<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the
fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
KOSS CORPORATION Commission file number 0-3295
- -------------------------------------------------------------------------------
(Exact name of registrant as specified
in its charter)
A Delaware Corporation 391168275
- -------------------------------------------------------------------------------
(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)
Registrant's telephone number, including area code: (414) 964-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value (voting)
--------------------------------------
(Title of class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 10, 1998 was approximately $12,781,844 (based on the
$10.875 per share closing price of the Company's Common Stock as reported on the
NASDAQ Stock Market on September 10, 1998). In determining who are affiliates of
the Company for purposes of this computation, it is assumed that directors,
officers, and any persons who held on September 10, 1998 more than 5% of the
issued and outstanding common stock of the Company are "affiliates" of the
Company. The characterization of such directors, officers, and other persons as
affiliates is for purposes of this computation only and should not be construed
as a determination or admission for any other purpose that any of such persons
are, in fact, affiliates of the Company.
On September 10, 1998, 3,177,269 shares of voting common stock were outstanding.
<PAGE> 2
Documents Incorporated by Reference
Part III incorporates by reference information from Koss Corporation's Proxy
Statement for its 1998 Annual Meeting of Stockholders to be filed within 120
days of the end of the fiscal year covered by this Report. The exhibits hereto
incorporate by reference information from the Company's Annual Report on Form
10-K for the fiscal years ended June 30, 1988, 1990, 1995, and 1996, and the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and
March 31, 1997.
PART I
Item 1. BUSINESS.
As used herein, the term "Company" means Koss Corporation and its consolidated
subsidiaries, unless the context otherwise requires.
The Company operates in the audio/video industry segment of the home
entertainment industry through its design, manufacture and sale of stereo
headphones, audio/video loudspeakers, and related accessory products.
The Company's principal product is the design, manufacture, and sale of
stereophones and related accessories. The percentage of total revenues related
to the product line over the past three years was:
1998 1997 1996
---- ---- ----
Stereophones 87% 83% 80%
The Company's products are sold through audio specialty stores, catalog
showrooms, regional department store chains, military exchanges and national
retailers under the "Koss" name and dual label. The Company has more than 1,600
domestic dealers and its products are carried in more than 17,000 domestic
retail outlets. International markets are served by domestic sales
representatives and a sales office in Switzerland which utilizes independent
distributors in several foreign countries.
Management believes that it has sources of raw materials that are adequate for
its needs.
The Company regularly applies for registration of its trademarks and has
numerous patents. Certain of its trademarks are of material value and importance
to the conduct of its business. Although the Company considers protection of its
proprietary developments important, the Company's business is not, in the
opinion of management, materially dependent upon any single patent.
Although retail sales of consumer electronics are predictably higher during the
holiday season, management of the Company is of the opinion that its business
and industry segment are not seasonal as evidenced by the fact that 54% of sales
occurred in the first six months of the fiscal year and 46% of sales occurred in
the latter six months of the fiscal year.
The Company's working capital needs do not differ substantially from those of
its competitors in the industry and generally reflect the need to carry
significant amounts of inventory to meet delivery requirements of its customers.
The Company provides extended payment terms for product sales to certain
customers. Based on historical trends, management does not expect these
practices to have any material effect on net sales or revenues. The Company's
current backlog of orders is not material in relation to annual net sales.
2
<PAGE> 3
The Company markets its products to approximately 2,000 customers worldwide.
During 1998 the Company's sales to its largest single customer, Tandy
Corporation, were 19% of total sales. Management believes that any loss of this
customer's revenues would be partially offset by a corresponding decrease, on a
percentage basis, in expenses thereby dampening the impact on the Company's
operating income. Although perhaps initially material, management believes this
impact would be offset in future years by expanded sales to both existing and
new customers. The five largest customers of the Company accounted for
approximately 39% of total sales in 1998.
Although competition in the stereophone market has increased this past year, the
Company has maintained its competitive position as a leading marketer and
producer of high fidelity stereophones in the United States. In the stereophone
market, the Company competes directly with approximately five major competitors,
several of which are large and diversified and have greater total assets and
resources than the Company.
The amount spent on engineering and research activities relating to the
development of new products or the improvement of existing products was $265,000
during fiscal 1998 as compared with $245,000 during fiscal 1997 and $225,000
during fiscal 1996. These activities were conducted by both Company personnel
and outside consultants. The Company relies upon its unique sound, quality
workmanship, brand identification, engineering skills and customer service to
maintain its competitive position.
As of June 30, 1998, the Company employed 184 people. The Company also utilizes
temporary personnel to meet seasonal production demands.
Foreign Sales.
International markets are serviced through manufacturers representatives or
independent distributors with product produced in the United States. In the
opinion of management, the Company's competitive position and risks attendant to
the conduct of its business in such markets are comparable to the domestic
market. For further information, see Note 10 to consolidated financial
statements accompanying this Form 10-K.
Item 2. PROPERTIES.
The Company leases its main plant and offices in Milwaukee, Wisconsin from its
Chairman, John C. Koss. On June 25, 1993, the lease was renewed for a period of
ten years, and is being accounted for as an operating lease. The lease extension
increases the rent from $280,000 per year (plus Consumer Price Index increase in
1994) to a fixed rate of $350,000 per year for three years and $380,000 for the
seven years thereafter. The lease is on terms no less favorable to the Company
than those that could be obtained from an independent party. The Company is
responsible for all property maintenance, insurance, taxes and other normal
expenses related to ownership.
All facilities are in good repair and, in the opinion of management, are
suitable for the Company's purposes.
Item 3. LEGAL PROCEEDINGS.
Neither Koss nor its subsidiaries are subject to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth quarter of
the fiscal year ended June 30, 1998.
3
<PAGE> 4
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION ON COMMON STOCK
The Company's common stock is traded on The Nasdaq Stock Market under the
trading symbol "KOSS". There were approximately 1,087 holders of the Company's
common stock as of September 10, 1998. No dividends have been paid for the years
ended June 30, 1998, 1997, and 1996. The quarterly high and low sale prices of
the Company's common stock for the last two fiscal years are shown below.
Fiscal Year 1998 Fiscal Year 1997
---------------- ----------------
Quarter High Low High Low
- ------- ---- --- ---- ---
First $14-0/0 $8-1/4 $7-3/8 $5-3/4
Second $15-1/8 $11-1/4 $7-0/0 $5-3/4
Third $12-1/2 $10-0/0 $13-0/0 $6-1/4
Fourth $11-1/4 $9-1/2 $11-1/4 $8-3/4
Item 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Net sales $40,638,747 $39,554,720 $36,422,377 $33,432,344 $35,561,322
Net income $5,477,629 $3,587,688 $2,360,963 $2,087,994 $2,800,855
Earnings per common share:
Basic $1.68 $1.09 $0.69 $0.63 $0.88
Diluted $1.65 $1.07 $0.67 $0.58 $0.75
Total assets $32,028,769 $26,332,923 $22,005,257 $20,972,923 $19,220,406
Long-term debt $2,746,000 $1,221,000 $470,000 $570,000 $2,068,741
</TABLE>
4
<PAGE> 5
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL CONDITION AND LIQUIDITY
During 1998, cash provided by operations was $1,839,750. Working capital was
$25,044,408 at June 30, 1998. The increase of $4,255,260 from the balance at
June 30, 1997 represents primarily the net effect of an increase in inventory of
$4,938,405. The increase in inventory is the result of anticipated higher sales
volume in the upcoming year.
Capital expenditures for new property and equipment including production tooling
were $221,560, $782,287, and $690,932 in 1998, 1997, and 1996, respectively.
Depreciation charges aggregated $636,558, $649,099, and $629,985 for the same
fiscal years. Budgeted capital expenditures for fiscal year 1999 are $1,100,000.
The Company expects to generate sufficient funds through operations to fulfill
these expenditures.
Stockholders' investment increased to $22,591,160 at June 30, 1998 from
$20,274,494 at June 30, 1997. The increase reflects primarily the effect of net
income, the purchase and retirement of common stock, and the exercise of stock
options for the year. No cash dividends have been paid since the first quarter
of fiscal 1984.
The Company has an unsecured working capital line of credit facility 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 covenants that require the Company to maintain a minimum tangible net
worth and specified current, interest coverage and leverage ratios. Borrowings
under this credit facility as of June 30, 1998 totaled $2,746,000.
There are no commitments for foreign letters of credit at June 30, 1998.
In April, 1995 the Board of Directors approved a stock repurchase program
authorizing the Company to purchase from time to time 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. In August
of 1998, the Board of Directors approved an increase of $3,000,000 in the
Company's stock repurchase program, thereby increasing the total amount of stock
repurchases for the Company's own account from $5,000,000 to $8,000,000. 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 own cash flow or by borrowing for such purchases. For the
fiscal year ended June 30, 1998, the Company purchased 547,772 shares of its
common stock at an average gross price of $12.75 per share (and an average net
price of $7.96 per share), and retired all such shares.
From the commencement of the Company's stock repurchase program through June 30,
1998, the Company has purchased and retired a total of 891,348 shares for 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 purchasing from certain employees shares of the Company's
stock acquired by such employees pursuant to the Company's stock option program.
5
<PAGE> 6
1998 RESULTS COMPARED WITH 1997
Net sales for 1998 were $40,638,747 compared with $39,554,720 in 1997, an
increase of $1,084,027 or 3%. The increase was the result of higher sales of
current products as well as the introduction of new products.
The Company anticipates a decline in net sales for fiscal 1999 as a result of
the Company's previously announced decision to exit the computer speaker
business, which accounted for $5,831,234 of gross sales for the fiscal year
ending June 30, 1998.
Gross profit was $15,794,779 or 38.9% in 1998 compared with $13,632,099 or 34.5%
in 1997. Shifts in product mix resulted in the increase in gross profit as
compared to last year.
Selling, general and administrative expenses for 1998 were $7,822,338 compared
with $8,594,260 in 1997, a decrease of $771,922 or 9%. This decrease is a result
of the closing of Koss Limited in Canada.
Income from operations was $7,972,441 in 1998 compared with $5,037,839 in 1997,
an increase of 58%. Net interest expense for 1998 was $253,171 compared with
$200,401 in 1997. The increase is due to increased levels of borrowings during
the fiscal 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 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 year ended June 30, 1998 was
$1,206,359 as compared to $1,131,250 for the same period in 1997. The Company
recognizes royalty income when earned. The increase in royalty income for the
twelve-month period is the result of higher sales volume in products covered
under this License Agreement.
The License Agreement with Trabelco N.V. covering many European countries
remains in place. No sales have been reported under this License Agreement to
date; however, 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.
Income taxes are discussed in Note 6 to the financial statements.
6
<PAGE> 7
1997 RESULTS COMPARED WITH 1996
Net sales for 1997 were $39,554,720 compared with $36,422,377 in 1996, an
increase of $3,132,343 or 9%. The increase was the result of higher sales of
current product as well as the introduction of new products.
Gross profit was $13,632,099 or 34.5% in 1997 compared with $11,180,754 or 30.7%
in 1996. Shifts in product mix resulted in the increase in gross profit as
compared to last year.
Selling, general and administrative expenses for 1997 were $8,594,260 compared
with $8,528,098 in 1996, an increase of $66,162 or less than 1%.
Income from operations was $5,037,839 in 1997 compared with $2,652,656 in 1996,
an increase of 90%. Net interest expense for 1997 was $200,401 compared with
$40,195 in 1996. The increase is due to increased levels of borrowings during
the fiscal 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 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 year ended June 30, 1997 was
$1,131,250 as compared to $1,303,502 for the same period in 1996. The Company
recognizes royalty income when earned. The decrease in royalty income for the
twelve-month period is the result of lower sales volume in products covered
under this License Agreement.
The License Agreement with Trabelco N.V. covering many European countries
remains in place. No sales have been reported under this License Agreement to
date; however, 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.
Income taxes are discussed in Note 6 to the financial statements.
7
<PAGE> 8
MANAGEMENT'S REPORT
The consolidated financial statements and related financial information included
in this report are the responsibility of management as to preparation,
presentation and reliability. Management believes that the financial statements
have been prepared in conformity with generally accepted accounting principles
appropriate under the circumstances and necessarily include amounts that are
based on best estimates and judgments.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that the books and records
reflect the authorized transactions of the Company.
The Board of Directors, acting through the Audit Committee, is responsible for
the selection and appointment of the independent auditors and reviews the scope
of their audit and their findings. The independent auditors have direct access
to the Audit Committee, with or without the presence of management
representatives, to discuss the scope and the results of their audit work. The
Audit Committee is comprised solely of non-employee directors.
The independent auditors provide an objective assessment of the degree to which
management meets its responsibility for fairness of financial reporting. They
evaluate the system of internal accounting controls in connection with their
audit and perform such tests and procedures as they deem necessary to reach and
express an opinion on the fairness of the financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
(SFAS 131) which establishes standards for reporting information about operating
segments in annual financial statements and interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997 and requires presentation of prior period
financial statements for comparability purposes. The Company is currently
evaluating its required disclosures under SFAS 131 and expects to adopt this
standard during the year ended June 30, 1999.
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.
8
<PAGE> 9
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of the Company at June 30, 1998 and 1997 and
for each of the three years in the period ended June 30, 1998 and the notes
thereto, and the report of independent accountants thereon are set forth on
pages 13 to 25.
Selected unaudited quarterly financial data is as follows:
<TABLE>
<CAPTION>
Quarter
-------
1998 First Second Third Fourth
- ---- ----- ------- ----- ------
<S> <C> <C> <C> <C>
Net sales $11,755,125 $10,378,151 $8,089,590 $10,415,881
Gross profit 4,424,457 3,310,141 2,517,692 5,542,489
Net income 1,401,423 1,084,436 661,608 2,330,162
Earnings per common share:
Basic .42 .33 .21 .73
Diluted .41 .32 .20 .73
Quarter
-------
1997 First Second Third Fourth
- ---- ----- ------- ----- ------
Net sales $9,862,803 $13,320,166 $8,583,303 $7,788,448
Gross profit 3,287,678 4,544,115 2,922,694 2,877,612
Net income 838,990 1,482,478 531,552 734,668
Earnings per common share:
Basic .25 .45 .16 .22
Diluted .25 .45 .15 .21
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
9
<PAGE> 10
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the directors of Koss Corporation is incorporated herein
by reference from the "ELECTION OF DIRECTORS -- Information As To Nominees" and
the "ELECTION OF DIRECTORS -- Executive Officers" contained in the Koss
Corporation Proxy Statement for its 1998 Annual Meeting of Stockholders (the
"1998 Proxy Statement"), which 1998 Proxy Statement is to be filed within 120
days of the end of the fiscal year covered by this Report pursuant to General
Instruction G(3) of Form 10-K.
Item 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is incorporated herein by
reference from the "ELECTION OF DIRECTORS -- Executive Compensation And Related
Matters" section of the 1998 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to the security ownership of certain beneficial owners and
management is incorporated herein by reference from the "ELECTION OF DIRECTORS
- -- Beneficial Ownership Of Company Securities" section of the 1998 Proxy
Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to related transactions is incorporated herein by reference
from the "ELECTION OF DIRECTORS -- Executive Compensation And Related Matters"
and "ELECTION OF DIRECTORS -- Related Transactions" sections of the 1998 Proxy
Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. The following documents are filed as part of this report:
<TABLE>
<S> <C>
1. Financial Statements
The following consolidated financial statements of Koss Corporation are set forth on pages 13 to
25:
Report of Independent Accountants............................................................. 13
Consolidated Statements of Income for the Years
Ended June 30, 1998, 1997, and 1996.......................................................... 14
Consolidated Balance Sheets as of June 30, 1998 and 1997...................................... 15
Consolidated Statements of Cash Flows
for the Years Ended June 30, 1998, 1997, and 1996............................................ 16
Consolidated Statements of Stockholders' Investment
for the Years Ended June 30, 1998, 1997, and 1996............................................ 17
Notes to Consolidated Financial Statements.................................................... 18
</TABLE>
10
<PAGE> 11
2. Financial Statement Schedules
All schedules have been omitted because the information is not
applicable or is not material or because the information
required is included in the financial statements or the notes
thereto.
3. Exhibits Filed
3.1 Certificate of Incorporation of Koss Corporation.
3.2 By-Laws of Koss Corporation.
4.1 Certificate of Incorporation of Koss Corporation.
4.2 By-Laws of Koss Corporation.
10.1 Officer Loan Policy.
10.3 Supplemental Medical Care Reimbursement Plan.
10.4 Death Benefit Agreement with John C. Koss.
10.5 Stock Repurchase Agreement with John C. Koss.
10.6 Salary Continuation Resolution for John C. Koss.
10.7 1983 Incentive Stock Option Plan.
10.8 Assignment of Lease to John C. Koss.
10.9 Addendum to Lease.
10.10 1990 Flexible Incentive Plan.
10.12 Loan Agreement, effective as of February 17, 1995.
10.13 Amendment to Loan Agreement dated June 15, 1995,
effective as of February 17, 1995.
10.14 License Agreement dated November 15, 1991 between
Koss Corporation and Trabelco N.V. (a subsidiary of
Hagemeyer N.V.) for North America, Central America
and South America (including Amendment to License
Agreement dated November 15, 1991; Renewal Letter
dated November 18, 1994; and Second Amendment to
License Agreement dated September 29, 1995).
10.15 License Agreement dated September 29, 1995 between
Koss Corporation and Trabelco N.V. (a subsidiary of
Hagemeyer N.V.) for Europe (including First Amendment
to License Agreement dated December 26, 1995).
10.16 Third Amendment and Assignment of License Agreement
to Jiangsu Electronics Industries Limited dated March
31, 1997.
11
<PAGE> 12
10.17 Fourth Amendment to License Agreement dated as of May
29, 1998.
10.18 License Agreement dated June 30, 1998 between Koss
Corporation and Logitech Electronics Inc. (including
Addendum to License Agreement dated June 30, 1998).
10.19 Consent of Directors (Supplemental Executive
Retirement Plan for Michael J. Koss dated March 7,
1997).
22 List of Subsidiaries of Koss Corporation.
27 Financial Data Schedule.
b. One report on Form 8-K was filed by the Company during the last quarter
of the period covered by this report. This Form 8-K referenced a Press
Release issued by the Company announcing a decline in forecasted sales
revenue of approximately $4,000,000, or 10%, for the fiscal year ending
June 30, 1999, relating to an anticipated reduction in sales of the
Company's computer loudspeaker and associated peripheral business.
12
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KOSS CORPORATION
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 10 present fairly, in all material
respects, the financial position of Koss Corporation and its subsidiaries at
June 30, 1998 and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
- --------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 15, 1998
13
<PAGE> 14
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $40,638,747 $39,554,720 $36,422,377
Cost of goods sold 24,843,968 25,922,621 25,241,623
- ----------------------------------------------------------------------------------------------------------
Gross profit 15,794,779 13,632,099 11,180,754
Selling, general and
administrative expense 7,822,338 8,594,260 8,528,098
- ---------------------------------------------------------------------------------------------------------
Income from operations 7,972,441 5,037,839 2,652,656
Other income (expense)
Royalty income 1,206,359 1,131,250 1,303,502
Interest expense (net) (253,171) (200,401) (40,195)
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 8,925,629 5,968,688 3,915,963
Provision for income taxes (note 6) 3,448,000 2,381,000 1,555,000
- ---------------------------------------------------------------------------------------------------------
Net income $5,477,629 $ 3,587,688 $ 2,360,963
=========================================================================================================
Earnings per common share:
Basic $1.68 $1.09 $0.69
Diluted $1.65 $1.07 $0.67
- ---------------------------------------------------------------------------------------------------------
Dividends per common share None None None
=========================================================================================================
</TABLE>
See accompanying notes.
14
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 14,778 $ 32,551
Accounts receivable, less allowances of
$556,290 and $928,605, respectively (note 12) 8,387,839 6,992,513
Inventories 19,486,058 14,547,653
Prepaid expenses 548,892 603,997
Income taxes receivable -- 65,493
Deferred income taxes (note 6) 555,946 756,946
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 28,993,513 22,999,153
- ---------------------------------------------------------------------------------------------------------------------------
Equipment and Leasehold Improvements, at cost:
Leasehold improvements 742,289 735,930
Machinery, equipment, furniture and fixtures 4,587,729 4,548,096
Tools, dies, molds and patterns 8,351,591 8,176,023
- ---------------------------------------------------------------------------------------------------------------------------
13,681,609 13,460,049
Less--accumulated depreciation 11,619,078 10,982,520
- ---------------------------------------------------------------------------------------------------------------------------
2,062,531 2,477,529
Deferred Income Taxes (note 6) 364,135 258,135
Intangible and Other Assets 608,590 598,106
- ---------------------------------------------------------------------------------------------------------------------------
$32,028,769 $26,332,923
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,956,877 $ 741,646
Accrued liabilities (note 7) 1,314,701 994,877
Deferred revenue -- 473,482
Income taxes payable 677,527 --
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,949,105 2,210,005
- ---------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (note 4) 2,746,000 1,221,000
- ---------------------------------------------------------------------------------------------------------------------------
Deferred Compensation and Other Liabilities (note 11) 1,252,504 1,137,424
- ---------------------------------------------------------------------------------------------------------------------------
Contingently Redeemable Equity Interest (note 5) 1,490,000 1,490,000
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' Investment (note 5):
Common stock, $.01 par value,
authorized 8,500,000 shares;
issued and outstanding 3,177,269
and 3,323,791 shares, respectively 31,773 33,238
Paid in capital -- 2,328,677
Contingently redeemable common stock (1,490,000) (1,490,000)
Accumulated other comprehensive income (71,322) (71,322)
Undistributed retained earnings 24,120,709 19,473,901
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 22,591,160 20,274,494
- ---------------------------------------------------------------------------------------------------------------------------
$32,028,769 $26,332,923
===========================================================================================================================
</TABLE>
See accompanying notes.
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 5,477,629 $ 3,587,688 $ 2,360,963
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 676,673 712,215 777,238
Deferred income taxes 95,000 (74,532) (568,465)
Deferred compensation 115,080 115,080 115,080
Net changes in operating assets and
liabilities (note 8) (4,524,632) (4,407,722) (802,625)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 1,839,750 (67,271) 1,882,191
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (221,560) (782,287) (690,932)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreement (24,385,400) (21,029,000) (13,891,000)
Borrowings under line of credit agreement 25,910,400 21,780,000 13,791,000
Exercise of stock options 3,822,600 456,799 433,835
Purchase and retirement of common stock (6,983,563) (352,691) (1,547,320)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (1,635,963) 855,108 (1,213,485)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (17,773) 5,550 (22,226)
Cash at beginning of year 32,551 27,001 49,227
- --------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 14,778 $ 32,551 $ 27,001
==========================================================================================================================
</TABLE>
See accompanying notes.
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid In Retained Comprehensive
Stock Capital Earnings Income
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1995 $ 34,861 $ 3,336,431 $13,525,250 $ (65,116)
Net income -- -- 2,360,963 --
Foreign currency translation adjustment -- -- -- (42,114)
Purchase and retirement of treasury stock (2,519) (1,544,801) -- --
Exercise of stock options 837 432,998 -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 33,179 2,224,628 15,886,213 (107,230)
Net income -- -- 3,587,688 --
Foreign currency translation adjustment -- -- -- 35,908
Purchase and retirement of treasury stock (516) (352,175) -- --
Exercise of stock options 575 456,224 -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 33,238 2,328,677 19,473,901 (71,322)
Net income -- -- 5,477,629 --
Purchase and retirement of treasury stock (5,478) (6,147,264) (830,821) --
Exercise of stock options 4,013 3,818,587 -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $ 31,773 $ -- $24,120,709 $ (71,322)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
17
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
CONCENTRATION OF CREDIT RISK--The Company operates in the audio/video industry
segment of the home entertainment industry through its design, manufacture and
sale of stereo headphones, audio/video loudspeakers and related accessory
products. The Company's products are sold through audio specialty stores,
catalog showrooms, regional department store chains, military exchanges and
national retailers under the "Koss" name and dual label. The Company has more
than 1,600 domestic dealers and its products are carried in more than 17,000
domestic retail outlets. International markets are served by domestic sales
representatives and a sales office in Switzerland, which utilizes independent
distributors in several foreign countries. The Company grants credit to its
domestic and Canadian customers. Collection is dependent on the retailing
industry economy. International customers outside of Canada are sold on a cash
against documents or letter of credit basis. Approximately 16% and 13% of the
Company's accounts receivable at June 30, 1998 and 1997, respectively, were
foreign receivables.
BASIS OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly-owned. All
significant intercompany accounts and transactions have been eliminated.
ROYALTY INCOME--The Company recognizes royalty income when earned under terms of
license agreements, which expire in 1998 and 2000. These agreements contain
three year renewal options and require minimum calendar year royalty payments.
INVENTORIES--At June 30, 1998 and 1997, approximately 83% and 98%, respectively,
of the Company's inventories were valued at the lower of last-in, first-out
(LIFO) cost or market. All other inventories are valued at the lower of
first-in, first-out (FIFO) cost, or market. If the FIFO method of inventory
accounting had been used by the Company for inventories valued at LIFO,
inventories would have been $461,143 and $457,484 higher than reported at June
30, 1998 and 1997, respectively.
The components of inventories at June 30, is as follows:
1998 1997
----------------------------------------------------------
Raw materials and
Work in process $ 6,547,983 $ 7,242,161
Finished goods 12,938,075 7,305,492
----------------------------------------------------------
$19,486,058 $14,547,653
==========================================================
PROPERTY AND EQUIPMENT--Depreciation is provided on a straight-line basis over
the estimated useful life of the asset as follows:
Leasehold Improvements 10-15 years
Machinery, Equipment,
Furniture and Fixtures 3-10 years
Tools, Dies, Molds
and Patterns 4-5 years
RESEARCH AND DEVELOPMENT--Research and development expenditures charged to
operations amounted to approximately $265,000 in 1998, $245,000 in 1997, and
$225,000 in 1996.
EARNINGS PER SHARE--Basic earnings per share are computed based on the weighted
average number of common shares outstanding. When dilutive, stock options are
included as share equivalents using the treasury stock method.
18
<PAGE> 19
FAIR VALUE OF FINANCIAL INSTRUMENTS--Cash, accounts receivable, accounts payable
and accrued liabilities recorded in the consolidated balance sheets approximate
fair value based on the short maturity of these instruments. Amounts recorded
for long-term debt, deferred compensation and other liabilities are estimated to
approximate fair value based on market conditions and interest rates available
to the Company for similar financial instruments.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard 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 fiscal years ended June 30, 1998, 1997, and 1996 were
3,263,842, 3,304,194, and 3,443,247, respectively. When dilutive, stock options
are included in earnings per share as share equivalents using the treasury stock
method. Common stock equivalents of 64,889, 58,648, and 60,201 related to stock
option grants were included in the computation of the average number of shares
outstanding for diluted earnings per share for the fiscal years ended June 30,
1998, 1997, and 1996, respectively.
3. COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting of Comprehensive Income," (SFAS 130). This Statement requires
that certain items recognized under generally accepted accounting principles as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence of other financial statements.
Total comprehensive income totaled $5,477,629 and $3,623,596 for the fiscal
years ended June 30, 1998 and 1997, respectively. Total comprehensive income for
the year ended June 30, 1998 and 1997, is comprised of net income of $5,477,629
and $3,587,688, respectively, and other comprehensive income of $-0- and
$35,908, respectively. Other comprehensive income is comprised solely of foreign
currency transaction adjustments and are included in the Consolidated Statement
of Stockholder's Investment.
4. LONG TERM DEBT
The Company has an unsecured working capital line of credit facility with a
bank, which expires 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. Borrowings under this credit facility as of June 30, 1998
totaled $2,746,000. There are no commitments for foreign letters of credit at
June 30, 1998. Utilization of this credit facility as of June 30, 1997 was
$1,274,386, consisting of $1,221,000 in borrowings and $53,386 in foreign
letters of credit.
19
<PAGE> 20
5. STOCK OPTIONS AND STOCK PURCHASE AGREEMENTS
In 1990, pursuant to the recommendation of the Board of Directors, the
stockholders ratified the creation of the Company's 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 Plan's 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 to
the 1990 Plan, which was approved by the stockholders. In 1993, the Board of
Directors authorized the reservation of an additional 300,000 shares to the 1990
Plan, which was approved by the stockholders. In 1997, the Board of Directors
authorized the reservation of an additional 300,000 shares to the 1990 Plan,
which was approved by the stockholders.
The following table identifies options granted, exercised, cancelled or
available for exercise pursuant to the above mentioned Plan:
<TABLE>
<CAPTION>
Number of Price per
Shares Share
-------------------------------------------------------------------------------------
<S> <C> <C>
Shares under option at June 30, 1995 536,250 $1.75-$10.55
Granted 72,500 $5.32-$5.85
Exercised (56,250) $1.75-$2.75
-------------------------------------------------------------------------------------
Shares under option at June 30, 1996 552,500 $1.75-$10.55
Granted 52,500 $10.20-$11.22
Exercised (57,500) $2.50-$7.50
Cancelled (11,250) $5.32-$7.35
-------------------------------------------------------------------------------------
Shares under option at June 30, 1997 536,250 $2.50-$11.22
Granted 55,000 $10.83-$11.91
Exercised (401,250) $2.50-$10.55
-------------------------------------------------------------------------------------
Shares under option at June 30, 1998 190,000 $5.32-$11.91
=====================================================================================
Options exercisable at June 30, 1998 52,500 $5.32-$10.20
=====================================================================================
</TABLE>
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.
The Company currently accounts for its stock-based compensation plans using the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). In 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Under the provisions of SFAS 123, companies can elect to account for
stock-based compensation plans using a fair-value-based method or continue
measuring compensation expense for those plans using the intrinsic value method
prescribed in APB 25. SFAS 123 requires that companies electing to continue
using the intrinsic value method must make pro forma disclosures of net income
and earnings per share as if the fair-value-based method of accounting had been
applied. The Company has adopted the disclosure-only provisions of SFAS 123;
accordingly, no compensation cost has been recognized for options granted under
the stock-based compensation plan. Had compensation cost been determined based
on the fair value at the grant date for awards in 1998, 1997, and 1996
consistent with the provisions of SFAS 123, the Company's pro forma net income
and earnings per share would have been as presented below:
20
<PAGE> 21
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- ------------
<S> <C> <C> <C>
Net income - as reported $5,477,629 $3,587,688 $2,360,963
Net income - pro forma 5,318,518 3,511,965 2,349,608
Earnings per common share - as reported
Basic 1.68 1.09 .69
Diluted 1.65 1.07 .67
Earnings per common share - pro forma
Basic 1.63 1.06 .68
Diluted 1.60 1.04 .67
</TABLE>
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION> 1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Expected stock price volatility 69.17% 70.94% 70.53%
Risk free interest rate 5.72% 6.84% 6.45%
Expected life of options 5.91 years 6 years 5.6 years
</TABLE>
The weighted average exercise prices per share for options outstanding and
exercisable at June 30, 1998 are $9.02 and $7.92, respectively. The weighted
average exercise prices per share for options outstanding and exercisable at
June 30, 1997 are $7.56 and $7.67, respectively. The weighted average exercise
prices per share for options outstanding and exercisable at June 30, 1996 are
$7.15 and $7.80, respectively. The weighted average fair value of options
granted during 1998, 1997, and 1996 are $6.95, $7.02, and $3.37 per share,
respectively.
21
<PAGE> 22
6. INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires use of the liability method of
accounting for income taxes. The liability method measures the expected tax
impact of future taxable income and deductions implicit in the consolidated
balance sheet.
The provision for income taxes in 1998, 1997, and 1996 consists of the
following:
<TABLE>
<CAPTION>
Year Ended June 30, 1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $2,839,000 $2,061,000 $1,536,000
State 514,000 394,000 296,000
Foreign -- -- (44,000)
Deferred 95,000 (74,000) (233,000)
-------------------------------------------------------------------------------------------------
$3,448,000 $2,381,000 $1,555,000
=================================================================================================
</TABLE>
The 1998, 1997, and 1996 tax provision results in an effective rate different
than the federal statutory rate due to the following:
<TABLE>
<CAPTION>
Year Ended June 30, 1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at
statutory rate $3,035,000 $2,029,000 $1,331,000
State income taxes, net of
federal tax benefit 339,000 260,000 195,000
Other 74,000 92,000 29,000
-------------------------------------------------------------------------------------------------
Total provision for
income taxes $3,448,000 $2,381,000 $1,555,000
=================================================================================================
</TABLE>
Income before taxes for United States operations was $8,925,629 in 1998,
$6,803,219 in 1997, and $4,013,970 in 1996. Losses before taxes for foreign
operations were $0, $834,531, and $97,322 for the respective years.
22
<PAGE> 23
Temporary differences which give rise to deferred tax assets and liabilities at
June 30 include:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Deferred compensation $307,000 $ 265,000
Accrued expenses and reserves 579,000 530,000
Royalties receivable/deferred -- 179,000
Package design and trademarks 150,000 125,000
Other 9,000 39,000
--------------------------------------------------------------------------------------------------
1,045,000 1,138,000
Deferred Tax Liabilities
Royalties receivable/deferred (32,000) --
Equipment and leasehold improvements (93,000) (123,000)
--------------------------------------------------------------------------------------------------
Net deferred tax asset $920,000 $1,015,000
==================================================================================================
</TABLE>
The net deferred tax asset at June 30, 1998 is comprised of a current asset of
$555,946 and a long term asset of $364,135. The net deferred tax asset at June
30, 1997 is comprised of a current asset of $756,946 and a long term asset of
$258,135.
7. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Salaries and wages $608,288 $340,498
Cooperative advertising
and promotion allowances 282,761 240,612
Payroll taxes and
employee benefits 161,075 162,626
Other 262,577 251,141
--------------------------------------------------------------------------------------------------
$1,314,701 $994,877
==================================================================================================
</TABLE>
8. ADDITIONAL CASH FLOW INFORMATION
The net operating changes in cash as a result of changes in operating assets and
liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable $(1,395,326) $ 1,972,700 $ (1,722,351)
Inventories (4,938,405) (5,734,529) 576,585
Prepaid expenses 55,105 (221,860) 294,737
Net income taxes 743,020 (427,348) 738,002
Other assets (50,599) (92,422) (146,495)
Accounts payable 1,215,231 (586,269) (398,796)
Deferred revenue (473,482) 473,482 --
Accrued liabilities 319,824 208,524 (144,307)
---------------------------------------------------------------------------------------------------
Net change $(4,524,632) $ (4,407,722) $ (802,625)
===================================================================================================
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Net cash paid during the year for:
Interest $ 241,687 $ 297,398 $ 161,256
Income taxes $1,771,313 $2,849,333 $1,413,283
</TABLE>
9. EMPLOYEE BENEFIT PLANS
Substantially all domestic employees are participants in the Company's Employee
Stock Ownership Plan and Trust under which an annual contribution in either cash
or common stock may be made at the discretion of the Board of Directors. The
expense recorded for such contributions amounted to $216,000 in 1998, $200,000
in 1997, and $344,000 in 1996.
The Company maintains a retirement savings plan under Section 401(k) of the
Internal Revenue Code. This plan covers all employees of the Company who have
completed six months of service. Matching contributions can be made at the
discretion of the Company's Board of Directors. For calendar years 1998, 1997,
and 1996, the matching contribution was 100% of employee contributions to the
plan, not to exceed 10% of the employee's annual compensation. Vesting of
Company contributions occurs immediately. Contributions for the years ended June
30, 1998, 1997, and 1996 were $170,600, $144,000, and $264,631, respectively.
10. INDUSTRY SEGMENT INFORMATION, FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
The Company has one line of business--the design, manufacture and sale of
stereophones and related accessories. The table below summarizes certain
information regarding the Company's United States and Canadian operations for
the years ended June 30, 1998, 1997, and 1996.
<TABLE>
<S> <C> <C> <C> <C>
000's Omitted United
States Canada Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------
1998:
- -----------------------------------------------------------------------------------------------------
Net sales $ 40,638 $ -- $ -- $ 40,638
Intercompany transfers 300 -- (300) --
- -----------------------------------------------------------------------------------------------------
Total $ 40,938 $ -- $ (300) $ 40,638
- -----------------------------------------------------------------------------------------------------
Income from operations $ 7,964 $ -- $ 8 $ 7,972
- -----------------------------------------------------------------------------------------------------
Assets $ 32,029 $ -- $ -- $ 32,029
=====================================================================================================
1997:
- -----------------------------------------------------------------------------------------------------
Net sales $ 39,128 $ 427 $ -- $ 39,555
Intercompany transfers 1,111 -- (1,111) --
- -----------------------------------------------------------------------------------------------------
Total $ 40,239 $ 427 $ (1,111) $ 39,555
- -----------------------------------------------------------------------------------------------------
Income from operations $ 5,840 $ (742) $ (60) $ 5,038
- -----------------------------------------------------------------------------------------------------
Assets $ 26,333 $ -- $ -- $ 26,333
=====================================================================================================
1996:
- -----------------------------------------------------------------------------------------------------
Net sales $ 33,319 $ 3,103 $ -- $ 36,422
Intercompany transfers 2,829 -- (2,829) --
- -----------------------------------------------------------------------------------------------------
Total $ 36,148 $ 3,103 $ (2,829) $ 36,422
- -----------------------------------------------------------------------------------------------------
Income from operations $ 2,716 $ (70) $ 7 $ 2,653
- -----------------------------------------------------------------------------------------------------
Assets $ 20,313 $ 1,730 $ (38) $ 22,005
=====================================================================================================
24
</TABLE>
<PAGE> 25
The Company's export sales to customers in foreign countries amounted to
$5,245,982 during 1998, $4,955,824 during 1997, and $6,481,135 during 1996.
Sales to one customer, Tandy Corporation, were approximately 19% of total sales
for the year ended June 30, 1998, and 17% and 16% for the years ended June 30,
1997, and 1996, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases its main plant and offices in Milwaukee, Wisconsin from its
Chairman. On June 25, 1993, the lease was renewed for a period of ten years, and
is being accounted for as an operating lease. The lease extension increases the
rent from $280,000 per year (plus Consumer Price Index increase in 1994) to a
fixed rate of $350,000 per year for three years and $380,000 for the seven years
thereafter. The lease is on terms no less favorable to the Company than those
that could be obtained from an independent party. The Company is responsible for
all property maintenance, insurance, taxes and other normal expenses related to
ownership. Rent expense, which includes this lease, was $394,000 in 1998,
$432,000 in 1997, and $450,000 in 1996.
In 1980, the Company entered into an agreement with John C. Koss that if he dies
prior to attaining 70 years of age, the Company will pay to his spouse or other
designated beneficiary the sum of $50,000 every six months until the total
benefits paid equal $700,000. The agreement is null and void if he reaches age
70.
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 he
becomes disabled or not. 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 June 30, 1998 and 1997,
respectively, the related liabilities in the amounts of $766,380 and $651,300
have been included in deferred compensation and other liabilities in the
accompanying balance sheets.
12. SUPPLEMENTARY INFORMATION
Changes in the allowance for doubtful accounts for the years ended June 30,
1998, 1997, and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Year Balance at Beginning Charges Against Balance at End of
---- -------------------- --------------- -----------------
Ending of Period Income Deductions* Period
------ --------- ------ ----------- ------
<S> <C> <C> <C> <C>
1998 $928,605 $310,000 $682,315 $556,290
1997 $685,107 $434,000 $190,502 $928,605
1996 $289,217 $490,097 $ 94,207 $685,107
</TABLE>
*Represents charges against the allowance, net of recoveries.
The amounts included for advertising in selling, general and administrative
expenses in the accompanying statements of income were $397,033 in 1998,
$428,428 in 1997, and $486,723 in 1996.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KOSS CORPORATION
By: /s/ Michael J. Koss Dated: 9/21/98
-------------------- -------
Michael J. Koss, President,
Chief Executive Officer
Chief Operating Officer and
Chief Financial Officer
By: /s/ Sujata Sachdeva Dated: 9/21/98
--------------------- -------
Sujata Sachdeva,
Vice President - Finance
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ John C. Koss /s/ Michael J. Koss
- ----------------- ---------------------------
John C. Koss, Director Michael J. Koss, Director
Dated: 9/21/98 Dated: 9/21/98
/s/ Martin F. Stein /s/ Victor L. Hunter
- --------------------- ---------------------------
Martin F. Stein, Director Victor L. Hunter, Director
Dated: 9/21/98 Dated: 9/21/98
/s/ John J. Stollenwerk
- ------------------------ ---------------------------
John J. Stollenwerk, Director Lawrence S. Mattson, Director
Dated: 9/21/98 Dated:
--------
/s/ Thomas L. Doerr
- --------------------
Thomas L. Doerr, Director
Dated: 9/21/98
The signatures of the above directors constitute a majority of the Board of
Directors of Koss Corporation.
26
<PAGE> 27
OFFICERS AND DIRECTORS
SENIOR MANAGEMENT
John C. Koss John C. Koss
Chairman of the Board Chairman of the Board
Koss Corporation
Michael J. Koss
President Thomas L. Doerr
Chief Executive Officer President
Chief Operating Officer Doerr Corporation
Chief Financial Officer
Victor L. Hunter
John C. Koss, Jr. President
Vice President-Sales Hunter Business Direct
Daniel Esposito Michael J. Koss
Vice President-Corporate Systems President, C.E.O.,
C.O.O., C.F.O.
Sujata Sachdeva
Vice President-Finance Lawrence S. Mattson
Retired President
Jill McCurdy Oster Company
Vice President-Product Development
Martin F. Stein
Lenore Lillie Chairman
Vice President-Operations Eyecare One Inc.
Richard W. Silverthorn John J. Stollenwerk
Secretary President
General Counsel Allen-Edmonds Shoe Corporation
Declan Hanley
Vice President-International Sales
ANNUAL MEETING
October 22, 1998
Performance Center
Koss Corporation
4129 N. Port Washington Avenue INDEPENDENT ACCOUNTANTS
Milwaukee, WI 53212
PricewaterhouseCoopers LLP
TRANSFER AGENT Milwaukee, Wisconsin
Questions regarding change of address, LEGAL COUNSEL
stock transfer, lost certificate, or
information on a particular account Whyte Hirschboeck Dudek S.C.
should be directed in writing to:
Firstar Trust Company
Box 2077
Milwaukee, WI 53201
Attn: Nikhat Quryski
27
<PAGE> 28
EXHIBIT INDEX
The Company will furnish a copy of any exhibit described below upon
request and upon reimbursement to the Company of its reasonable expenses of
furnishing such exhibit, which shall be limited to a photocopying charge of
$0.25 per page and, if mailed to the requesting party, the cost of first-class
postage.
<TABLE>
<CAPTION>
Designation Incorporation
of Exhibit Exhibit Title by Reference
- ----------- ------------- -------------
<S> <C> <C>
3.1 Certificate of Incorporation of Koss Corporation, as in
effect on September 25, 1996.............................. (1)
3.2 By-Laws of Koss Corporation, as in effect on
September 25, 1996....................................... (2)
4.1 Certificate of Incorporation of Koss Corporation, as in
effect on September 25, 1996............................. (1)
4.2 By-Laws of Koss Corporation, as in effect on
September 25, 1996....................................... (2)
10.1 Officer Loan Policy....................................... (3)
10.3 Supplemental Medical Care Reimbursement Plan.............. (4)
10.4 Death Benefit Agreement with John C. Koss................. (5)
10.5 Stock Purchase Agreement with John C. Koss................ (6)
10.6 Salary Continuation Resolution for John C . Koss.......... (7)
10.7 1983 Incentive Stock Option Plan ......................... (8)
10.8 Assignment of Lease to John C. Koss ...................... (9)
10.9 Addendum to Lease ........................................ (10)
10.10 1990 Flexible Incentive Plan ............................. (11)
10.12 Loan Agreement, effective as of February 17, 1995 ........ (12)
10.13 Amendment to Loan Agreement dated June 15, 1995,
effective as of February 17, 1995......................... (13)
10.14 License Agreement dated November 15, 1991 between
Koss Corporation and Trabelco N.V. (a subsidiary
of Hagemeyer N.V.) for North America, Central
America and South America (including Amendment
to License Agreement dated November 15, 1991;
Renewal Letter dated November 18, 1994; and Second
Amendment to License Agreement dated September 29, 1995)... (14)
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
10.15 License Agreement dated September 29, 1995 between
Koss Corporation and Trabelco N.V. (a subsidiary
of Hagemeyer N.V.) for Europe (including First
Amendment to License Agreement dated December 26,
1995) ........................................................................ (15)
10.16 Third Amendment and Assignment of License Agreement to Jiangsu
Electronics Industries Limited dated as of March 31, 1997 .................... (16)
10.17 Fourth Amendment to License Agreement dated as of May 29, 1998
filed herewith................................................................ filed herewith
10.18 License Agreement dated June 30, 1998 between Koss Corporation
and Logitech Electronics Inc. (including Addendum to License
Agreement dated June 30, 1998)................................................ filed herewith
10.19 Consent of Directors (Supplemental Executive Retirement Plan
for Michael J. Koss dated March 7, 1997)...................................... (17)
22 List of Subsidiaries of Koss Corporation ..................................... (18)
27 Financial Data Schedule....................................................... filed herewith
(1) Incorporated by reference from Exhibit 3.1 to the
Company's Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(2) Incorporated by reference from Exhibit 3.2 to the
Company's Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(3) Incorporated by reference from Exhibit 10.1 to the Company's
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(4) Incorporated by reference from Exhibit 10.3 to the Company's
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(5) Incorporated by reference from Exhibit 10.4 to the Company's
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(6) Incorporated by reference from Exhibit 10.5 to the Company's
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(7) Incorporated by reference from Exhibit 10.6 to the Company's
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(8) Incorporated by reference from Exhibit 10.7 to the Company's
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(9) Incorporated by reference from Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1988
(Commission File No. 0-3295)
</TABLE>
29
<PAGE> 30
(10) Incorporated by reference from Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1988
(Commission File No. 0-3295)
(11) Incorporated by reference from Exhibit 25 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1990
(Commission File No. 0-3295)
(12) Incorporated by reference from Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1995 (Commission File No. 0-3295)
(13) Incorporated by reference from Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995
(Commission File No. 0-3295)
(14) Incorporated by reference from Exhibit 10.14 to the Company's
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(15) Incorporated by reference from Exhibit 10.15 to the Company's
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(16) Incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 (Commission File No. 0-3295)
(17) Incorporated by reference from Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 (Commission File No. 0-3295)
(18) Incorporated by reference from Exhibit 22 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1988
(Commission File No. 0-3295)
30
<PAGE> 31
Annual Report 1998
Dear Stockholders,
We are pleased to report a third year of consecutive record sales for fiscal
year 1998.
Sales for the fiscal year ending June 30, 1998 were $40,638,747 compared
with $39,554,720 in fiscal year 1997. Net income for the year was $5,477,629
compared with $3,587,688 for the same period in 1997, an increase of 53%.
Diluted earnings per share for the year were $1.65 compared with $1.07 for the
same period a year ago, an increase of 54%.
Contributing to the success of this record year was an exceptionally strong
fourth quarter. The capability of meeting customer demand came on the heels of
the Company's decision to smooth production through a multi million dollar
commitment to raising our finished goods inventory. Increasing finished goods
inventory has helped reduce our seasonal labor demand and variances in cost and
quality. We have also instituted an aggressive program to outsource all
non-critical sub-assembly operations to lower our cost of sales and increase our
gross margin contribution.
In the fourth quarter, the Company also finalized an agreement with Jiangsu
Electronics Industries Limited of Hong Kong to expand the license of the Koss
name to include mobile electronics for the car stereo market. A second agreement
was also reached with Logitech Electronics, Inc. of Ontario, Canada for Koss
branded multimedia/computer speakers. These two agreements are expected to
contribute increases in royalty minimums of 27% and 55% over the course of the
next two fiscal years.
The stock market has not reflected a multiple of earnings that is consistent
with historical norms for the Company. We have therefore continued to
re-purchase shares of the Company's stock from the open market or in privately
negotiated transactions. We believe that fundamental changes in the nature of
the stock market itself, coupled with general market concerns, have temporarily
orphaned many small cap stocks. In fact, we plan to re-purchase approximately
$3.5 million dollars in stock during the coming fiscal year to take advantage of
the market's lower than average EPS multiple on Koss stock.
1998 marks the 40th Anniversary of the SP/3 Stereophone. The Company is
focusing on the base stereophone business as it looks to new and expanded
applications in the computer and telephony segments of the marketplace. This
strategic focus has allowed the company to continue its earnings growth
reflecting solid ROE and ROI performance. Management remains committed to the
long range, profitable return on it's prudentially deployed capital in support
of the stereo headphone industry we created 40 years ago.
We would like to take this opportunity to thank our customers, suppliers,
stockholders, as well as the entire Koss team for their efforts during this
record setting year. We look to each of you for continued support and dedication
in the year ahead.
Sincerely,
John C. Koss Michael J. Koss
Chairman President and CEO
<PAGE> 32
CONSOLIDATED STATEMENTS OF INCOME KOSS CORPORATION
<TABLE>
<CAPTION>
Year Ended June 30, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $40,638,747 $39,554,720 $36,422,377
Cost of goods sold 24,843,968 25,922,621 25,241,623
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 15,794,779 13,632,099 11,180,754
Selling, general and
administrative expense 7,822,338 8,594,260 8,528,098
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 7,972,441 5,037,839 2,652,656
Other income (expense)
Royalty income 1,206,359 1,131,250 1,303,502
Interest expense, net (253,171) (200,401) (40,195)
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,925,629 5,968,688 3,915,963
Provision for income taxes 3,448,000 2,381,000 1,555,000
- ----------------------------------------------------------------------------------------------------------------------
Net income $5,477,629 $ 3,587,688 $2,360,963
======================================================================================================================
Earnings per common share:
Basic $1.68 $1.09 $ .69
Diluted $1.65 $1.07 $ .67
======================================================================================================================
Dividends per common share None None None
======================================================================================================================
</TABLE>
<PAGE> 33
CONSOLIDATED BALANCE SHEETS KOSS CORPORATION
<TABLE>
<CAPTION>
As of June 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 14,778 $ 32,551
Accounts receivable, less allowances of
$556,290 and $928,605, respectively 8,387,839 6,992,513
Inventories 19,486,058 14,547,653
Prepaid expenses 548,892 603,997
Income taxes receivable -- 65,493
Deferred income taxes 555,946 756,946
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 28,993,513 22,999,153
- -------------------------------------------------------------------------------------------------------------------------
Equipment and Leasehold improvements, at cost:
Leasehold improvements 742,289 735,930
Machinery, equipment, furniture and fixtures 4,587,729 4,548,096
Tools, dies, molds and patterns 8,351,591 8,176,023
- -------------------------------------------------------------------------------------------------------------------------
13,681,609 13,460,049
Less--accumulated depreciation 11,619,078 10,982,520
- -------------------------------------------------------------------------------------------------------------------------
2,062,531 2,477,529
Deferred Income Taxes 364,135 258,135
Intangible and Other Assets 608,590 598,106
- -------------------------------------------------------------------------------------------------------------------------
$32,028,769 $ 26,332,923
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,956,877 $ 741,646
Accrued liabilities 1,314,701 994,877
Deferred revenue -- 473,482
Income taxes payable 677,527 --
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,949,105 2,210,005
- -------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 2,746,000 1,221,000
Deferred Compensation and Other Liabilities 1,252,504 1,137,424
Contingently Redeemable Equity Interest 1,490,000 1,490,000
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Investment:
Common stock, $.01 par value,
authorized 8,500,000 shares;
issued and outstanding 3,177,269
and 3,323,791 shares, respectively 31,773 33,238
Paid in capital -- 2,328,677
Contingently redeemable common stock (1,490,000) (1,490,000)
Cumulative translation adjustment (71,322) (71,322)
Retained earnings 24,120,709 19,473,901
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 22,591,160 20,274,494
- -------------------------------------------------------------------------------------------------------------------------
$32,028,769 $ 26,332,923
=========================================================================================================================
</TABLE>
<PAGE> 34
STOCKHOLDERS' INFORMATION KOSS CORPORATION
Koss Corporation's 1998 Annual Report is presented in a simple, readable
and functional style. This Annual Report contains condensed financial statements
only. The detailed financial statements including footnotes are included in the
Form 10-K which has been provided to all stockholders along with the 1998 Annual
Report. The Company believes this manner of presentation provides a concise
summary for those who want to be kept informed while at the same time allowing
those who feel it necessary the opportunity to investigate further.
Koss Corporation common stock is traded on the Over the Counter market
and quotations are available through the National Market System. The trading
symbol is KOSS.
For additional Annual Reports, Form 10-K's or Proxy materials write to:
Investment Relations
Koss Corporation
4129 N. Port Washington Ave.
Milwaukee, WI 53212
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Koss Corporation
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Koss Corporation and its
subsidiaries as of June 30, 1998 and 1997, and the related consolidated
statements of income, of stockholders' investment and of cash flows for each of
the three years in the period ended June 30, 1998 (not presented herein); and in
our report dated July 15, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheets as of June 30, 1998 and
1997, and the related condensed consolidated statements of income for each of
the three years in the period ended June 30, 1998, when read in conjunction with
the consolidated financial statements from which it has been derived, is fairly
stated in all material respects in relation thereto.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 15, 1998
<PAGE> 35
MANAGEMENT INFORMATION KOSS CORPORATION
OFFICERS AND DIRECTORS
SENIOR MANAGEMENT
John C. Koss John C. Koss
Chairman of the Board Chairman of the Board
Michael J. Koss
President Thomas L. Doerr
Chief Executive Officer President
Chief Operating Officer Doerr Corporation
Chief Financial Officer
Victor L. Hunter
John C. Koss, Jr. President
Vice President-Sales Hunter Business Direct
Daniel Esposito Michael J. Koss
Vice President-Corporate Systems President, C.E.O.,
C.O.O., C.F.O.
Sujata Sachdeva
Vice President-Finance Lawrence S. Mattson
Retired President
Jill McCurdy Oster Company
Vice President-Product Development
Martin F. Stein
Lenore Lillie Chairman
Vice President-Operations Eyecare One Inc.
Richard W. Silverthorn John J. Stollenwerk
Secretary President
General Counsel Allen-Edmonds Shoe Corporation
Declan Hanley
Vice President-International Sales ANNUAL MEETING
October 22, 1998
INDEPENDENT ACCOUNTANTS Performance Center
Koss Corporation
PricewaterhouseCoopers LLP 4129 N. Port Washington Avenue
Milwaukee, Wisconsin Milwaukee, WI 53212
TRANSFER AGENT
LEGAL COUNSEL
Questions regarding change
Whyte Hirschboeck Dudek S.C. of address, stock transfer,
lost certificate, or
information on a particular
account should be directed in
writing to: Firstar Trust Company
Box 2077
Milwaukee, WI 53201
Attn: Mr. Eugene R. Lee
<PAGE> 1
FOURTH AMENDMENT TO LICENSE AGREEMENT
THIS FOURTH AMENDMENT TO LICENSE AGREEMENT ("Fourth Amendment") made
and entered into this 29 day of May, 1998, by and between KOSS CORPORATION, a
Delaware corporation ("LICENSOR"), and JIANGSU ELECTRONICS INDUSTRIES LIMITED, a
British Virgin Islands company ("LICENSEE").
WITNESSETH:
WHEREAS, LICENSOR and LICENSEE (by way of assignment) are parties to a
certain License Agreement dated November 15, 1991, as amended by Amendment to
License Agreement dated November 15, 1991, a Second Amendment to License
Agreement dated September 29, 1995 and a Third Amendment and Assignment of
License Agreement dated March 31, 1997 (as amended, the "License Agreement"):
and
WHEREAS, the parties now desire to further amend certain terms and
provisions of the License Agreement as hereinafter provided.
NOW, THEREFORE, the parties hereby agree as follows:
1. Section 10 of the Third Amendment and Assignment of License
Agreement dated March 31, 1997, is hereby amended to provide that LICENSEE shall
pay to LICENSOR the following Minimum Royalties for the Contract Years set forth
below:
Year Minimum Royalties
---- -----------------
1998 $750,000
1999 $800,000
2000 $850,000
2. Section 1.2 of the License Agreement dated November 15, 1991, is
hereby deleted in its entirety and the following inserted in its place:
1.2 "Products" mean the consumer electronic products of LICENSEE set
forth on Exhibit B attached hereto; provided, however, that, except as
provided in the immediately following sentence, any such consumer
electronic products set forth on Exhibit B which have not been sold by
LICENSEE in the Territory (as defined in the first sentence of Section
1.4, as amended pursuant to this Fourth Amendment), bearing any of the
Licensed Trademarks, by December 31, 1998, shall be deleted from
Exhibit B as of January 1, 1999, and as of that date, such products
shall not be considered to be part of the Products. Notwithstanding the
immediately preceding sentence, such products, which otherwise would be
so deleted if not for the following exception ("otherwise-deleted
products"), shall not
1
<PAGE> 2
be deleted with respect to only the United States, Canada and Mexico
until January 1, 2000, and then only with respect to those
otherwise-deleted products which have not been sold by LICENSEE in the
United States, Canada or Mexico, bearing any of the Licensed
Trademarks, by December 31, 1999. A sale for the purpose of this
Section 1.2 shall be a sale in the normal course of business, and not
merely to preserve any rights under the License Agreement. Minimum
Royalties shall not be affected by the deletion of any products from
the Products. Notwithstanding any other provisions of, and without
diminishing LICENSEE's obligations under, the License Agreement,
LICENSOR, after December 31, 1998, shall have no obligations to
LICENSEE with respect to either products deleted from the Products as
of January 1, 1999, or otherwise-deleted products whether or not
eventually deleted, including without limitation, the indemnification
obligations under Section 11.1, the royalty-reimbursement obligations
under Section 10.1, the minimum-royalty-reduction obligations under
Section 10.1, and the obligations to obtain or maintain trademark
applications or registrations.
3. Section 1.4 of the License Agreement dated November 15, 1991, is
hereby deleted in its entirety and the following inserted in its place:
1.4 Without limiting Seller's rights under Section 6 of the Third
Amendment and Assignment of License Agreement dated March 31, 1997,
"Territory" means the United States of America, Puerto Rico, Canada,
Mexico, Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,
Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica,
Nicaragua, Panama, Paraguay, Peru, Trinidad & Tobago, Uruguay and
Venezuela. With the written consent of LICENSOR, which consent shall
not be unreasonably withheld or delayed, the Territory may be expanded
to include the jurisdictions of Aruba, Bermuda, Cuba, French Guiana,
Grenada, Guyana, Haiti, Surinam and/or other jurisdictions in the
Territory as defined prior to this Fourth Amendment. Except as
otherwise indicated in the License Agreement, all licensed use of the
Licensed Trademarks in such expanded jurisdictions shall be subject to
the same terms and conditions as if such expanded jurisdictions were
included in the Territory as defined in the first sentence of this
Section 1.4. Except as otherwise provided in the License Agreement,
after providing written consent, LICENSOR shall promptly cause the
appropriate trademark applications to be filed in any such expanded
jurisdictions, and all costs associated with the preparation, filing,
prosecution, registration and maintenance of such applications and
resulting registrations shall be paid by LICENSOR; provided, however
that LICENSEE shall reimburse LICENSOR for a portion of such costs in
any such expanded jurisdiction in which Royalties paid by LICENSEE to
LICENSOR for sales of the Licensed Products in such expanded
jurisdiction either prior to termination of this License Agreement or
within the first three full calendar years following such consent,
whichever comes first, do not exceed U.S. $12,000 in the same such
expanded jurisdiction. The portion to be reimbursed by LICENSEE in each
such expanded jurisdiction shall be the
2
<PAGE> 3
difference between U.S. $12,000 and the amount of Royalties paid by
LICENSEE to LICENSOR for sales of the Licensed Products in each such
expanded jurisdiction either prior to termination of the License
Agreement or within the first three full calendar years following
consent, whichever comes first.
4. Section 8.5 of the License Agreement dated November 15, 1991, and
Sections 16(r) and 21 of the Third Amendment and Assignment of License Agreement
dated March 31, 1997, are hereby deleted in their entirety, and the following
inserted in their place:
21. This License Agreement shall be governed by the substantive laws of
the State of Wisconsin (regardless of laws that might be applicable
under principles of conflicts of laws) as to all matters, including but
not limited to matters of validity, construction, effect and
performance. Resolution of any and all disputes between LICENSOR and
LICENSEE arising from or in connection with this License Agreement,
whether based on contract, tort, common law, equity, statute,
regulation, order or otherwise, shall be governed by and settled in
accordance with binding arbitration; provided, however, that the three
arbitrators selected shall each have extensive knowledge in the area of
federal trademark law. If the parties cannot agree on the selection of
three arbitrators, each party shall select one arbitrator, and those
two arbitrators together shall select the third arbitrator, and the
three arbitrators, each of which shall have extensive knowledge in the
area of federal trademark law, shall resolve the dispute as provided
herein. The arbitrators' findings and decisions shall be limited to the
subject matter of the dispute, and such findings and decisions shall be
in writing and shall be final and binding on the parties hereto, and
shall specify the reasons for and facts on which such findings and
decisions were reached. The parties shall bear equally the arbitrators'
fees and charges, and each party shall bear its other costs and
expenses for the arbitration, including attorneys' fees. The
arbitration shall be conducted in Milwaukee, Wisconsin. To the extent
that the parties hereto need to enforce the arbitration provisions in
this License Agreement or need to enforce or otherwise give effect to
any arbitration finding, decision or award, the parties hereby agree
that any such action or proceeding shall be adjudicated before a
federal or state court located in Milwaukee, Wisconsin, and they hereby
submit to the exclusive jurisdiction of the courts of the State of
Wisconsin located in Milwaukee, Wisconsin, and of the federal courts
located in Milwaukee, Wisconsin, with respect to any such action or
proceeding commenced by either party, and irrevocably waive any
objection they now or hereafter may have respecting the venue of any
such action or proceeding brought in such a court or respecting the
fact that such court is an inconvenient forum, and hereby consent to
the service of process in any such action or proceeding by means of
registered or certified mail, return receipt requested, in care of the
applicable address set forth under the notice provisions in this
License Agreement.
3
<PAGE> 4
5. Section 10.1 of the License Agreement dated November 15, 1991, is
hereby deleted in its entirety and the following inserted in its place:
10.1 LICENSOR shall be required to file trademark applications and to
seek trademark registrations for the Licensed Trademarks in the
Territory in order to encompass Licensed Products added pursuant to
this Fourth Amendment, but only if specifically requested by LICENSEE
and all costs associated with the preparation, filing, prosecution,
registration and maintenance of such applications and registrations
shall be paid in advance by LICENSEE. LICENSOR shall not be required to
pursue or maintain any such application or registration for which such
costs have not been paid in advance by LICENSEE at LICENSOR's request.
LICENSEE shall cooperate by providing necessary samples, invoices or
other documents necessary to support all applicable applications and
registrations for the Licensed Trademarks in connection with the
Licensed Products.
In the event LICENSOR is unable to register or to maintain its
registrations for one or more of the Licensed Trademarks in connection
with the Licensed Products in any jurisdiction in the Territory, the
parties agree to negotiate in good faith a mutually acceptable
resolution with respect to such jurisdictions, with the understanding
that neither LICENSOR nor LICENSEE shall have any liability to the
other for such inability to register or to maintain such registrations
for any such trademarks; provided, however, that in the event any
trademark application is successfully opposed in the United States or
Canada, and as a result of such successful opposition LICENSEE is
prohibited from selling Licensed Products in either the United States
or Canada, LICENSOR shall reimburse to LICENSEE the amount of Royalties
theretofore received by LICENSOR under the License Agreement relating
to the sale of the prohibited Licensed Products only, in the prohibited
jurisdiction of the United States and/or Canada only, during the three
(3) year period immediately preceding such prohibition; provided,
however, that (i) all such reimbursements shall not exceed a total of
Three Million Dollars ($3,000,000) for all prohibited Licensed Products
in both jurisdictions, (ii) LICENSOR shall not be required to make any
such reimbursement to LICENSEE if any such successful opposition or
prohibition would not have occurred if LICENSOR had not lost any
trademark rights due to LICENSEE's non-use or misuse of any of the
Licensed Trademarks and (iii) LICENSOR shall not be required to make
any such reimbursement to LICENSEE relating to prohibited Licensed
Products consisting of consumer electronic products added to Exhibit B
pursuant to this Fourth Amendment. LICENSEE shall be permitted to
terminate this License Agreement if, as a result of any successful
opposition, cancellation or infringement action relating to any of the
Licensed Trademarks in the Territory resulting in any prohibition as to
use of any of the Licensed Trademarks in the Territory, LICENSEE's
total net sales in the Territory decrease by ten percent (10%) or more;
provided, however, that (i) prohibited Licensed Products consisting of
consumer electronic products added to Exhibit B pursuant to this
4
<PAGE> 5
Fourth Amendment shall not be taken into consideration for this purpose
and (ii) LICENSEE shall not be able to so terminate this License
Agreement if any such opposition or cancellation action resulting in
any such prohibition as to use would not have occurred if LICENSOR had
not lost any trademark rights due to LICENSEE's non-use or misuse of
the Licensed Trademarks.
In the event that LICENSEE is prohibited, by LICENSOR, or by either a
court or an administrative agency, or both, having legal authority in
the jurisdiction at issue, from selling any or all of the Licensed
Products in any jurisdiction in the Territory as a result of any actual
or potential trademark infringement action against LICENSOR, LICENSEE's
Minimum Royalties shall be reduced, for no longer than such prohibition
remains in effect, by the sum of Royalties paid by LICENSEE to LICENSOR
for sales of the prohibited Licensed Products in the prohibited
jurisdiction in the Contract Year immediately preceding the year such
prohibition went into effect, relative to the sum of all Royalties paid
by LICENSEE to LICENSOR for sales of all Licensed Products in the
Territory in that same Contract Year; provided, however, that any such
reduction of the Minimum Royalties shall only apply to the Contract
Period consisting of the years 1998, 1999 and 2000 and shall not be
taken into consideration (i) to in any way reduce all future Minimum
Royalties calculated in accordance with Section 7.3 of the License
Agreement, or (ii) to reduce by fifty percent (50%) the amount of
Royalties that LICENSEE shall be required to pay LICENSOR pursuant to
Section 7.1 of the License Agreement.
6. The heading for Section 11 of the License Agreement dated
November, 15, 1991, Section 11.1 of the License Agreement dated November 15,
1991, and Section 16(g) of the Third Amendment and Assignment of License
Agreement dated March 31, 1997, are hereby deleted in their entirety and the
following inserted in their place:
11. REPRESENTATIONS AND INDEMNITIES
11.1 LICENSOR represents that, as of the date of this Fourth Amendment,
LICENSOR owns at least one application or registration for at least one
of the Licensed Trademarks in each jurisdiction in the Territory (as
defined in the first sentence of Section 1.4, as amended pursuant to
this Fourth Amendment). Listed in Exhibit E to the License Agreement
are LICENSOR's pending trademark applications and issued trademark
registrations relating to the License Agreement for the Licensed
Trademarks in the Territory as of the date of this Fourth Amendment. If
LICENSEE complies with the notice, cooperation and assistance
requirements of this Section 11.1 herein, LICENSOR agrees to indemnify
LICENSEE, its parent, subsidiaries and affiliates, and all officers,
directors, agents and employees thereof, and any of them, from any and
all expenses, damages, claims, suits, actions, judgments and costs
whatsoever (including reasonable attorneys' fees) (collectively,
"Damages") which LICENSEE may hereinafter
5
<PAGE> 6
incur, suffer or be required to pay arising out of or in connection
with any third-party claim, suit or action resulting from the use by
LICENSEE of the Licensed Trademarks in the Territory pursuant to this
License Agreement (collectively, "Third-Party Claim"); provided,
however, that LICENSOR's liability to indemnify LICENSEE (i) shall not
apply in any situation in which any Damages would not have occurred if
LICENSOR had not lost any trademark rights due to LICENSEE's non-use or
misuse of any of the Licensed Trademarks, (ii) shall not include any
Damages to the extent to which Damages are attributable to LICENSEE's
failure to cease use of the Licensed Trademarks pursuant to LICENSOR's
oral or written instructions as a result of any actual or potential
Third-Party Claim, (iii) shall not exceed the sum of the amount of
Royalties theretofore received by LICENSOR under this License
Agreement, relating to sales of only the Licensed Products at issue in
those countries affected by a final settlement, or a final
non-appealable judgment against LICENSEE, arising out of the
Third-Party Claim, during the three (3) year period immediately
preceding initiation of the Third-Party Claim to which the
indemnification relates and (iv) shall not include any Damages to the
extent to which such Damages are attributable to any consumer
electronic products added to Exhibit B pursuant to this Fourth
Amendment. The indemnification provided by LICENSOR shall only cover
Damages incurred by LICENSEE in connection with a final settlement, or
a final, non-appealable judgment against LICENSEE, arising out of a
Third-Party Claim; provided, however, that in no event shall such
indemnification include any loss of profits or consequential or
indirect damages incurred by LICENSEE. LICENSEE shall give LICENSOR
prompt written notice, cooperation and assistance in connection with
any Third-Party Claim, and LICENSOR shall have complete control over
the defense and settlement thereof.
7. Exhibit A to the License Agreement dated November 15, 1991, is
hereby deleted in its entirety and the Exhibit A attached hereto shall be
inserted in its place.
8. Exhibit B to the License Agreement dated November 15, 1991, is
hereby deleted in its entirety and the Exhibit B attached hereto shall be
inserted in its place.
9. Exhibit D to the License Agreement dated November 15, 1991, is
hereby deleted in its entirety and the Exhibit D attached hereto shall be
inserted in its place.
6
<PAGE> 7
10. Except as hereby amended, the License Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment on the day and year first above written.
KOSS CORPORATION JIANGSU ELECTRONICS INDUSTRIES
LIMITED
By:/s/ Michael Koss By: /s/ Patrick Lam
----------------------- ---------------------------
Michael Koss, President
Name: PATRICK LAM
-------------------------
Title: VICE PRESIDENT
------------------------
CONSENT OF GUARANTOR
The undersigned, Orient Power Holdings Limited, a Bermuda company
("Orient Power"), for good and valuable consideration, the receipt of which is
hereby acknowledged, hereby consents to the foregoing Fourth Amendment to
License Agreement ("Fourth Amendment") and reaffirms its guarantee of the
performance by Jiangsu Electronics Industries Limited ("Jiangsu Electronics") or
any sublicensee of Jiangsu Electronics (Jiangsu Electronics and any sublicensee
are hereinafter collectively referred to as "Jiangsu") of all of Jiangsu's
obligations under (a) the Fourth Amendment and (b) that certain License
Agreement between Koss Corporation, as Licensor, and Trabelco N.V., as Licensee,
dated November 15, 1991, as amended by an Amendment to License Agreement dated
November 15, 1991, and a Second Amendment to License Agreement dated September
29, 1995, and a Third Amendment and Assignment of License Agreement dated as of
March 31, 1997 between Trabelco N.V., Jiangsu Electronics, Hagemeyer Electronics
(N.A.), Inc., Hagemeyer Consumer Products, Inc. d/b/a/ Koss Electronics
Products, KCP Limited and Koss Corporation (collectively, that certain License
Agreement and the amendments thereto are hereinafter referred to as the "License
Agreement"). Orient Power also guarantees the payment to Koss Corporation of any
and all amounts owed to Koss Corporation by Jiangsu under the Fourth Amendment
and the License Agreement, including but not limited to, the indemnity
obligations of Jiangsu thereunder.
Dated: May 29, 1998
ORIENT POWER HOLDINGS LIMITED
By: /s/ Simon Poon
------------------------
Name: SIMON POON
----------------------
Title: CEO
---------------------
7
<PAGE> 8
Exhibit A
KOSS (Plain Block Letters) (as shown in U.S. Registration No. 1,821,035)
KOSS (Stylized) (as shown in U.S. Registration No. 1,850,556)
KOSS & Design (as shown in U.S. Registration No. 2,070,098)
<PAGE> 9
Exhibit B
Product Royalty
- ------- -------
Clock Radios 2.0%
Radios (including mobile*) without a cassette or compact
disc player 3.0%
Audio systems of any nature (including mobile*) with a
cassette player but without a compact disc player 2.0%
Audio systems of any nature (including mobile*) with a
compact disc player and/or CD changer 1.5%
Power Amplifiers 1.5%
Telephones and telephone answering devices 2.0%
Televisions 1.5%
Video cassette recorders 1.5%
*All products which include the word "mobile" in their description in this
Exhibit B shall mean that such products so described shall include products
which are designed for use in automobiles or as battery-operated portable units.
<PAGE> 10
EXHIBIT D
Calculation of Quarterly Royalties Payment
<TABLE>
<CAPTION>
Total Sales Returns Net Sales Royalty Rate Subtotal
----------- -------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Clock Radios $ $ 2.0%
----------- -------------- ----------- ---------
Radios (including mobile) 3.0%
without a cassette or ----------- -------------- ----------- ---------
compact disc player
Audio systems of any 2.0%
nature (including mobile) ----------- -------------- ----------- ---------
with a cassette player but
without a compact disc
player
Audio systems of any 1.5%
nature (including mobile) ----------- -------------- ----------- ---------
with a compact disc player
and/or CD changer
Power Amplifiers 1.5%
----------- -------------- ----------- ---------
Telephones and telephone 2.0%
answering devices ----------- -------------- ----------- ---------
Televisions 1.5%
----------- -------------- ----------- ---------
Video cassette recorders 1.5%
----------- -------------- ----------- ---------
Subtotal $ x
---------
Subtotal $ x
--------------
Less 2% of itemized discounts,
rebates and shipping costs ( )
--------------
ROYALTIES PAYMENT $
--------------
</TABLE>
<PAGE> 11
Exhibit E
UNITED STATES
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
PUERTO RICO
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
CANADA
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
MEXICO
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
ARGENTINA
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
BOLIVIA
KOSS (Plain Block Letters) Pending Application
KOSS (Stylized) Pending Application
KOSS (Plain Block Letters) Pending Application
<PAGE> 12
Exhibit E
BRAZIL
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Pending Application
KOSS & Design Registered
CHILE
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Pending Application
KOSS & Design Pending Application
COLOMBIA
KOSS & Design Pending Application
COSTA RICA
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
DOMINICAN REPUBLIC
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
ECUADOR
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
2
<PAGE> 13
Exhibit E
EL SALVADOR
KOSS (Plain Block Letters) Pending Application
KOSS (Stylized) Registered
KOSS & Design Pending Application
GUATEMALA
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Pending Application
KOSS & Design Registered
HONDURAS
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
JAMAICA
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
NICARAGUA
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
PANAMA
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
3
<PAGE> 14
Exhibit E
PARAGUAY
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
PERU
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
TRINIDAD & TOBAGO
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
URUGUAY
KOSS (Plain Block Letters) Registered
KOSS (Stylized) Registered
KOSS & Design Registered
VENEZUELA
KOSS (Plain Block Letters) Pending Application
KOSS (Stylized) Pending Application
KOSS & Design Pending Application
4
<PAGE> 15
ADDENDUM TO LICENSE AGREEMENT
THIS ADDENDUM TO LICENSE AGREEMENT ("Addendum") is made and entered
into this 30 day of June, 1998, by and between KOSS CORPORATION, a
Delaware corporation ("LICENSOR"), and LOGITECH ELECTRONICS INC., an Ontario
company ("LICENSEE").
WITNESSETH:
WHEREAS, LICENSOR and LICENSEE are parties to a certain License
Agreement dated June 30, 1998 (the "License Agreement"); and
WHEREAS, the parties now desire to add certain terms and provisions to
the License Agreement as hereinafter provided.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. DEFINITIONS.
1.1 All defined terms used in this Addendum shall have
the same meaning as set forth in the License
Agreement unless otherwise defined in this Addendum.
1.2 "Licensed Trademarks" shall mean the "Koss"
trademarks listed on Exhibit A to this Addendum.
1.3 "Accessories" shall mean the consumer electronic
accessory products of LICENSEE set forth on Exhibit B
to this Addendum.
1.4 "Licensed Accessories" shall mean all Accessories of
LICENSEE which have the Licensed Trademarks affixed
or attached thereto in any manner.
2. GRANT OF LICENSE. Subject to all of the terms and conditions
of this Addendum, LICENSOR hereby grants to LICENSEE the exclusive right and
license to use the Licensed Trademarks in Canada only, during the Contract
Period, in connection with, and only with, the manufacturer, promotion,
distribution and sale of Accessories.
3. INCORPORATION OF PROVISIONS OF LICENSE AGREEMENT.
3.1 The following provisions of the License Agreement
(the "Incorporated Provisions") are hereby
incorporated into this Addendum as covenants and
agreements between LICENSOR and LICENSEE, with the
same force and effect as if fully set forth herein:
1
<PAGE> 16
Sections 2.2, 2.3, 2.4, 3.1, 3.2, 3.3, 3.4,
4.1, 4.2, 5.1, 5.2, 5.3, 5.4, 6.1, 6.4, 6.5,
7.1, 7.2, 7.3, 7.4, 8.1, 8.2, 8.3, 8.4, 9,
10.1, 10.2 (with no change in the amount of
products liability insurance), 11.1, 11.2,
11.3, 11.4, 12.1, 12.2, 13, 14, and 15.
3.2 All section references set forth in any of the
Incorporated Provisions herein shall continue to be
references to the applicable section of the License
Agreement.
3.3 For all Incorporated Provisions herein, the term
"Territory" as used in the License Agreement shall be
replaced in this Addendum with the term "Canada," the
term "Products" as used in the License Agreement
shall be replaced in this Addendum with the term
"Accessories," and the term "Licensed Products" as
used in the License Agreement shall be replaced in
this Addendum with the term "Licensed Accessories."
3.4 With respect to the Incorporated Provisions in this
Addendum, any reference to an Exhibit to the License
Agreement shall instead be deemed to be a reference
to the corresponding Exhibit to this Addendum. For
example, a reference in an Incorporated Provision to
Exhibit C of the License Agreement shall be deemed
instead to be a reference to Exhibit C to this
Addendum.
4. MISCELLANEOUS.
4.1 Section headings contained herein are solely for the
purpose of aiding in speedy location of subject
matter and are not in any sense to be given weight in
the construction of this Addendum. Accordingly, in
case of any question with respect to the construction
of this Addendum, it is to be construed as though
such section headings had been omitted.
4.2 This Addendum constitutes the entire agreement
between the parties hereto and may not be changed or
modified except by a writing signed by the parties
hereto.
4.3 If and to the extent that any provisions of this
Addendum are prohibited or unenforceable under any
applicable law, such provisions shall be ineffective
to the extent of such prohibition or unenforceable
without invalidating the remaining provisions hereof
or affecting the validity or enforceability of any
other provision hereof.
4.4 The failure of either party at any time or times to
demand strict performance by the other of any of the
terms, covenants or conditions set forth herein shall
not be construed as a continuing waiver or
relinquishment thereof and each may at any time
demand strict and
2
<PAGE> 17
complete performance by the other of said terms,
covenants and conditions.
4.5 This Addendum shall be governed by the substantive
laws of the State of Wisconsin (regardless of laws
that might be applicable under principles of
conflicts of laws) as to all matters, including but
not limited to matters of validity, construction,
effect and performance. Resolution of any and all
disputes between LICENSOR and LICENSEE arising from
or in connection with this Addendum, whether based on
contract, tort, common law, equity, statute,
regulation, order or otherwise, shall be governed by
and settled in accordance with binding arbitration by
three (3) arbitrators; provided, however, that the
three arbitrators selected shall each have extensive
knowledge in the area of federal trademark law. If
the parties cannot agree on the selection of three
arbitrators, each party shall select one arbitrator,
and those two arbitrators together shall select the
third arbitrator, and the three arbitrators, each of
which shall have extensive knowledge in the area of
federal trademark law, shall resolve the dispute as
provided herein. The arbitrators' findings and
decisions shall be limited to the subject matter of
the dispute, and such findings and decisions shall be
in writing and shall be final and binding on the
parties hereto, and shall specify the reasons for and
facts on which such findings and decisions were
reached. The parties hereto shall bear equally the
arbitrators' fees and charges, and each party shall
bear its other costs and expenses for the
arbitration, including attorneys' fees. The
arbitration shall be conducted in Milwaukee,
Wisconsin. To the extent that the parties hereto need
to enforce the arbitration provisions in this
Addendum or need to enforce or otherwise give effect
to any arbitration finding, decision or award, the
parties hereto hereby agree that any such action or
proceeding shall be adjudicated before a federal or
state court located in Milwaukee, Wisconsin, and they
hereby submit to the exclusive jurisdiction of the
courts of the State of Wisconsin located in
Milwaukee, Wisconsin, and of the federal courts
located in Milwaukee, Wisconsin, with respect to any
such action or proceeding commenced by either party.
The parties hereto irrevocably waive any objection
they now or hereafter may have respecting the venue
of any such action or proceeding brought in such a
court or respecting the fact that such court is an
inconvenient forum, and hereby consent to the service
of process in any such action or proceeding by means
of registered or certified mail, return receipt
requested, in care of the applicable address set
forth under the notice provisions in this Addendum.
3
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed as of the date set forth above. The effective date of this Addendum is
July 1, 1998.
KOSS CORPORATION
By:/s/ Michael J. Koss
------------------------------
Michael J. Koss
Title: President and CEO
LOGITECH ELECTRONICS INC.
By:/s/ Greg Bell
------------------------------
Print Name: Greg Bell
-------------------
Title: President and CEO
------------------------
4
<PAGE> 19
EXHIBIT A
KOSS (Plain Block Letters) (as shown in U.S. Registration No. 1,821,035)
KOSS (Stylized) (as shown in U.S. Registration No. 1,850,556)
KOSS & Design (as shown in U.S. Registration No. 2,070,098)
5
<PAGE> 20
EXHIBIT B
Description of Accessory Products to be sold under the Licensed
Trademarks.
Those accessory products of Licensee suitable for use with any audio,
video, communication, or computer products and peripherals, but specifically
excluding any type of headphone, stereophones or any type of security product or
device.
6
<PAGE> 21
EXHIBIT C
TO:
FROM: (Subcontractor) Manufacturing Factory
RE: Use of the "Koss" Brandname
The purpose of this letter is to acknowledge that ___________________ has the
right to manufacture Licensed Accessories, as defined in the Addendum to License
Agreement between Logitech Electronics Inc. and Koss Corporation dated
___________, 1998 ("Addendum"), bearing the "Koss" brandname and trademarks only
for the account of Logitech Electronics Inc. and only as a subcontract
manufacturer pursuant to Sections 2.2 and 2.3 of the License Agreement between
Logitech Electronics Inc. and Koss Corporation dated _________, 1998 and for no
other purpose. We agree that we will not use the "Koss" name on any products
other than those manufactured for Logitech Electronics Inc.'s account.
__________ agrees that neither it nor any affiliated or related individual or
entity (i) will, at any time, file any application for trademark registration or
otherwise obtain or attempt to obtain ownership of the "Koss" brandname or
trademarks, or any name or mark which is confusingly similar thereto, anywhere
in the word or (ii) directly or indirectly challenge or contest Koss
Corporation's ownership of or rights in the "Koss" brandname and tradenames,
whether for the Licensed Accessories or otherwise.
7
<PAGE> 22
EXHIBIT D
Calculation of Quarterly Royalties Payment (in U.S. Dollars)
Accessory Products Total Sales Returns Net Sales Royalty Rate
$ $ $ 10%
---------- ------ -------- -------
ROYALTIES PAYMENT U.S. $
------
8
<PAGE> 1
LICENSE AGREEMENT
THIS AGREEMENT is made this 30 day of June, 1998 by and between
KOSS CORPORATION, a Delaware corporation with its principal place of business at
4129 North Port Washington Avenue, Milwaukee, WI 53212 (the "LICENSOR") and
LOGITECH ELECTRONICS INC., an Ontario company, with its principal place of
business at 60 Bell Farm Road, Barrie, Ontario L4M5G6 (the "LICENSEE").
WITNESSETH:
WHEREAS, LICENSEE desires to obtain the right to use certain trademarks
of LICENSOR in connection with the marketing and sale of certain of LICENSEE's
products; and
WHEREAS, LICENSOR is willing to grant such rights to LICENSEE upon the
terms and conditions set forth below;
NOW, THEREFORE, for and in consideration of the premises and of the
mutual promises and conditions herein contained, the parties hereby agree as
follows:
1. DEFINITIONS.
For purposes of this Agreement, unless the context otherwise requires,
the following terms shall have the meanings set forth below:
1.1 "Licensed Trademarks" mean the "Koss" trademarks listed on Exhibit
A attached hereto.
1.2 "Products" mean the consumer electronic products of LICENSEE set
forth on Exhibit B attached hereto.
1.3 "Licensed Products" mean all Products of LICENSEE which have the
Licensed Trademarks affixed or attached thereto in any manner.
1.4 "Territory" means the United States of America, Canada, Mexico,
Australia, Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru,
Uruguay, Venezuela, French Guiana, Guyana, Suriname, Austria, Belgium,
Czechoslovakia, Greece, Hungary, Ireland, Israel, Luxembourg, The Netherlands,
Poland, Portugal, Romania, Spain, Benelux, France, Germany, England, Italy,
Switzerland, Norway, Sweden, Denmark, and Finland.
1.5 "Contract Period" means the period beginning on July 1, 1998 and
ending on June 30, 2003, and any applicable renewal period.
1
<PAGE> 2
1.6 "Contract Year" means the fiscal year of Koss Corporation (July
1-June 30).
2. GRANT OF LICENSE; LICENSOR'S SALES.
2.1 Subject to all the terms and conditions of this Agreement, LICENSOR
hereby grants to LICENSEE the exclusive right and license to use the Licensed
Trademarks within the Territory during the Contract Period in connection with,
and only with, the manufacture, promotion, distribution and sale of the
Products.
2.2 LICENSEE agrees that it will not make or authorize any use, direct
or indirect, of the Licensed Trademarks outside of the Territory; provided,
however, that subject to the provisions of Section 2.3 below, LICENSEE shall
have the right to have the Licensed Products manufactured outside the Territory
solely for sale by LICENSEE inside the Territory.
2.3 LICENSEE shall have the right to subcontract the manufacture of the
Licensed Products to another entity, provided that such entity executes a letter
agreement in form substantially similar to Exhibit C attached hereto. LICENSEE
shall not grant any other subcontracting rights other than as provided in this
Section 2.3.
2.4 LICENSEE agrees to sell Products and Licensed Products to LICENSOR
at a price equal to the price LICENSEE pays for such Products or Licensed
Products, plus ten percent (10%), terms of net ninety (90) days. Notwithstanding
anything to the contrary set forth in this Agreement, any schedule or Exhibit
hereto, or any other document, LICENSOR and LICENSEE acknowledge and agree that
LICENSOR shall continue to have the right, without any restrictions whatsoever
and on terms acceptable to LICENSOR in its sole discretion, to sell Products or
Licensed Products within the Territory or outside of the Territory (i) to the
U.S. military or U.S. government or any other military or governmental agency
until July 1, 2000, (ii) by direct mail or out of any of LICENSOR's outlet
stores existing now or in the future, or (iii) directly to customers or
end-users through LICENSOR's web site or otherwise via the internet.
3. LICENSEE'S OBLIGATIONS.
3.1 LICENSEE agrees that no Licensed Products will be manufactured,
advertised, promoted, distributed or sold:
(a) in violation of any law or regulatory restriction; or
(b) in any manner which damages the image, reputation or
goodwill of the Licensed Trademarks or of LICENSOR.
2
<PAGE> 3
3.2 LICENSEE agrees that during the Contract Period, LICENSEE will
diligently manufacture, promote, distribute and sell Licensed Products and make
and maintain adequate arrangements for the distribution, repair and servicing of
the Licensed Products throughout the Territory. LICENSEE and LICENSOR shall each
inform the other party of their respective toll-free customer service telephone
numbers, and shall inform customers who have mistakenly telephoned one party of
the other party's customer service telephone number.
3.3 LICENSEE agrees that LICENSEE will not sell refurbished Products
labeled with the Licensed Trademarks unless such Products are clearly and
conspicuously labeled as refurbished merchandise.
3.4 LICENSEE agrees that all translation costs, filing fees and all
other fees, costs and expenses associated with "registered user" filings within
the Territory shall be paid in advance by LICENSEE to LICENSOR at the request of
LICENSOR.
4. APPROVAL OF LICENSED PRODUCTS.
4.1 LICENSEE agrees that LICENSOR shall have the right to approve or
disapprove, in the manner provided herein in advance of sale, the quality,
style, appearance, material and workmanship of all Licensed Products and the
packaging therefor, and to approve or disapprove in advance any and all
trademarks, trade names, designs and logos (whether included in the Licensed
Trademarks or not) used in connection with the Licensed Products. LICENSEE shall
not advertise, distribute or sell any such Licensed Product which has not been
approved by LICENSOR. Before selling or distributing any Licensed Product,
LICENSEE shall submit to LICENSOR for its approval, artist renderings of the
proposed products and/or mock-ups with full engineering specifications together
with packaging, labels and the like. LICENSOR agrees that it shall, within
twenty (20) business days after receipt of each of the renderings and/or
mock-ups, approve or disapprove such products in writing, failing which such
products shall be deemed to have been approved. After LICENSOR has approved the
proposed products and LICENSEE has obtained tooling for the proposed products,
LICENSEE shall provide LICENSOR with off-tool and/or production samples of the
products and LICENSOR shall disapprove such samples in writing within twenty
(20) business days after LICENSOR's receipt of such items or else LICENSEE shall
be deemed to have approved them. LICENSEE shall also provide to LICENSOR, at no
cost to LICENSOR, two (2) working samples of each Product within thirty (30)
days of the commencement of production of such Product. LICENSEE agrees that
Licensed Products which are sold or distributed hereunder shall be of no lesser
quality than the corresponding samples approved by LICENSOR. LICENSOR agrees
that any approval required by LICENSOR under this Section 4.1 shall not be
unreasonably withheld.
3
<PAGE> 4
4.2 During the Contract Period, LICENSEE shall take all actions
reasonably necessary to cure any product defects in the Licensed Products and
will act to preserve the image, reputation and goodwill of the Licensed
Trademarks and of LICENSOR.
5. APPROVAL OF ADVERTISING, APPEARANCE AND USE OF LICENSED
TRADEMARKS.
5.1 LICENSEE agrees that LICENSOR shall have the right to approve or
disapprove, in advance of LICENSEE's commercial use of the Licensed Products,
the contents, appearance and presentation of all advertising materials which
incorporate the Licensed Trademarks or which make reference in any way to the
Licensed Trademarks. Before producing, publishing or distributing any
advertising materials hereunder, LICENSEE shall submit to LICENSOR, for its
approval, line art and color specifications for the materials. LICENSOR agrees
that it shall, within twenty (20) business days after receipt, approve or
disapprove such material in writing, failing which such material shall be deemed
to have been approved, provided that LICENSOR's approval shall be subject to
submission and approval of LICENSEE's final packaging materials. LICENSOR agrees
that any approval required by LICENSOR under this Section 5.1 shall not be
unreasonably withheld.
5.2 LICENSEE agrees to protect, indemnify and save harmless LICENSOR,
its parent, subsidiaries and affiliates and all officers, directors, agents,
employees and representatives thereof, and any of them, from and against any and
all expenses, damages, claims, suits, actions, judgments and costs whatsoever,
including reasonable attorneys fees, arising out of, or in any way connected
with, any claim or action relating to the contents of LICENSEE's advertising or
use of the Licensed Products, whether or not approved by LICENSOR hereunder.
5.3 LICENSEE agrees that LICENSOR shall have the right to include a
full line catalog of LICENSOR's products within each Product to which the
Licensed Trademarks are affixed and distributed by LICENSEE. A sample of the
full line catalog will be provided to LICENSEE, who shall instruct LICENSOR on a
quarterly basis as to the quantity of full line catalogs needed and the
destination where they should be shipped for LICENSEE's packaging purposes.
LICENSEE further agrees that LICENSOR shall have the right to include
promotional coupons for certain of LICENSOR's products on a quarterly basis
except as prohibited by specific retailers. Such coupons shall be provided in a
manner similar to that set forth above for the full line catalog and are to be
included in every product bearing the Licensed Trademarks and distributed by
LICENSEE.
5.4 LICENSEE agrees to provide to LICENSOR a copy of LICENSEE's most
recent list of holders of warranties on all Products distributed by LICENSEE.
LICENSOR agrees to keep such information confidential and to use it solely for
soliciting direct mail consumer sales.
4
<PAGE> 5
6. ROYALTIES; PAYMENT; RENEWAL.
6.1 During the term of this Agreement, LICENSEE will pay to LICENSOR as
royalties ("Royalties") an amount equal to ten percent (10%) of net sales of the
Licensed Products. The term "net sales" with respect to the Licensed Products
shall be defined as the total amount invoiced by LICENSEE for sales of the
Licensed Products less the total amount of returns of the Licensed Products, as
exemplified on Exhibit D attached hereto. LICENSOR and LICENSEE agree that no
Royalties shall be paid on sales of products from LICENSEE to LICENSOR.
6.2 Notwithstanding the provisions of Section 6.1, LICENSEE hereby
agrees to pay to LICENSOR during the Contract Period annual minimum Royalties
("Minimum Royalties") as follows:
Contract Year Minimum Royalties
------------ -----------------
July 1, 1998 - June 30, 1999 U.S. $125,000
July 1, 1999 - June 30, 2000 U.S. $325,000
July 1, 2000 - June 30, 2001 U.S. $425,000
July 1, 2001 - June 30, 2002 U.S. $525,000
July 1, 2002 - June 30, 2003 U.S. $600,000
If the sum of the total Royalties paid with respect to a Contract Year do not
equal or exceed the Minimum Royalties for such Contract Year, the difference
between the Minimum Royalties and the Royalties for such Contract Year shall be
due and payable thirty (30) days following the end of such Contract Year.
6.3 If upon the expiration of the initial Contract Period, LICENSOR in
its sole and absolute discretion elects to renew this Agreement as hereinafter
provided for an additional five (5) year term, the Minimum Royalties for the
first renewal period shall be the greater of the following:
Contract Year Minimum Royalties
------------- -----------------
July 1, 2003 - June 30, 2004 Actual Royalties for
the Contract Year
ending on June 30, 2003
plus 15%, or U.S.
$660,000
July 1, 2004 - June 30, 2005 Minimum Royalties for
the Contract Year
ending on June 30, 2004
plus 10%, or U.S.
$725,000
July 1, 2005 - June 30, 2006 Minimum Royalties for
the Contract Year
ending on June 30, 2005
plus 10%, or U.S.
$790,000
5
<PAGE> 6
July 1, 2006 - June 30, 2007 Minimum Royalties for the
Contract Year ending on
June 30, 2006 plus 10%,
or U.S. $875,000
July 1, 2007 - June 30, 2008 Minimum Royalties for the
Contract Year ending on June
30, 2007 plus 10%, or U.S.
$970,000
6.4 Payment of Royalties shall be made quarterly by LICENSEE to
LICENSOR on or before the 20th day following the end of each calendar quarter of
each Contract Year during the term of this Agreement (i.e. January 20, April 20,
July 20 and October 20) and within thirty (30) days after the expiration or
earlier termination of this Agreement, in respect of all Licensed Products
shipped during such quarter.
6.5 Payment of all Royalties shall be in United States funds. The late
payment of any Royalties shall bear interest at the rate of one and one-half
percent (1-1/2%) per month, or at the highest rate permitted by applicable state
law, whichever is lower.
7. BOOKS, RECORDS, AND STATEMENTS.
7.1 LICENSEE shall maintain for three (3) years following the close of
each Contract Year accurate books and records which disclose, at a minimum, the
following: the cost of sales of the Licensed Products, the amount of sales of
the Licensed Products, the amount of credits for returns, trade discounts and
customer's shipping costs, the amount of all Royalties payable hereunder by
LICENSEE and the manner in which such Royalties were determined.
7.2 LICENSEE shall deliver to LICENSOR with each quarterly payment a
detailed accounting statement showing the calculation of such Royalties payment.
Such statement shall be in sufficient detail to be audited from the books of
LICENSEE maintained pursuant to Section 7.1 hereof. By the 15th day of each
month during the Contract Period, LICENSEE shall also provide LICENSOR with a
preliminary tabulation of the sales and returns by customer and by Product model
number for the prior month, for LICENSOR's use and analysis.
7.3 Annually, within ninety (90) days after the close of each Contract
Year, LICENSEE shall furnish to LICENSOR a statement, certified to be true and
correct by LICENSEE's Chief Financial Officer, that the accounting for sales is
complete and correct, and the total sales of the Licensed Products to each
retail account.
7.4 LICENSOR, at its expense, shall have the right at any time during
regular business hours after the end of any Contract Year, upon five (5) days
written notice to LICENSEE, to have a representative of LICENSOR examine or
audit the books, accounts and records of LICENSEE which pertain to the
manufacture, distribution and sale of the
6
<PAGE> 7
Licensed Products and the amount of credit for returns, trade discounts and
customer's shipping costs with respect thereto, and other books and records as
they may be reasonably required by LICENSOR's accountants in order to verify the
figures reported in any statements furnished to LICENSOR pursuant to this
Section 7. Such books of account and records shall be made available to LICENSOR
and its accountants at LICENSEE's office located as herein stated or such other
place as the parties shall mutually agree. LICENSEE shall render all possible
assistance to LICENSOR and its accountants for the purpose of facilitating the
checking or auditing of net sales and of the figures set forth in any of
LICENSEE's statements. If the examination or audit reveals the underpayment of
any Royalties, LICENSEE shall immediately pay LICENSOR the amount of the
deficiency with interest, and if the deficiency exceeds five percent (5%) of the
amount of Royalties paid with respect to such year or years audited, LICENSEE
shall pay the cost of the examination or audit.
8. TRADEMARKS.
8.1 LICENSEE shall cause to be imprinted irremovably and legibly on
each Licensed Product manufactured, distributed or sold under this Agreement
(including, but not limited to, advertising, promotional, packaging and wrapping
material and any other such material wherein the Licensed Trademarks may
appear), the appropriate trademark and/or copyright notices, as shall be
designated in writing in advance by LICENSOR. LICENSEE agrees to deliver to
LICENSOR upon request, free of cost, samples of each Licensed Product together
with their packaging and wrapping material for approval and for trademark and/or
copyright registration purposes.
8.2 LICENSEE agrees that it will not, during the Contract Period or
thereafter, file any application for trademark registration or otherwise obtain
or attempt to obtain ownership of any name, design, logo, trademark or trade
name, within the Territory or in any other country of the world, which includes
or is confusingly similar to or suggestive of the Licensed Trademarks.
8.3 LICENSEE agrees that it will not, directly or indirectly, challenge
or contest LICENSOR's ownership of or rights in the Licensed Trademarks, whether
for the Licensed Products or otherwise.
8.4 All use of the Licensed Trademarks by LICENSEE shall inure to the
benefit of LICENSOR, and LICENSEE shall acquire no rights therein adverse to
LICENSOR.
9. MAINTENANCE OF LICENSED TRADEMARKS.
LICENSEE shall promptly notify LICENSOR in writing of any infringement
by others of the Licensed Trademarks on articles similar to the Licensed
Products if and when
7
<PAGE> 8
such become known to LICENSEE and shall provide LICENSOR with any available
evidence of such infringement. Only LICENSOR shall have the right to commence
legal proceedings against such infringer, and the expense of such legal
proceedings shall be shared equally by LICENSOR and LICENSEE. In any
infringement action, proceeding or claim brought by LICENSOR, LICENSEE, at its
expense, shall make available to LICENSOR any relevant books, records, papers,
information, designs, samples, specimens, and the like and shall cause any of
the LICENSEE's employees to be deposed or to testify, whenever requested to do
so by LICENSOR. Any damage award or recovery resulting from such legal
proceedings shall be divided equally between LICENSOR and LICENSEE.
10. INDEMNIFICATION AND INSURANCE.
10.1 LICENSEE agrees to protect, indemnify and save harmless LICENSOR,
its parent, subsidiaries and affiliates and all officers, directors, agents,
employees and representatives thereof, and any of them, from and against any and
all expenses, damages, claims, suits, actions, judgments and costs whatsoever,
including reasonable attorneys fees, arising out of, or in any way connected
with, any claim or action for the violation by LICENSEE of any statutory or
regulatory obligation, any claim or action for injury or damage to property,
personal injury, death or other cause of action involving alleged defects in
Licensed Products, and any other claim or action arising out of LICENSEE's
activities pursuant to this Agreement or other conduct of its business.
10.2 LICENSEE shall, within thirty (30) calendar days after the
execution of this Agreement, obtain from an insurance company reasonably
acceptable to LICENSOR, and maintain during the term of this Agreement and for a
period of twenty-four (24) months following the expiration or termination of
this Agreement, public and products liability insurance with a limit of
liability of not less than Five Million ($5,000,000) U.S. dollars per occurrence
in order to protect LICENSOR against any liabilities with which it may be
charged because of damage or injuries suffered by any servants, agents,
contractors, employees or customers of LICENSEE or by the general public,
resulting from the use or sale of the Licensed Products manufactured,
distributed, advertised or sold by LICENSEE or by LICENSEE's contractor.
LICENSEE agrees to cause LICENSOR's name to be entered in such policy as an
additional named insured and an additional loss payee, and to deliver to
LICENSOR a certificate thereof. Said insurance shall provide that it cannot be
canceled without the insurer first giving LICENSOR twenty (20) calendar days'
advance written notice thereof. LICENSEE shall furnish or cause to be furnished
to LICENSOR evidence of the maintenance and renewal of the insurance required
herein, including, but not limited to, copies of policies, certificates of
insurance, with applicable riders and endorsements, and proof of premium
payments.
8
<PAGE> 9
11. DEFAULT; TERMINATION.
11.1 In the event of a default by either party in the performance of
any of its obligations pursuant to this Agreement, the non-defaulting party
shall give written notice of such default to the defaulting party. Within thirty
(30) days of its receipt of such notice, the defaulting party shall cure the
default. If the defaulting party does not take such corrective actions or cure
the default within the respective time period, the non-defaulting party shall
have the right to terminate this Agreement upon the expiration of the respective
period. The right to remedy a default shall not apply to a violation of Sections
4, 5, 6 or 7 of this Agreement, which shall give LICENSOR the right, in its sole
discretion, to treat as such violation a non-curable default and to terminate
this Agreement.
11.2 Either party shall have the right to terminate this Agreement upon
ten (10) days prior notice upon the occurrence of any of the following events:
(a) If the other party shall become insolvent or shall
make an assignment for the benefit of creditors or
become the subject of receivership, bankruptcy or
other insolvency or debtor relief proceedings, or any
similar proceedings;
(b) If the other party shall cease to do business; or
(c) Except as permitted under Section 14 hereof, if the
other party shall attempt to assign any of its rights
under this Agreement.
A party's exercise of its right, pursuant to this Section 11.2, to
terminate this Agreement shall be without prejudice to any other legal or
equitable remedy such party may hold against the other party by reason of the
other party's breach of any term or condition of this Agreement.
11.3 No assignee for the benefit of creditors, receiver, liquidator,
trustee in bankruptcy, sheriff or any other officer of the court or official
charged with taking over custody of LICENSEE's assets or business, shall have
any right to continue performance of this Agreement, and this Agreement may not
be assigned by operation of law.
11.4 Failure to terminate this Agreement pursuant to this Section 11
shall not effect or constitute a waiver of any remedies the non-defaulting party
would have been entitled to demand, whether by way of damages, termination or
otherwise. Termination of this Agreement shall be without prejudice to the
rights and liabilities of either party to the other in respect of any matter
arising under this Agreement.
9
<PAGE> 10
12. RIGHTS AFTER TERMINATION.
12.1 Except as provided in Section 12.2 hereof, from and after the
termination of this Agreement, whether because of non-renewal, default or
otherwise, all of the rights of LICENSEE to the use of the Licensed Trademarks
shall, except as hereinafter expressly provided, cease absolutely, and LICENSEE
shall not thereafter manufacture, advertise, promote, distribute or sell any
item whatsoever in connection with the Licensed Trademarks. It is further agreed
that following expiration of the Contract Period, LICENSEE shall not
manufacture, advertise, promote, distribute or sell any item whatsoever in
connection with the use of any name, figure, design, logo, trademark or trade
name similar to or suggestive of the Licensed Trademarks.
12.2 Any Licensed Products for which as of the date of termination
LICENSEE has non-cancelable open orders or which are in transit to the United
States may be sold by LICENSEE on a non-exclusive basis during the twelve (12)
month period following the date of termination. Any Licensed Products which are
warehoused in the United States on the date of termination and any Licensed
Products which were returned to LICENSEE by a customer may be sold by LICENSEE
on a non-exclusive basis during the nine (9) month period following the date of
termination. LICENSEE shall continue to pay to LICENSOR with respect to such
sales Royalties at the rate and in the manner specified in this Agreement.
Within sixty (60) days of the date of termination, LICENSEE shall provide to
LICENSOR a complete listing of the inventory in transit and the warehoused
inventory. Notwithstanding anything herein to the contrary, LICENSEE shall have
no right to manufacture any additional Licensed Products after the date of
termination.
13. NOTICE.
All notices required or provided for in this Agreement shall be in
writing and shall be given by registered mail, prepaid and properly addressed to
the last known address of the party to be served herewith, or by telecopy
facsimile and confirmed by regular mail, and shall be deemed to have been given
on the seventh (7th) day after mailing or on the same day as the facsimile
transmission is received. Notices sent to LICENSOR shall be addressed as
follows:
Koss Corporation
4129 North Port Washington Avenue
Milwaukee, WI 53212
Attn: President
Fax No.: (414) 967-1537
10
<PAGE> 11
Notices sent to LICENSEE shall be addressed as follows:
Logitech Electronics Inc.
60 Bell Farm Road
Barrie, Ontario
L4M5G6
Attn: President
Fax No.: (705) 734-1342
14. ASSIGNMENT.
This Agreement shall bind and inure to the benefit of LICENSOR, and the
successors and assigns of LICENSOR. The rights granted LICENSEE hereunder shall
be exclusive to it and shall not, without the prior written consent of LICENSOR,
be transferred or assigned to any other entity. In the event of the merger or
consolidation of LICENSEE with any other entity, LICENSOR shall have the right
to terminate this Agreement by so notifying LICENSEE in writing on or before
sixty (60) days after LICENSOR has received written notice of such merger or
consolidation.
15. JOINT VENTURE.
This Agreement does not constitute and shall not be construed as
constituting a partnership or joint venture between LICENSOR and LICENSEE.
Neither party shall have any right to obligate or bind the other party in any
manner whatsoever, and nothing herein contained shall give, or is intended to
give, any rights of any kind to any third person.
16. MISCELLANEOUS.
16.1 Section headings contained herein are solely for the purpose of
aiding in speedy location of subject matter and are not in any sense to be given
weight in the construction of this Agreement. Accordingly, in case of any
question with respect to the construction of this Agreement, it is to be
construed as though such section headings had been omitted.
16.2 This writing constitutes the entire Agreement between the parties
hereto and may not be changed or modified except by a writing signed by the
parties hereto.
16.3 If and to the extent that any provisions of this Agreement are
prohibited or unenforceable under any applicable law, such provisions shall be
ineffective to the extent of such prohibition or unenforceable without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of any other provision hereof.
11
<PAGE> 12
16.4 The failure of either party at any time or times to demand strict
performance by the other of any of the terms, covenants or conditions set forth
herein shall not be construed as a continuing waiver or relinquishment thereof
and each may at any time demand strict and complete performance by the other of
said terms, covenants and conditions.
16.5 This Agreement shall be governed by the substantive laws of the
State of Wisconsin (regardless of laws that might be applicable under principles
of conflicts of laws) as to all matters, including but not limited to matters of
validity, construction, effect and performance. Resolution of any and all
disputes between LICENSOR and LICENSEE arising from or in connection with this
Agreement, whether based on contract, tort, common law, equity, statute,
regulation, order or otherwise, shall be governed by and settled in accordance
with binding arbitration by three (3) arbitrators; provided, however, that the
three arbitrators selected shall each have extensive knowledge in the area of
federal trademark law. If the parties cannot agree on the selection of three
arbitrators, each party shall select one arbitrator, and those two arbitrators
together shall select the third arbitrator, and the three arbitrators, each of
which shall have extensive knowledge in the area of federal trademark law, shall
resolve the dispute as provided herein. The arbitrators' findings and decisions
shall be limited to the subject matter of the dispute, and such findings and
decisions shall be in writing and shall be final and binding on the parties
hereto, and shall specify the reasons for and facts on which such findings and
decisions were reached. The parties hereto shall bear equally the arbitrators'
fees and charges, and each party shall bear its other costs and expenses for the
arbitration, including attorneys' fees. The arbitration shall be conducted in
Milwaukee, Wisconsin. To the extent that the parties hereto need to enforce the
arbitration provisions in this Agreement or need to enforce or otherwise give
effect to any arbitration finding, decision or award, the parties hereto hereby
agree that any such action or proceeding shall be adjudicated before a federal
or state court located in Milwaukee, Wisconsin, and they hereby submit to the
exclusive jurisdiction of the courts of the State of Wisconsin located in
Milwaukee, Wisconsin, and of the federal courts located in Milwaukee, Wisconsin,
with respect to any such action or proceeding commenced by either party. The
parties hereto irrevocably waive any objection they now or hereafter may have
respecting the venue of any such action or proceeding brought in such a court or
respecting the fact that such court is an inconvenient forum, and hereby consent
to the service of process in any such action or proceeding by means of
registered or certified mail, return receipt requested, in care of the
applicable address set forth under the notice provisions in this Agreement.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date set forth above. The effective date of this Agreement is
July 1, 1998.
KOSS CORPORATION
By:/s/ Michael J. Koss
--------------------------------
Michael J. Koss
Title: President and CEO
LOGITECH ELECTRONICS INC.
By:/s/ Greg Bell
--------------------------------
Print Name: Greg Bell
---------------------
Title: President and CEO
13
<PAGE> 14
EXHIBIT A
KOSS (Plain Block Letters) (as shown in U.S. Registration No. 1,821,035)
KOSS (Stylized) (as shown in U.S. Registration No. 1,850,556)
KOSS & Design (as shown in U.S. Registration No. 2,070,098)
14
<PAGE> 15
EXHIBIT B
Description of Products to be sold under Licensor's Trademark.
All powered and passive speaker products suitable for use with any audio, video,
communication, or computer products. Speaker construction will primarily be made
of injection molded plastic with the possible exception of some subwoofer
products that may be made of wood or wood composites. Also included will be any
AC or DC adaptors, connecting cables (including speaker wire), as well as
mounting brackets and assemblies.
15
<PAGE> 16
EXHIBIT C
TO:
FROM: (Subcontractor) Manufacturing Factory
RE: Use of the "Koss" Brandname
The purpose of this letter is to acknowledge that ___________________ has the
right to manufacture Licensed Products, as defined in the License Agreement
between Logitech Electronics Inc. and Koss Corporation dated ___________, 1998
("License Agreement"), bearing the "Koss" brandname and trademarks only for the
account of Logitech Electronics Inc. and only as a subcontract manufacturer
pursuant to Sections 2.2 and 2.3 of the License Agreement and for no other
purpose. We agree that we will not use the "Koss" name on any products other
than those manufactured for Logitech Electronics Inc.'s account. __________
agrees that neither it nor any affiliated or related individual or entity (i)
will, at any time, file any application for trademark registration or otherwise
obtain or attempt to obtain ownership of the "Koss" brandname or trademarks, or
any name or mark which is confusingly similar thereto, anywhere in the word or
(ii) directly or indirectly challenge or contest Koss Corporation's ownership of
or rights in the "Koss" brandname and tradenames, whether for the Licensed
Products or otherwise.
16
<PAGE> 17
EXHIBIT D
Calculation of Quarterly Royalties Payment (in U.S. Dollars)
Products Total Sales Returns Net Sales Royalty Rate
$ $ $ 10%
----------- -------- ---------- -------
ROYALTIES PAYMENT U.S. $
--------
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 14,778
<SECURITIES> 0
<RECEIVABLES> 8,387,839
<ALLOWANCES> 0
<INVENTORY> 19,486,058
<CURRENT-ASSETS> 28,935,513
<PP&E> 13,681,609
<DEPRECIATION> 11,619,078
<TOTAL-ASSETS> 32,028,769
<CURRENT-LIABILITIES> 3,949,105
<BONDS> 0
0
0
<COMMON> 31,773
<OTHER-SE> 31,996,996
<TOTAL-LIABILITY-AND-EQUITY> 32,028,769
<SALES> 40,638,747
<TOTAL-REVENUES> 40,638,747
<CGS> 24,843,968
<TOTAL-COSTS> 24,843,968
<OTHER-EXPENSES> 7,822,338
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253,171
<INCOME-PRETAX> 8,925,629
<INCOME-TAX> 3,448,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,477,629
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.65
</TABLE>
