<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-3295
- - --------------------------------------------------------------------------------
KOSS CORPORATION
- - --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
A DELAWARE CORPORATION 39-1168275
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212
- - --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
At December 31, 1998, there were 3,182,269 shares outstanding of the
Registrant's common stock, $0.01 par value per share.
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<PAGE> 2
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
December 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1998 (Unaudited) and June 30, 1998 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months and six months ended
December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Six months ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) December 31, 1998 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security-Holders 10-11
Item 6 Exhibits and Reports on Form 8-K 11
</TABLE>
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<PAGE> 3
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
(Unaudited) (*)
------------------------- --------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 22,527 $ 14,778
Accounts receivable 9,553,781 8,387,839
Inventories 15,494,639 19,486,058
Income taxes receivable 504,406 --
Other current assets 1,147,779 1,104,838
- - ----------------------------------------------------------------------------------------------------------------------
Total current assets 26,723,132 28,993,513
Property and Equipment, net 1,923,514 2,062,531
Intangible and Other Assets 1,008,754 972,725
- - ----------------------------------------------------------------------------------------------------------------------
$29,655,400 $32,028,769
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities:
Accounts payable $ 615,089 $ 1,956,877
Accrued liabilities 1,280,156 1,314,701
Income taxes payable -- 677,527
- - ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,895,245 3,949,105
Long-Term Debt -- 2,746,000
Deferred Compensation and Other Liabilities 1,310,044 1,252,504
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 24,960,111 22,591,160
- - ----------------------------------------------------------------------------------------------------------------------
$29,655,400 $32,028,769
======================================================================================================================
</TABLE>
* The balance sheet at June 30, 1998 has been prepared from the audited
financial statements at that date.
See accompanying notes.
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<PAGE> 4
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Period Ended December 31 1998 1997 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $8,386,879 $10,378,151 $17,417,922 $22,133,276
Cost of goods sold 5,052,274 7,068,010 10,110,378 14,398,678
- - --------------------------------------------------------------------------------------------------------------------------
Gross profit 3,334,605 3,310,141 7,307,544 7,734,598
Selling, general and
administrative expense 2,049,987 2,079,962 4,106,754 4,281,130
- - --------------------------------------------------------------------------------------------------------------------------
Income from operations 1,284,618 1,230,179 3,200,790 3,453,468
Other income (expense)
Royalty income 456,404 460,381 709,718 630,677
Interest income 1,418 6,077 5,356 10,015
Interest expense (5,667) (59,895) (56,617) (80,251)
- - --------------------------------------------------------------------------------------------------------------------------
Income before income tax provision 1,736,773 1,636,742 3,859,247 4,013,909
Provision for income taxes 703,158 552,306 1,534,171 1,528,050
- - --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,033,615 $ 1,084,436 $ 2,325,076 $ 2,485,859
==========================================================================================================================
Earnings per common share:
Basic $0.33 $0.33 $0.73 $0.74
Diluted $0.32 $0.32 $0.72 $0.72
==========================================================================================================================
Dividends per common share None None None None
==========================================================================================================================
</TABLE>
See accompanying notes.
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<PAGE> 5
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended December 31 1998 1997
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 2,325,076 $ 2,485,859
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Depreciation and amortization 391,305 429,958
Deferred compensation 57,540 57,540
Net changes in operating assets and
liabilities 174,271 (1,870,933)
- - ----------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 2,948,192 1,102,424
- - ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (238,318) (46,214)
- - ----------------------------------------------------------------------------------------------------
Net cash used in
investing activities (238,318) (46,214)
- - ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (9,443,000) (11,421,000)
Borrowings under line of credit agreements 6,697,000 12,750,000
Purchase and retirement of common stock -- (5,309,656)
Exercise of stock options 43,875 2,894,787
- - ----------------------------------------------------------------------------------------------------
Net cash used in financing
activities (2,702,125) (1,085,869)
- - ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 7,749 (29,659)
Cash at beginning of year 14,778 32,551
- - ----------------------------------------------------------------------------------------------------
Cash at end of period $ 22,527 $ 2,892
====================================================================================================
</TABLE>
See accompanying notes.
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<PAGE> 6
KOSS CORPORATION AND SUBSIDIARIES
December 31, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements presented herein are based on interim amounts
and are subject to audit. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows at
December 31, 1998 and for all periods presented have been made. The
income from operations for the quarter ended December 31, 1998 is not
necessarily indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in
the Registrant's June 30, 1998, Annual Report on Form 10-K.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings per share are computed based on the weighted
average number of common shares outstanding. The weighted average
number of common shares outstanding for the quarters ending December
31, 1998 and 1997 were 3,179,457 and 3,334,292, respectively. For the
six months ended December 31, 1998 and 1997, weighted average number of
common shares outstanding were 3,178,355 and 3,338,389, respectively.
When dilutive, stock options are included as share equivalents using
the treasury stock method. Common stock equivalents of 34,525 and
63,482 related to stock option grants were included in the computation
of the average number of shares outstanding for diluted earnings per
share for the quarters ended December 31, 1998 and 1997, respectively.
Common stock equivalents of 36,546 and 99,714 related to stock option
grants were included in the computation of the average number of shares
outstanding for diluted earnings per share for the six months ended
December 31, 1998 and 1997, respectively.
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<PAGE> 7
3. INVENTORIES
The classification of inventories is as follows:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials and
work in process $ 5,197,636 $ 6,700,168
Finished goods 10,764,170 13,247,057
-------------------------------------------------------------------------------
15,961,806 19,947,225
LIFO Reserve (467,167) (461,167)
-------------------------------------------------------------------------------
$15,494,639 $ 19,486,058
===============================================================================
</TABLE>
4. STOCK PURCHASE AGREEMENT
The Company has an agreement with its Chairman to repurchase stock from
his estate in the event of his death. The repurchase price is 95% of
the fair market value of the common stock on the date that notice to
repurchase is provided to the Company. The total number of shares to be
repurchased shall be sufficient to provide proceeds which are the
lesser of $2,500,000 or the amount of estate taxes and administrative
expenses incurred by his estate. The Company is obligated to pay in
cash 25% of the total amount due and to execute a promissory note at
the prime rate of interest for the balance. The Company maintains a
$1,150,000 life insurance policy to fund a substantial portion of this
obligation. At December 31, 1998 and June 30, 1998, $1,490,000 has been
classified as a Contingently Redeemable Equity Interest reflecting the
estimated obligation in the event of execution of the agreement.
5. DEFERRED COMPENSATION
In 1991, the Board of Directors agreed to continue John C. Koss'
current base salary in the event he becomes disabled prior to age 70.
After age 70, Mr. Koss shall receive his current base salary for the
remainder of his life, whether or not he becomes disabled. The Company
is currently recognizing an annual expense of $115,080 in connection
with this agreement, which represents the present value of the
anticipated future payments. At December 31, 1998 and June 30, 1998,
respectively, the related liabilities in the amounts of $823,920 and
$766,380 have been included in deferred compensation on the
accompanying balance sheets.
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<PAGE> 8
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
December 31, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash generated by operating activities during the six months ended December 31,
1998 amounted to $2,948,192. Working capital was $24,827,887 at December 31,
1998, a decrease of $216,521 from the balance at June 30, 1998. The cash
necessary to fund the Company's operating activities fluctuates from time to
time; however, as a general rule, the Company expects to generate adequate
amounts of cash to meet future operating needs. The Company maintains sufficient
borrowing capacity to fund any shortfall.
Capital expenditures for new property and equipment (including production
tooling) were $238,318 for the six months. For the fiscal year ending June 30,
1999, the Company expects its capital expenditures to be approximately
$1,100,000. The Company expects to generate sufficient operating funds to
fulfill these expenditures.
Stockholders' investment increased to $24,960,111 at December 31, 1998, from
$22,591,160 at June 30, 1998. The increase reflects the net effect of income and
stock options exercised.
The Company has an unsecured working capital line of credit with a bank, which
expires November 1, 1999. This credit facility provides for borrowings up to a
maximum of $8,000,000. Borrowings under this credit facility bear interest at
the bank's prime rate, or LIBOR plus 2.25%. This credit facility includes
certain financial covenants that require the Company to maintain a minimum
tangible net worth and specified current, interest coverage, and leverage
ratios. There was no utilization of this credit facility at December 31, 1998.
Utilization of this credit facility as of June 30, 1998 was $2,746,000. The
decrease as of December 31, 1998 is the result of decreased inventory purchases.
The Company has also reinstated a $2,000,000 credit facility, which can be used
by the Company to purchase shares of its own stock pursuant to the Company's
stock repurchase program. This credit facility also expires November 1, 1999.
The Company is currently in the process of combining these two credit facilities
into one credit facility in the amount of $10,000,000 to be used for both
working capital purposes and stock repurchases.
In August 1998, the Board of Directors authorized an additional $3,000,000 to be
used for purchasing the Company's common stock for its own account, increasing
the total net amount of the Company's stock repurchase program to $10,000,000.
The Company intends to effectuate all stock purchases either on the open market
or through one or more privately negotiated transactions, and intends to finance
all stock purchases through its own cash flow or by borrowing for such
purchases. For the quarter and six months ended December 31, 1998, the Company
did not purchase any shares of its common stock pursuant to the Company's stock
repurchase program.
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<PAGE> 9
From the commencement of the Company's stock repurchase program through December
31, 1998, the Company has purchased and retired a total of 891,348 shares at a
total gross purchase price of $9,108,577 (representing an average gross purchase
price of $10.22 per share) and a total net purchase price of $6,485,677
(representing an average net purchase price of $7.28 per share). The difference
between the total gross purchase price and the total net purchase price reflects
the savings to the Company as a result of the Company repurchasing certain
shares from employees who acquired Company stock pursuant to the Company's stock
option program.
The Company also has an Employee Stock Ownership Plan and Trust ("ESOP") under
which shares of Company stock are purchased by the ESOP for allocation to the
accounts of ESOP participants. For the quarter ended December 31, 1998, the ESOP
did not purchase any shares of its common stock for allocation to the ESOP.
Results of Operations
Net sales for the second quarter ended December 31, 1998 fell 19% to $8,386,879
from $10,378,151 for the same period in 1997. Net sales for the six months ended
December 31, 1998 were $17,417,922, down 21% compared with $22,133,276 during
the same six months one year ago. This decrease was primarily a result of the
Company's decision to withdraw from the speaker business.
Gross profit as a percent of net sales was 40% for the quarter ended December
31, 1998 compared with 32% for the same period in the prior year. For the six
month period ended December 31, 1998, the gross profit percentage was 42%
compared with 35% for the same period in 1997. Shifts in product mix resulted in
the increase in gross profit for the six month period as compared to last year.
Selling, general and administrative expenses for the quarter ended December 31,
1998 were $2,049,987 or 24% of net sales, as against $2,079,962 or 20% of net
sales for the same period in 1997. For the six month period ended December 31,
1998, such expenses were $4,106,754 or 24% of net sales, as against $4,281,130
or 19% of net sales, for the same period in 1997.
For the second quarter ended December 31, 1998, income from operations was
$1,284,618 versus $1,230,179 for the same period in the prior year. Income from
operations for the six months ended December 31, 1998 was $3,200,790 as compared
to $3,453,468 for the same period in 1997. The decrease is primarily related to
the decrease in gross margin.
Interest expense amounted to $5,667 for the quarter as compared to $59,895 for
the same period in the prior year. For the six month period, the interest
expense amounted to $56,617 compared with $80,251 for the same period in the
prior year. The decrease is a result of the Company borrowing at much lower
levels as compared to the same periods last year.
The Company has a License Agreement with Jiangsu Electronics Industries Limited
("Jiangsu"), a subsidiary of Orient Power Holdings Limited, by way of an
assignment of a previously existing License Agreement with Trabelco N.V. Orient
Power is based in Hong Kong and has an extensive portfolio of audio and video
products. This License Agreement covers North America, Central America, and
South America. Pursuant to this License Agreement, Jiangsu has agreed to make
royalty payments through December 31, 2000, subject to certain minimum royalty
amounts due for the years 1998, 1999, and 2000. The products covered by this
License Agreement include various consumer electronics products. This License
Agreement is subject to renewal for additional 3 year periods.
9 of 12
<PAGE> 10
The Company also had a License Agreement with Trabelco N.V. covering certain
European countries. Although no sales were ever reported under this License
Agreement, certain minimum royalties were due for calendar year 1998. This
License Agreement expired on December 31, 1998.
Effective July 1, 1998, the Company entered into a License Agreement and an
Addendum thereto with Logitech Electronics Inc. ("Logitech") of Ontario, Canada
whereby the Company licensed to Logitech the right to sell multimedia/computer
speakers under the Koss brand name. This License Agreement covers North America
and certain countries in South America and Europe. This License Agreement
extends for 5 years and includes a 5 year renewal option at the Company's
discretion. This License Agreement requires royalty payments by Logitech through
June 30, 2003, subject to certain minimum royalty amounts due each year.
Year 2000
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using 2 digits to define the applicable year (as
opposed to 4 digits). Any of the Company's programs that have time sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or systems failure. Based on a
review of the Company's software by the Chief Information Officer and outside
consultants, the anticipated costs of addressing potential problems are not
expected to have an adverse impact on the Company's financial position, results
of operations or cash flows in future periods. The Company has hired a year 2000
solution provider. 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
plans. The same procedure is being followed with our suppliers and vendors. The
Company's current inventory levels and forecasting technique will insure product
is available to support customer requirements. In the event there are any
adverse conditions, the Company will devote necessary resources to resolve all
significant year 2000 issues in a timely manner.
PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security-Holders
(a) On October 22, 1998 an Annual Meeting of Stockholders was
held.
(b) Proxies for the election of directors were solicited pursuant
to Regulation 14. There was no solicitation in opposition to
management's nominees, and all such nominees were elected
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<PAGE> 11
(c) There were 3,177,269 shares of common stock eligible to vote at the
Annual Meeting, of which 2,846,199 shares were present at the Annual
Meeting in person or by proxy, which constituted a quorum. The
following is a summary of the results of the voting:
<TABLE>
<CAPTION>
Number of Votes Broker
--------------- ------
For Withheld Non-Votes
--- -------- ---------
Nominees for 1-year
terms ending in 1999:
<S> <C> <C> <C> <C>
John C. Koss 2,828,644 17,555 0
Thomas L. Doerr 2,827,834 18,365 0
Victor L. Hunter 2,827,246 18,953 0
Michael J. Koss 2,828,423 17,776 0
Lawrence S. Mattson 2,827,096 19,103 0
Martin F. Stein 2,828,867 17,332 0
John J. Stollenwerk 2,828,779 17,420 0
</TABLE>
<TABLE>
<CAPTION>
Number of Votes Broker
--------------- ------
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Appointment of
PricewaterhouseCoopers LLP
as independent auditors
for the year ended
June 30, 1999 2,842,456 1,927 1,816 0
</TABLE>
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits Filed 27 Financial Data Schedule
(b) Reports on Form 8-K There were no reports on Form
8-K filed by the Company during the period covered by
this report.
11 of 12
<PAGE> 12
Signatures
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
KOSS CORPORATION
Dated: 2/15/99 /s/ Michael J. Koss
------- -----------------------------------
Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 2/15/99 /s/ Sue Sachdeva
------- -----------------------------------
Sue Sachdeva
Vice President--Finance
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 22527
<SECURITIES> 0
<RECEIVABLES> 9553781
<ALLOWANCES> 0
<INVENTORY> 15494639
<CURRENT-ASSETS> 26723132
<PP&E> 13919927
<DEPRECIATION> (11996413)
<TOTAL-ASSETS> 29655400
<CURRENT-LIABILITIES> 1895245
<BONDS> 0
0
0
<COMMON> 31773
<OTHER-SE> 29623627
<TOTAL-LIABILITY-AND-EQUITY> 29655400
<SALES> 8386879
<TOTAL-REVENUES> 8843283
<CGS> 5052274
<TOTAL-COSTS> 5052274
<OTHER-EXPENSES> 2049987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4249)
<INCOME-PRETAX> 1736773
<INCOME-TAX> 703158
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703158
<EPS-PRIMARY> .33
<EPS-DILUTED> .32
</TABLE>
