----------- -----------
Total current liabilities 3,621,039 2,476,123
Long-Term Debt 3,286,000 470,000
Deferred Compensation and Other Liabilities 1,079,884 1,022,344
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 18,515,273 16,546,790
----------- -----------
$27,992,196 $22,005,257
=========== ===========
</TABLE>
* The balance sheet at June 30, 1996, 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 STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Period Ended December 31 1996 1995 1996 1995
- ------------------------ ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $13,320,166 $9,870,439 $23,182,969 $19,458,983
Cost of goods sold 8,776,051 6,988,367 15,351,176 13,432,290
----------- ---------- ----------- -----------
Gross profit 4,544,115 2,882,072 7,831,793 6,026,693
Selling, general and
administrative expense 2,394,291 2,227,795 4,490,960 4,368,540
----------- ---------- ----------- -----------
Income from operations 2,149,824 654,277 3,340,833 1,658,153
Other income (expense)
Royalty income 427,890 679,737 696,375 1,068,729
Interest income 55,082 4,323 59,116 8,448
Interest expense (135,149) (33,181) (177,428) (60,349)
----------- ---------- ----------- -----------
Income before income tax provision 2,497,647 1,305,156 3,918,896 2,674,981
Provision for income taxes 1,015,169 534,750 1,597,428 1,096,463
----------- ---------- ----------- -----------
Net income $ 1,482,478 $ 770,406 $ 2,321,468 $ 1,578,518
=========== ========== =========== ===========
Number of common and common
equivalent shares used in
computing earnings per share 3,321,602 3,575,094 3,335,631 3,570,142
============ =========== ============ ============
Net income per common share $ 0.45 $ 0.22 $ 0.70 $ 0.44
============ =========== ============ ============
Dividends per common share None None 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>
Six Months Ended December 31 1996 1995
- ---------------------------- ---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 2,321,468 $ 1,578,518
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Depreciation and amortization 439,078 341,874
Deferred compensation and other liabilities 57,540 140,088
Net changes in operating assets and
liabilities (4,818,836) (2,305,514)
----------- -----------
Net cash used in operating activities: (2,000,750) (245,034)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (495,902) (165,483)
----------- -----------
Net cash used in
investing activities (495,902) (165,483)
----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (9,659,000) (8,384,000)
Borrowings under line of credit agreements 12,475,000 8,743,948
Purchase and retirement of common stock (352,692) --
Exercise of stock options 18,750 66,250
----------- -----------
Net cash provided
by financing activities 2,482,058 426,198
----------- -----------
Net increase (decrease) in cash (14,594) 15,681
Cash at beginning of year 27,001 49,227
----------- -----------
Cash at end of period $ 12,407 $ 64,908
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE> 6
KOSS CORPORATION AND SUBSIDIARIES
December 31, 1996
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements presented herein are based on interim figures
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
December 31, 1996, and for all periods presented have been made. The income
from operations for the quarter and six months ended December 31, 1996 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 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, 1996, Annual Report on Form 10-K.
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 38,939 and 64,014 related to stock option grants
were included in the computation of the average number of shares
outstanding for the quarter ended December 31, 1996 and 1995,
respectively.
3. INVENTORIES
The classification of inventories is as follows:
December 31, 1996 June 30, 1996
----------------- --------------
Raw materials and
work in process $ 6,990,887 $4,751,156
Finished goods 5,846,480 4,663,842
----------- ----------
12,837,367 9,414,998
LIFO Reserve (637,782) (637,782)
----------- ----------
$12,199,585 $8,777,216
=========== ==========
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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 a 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
December 31, 1996 and June 30, 1996, $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 December 31, 1996 and June 30, 1996, respectively, the
related liabilities in the amounts of $593,760 and $536,220 have been
included in deferred compensation on the accompanying balance sheets.
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<PAGE> 8
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q - December 31, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash used by operating activities during the six months ended December
31, 1996 amounted to $2,000,750. Working capital was $20,976,503 at December
31, 1996. The increase of $4,783,113 from the balance at June 30, 1996 reflects
the net effect of an increase in receivables, inventory and payables. These
increases are the result of higher sales volume in the current quarter and
anticipated higher sales volume in the coming quarter. 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 $495,902 for the six months ended December 31, 1996.
Depreciation and amortization aggregated $439,078 for the six months. For the
fiscal year ending June 30, 1997, the Company expects its capital expenditures
to be approximately $1,500,000. The Company expects to generate sufficient
operating funds to fulfill these expenditures.
Stockholders' investment increased to $18,515,273 at December 31, 1996, from
$16,546,790 at June 30, 1996. The increase reflects primarily the income for
the six month period ending December 31, 1996. No cash dividends have been
paid since the first quarter of fiscal 1984.
The Company has an unsecured working capital credit facility with a bank, which
runs through March 15, 1998. 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 December 31, 1996 totaled
$3,379,602, consisting of $3,286,000 in borrowings and $93,602 in commitments
for foreign letters of credit. Utilization of this credit facility as of June
30, 1996 was $944,784, consisting of $470,000 in borrowings and $474,784 in
foreign letters of credit. The increase as of December 31, 1996 is the result
of an increase in inventory due to anticipated higher sales volume for the
upcoming quarter. The Company also has 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 runs through March 15, 1997 and the
Company is in the process of attempting to extend the term of this facility.
The Company can also use up to $1,000,000 of its working capital credit
facility to purchase shares of its own stock.
The Company's Canadian subsidiary has a line of credit of $550,000, which is
guaranteed by the Company. Borrowings under this credit facility bear interest
at the bank's prime rate plus 1.5%. The credit facility is subject to the
availability of qualifying receivables and inventories which serve as security
for the borrowings. As of December 31, 1996, there were no borrowings
outstanding against this line of credit. The due date for the line is October
31, 1997.
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<PAGE> 9
Pursuant to the Company's stock repurchase program, for the six month period
ended December 31, 1996, the Company purchased 51,629 shares of its common
stock at an average price of $6.83 per share. All 51,629 shares were retired.
For the quarter ended December 31, 1996, the Company purchased 14,307 shares of
its common stock at an average price of $6.46 per share. Since the
commencement of the Company's stock repurchase program, the Company has
purchased 343,576 shares of its common stock for a total of $2,189,389,
representing an average price of $6.37 per share.
For the six month period ended December 31, 1996, the Company purchased 17,371
shares of its common stock for the Company's Employee Stock Ownership Plan and
Trust ("ESOP") at an average price of $6.76 per share. For the quarter ended
December 31, 1996, the Company purchased 7,693 shares of its common stock for
the ESOP at an average price of $6.50 per share.
Results of Operations
Net sales for the second quarter ended December 31, 1996 rose 35% to
$13,320,166 from $9,870,439 for the same period in 1995. Net sales for the six
months ended December 31, 1996, were $23,182,969, up 19% compared with
$19,458,983 during the same six months one year ago. This increase was
primarily a result of strong orders throughout the second quarter.
Gross profit as a percent of net sales was 34% for the quarter ended December
31, 1996 compared with 29% for the same period in the prior year. For the six
month period ended December 31, 1996, the gross profit percentage was 34%
compared with 31% for the same period in 1995. Shifts in product mix resulted
in the increase in gross profit as compared to last year.
Selling, general and administrative expenses for the quarter ended December 31,
1996 were $2,394,291 or 18%, as against $2,227,795 or 23% for the same period
in 1995. For the six month period ended December 31, 1996, such expenses were
$4,490,960 or 19%, as against $4,368,540 or 22% for the same period in 1995.
The percentage decrease is a direct result of higher sales.
For the second quarter ended December 31, 1996, income from operations was
$2,149,824 versus $654,277 for the same period in the prior year. Income from
operations for the six months ended December 31, 1996 was $3,340,833 as
compared to $1,658,153 for the same period in 1995. The increase is primarily
related to higher sales and to the increase in gross margin resulting from
shifts in product mix.
Net interest expense amounted to $135,149 for the quarter as compared to
$33,181 for the same period in the prior year. For the six month period, the
interest expense amounted to $177,428 compared with $60,349 for the same period
in the prior year. The increase is a result of the Company borrowing at much
higher levels as compared to the same periods last year. The higher level of
borrowing was the result of increased inventory purchases to support the
increase in sales.
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<PAGE> 10
The Company has a License Agreement with Trabelco N.V., a subsidiary of
Hagemeyer N.V. Hagemeyer N.V. is a diverse international trading company based
in the Netherlands, which has business interests in food, appliances,
electromechanical and automobile distribution as well as a solid base of
consumer electronic distribution business in Asia, Europe and North America.
Royalty income earned in connection with this License Agreement for the quarter
ended December 31, 1996 was $427,890 as compared to $679,737 for the same
period in 1995. For the six month period, royalty income was $696,375 compared
to $1,068,729 at December 31, 1995. The Company recognizes royalty income when
earned. The decrease in royalty income is the result of lower sales volume by
Trabelco N.V. in products covered under this License Agreement. This License
Agreement expires on December 31, 1997; however, it can be renewed for an
additional 3 year period at the option of Trabelco N.V.
On September 29, 1995, the Company entered into a second License Agreement with
Trabelco N.V. covering many European countries. No sales have been reported
under this License Agreement to date. This License Agreement expires on
December 31, 1998. Trabelco N.V. has the option to renew this License
Agreement for an additional 3 year period.
PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security Holders
The information reported under Part II, Item 4
(Submission of Matters to Vote of Security Holders)
in the Form 10-Q filed for the period ended
September 30, 1996 is incorporated herein by
reference.
Item 6 (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.
10 of 11
<PAGE> 11
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: 2/13/97 /s/ Michael J. Koss
-------------- ---------------------------
Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 2/13/97 /s/ Sue Sachdeva
-------------- ---------------------------
Sue Sachdeva
Vice President -- Finance
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,407
<SECURITIES> 0
<RECEIVABLES> 11,264,104
<ALLOWANCES> 0
<INVENTORY> 12,199,585
<CURRENT-ASSETS> 24,597,542
<PP&E> 13,173,664
<DEPRECIATION> (10,744,499)
<TOTAL-ASSETS> 27,992,196
<CURRENT-LIABILITIES> 3,621,039
<BONDS> 0
0
0
<COMMON> 33,180
<OTHER-SE> 27,959,016
<TOTAL-LIABILITY-AND-EQUITY> 27,992,196
<SALES> 23,182,969
<TOTAL-REVENUES> 23,182,969
<CGS> 15,351,176
<TOTAL-COSTS> 15,351,176
<OTHER-EXPENSES> 4,490,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,116
<INCOME-PRETAX> 3,918,896
<INCOME-TAX> 1,597,428
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,321,468
<EPS-PRIMARY> .70
<EPS-DILUTED> 0
</TABLE>
