<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, 1998
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, 1998, there were 3,177,269 shares outstanding of the
Registrant's common stock, $0.01 par value per share.
1 of 12
<PAGE> 2
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 (Unaudited) and June 30, 1998 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Three months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) September 30, 1998 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 a Vote of Security-Holders 10-11
Item 6 Exhibits and Reports on Form 8-K 11
</TABLE>
2 of 12
<PAGE> 3
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
(Unaudited) (*)
----------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 19,048 $ 14,778
Accounts receivable 9,950,184 8,387,839
Inventories 16,177,331 19,486,058
Other current assets 1,232,891 1,104,838
- - -----------------------------------------------------------------------------------------------------------------------
Total current assets 27,379,454 28,993,513
Property and Equipment, net 2,035,788 2,062,531
Intangible and Other Assets 965,655 772,725
- - -----------------------------------------------------------------------------------------------------------------------
$30,380,897 $32,028,769
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,003,312 $ 1,956,877
Accrued liabilities 1,066,429 1,314,701
Income taxes payable 290,261 677,527
- - -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,360,002 3,949,105
Long-Term Debt 1,367,000 2,746,000
Deferred Compensation and Other Liabilities 1,281,274 1,252,504
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 23,882,621 22,591,160
=======================================================================================================================
$30,380,897 $32,028,769
=======================================================================================================================
</TABLE>
* The balance sheet at June 30, 1998, has been prepared from the audited
financial statements at that date.
See accompanying notes.
3 of 12
<PAGE> 4
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30 1998 1997
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 9,031,043 $11,755,125
Cost of goods sold 5,058,104 7,330,668
- - --------------------------------------------------------------------------------------------------------------
Gross profit 3,972,939 4,424,457
Selling, general and
administrative expense 2,056,767 2,201,168
- - --------------------------------------------------------------------------------------------------------------
Income from operations 1,916,172 2,223,289
Other income (expense)
Royalty income 253,314 170,296
Interest income 3,938 3,938
Interest expense (50,950) (20,356)
- - --------------------------------------------------------------------------------------------------------------
Income before income tax provision 2,122,474 2,377,167
Provision for income taxes 831,013 975,744
==============================================================================================================
Net income $ 1,291,461 $ 1,401,423
==============================================================================================================
Earnings per common share:
Basic $0.41 $0.42
Diluted $0.40 $0.41
==============================================================================================================
Dividends per common share None None
==============================================================================================================
</TABLE>
See accompanying notes.
4 of 12
<PAGE> 5
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30 1998 1997
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 1,291,461 $ 1,401,423
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 173,638 216,312
Deferred compensation 28,770 28,770
Net changes in operating assets and
liabilities 29,227 301,133
- - ------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 1,523,096 1,947,638
- - ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (139,826) (22,619)
- - ------------------------------------------------------------------------------------------------------
Net cash used in
investing activities (139,826) (22,619)
- - ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (7,610,000) (4,716,000)
Borrowings under line of credit agreements 6,231,000 4,940,000
Purchase and retirement of common stock -- (4,763,844)
Exercise of stock options -- 2,681,050
- - ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,379,000) (1,858,794)
- - ------------------------------------------------------------------------------------------------------
Net increase in cash 4,270 66,225
Cash at beginning of year 14,778 32,551
======================================================================================================
Cash at end of quarter $ 19,048 $ 98,776
======================================================================================================
</TABLE>
See accompanying notes.
5 of 12
<PAGE> 6
KOSS CORPORATION AND SUBSIDIARIES
September 30, 1998
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, 1998 and for all periods presented have been made. The
income from operations for the quarter ended September 30, 1998 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, 1998, Annual Report on Form 10-K.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, the Financial Accounting Standards Board ("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.
The Company's adoption of the provisions of SFAS 128 resulted in the
dual presentation of basic and diluted per share amounts on the
Company's income statement.
Basic earnings per 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 September 30, 1998
and 1997 were 3,177,269 and 3,342,486, respectively. When dilutive,
stock options are included as share equivalents using the Treasury
stock method. Common stock equivalents of 38,769 and 110,510 related to
stock option grants were included in the computation of the average
number of shares outstanding for diluted earnings per share for the
quarters ended September 30, 1998 and 1997, respectively.
6 of 12
<PAGE> 7
3. INVENTORIES
The classification of inventories is as follows:
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and
work in process $ 5,654,369 $ 6,700,168
Finished goods 10,984,129 13,247,057
-------------------------------------------------------------------------------
16,638,498 19,947,225
LIFO Reserve (461,167) (461,167)
===============================================================================
$16,177,331 $19,486,058
===============================================================================
</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, 1998 and June 30, 1998, $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, 1998 and June 30, 1998,
respectively, the related liabilities in the amounts of $795,150 and
$766,380 have been included in deferred compensation on the
accompanying balance sheets.
7 of 12
<PAGE> 8
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1998
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, 1998 amounted to $1,523,096. Working capital was $25,019,452 at September
30, 1998, a decrease of $24,956 from the balance at June 30, 1998. 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 $139,826 for the quarter. For the fiscal year ending June 30,
1999, the Company expects its capital expenditures to be approximately
$1,100,000. The Company expects to generate sufficient operating funds to
fulfill these expenditures.
Stockholders' investment increased to $23,882,621 at September 30, 1998, from
$22,591,160 at June 30, 1998. The increase reflects primarily the net effect of
income.
The Company has an unsecured working capital line of credit with a bank which
expires 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 financial 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, 1998 and June
30, 1998 totaled $1,367,000 and $2,746,000, respectively, consisting solely of
borrowings. The decrease as of September 30, 1998 is the result of decreased
inventory purchases due to lower sales volumes.
The Company has also reinstated a $2,000,000 credit facility which can be used
by the Company to purchase shares of its own stock pursuant to the Company's
stock repurchase program. This credit facility also expires November 1, 1999.
In August 1998, the Board of Directors authorized an additional $3,000,000 to be
used for purchasing the Company's common stock for its own account, increasing
the total net amount of the Company's stock repurchase program from $7,000,000
to $10,000,000. The Company intends to effectuate all stock purchases either on
the open market or through one or more privately negotiated transactions, and
intends to finance all stock purchases through its own cash flow or by borrowing
for such purchases. For the quarter ended September 30, 1998, the Company did
not purchase any shares of its common stock pursuant to the Company's stock
repurchase program. For the quarter ended September 30, 1998, the Company
purchased 15,000 shares of its common stock for allocation to the Company's
Employee Stock Ownership Plan and Trust ("ESOP") at an average price of $12.23
per share.
8 of 12
<PAGE> 9
From the commencement of the Company's stock repurchase program through
September 30, 1998, the Company has purchased and retired a total of 891,348
shares at a total gross purchase price of $9,108,577 (representing an average
gross purchase price of $10.22 per share) and a total net purchase price of
$6,485,677 (representing an average net purchase price of $7.28 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 pursuant to the Company stock option program.
Results of Operations
Net sales for the quarter ended September 30, 1998 were $9,031,043 compared with
$11,755,125 for the same period in 1997, a decrease of $2,724,082. This is the
result of the Company's decision to withdraw from the speaker business.
Gross profit as a percent of net sales was 44% for the quarter ended September
30, 1998 compared with 38% in the prior year. This improvement is primarily due
to a change in product mix and withdrawal from the speaker business.
Selling, general and administrative expenses for the quarter ended September 30,
1998 were $2,056,767 or 23% of net sales, as against $2,201,168 or 19% of net
sales for the same period in 1997.
For the quarter ended September 30, 1998, income from operations was $1,916,172
versus $2,223,289 for the same period in 1997, a decrease of $307,117.
Interest expense amounted to $50,950 for the quarter as compared to $20,356 for
the same period in the prior year. This increase is a result of increased
borrowing activity 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 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. In May of 1998, the Company and Jiangsu entered into an
amendment to this License Agreement expanding the products covered by this
License Agreement to include mobile electronics and increasing 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, 1998 was $253,314 as compared to $170,296 for the same
period in 1997. The Company recognizes royalty income when earned. The increase
in royalty income for the quarter was the result of higher sales volume in
products covered under this License Agreement.
9 of 12
<PAGE> 10
The License Agreement between the Company and Trabelco N.V. covering certain
European countries remains in place. Although no sales have been reported under
this License Agreement to date, certain minimum royalties are due for calendar
year 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.
Effective July 1, 1998, the Company entered into a License Agreement and an
Addendum thereto with Logitech Electronics Inc. ("Logitech") of Ontario, Canada
whereby the Company licensed to Logitech the right to sell multimedia/computer
speakers under the Koss brand name. This License Agreement covers North
America and certain countries in South America and Europe. This License
Agreement extends for 5 years and includes a 5 year renewal option at the
Company's discretion. This License Agreement requires royalty payments by
Logitech through June 30, 2003, subject to certain minimum royalty amounts due
each year.
Year 2000
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using 2 digits to define the applicable year (as
opposed to 4 digits). Any of the Company's programs that have time sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or systems failure. Based on a
review of the Company's software by the Chief Information Officer and outside
consultants, the anticipated costs of addressing potential problems are not
expected to have an adverse impact on the Company's financial position, results
of operations or cash flows in future periods. The Company expects its computer
systems will be year 2000 compliant by January 31, 1999.
A year 2000 compliance letter and survey form has been sent to all our
customers doing over $10,000 annually in sales. Responses will be analyzed to
see if there are any adverse conditions that the Company may have overlooked in
its year 2000 plan. The same procedure is being followed with our suppliers
and vendors. The Company's current inventory levels and forecasting technique
will insure product is available to support customer requirements. In the
event there are any adverse conditions, the Company will devote necessary
resources to resolve all significant year 2000 issues in a timely manner.
PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security-Holders
(a) On October 22, 1998 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 3,177,269 shares of common stock eligible to
vote at the Annual Meeting, of which 2,845,927 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:
10 of 12
<PAGE> 11
<TABLE>
<CAPTION>
Number of Votes Broker
--------------- ------
For Withheld Non-Votes
--- -------- ---------
<S> <C> <C> <C>
Nominees for 1-year
terms ending in 1999:
John C. Koss 2,828,644 17,555 0
Thomas L. Doerr 2,827,834 18,365 0
Victor L. Hunter 2,827,246 18,953 0
Michael J. Koss 2,828,423 17,776 0
Lawrence S. Mattson 2,827,096 19,103 0
Martin F. Stein 2,828,867 17,332 0
John J. Stollenwerk 2,828,779 17,420 0
</TABLE>
<TABLE>
<CAPTION>
Number of Votes Broker
--------------- ------
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Appointment of
PricewaterhouseCoopers L.L.P.
as independent auditors
for the year ended
June 30, 1999 2,842,456 1,927 1,816 0
</TABLE>
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.
11 of 12
<PAGE> 12
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: 11/13/98 /s/ Michael J. Koss
-----------------------------------
Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 11/13/98 /s/ Sue Sachdeva
-----------------------------------
Sue Sachdeva
Vice President--Finance
12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,048
<SECURITIES> 0
<RECEIVABLES> 9,950,184
<ALLOWANCES> 0
<INVENTORY> 16,177,331
<CURRENT-ASSETS> 27,379,454
<PP&E> 2,035,788
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,380,897
<CURRENT-LIABILITIES> 2,360,002
<BONDS> 0
0
0
<COMMON> 31,773
<OTHER-SE> 30,349,124
<TOTAL-LIABILITY-AND-EQUITY> 30,380,897
<SALES> 9,031,043
<TOTAL-REVENUES> 9,031,043
<CGS> 5,058,104
<TOTAL-COSTS> 5,058,104
<OTHER-EXPENSES> 2,056,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,950
<INCOME-PRETAX> 2,122,474
<INCOME-TAX> 831,013
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,291,461
<EPS-PRIMARY> .41
<EPS-DILUTED> .40
</TABLE>
