<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
KOSS CORPORATION Commission file number 0-3295
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(Exact name of registrant as specified in its charter)
A Delaware Corporation 391168275
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212
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(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.
YES X NO
--- ---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 1, 1999 was approximately $17,065,005 (based on the
$14.125 per share closing price of the Company's Common Stock as reported on the
NASDAQ Stock Market on September 1, 1999). 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 1, 1999 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 1, 1999, 2,682,669 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 1999 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, 1996, and 1998 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, 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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Stereophones 97% 87% 83%
</TABLE>
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 16,000 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 52% of sales
occurred in the first six months of the fiscal year and 48% 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
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The Company markets its products to approximately 2,000 customers worldwide.
During 1999 the Company's sales to its largest single customer, Tandy
Corporation, were approximately 17% of total net 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 42% of total net sales in 1999.
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 $243,000
during fiscal 1999 as compared with $265,000 during fiscal 1998 and $245,000
during fiscal 1997. 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, 1999, the Company employed 149 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 the 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, 1999.
3
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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 963 holders of the Company's
common stock as of September 1, 1999. No dividends have been paid for the years
ended June 30, 1999, 1998, and 1997. The quarterly high and low sale prices of
the Company's common stock for the last two fiscal years are shown below.
<TABLE>
<CAPTION>
Fiscal Year 1999 Fiscal Year 1998
---------------- ----------------
Quarter High Low High Low
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $15-1/4 $9-1/2 $14-0/0
$8-1/4
Second $11-3/4 $9-1/4 $15-1/8 $11-1/4
Third $12-1/2 $10-15/16 $12-1/2 $10-0/0
Fourth $13-3/8 $9-1/4 $11-1/4 $9-1/2
</TABLE>
Item 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ------------------------------------ --------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales $33,188,174 $40,638,747 $39,554,720 $36,422,377 $33,432,344
Net income $4,318,189 $5,477,629 $3,587,688 $2,360,963 $2,087,994
Earnings per common share:
Basic $1.41 $1.68 $1.09 $0.69 $0.63
Diluted $1.39 $1.65 $1.07 $0.67 $0.58
Total assets $25,721,696 $32,028,769 $26,332,923 $22,005,257 $20,972,923
Long-term debt $0 $2,746,000 $1,221,000 $470,000 $570,000
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL CONDITION AND LIQUIDITY
During 1999, cash provided by operations was $10,052,391. Working capital was
$20,985,159 at June 30, 1999. The decrease of $4,059,249 from the balance at
June 30, 1998 represents primarily the net effect of a decrease in inventory of
$6,530,940.
Capital expenditures for new property and equipment including production tooling
were $421,251, $221,560, and $782,287, in 1999, 1998, and 1997, respectively.
Depreciation charges aggregated $614,184, $636,558, and $649,099 for the same
fiscal years. Budgeted capital expenditures for fiscal year 2000 are $832,100.
The Company expects to generate sufficient funds through operations to fulfill
these expenditures.
Stockholders' investment decreased to $21,180,935 at June 30, 1999 from
$22,591,160 at June 30, 1998. The decrease 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 amended its existing credit facility in April 1999, extending the
maturity date of the unsecured line of credit to November 1, 2000. This credit
facility provides for borrowings up to a maximum of $10,000,000. The Company can
use this credit facility for working capital purposes or for the purchase of its
own stock pursuant to the Company's stock repurchase program. The increase in
this credit facility from $8,000,000 to $10,000,000 is the result of combining
the Company's $8,000,000 working capital credit facility with the Company's
$2,000,000 stock repurchase credit facility. Borrowings under this credit
facility bear interest at the bank's prime rate, or LIBOR plus 1.75%. 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 June
30, 1999. Utilization of this credit facility as of June 30, 1998 was
$2,746,000. The decrease as of June 30, 1999 is the result of decreased
inventory purchases.
In April of 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 of 1996, the Board of Directors
approved an increase in the stock repurchase program from $2,000,000 to
$3,000,000. In July of 1997, the Board of Directors again approved an increase
in the stock repurchase program from $3,000,000 to $5,000,000. In January of
1998, the Board of Directors approved an increase of an additional $2,000,000,
increasing the total stock repurchase program from $5,000,000 to $7,000,000. 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 from $7,000,000 to $10,000,000. In April of 1999, the Board of
Directors again approved an increase in the stock repurchase program from
$10,000,000 to $15,000,000. 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,
1999, the Company purchased 488,650 shares of its common stock at an average
gross price of $12.16 per share (and an average net price of $11.98 per share),
and retired all such shares.
From the commencement of the Company's stock repurchase program through June 30,
1999, the Company has purchased and retired a total of 1,379,998 shares for a
total gross purchase price of $15,051,360 (representing an average gross
purchase price of $10.91 per share) and a total net purchase price of
$12,338,347 (representing an average net purchase price of $8.94 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. In determining the dollar amount available for additional
purchases under the stock repurchase program, the Company uses the total net
purchase price paid by the Company for all stock purchases, as authorized by the
Board of Directors.
5
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1999 RESULTS COMPARED WITH 1998
Net sales for 1999 were $33,188,174 compared with $40,638,747 in 1998, a
decrease of $7,450,573 or 18%. The decrease was primarily the result of the
Company's decision to withdraw from the speaker business.
Gross profit was $12,855,894 or 38.7% in 1999 compared with $15,794,779 or 38.9%
in 1998.
Selling, general and administrative expenses for 1999 were $7,225,340 compared
with $7,822,338 in 1998, a decrease of $596,998 or 8%. This decrease was a
result of lower sales.
Income from operations was $5,630,554 in 1999 compared with $7,972,441 in 1998,
a decrease of 29%. Interest expense for 1999 was $67,932 compared with $308,405
in 1998. The decrease is due to decreased levels of borrowings during the fiscal
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 each year. The products covered by this License Agreement include
various consumer electronics products. This License Agreement is subject to
renewal for additional 3 year periods.
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.
Income taxes are discussed in Note 6 to the consolidated financial statements.
6
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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 each year. 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 each year. 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 consolidated financial statements.
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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.
YEAR 2000
The Company has implemented a comprehensive Year 2000 initiative to identify and
address issues associated with the Year 2000. A team of internal staff is
managing the initiative, along with the assistance of outside consultants.
The Company has completed the assessment phase of both its information
technology and non-information technology systems associated with the Year 2000.
The assessment indicated that several of the Company's systems would be
vulnerable to Year 2000 issues. The Company is in the process of remedying the
systems identified as vulnerable during the assessment phase.
The Company is also working with its significant suppliers and financial
institutions to ascertain whether or not those parties have appropriate plans to
remedy Year 2000 issues with their systems that may impact the Company's
operations. The Company has communicated in writing, a Year 2000 compliance
letter and survey, to all its customers doing over $10,000 annually in sales,
along with all significant suppliers and vendors. The Company does not
anticipate any adverse material effects due to its ability to deliver product to
customers.
The Company's Year 2000 initiative is under way, and is expected to be completed
prior to December 31, 1999. The Company has not identified a need to develop an
extensive contingency plan for non-remedied issues. In the event of any adverse
conditions caused by unforeseen Year 2000 issues, the Company will devote the
necessary resources to resolve any significant Year 2000 issues in a timely
manner.
The Company's assessments to date indicate the cost of the Year 2000 initiative
is estimated to be $80,000.
The cost of the project and the date the Company believes it will be complete
are forward-looking statements and are based on the Company's best estimates.
Factors that may cause the actual results to differ include the availability and
retention of skilled professionals, and the ability to identify all Year 2000
issues.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of the Company at June 30, 1999 and 1998 and
for each of the three years in the period ended June 30, 1999 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
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1999 First Second Third Fourth
----- ------- ----- ------
<S> <C> <C> <C> <C>
Net sales $ 9,031,043 $ 8,386,879 $ 7,679,636 $ 8,090,616
Gross profit 3,972,939 3,334,605 3,071,920 2,476,430
Net income 1,291,461 1,033,615 806,158 1,186,955
Earnings per common share:
Basic .41 .33 .26 .42
Diluted .40 .32 .26 .41
Quarter
-------
1998 First Second Third Fourth
----- ------- ----- ------
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
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
9
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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 1999 Annual Meeting of Stockholders (the
"1999 Proxy Statement"), which 1999 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 1999 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 1999 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 1999 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>
<CAPTION>
<S> <C> <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, 1999, 1998, and 1997..............................................................14
Consolidated Balance Sheets as of June 30, 1999 and 1998.........................................15
Consolidated Statements of Cash Flows
for the Years Ended June 30, 1999, 1998, and 1997................................................16
Consolidated Statements of Stockholders' Investment
for the Years Ended June 30, 1999, 1998, and 1997................................................17
Notes to Consolidated Financial Statements.......................................................18
</TABLE>
10
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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 Amendment to Loan Agreement dated April 29, 1999.
10.15 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).
10.16 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).
10.17 Third Amendment and Assignment of License Agreement
to Jiangsu Electronics Industries Limited dated March
31, 1997.
11
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10.18 Fourth Amendment to License Agreement dated as of May
29, 1998.
10.19 License Agreement dated June 30, 1998 between Koss
Corporation and Logitech Electronics Inc. (including
Addendum to License Agreement dated June 30, 1998).
10.20 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. No reports on Form 8-K were filed by the Company during the last quarter
of the period covered by this report.
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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, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1999, 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 16, 1999
13
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CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $33,188,174 $40,638,747 $39,554,720
Cost of goods sold 20,332,280 24,843,968 25,922,621
- -----------------------------------------------------------------------------------------------------------
Gross profit 12,855,894 15,794,779 13,632,099
Selling, general and
Administrative expense 7,225,340 7,822,338 8,594,260
- -----------------------------------------------------------------------------------------------------------
Income from operations 5,630,554 7,972,441 5,037,839
Other income (expense)
Royalty income 1,403,194 1,206,359 1,131,250
Interest income 33,373 55,234 105,777
Interest expense (67,932) (308,405) (306,178)
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 6,999,189 8,925,629 5,968,688
Provision for income taxes (note 6) 2,681,000 3,448,000 2,381,000
===========================================================================================================
Net income $ 4,318,189 $ 5,477,629 $ 3,587,688
===========================================================================================================
Earnings per common share:
Basic $1.41 $1.68 $1.09
Diluted $1.39 $1.65 $1.07
===========================================================================================================
Dividends per common share None None None
===========================================================================================================
</TABLE>
See accompanying notes.
14
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 1,171,504 $ 14,778
Accounts receivable, less allowances of
$447,644 and $556,290, respectively (note 12) 7,407,539 8,387,839
Inventories 12,955,118 19,486,058
Prepaid expenses 513,900 548,892
Income taxes receivable 266,329 --
Deferred income taxes (note 6) 353,946 555,946
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 22,668,336 28,993,513
- -----------------------------------------------------------------------------------------------------------------------------
Equipment and Leasehold Improvements, at cost:
Leasehold improvements 748,647 742,289
Machinery, equipment, furniture and fixtures 4,778,741 4,587,729
Tools, dies, molds and patterns 8,575,472 8,351,591
- -----------------------------------------------------------------------------------------------------------------------------
14,102,860 13,681,609
Less--accumulated depreciation 12,233,262 11,619,078
- -----------------------------------------------------------------------------------------------------------------------------
1,869,598 2,062,531
Deferred Income Taxes (note 6) 479,135 364,135
Other Assets 704,627 608,590
=============================================================================================================================
$25,721,696 $32,028,769
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 791,785 $1,956,877
Accrued liabilities (note 7) 891,392 1,314,701
Income taxes payable -- 677,527
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,683,177 3,949,105
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (note 4) -- 2,746,000
- -----------------------------------------------------------------------------------------------------------------------------
Deferred Compensation and Other Liabilities (note 11) 1,367,584 1,252,504
- -----------------------------------------------------------------------------------------------------------------------------
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 2,711,119
and 3,177,269 shares, respectively 27,111 31,773
Contingently redeemable common stock (1,490,000) (1,490,000)
Accumulated other comprehensive loss (71,322) (71,322)
Undistributed retained earnings 22,715,146 24,120,709
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 21,180,935 22,591,160
=============================================================================================================================
$25,721,696 $32,028,769
=============================================================================================================================
</TABLE>
See accompanying notes.
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $4,318,189 $5,477,629 $3,587,688
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 638,897 676,673 712,215
Deferred income taxes 87,000 95,000 (74,532)
Deferred compensation 115,080 115,080 115,080
Net changes in operating assets and
liabilities (note 8) 4,893,225 (4,524,632) (4,407,722)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 10,052,391 1,839,750 (67,271)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (421,251) (221,560) (782,287)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreement (9,443,000) (24,385,400) (21,029,000)
Borrowings under line of credit agreement 6,697,000 25,910,400 21,780,000
Exercise of stock options 214,365 3,822,600 456,799
Purchase and retirement of common stock (5,942,779) (6,983,563) (352,691)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (8,474,414) (1,635,963) 855,108
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,156,726 (17,773) 5,550
Cash at beginning of year 14,778 32,551 27,001
- -----------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 1,171,504 $ 14,778 $ 32,551
=============================================================================================================================
</TABLE>
See accompanying notes.
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid In Retained Comprehensive
Stock Capital Earnings Loss
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
Net income -- -- 4,318,189 --
Purchase and retirement of treasury stock (4,887) -- (5,937,892) --
Exercise of stock options 225 -- 214,140 --
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ 27,111 $ -- $22,715,146 $ (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, 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 16,000 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 20% and 16% of the Company's accounts
receivable at June 30, 1999 and 1998, 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 2000 and 2003. These agreements contain
three to five year renewal options and require minimum calendar year royalty
payments.
INVENTORIES--At June 30, 1999 and 1998, approximately 98% and 83%, 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 $1,021,989 and $461,143 higher than reported at June
30, 1999 and 1998, respectively.
The components of inventories at June 30, is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------ -----------------
<S> <C> <C>
Raw materials and
Work in process $4,302,921 $6,547,983
Finished goods 8,652,197 12,938,075
======================== ================== =================
$12,955,118 $19,486,058
======================== ================== =================
</TABLE>
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 $243,000 in 1999, $265,000 in 1998, and
$245,000 in 1997.
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
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, 1999, 1998, and 1997 were
3,072,500, 3,263,842, and 3,304,194, respectively. When dilutive, stock options
are included in earnings per share as share equivalents using the treasury stock
method. Common stock equivalents of 39,327, 64,889, and 58,648 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,
1999, 1998, and 1997, respectively.
3. COMPREHENSIVE INCOME
Total comprehensive income totaled $4,318,189, $5,477,629, and $3,623,596 for
the fiscal years ended June 30, 1999, 1998, and 1997, respectively. Total
comprehensive income for the year ended June 30, 1997 is comprised of net income
of $3,587,688, and other comprehensive income of $35,908. Other comprehensive
income is comprised solely of foreign currency transaction adjustments which are
included in the Consolidated Statement of Stockholders' Investment.
4. LONG-TERM DEBT
The Company amended its existing credit facility in April 1999, extending the
maturity date of the unsecured line of credit to November 1, 2000. This credit
facility provides for borrowings up to a maximum of $10,000,000. The Company can
use this credit facility for working capital purposes or for the purchase of its
own stock pursuant to the Company's stock repurchase program. The increase in
this credit facility from $8,000,000 to $10,000,000 is the result of combining
the Company's $8,000,000 working capital credit facility with the Company's
$2,000,000 stock repurchase credit facility. Borrowings under this credit
facility bear interest at the bank's prime rate, or LIBOR plus 1.75%. 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 June
30, 1999. Utilization of this credit facility as of June 30, 1998 was
$2,746,000.
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
for the 1990 Plan, which was approved by the stockholders. In 1993, the Board of
Directors authorized the reservation of an additional 300,000 shares for the
1990 Plan, which was approved by the stockholders. In 1997, the Board of
Directors authorized the reservation of an additional 300,000 shares for 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, 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
Granted 110,000 $10.00-$11.83
Exercised (22,500) $5.32-$10.83
Cancelled (8,750) $5.32-$10.83
-------------------------------------------- ----------------------- -------------------
Shares under option at June 30, 1999 268,750 $5.32-$11.91
============================================ ======================= ===================
Options exercisable at June 30, 1999 83,125 $5.32-$11.91
============================================ ======================= ===================
</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 1999, 1998, and 1997
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>
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
Net income - as reported $4,318,189 $5,477,629 $3,587,688
Net income - pro forma 4,073,710 5,318,518 3,511,965
Earnings per common share - as reported
Basic 1.41 1.68 1.09
Diluted 1.39 1.65 1.07
Earnings per common share - pro forma
Basic 1.33 1.63 1.06
Diluted 1.31 1.60 1.04
</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>
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
Expected stock price volatility 60.00% 69.17% 70.94%
Risk free interest rate 5.17% 5.72% 6.84%
Expected life of options 4.95 years 5.91 years 6 years
</TABLE>
The weighted average exercise prices per share for options outstanding and
exercisable at June 30, 1999 are $8.24 and $10.03, respectively. 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 fair value of options
granted during 1999, 1998, and 1997 are $5.62, $6.95, and $7.02 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 1999, 1998, and 1997 consists of the
following:
<TABLE>
<CAPTION>
Year Ended June 30, 1999 1998 1997
------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Current:
U.S. federal $2,200,000 $2,839,000 $2,061,000
State 394,000 514,000 394,000
Deferred 87,000 95,000 (74,000)
===================================== ==================== ==================== ====================
$2,681,000 $3,448,000 $2,381,000
===================================== ==================== ==================== ====================
</TABLE>
The 1999, 1998, and 1997 tax provision results in an effective rate different
than the federal statutory rate due to the following:
<TABLE>
<CAPTION>
Year Ended June 30, 1999 1998 1997
------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Federal income tax at
Statutory rate $2,380,000 $3,035,000 $2,029,000
State income taxes, net of
Federal tax benefit 260,000 339,000 260,000
Other 41,000 74,000 92,000
------------------------------------- -------------------- -------------------- --------------------
Total provision for
Income taxes $2,681,000 $3,448,000 $2,381,000
===================================== ==================== ==================== ====================
</TABLE>
Income before taxes for United States operations was $6,999,189 in 1999,
$8,925,629 in 1998, and $6,803,219 in 1997. Losses before taxes for foreign
operations were $0, $0, and $834,531 for the respective years.
22
<PAGE> 23
Temporary differences which give rise to deferred tax assets and liabilities at
June 30 include:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------ -------------------------- -------------------------
<S> <C> <C>
Deferred Tax Assets
Deferred compensation $359,000 $307,000
Accrued expenses and reserves 406,000 579,000
Package design and trademarks 179,000 150,000
Other 9,000 9,000
------------------------------------------------ -------------------------- -------------------------
953,000 1,045,000
Deferred Tax Liabilities
Royalties receivable/deferred (62,000) (32,000)
Equipment and leasehold improvements (58,000) (93,000)
Net deferred tax asset $833,000 $920,000
================================================ ========================== =========================
</TABLE>
The net deferred tax asset at June 30, 1999 is comprised of a current asset of
$353,946 and a long term asset of $479,135. 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.
7. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------ -------------------------- -------------------------
<S> <C> <C>
Salaries and wages $380,591 $608,288
Cooperative advertising
and promotion allowances 205,776 282,761
Payroll taxes and
employee benefits 173,670 161,075
Other 131,355 262,577
$891,392 $1,314,701
================================================ ========================== =========================
</TABLE>
8. ADDITIONAL CASH FLOW INFORMATION
The net changes in cash as a result of changes in operating assets and
liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ----------------- -------------------------- -------------------------
<S> <C> <C> <C>
Accounts receivable $ 980,300 $(1,395,326) $ 1,972,700
Inventories 6,530,940 (4,938,405) (5,734,529)
Prepaid expenses 34,992 55,105 (221,860)
Net income taxes (943,856) 743,020 (427,348)
Other assets (120,750) (50,599) (92,422)
Accounts payable (1,165,092) 1,215,231 (586,269)
Deferred revenue -- (473,482) 473,482
Accrued liabilities (423,309) 319,824 208,524
----------------------------- ----------------- -------------------------- -------------------------
Net change $ 4,893,225 $(4,524,632) $(4,407,722)
============================== ================= ========================== =========================
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net cash paid during the year for:
Interest $93,135 $241,687 $297,398
Income taxes $3,563,054 $1,771,313 $2,849,333
</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 approximated $200,000 in 1999, $216,000
in 1998, and $200,000 in 1997.
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 1999, 1998,
and 1997, 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, 1999, 1998, and 1997 were $182,155, $170,600, and $144,000, 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, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
000's Omitted United
States Canada Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------
1999:
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 33,188 $ -- $ -- $ 33,188
Intercompany transfers -- -- -- ---
- ----------------------------------------------------------------------------------------------------------
Total $ 33,188 $ -- $ -- $ 33,188
- ----------------------------------------------------------------------------------------------------------
Income from operations $ 5,631 $ -- $ -- $ 5,631
- ----------------------------------------------------------------------------------------------------------
Assets $ 25,722 $ -- $ -- $ 25,722
- ----------------------------------------------------------------------------------------------------------
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
==========================================================================================================
</TABLE>
24
<PAGE> 25
The Company's export sales to customers in foreign countries amounted to
$2,845,529 during 1999, $5,245,982 during 1998, and $4,955,824 during 1997.
Sales to one customer, Tandy Corporation, were approximately 17% of total sales
for the year ended June 30, 1999, and 19% and 17% for the years ended June 30,
1998, and 1997, 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, approximated $388,000 in
1999, $394,000 in 1998, and $432,000 in 1997.
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, 1999 and 1998,
respectively, the related liabilities in the amounts of $881,460 and $766,380
have been included in deferred compensation and other liabilities in the
accompanying consolidated balance sheets.
12. SUPPLEMENTARY INFORMATION
Changes in the allowance for doubtful accounts for the years ended June 30,
1999, 1998, and 1997 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>
1999 $556,290 $254,000 $362,646 $447,644
1998 $928,605 $310,000 $682,315 $556,290
1997 $685,107 $434,000 $190,502 $928,605
</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 $331,890 in 1999,
$397,033 in 1998, and $428,428 in 1997. Such costs are expensed as incurred.
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: 9/16/99
------------------------------ -------
Michael J. Koss,
Vice Chairman
President
Chief Executive Officer
Chief Operating Officer and
Chief Financial Officer
By: /s/ Sujata Sachdeva Dated: 9/16/99
------------------------------ -------
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: 9/16/99 Dated: 9/16/99
-------- --------
/s/ Martin F. Stein /s/ Victor L. Hunter
- ------------------- --------------------
Martin F. Stein, Director Victor L. Hunter, Director
Dated: 9/16/99 Dated: 9/16/99
-------- --------
/s/ John J. Stollenwerk
- ----------------------- ----------------
John J. Stollenwerk, Director Lawrence S. Mattson, Director
Dated: 9/16/99 Dated:
-------- ------
/s/ Thomas L. Doerr
- -------------------
Thomas L. Doerr, Director
Dated: 9/16/99
--------
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
Vice Chairman Thomas L. Doerr
President President
Chief Executive Officer Doerr Corporation
Chief Operating Officer
Chief Financial Officer Victor L. Hunter
President
John C. Koss, Jr. Hunter Business Group, LLC
Vice President-Sales
Michael J. Koss
Sujata Sachdeva Vice Chairman, President,
Vice President-Finance C.E.O., C.O.O., C.F.O.
Koss Corporation
Jill McCurdy
Vice President-Product Development Lawrence S. Mattson
Retired President
Lenore Lillie Oster Company
Vice President-Operations
Martin F. Stein
Richard W. Silverthorn Chairman
Secretary Eyecare One Inc.
General Counsel
John J. Stollenwerk
Declan Hanley President
Vice President-International Sales Allen-Edmonds Shoe Corporation
ANNUAL MEETING
October 21, 1999
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 Amendment to Loan Agreement dated April 29, 1999.......... filed herewith
10.15 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>
10.16 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)
10.17 Third Amendment and Assignment of License Agreement to Jiangsu
Electronics Industries Limited dated as of March 31, 1997.....
(16)
10.18 Fourth Amendment to License Agreement dated as of May 29, 1998
filed herewith................................................ (17)
10.19 License Agreement dated June 30, 1998 between Koss Corporation
and Logitech Electronics Inc. (including Addendum to License
Agreement dated June 30, 1998)................................ (18)
10.20 Consent of Directors (Supplemental Executive Retirement Plan
for Michael J. Koss dated March 7, 1997)...................... (19)
22 List of Subsidiaries of Koss Corporation ..................... (20)
27 Financial Data Schedule....................................... filed herewith
</TABLE>
(1) Incorporated by reference from Exhibit 3.1 to the Company's
Annual Report on 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
Annual Report on 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
Annual Report on 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
Annual Report on 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
Annual Report on 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
Annual Report on 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
Annual Report on 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
Annual Report on 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 Annual Report on Form 10-K for the year
ended June 30, 1988 (Commission File No. 0-3295)
29
<PAGE> 30
<TABLE>
<S> <C>
(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
Annual Report on 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
Annual Report on 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 10.17 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(Commission File No. 0-3295)
(18) Incorporated by reference from Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(Commission File No. 0-3295)
(19) 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)
(20) 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)
</TABLE>
30
<PAGE> 31
Dear Stockholder:
We are pleased to report sales and earnings for the fiscal year 1999.
Sales for the fiscal year were $33,188,174 compared with $40,638,747 for the
previous fiscal year. Net income for the 12 months was $4,318,189 compared with
$5,477,629. Basic earnings per share for the 12 months ending June 30, 1999 were
$1.41 compared with $1.68 for the same period one year ago.
Despite the reduction in sales, 1999 remains the second largest net income year
in the history of the Company.
The decline in sales in 1999 was attributed primarily to the Company's decision
in 1998 to move out of the computer speaker business and into a licensing
arrangement for the computer speaker products. Initially, it was believed by
some who follow the Company's business performance, that this decision would
drive the earnings per share number to $1.10 or $1.20. Improvements, however, in
stereo headphone margins and effective operations accounted for an earnings per
share number of $1.41 despite the overall revenue shortfall.
Unfortunately the order pattern of a few large accounts seems to have shifted
some sales in fiscal year 1999 into the upcoming fiscal year of 2000, resulting
in a revenue mix shortfall in our base business that was lower than had been
expected. Unit sales, however, actually increased by 12%.
In addition to the improvements made in operations, the Company saw a reduction
in its product return levels as well as a reduction in its returns inventory.
Product return levels dropped to $1.4 million, the lowest level in three years,
while the returns inventory was reduced to $102k, down from $723k in 1998.
Our initiative to increase finished goods readiness for better customer service
swelled inventory in fiscal year 1998. In 1999 we saw a reduction in inventory
of nearly $6 million. Only 29% of this reduction can be attributed to the
transfer of speaker inventory to the licensee in Canada.
1999 witnessed a strengthening of the licensing arrangement with Orient Power
for electronics goods and Logitech in Canada for speakers. Royalty income
reached $1,403,194 for the year, a 14% increase. In the years ahead, the Company
anticipates further negotiations with both licensees to expand these agreements
to include additional product lines as well as new geographic markets.
The Company remains committed to its core stereophone business and in the year
ahead plans to expand its brand into non retail markets such as telephony,
aviation and audio demonstration market. Reflecting its strong cash position, as
well as the current market valuation of the Company's shares, Koss Corporation
plans to continue repurchasing shares of its own stock from the market. In April
the Board of Directors approved an additional $5 million to continue this
program.
We would like to take this opportunity to thank our customers, suppliers and
stockholders as well as the entire Koss team for their efforts during the past
year. We look forward to your continued support and dedication in the year
ahead.
Sincerely,
John C. Koss Michael J. Koss
Chairman President and CEO
<PAGE> 32
Stockholders' Information
Koss Corporation's 1999 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 1999 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, 1999 and 1998, 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, 1999 (not presented herein); and in our report dated July
16, 1999, we expressed an unqualified opinion on those consolidated financial
statements.
In our opinion, the information set forth in the accompanying condensed
consolidated financial statements is fairly stated, in all material respects, in
relation to the consolidated financial statements from which it has been
derived.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 16, 1999
<PAGE> 33
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME KOSS CORPORATION
- ----------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $33,188,174 $40,638,747 $39,554,720
Cost of goods sold 20,332,280 24,843,968 25,922,621
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 12,855,894 15,794,779 13,632,099
Selling, general and
administrative expense 7,225,340 7,822,338 8,594,260
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 5,630,554 7,972,441 5,037,839
Other income (expense)
Royalty income 1,403,194 1,206,359 1,131,250
Interest income 33,373 55,234 105,777
Interest expense (67,932) (308,405) (306,178)
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,999,189 8,925,629 5,968,688
Provision for income taxes 2,681,000 3,448,000 2,381,000
======================================================================================================================
Net income $ 4,318,189 $ 5,477,629 $ 3,587,688
======================================================================================================================
Earnings per common share:
Basic $1.41 $1.68 $1.09
Diluted $1.39 $1.65 $1.07
======================================================================================================================
Divendends per common share None None None
======================================================================================================================
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS KOSS CORPORATION
- ----------------------------------------------------------------------------------------------------------------------------
As of June 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash: $ 1,171,504 $ 14,778
Accounts receivable, less allowances of
$447,644 and $556,290, respectively 7,407,539 8,387,839
Inventories 12,955,118 19,486,058
Prepaid expenses 513,900 548,892
Income taxes receivable 266,329 --
Deferred income taxes 353,946 555,946
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 22,668,336 28,993,513
- ----------------------------------------------------------------------------------------------------------------------------
Equipment and Leasehold improvements, at cost:
Leasehold improvements 748,647 742,289
Machinery, equipment, furniture and fixtures 4,778,741 4,587,729
Tools, dies, molds and patterns 8,575,472 8,351,591
- ----------------------------------------------------------------------------------------------------------------------------
14,102,860 13,681,609
Less--accumulated depreciation 12,233,262 11,619,078
- ----------------------------------------------------------------------------------------------------------------------------
1,869,598 2,062,531
Deferred Income Taxes 479,135 364,135
Other Assets 704,627 608,590
============================================================================================================================
$25,721,696 $32,028,769
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 791,785 $1,956,877
Accrued liabilities 891,392 1,314,701
Income taxes payable -- 677,527
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,683,177 3,949,105
- ----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt -- 2,746,000
Deferred Compensation and Other Liabilities 1,367,584 1,252,504
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 2,711,119
and 3,177,269 shares, respectively 27,111 31,773
Contingently redeemable common stock (1,490,000) (1,490,000)
Accumulated other comprehensive loss (71,322) (71,322)
Retained earnings 22,715,146 24,120,709
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 21,180,935 22,591,160
============================================================================================================================
$25,721,696 $32,028,769
============================================================================================================================
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
MANAGEMENT INFORMATION KOSS CORPORATION
- --------------------------------------------------------------------------------
<S> <C>
OFFICERS AND DIRECTORS
SENIOR MANAGEMENT
John C. Koss John C. Koss
Chairman of the Board Chairman of the Board
Koss Corporation
Michael J. Koss
Vice Chairman
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
Sujata Sachdeva Michael J. Koss
Vice President- Finance Vice Chairman, President, C.E.O.,
C.O.O., C.F.O.
Koss Corporation
Jill McCurdy
Vice Product Development Lawrence S. Mattson
Retired President
Lenore Lillie Oster Company
Vice President- Operations
Martin F. Stein
Richard W. Silverthorn Chairman
Secretary Eyecare One Inc.
General Counsel
John J. Stollenwerk
Declan Hanley President
Vice President-International Sales Allen-Edmonds Shoe Corporation
ANNUAL MEETING
October 21, 1999
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 of address,
Whyte Hirschboeck Dudek S.C. 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. Nikhat Quryski
</TABLE>
<PAGE> 1
EXHIBIT 10.14
AMENDMENT NO. 4 TO LOAN AGREEMENT
THIS AMENDMENT NO. 4 TO LOAN AGREEMENT (the "Amendment") is made and
entered into this 29th day of April, 1999, by and among LaSALLE NATIONAL BANK,
a national banking association (the "Lender"), and KOSS CORPORATION, a Delaware
corporation (the "Borrower").
WITNESSETH:
WHEREAS, Borrower and Lender entered into that certain Loan Agreement
dated February 17, 1995, as amended by that certain Amendment No. 1 to Loan
Agreement dated June 15, 1995, as further amended by that certain Amendment No.
2 to Loan Agreement dated May 20, 1996, and as further amended by that certain
Amendment No. 3 to Loan Agreement dated December 31, 1997 (collectively, the
"Loan Agreement"), pursuant to which Lender agreed to provide Borrower with a
revolving line of credit up to $8,000,000.00 (the "Revolving Loan"), and with
special loans up to $2,000,000.00 (the "Special Loans"); and
WHEREAS, Borrower has requested Lender to increase the Revolving Loan
amount to $10,000,000.00 and eliminate the Special Loans, and Lender has agreed
to do so provided, among other things, Borrower executes and delivers this
Amendment.
NOW THEREFORE, in consideration of the premises which are
incorporated herein by this reference, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Section 2.1(A) of the Loan Agreement shall be deleted in its
entirety and replaced with the following new Section 2.1(A):
Subject to the terms and conditions of this Agreement, on the date
upon which all terms and conditions of the Documents have been met or
fulfilled to the satisfaction of Lender (the "Closing Date"), the
Lender agrees to make loans to Borrower on a revolving basis (such
loans being herein called individually, a "Revolving Loan", and
collectively, the "Revolving Loans") from time to time in such
amounts as Borrower may from time to time request up to an aggregate
amount outstanding of $10,000,000.00; provided, however, that (i)
each borrowing by Borrower hereunder with respect to any Revolving
Loan shall be in the aggregate principal amount of at least
$10,000.00; (ii) the Lender's commitment to make Revolving Loans
shall remain in effect for a period to and including November 1, 2000
(the "Revolver Termination Date"); (iii) notwithstanding any
provision herein to the contrary (1) upon the occurrence and
continuance of any Event of Default, and in each such event, the
Lender may, in its sole discretion, immediately
<PAGE> 2
cease to make Revolving Loans; and (2) on the Revolver Termination
Date, Borrower shall repay to the Lender all Revolving Loans, plus
interest accrued to the date of payment; and (iv) for a period of at
least 30 consecutive days during each fiscal year of Borrower, the
amount of Revolving Loans outstanding shall not exceed $2,000,000.00.
2. Subsection 2.1(B)(a) of the Loan Agreement shall be deleted in
its entirety and replaced with the following new Subsection 2.1(B)(a):
(a) in no event shall total amount of Letters of Credit and
Revolving Loans issued and outstanding exceed $10,000,000.00;
3. Section 2.1(C) of the Loan Agreement shall be deleted in its
entirety and replaced with the following new Section 2.1(C):
2.1(C) Notwithstanding anything in this Agreement to the contrary,
Borrower shall pay to Lender a nonrefundable nonusage fee of 15
basis points calculated on an annualized basis, based on the
average unused amount of the Revolving Loan, calculated and
payable on a quarterly basis.
4. The first paragraph of Section 2.3 of the Loan Agreement shall
be deleted in its entirety and replaced with the following new first paragraph
of Section 2.3:
The Revolving Loans shall be evidenced by a promissory note (herein
called the "Revolving Note") in the form attached hereto, and made a
part hereof, as Exhibit 2.3, dated the date first above written,
payable to the order of Lender, in the principal amount of
$10,000,000.00. The date and amount of each Revolving Loan made by
the Lender and of each repayment of principal thereon received by the
Lender shall be recorded by the Lender in the records of the Lender
and the aggregate unpaid principal amount shown on such records shall
be rebuttable, presumptive evidence of the principal owing and unpaid
on such Revolving Note. The failure to record any such amount on such
records shall not, however, limit or otherwise affect the obligations
of Borrower hereunder or under the Revolving Note to repay the
principal amount of the Revolving Loans together with all interest
accruing thereon. The unpaid principal amount from time to time
outstanding on the Revolving Note shall, at Borrower's choice, bear
interest at either: (a) the Prime Rate, adjusted as of each change of
the Prime Rate (each Revolving Loan bearing interest at such rate a
"Prime Rate Loan"); or (b) provided that an Event of Default has
<PAGE> 3
not occurred and is not continuing, a rate per annum that shall be 175
basis points in excess of the per annum rate of interest at which U.S.
dollar deposits of an amount comparable to the amount of the Revolving
Loan and for a period equal to the relevant Interest Period (as
hereinafter defined) are offered generally to Lender (rounded upward
if necessary, to the nearest 1/16 of 1.0%) in the London Interbank
Eurodollar market at 10:00 a.m. (London time) two Business Days prior
to the commencement of each Interest Period ("LIBOR" and each
Revolving Loan bearing interest at such rate a "LIBOR Loan"), such
rate to remain fixed for such Interest Period. "Interest Period"
shall mean one-month, two-month or three-month periods as selected
from time to time by the Borrower by irrevocable notice (in writing,
by telex, telegram or cable) given to Lender not less than two
Business days prior to the first day of each respective Interest
Period commencing on the date hereof; provided that: (i) each such
Interest Period may be continued upon its expiration by Borrower by
irrevocable notice (in writing, by telex, telegram or cable) given to
Lender not less than two Business Days prior to the expiration
thereof, which notice shall specify that such Interest Period shall
continue for a one-month, two month or three month period; (ii) the
final Interest Period shall be such that its expiration occurs on or
before the stated maturity date hereof; (iii) if for any reason the
Borrower shall fail to select time a period, then interest on such
LIBOR Loan shall accrue and be payable at the Prime Rate; and (iv)
each such LIBOR Loan shall be in an amount of at least $1,000,000.00,
and shall be in $100,000.00 increments. "Business Day" shall mean any
day other than a Saturday, Sunday or a day on which banks in London,
England, and Chicago, Illinois, are required or permitted by law to
close.
5. Section 2.3(A) and Section 2.3(B) of the Loan Agreement shall be
deleted in their entirety.
6. Section 7.1(A) of the Loan Agreement shall be deleted in its
entirety and replaced with the following new Section 7.1(A):
(A) Borrower shall default in the payment when due of any
amount due and owing by Borrower to Lender under the Revolving
Note or Letters of Credit; or
7. Borrower has reviewed the areas within its business and
operations which could be adversely affected by, and has developed or is
developing a program to address on a timely basis, the "Year 2000 Problem"
(that is, the risk that computer applications used by Borrower may be unable to
recognize and perform properly date-sensitive functions involving certain dates
prior to and any date on or after December 31, 1999), and has made related
<PAGE> 4
appropriate inquiry of material suppliers and vendors. Based on such review
and program. Borrower believes that the "Year 2000 Problem" will not have a
material adverse effect on the Borrower. From time to time, at the request of
Lender, Borrower shall provide to Lender such updated information or
documentation as is requested regarding the status of its efforts to address
the Year 2000 problem.
8. Borrower shall deliver to Lender as a condition to Lender's
undertakings as provided hereunder, note amendments, a directors' consent,
secretary's certificate and such other documents as Lender shall request, each
in form and substance satisfactory to Lender and its counsel.
9. All references to "the Agreement" in the Loan Agreement shall
mean the Loan Agreement as amended by this Amendment. All references to "the
Loan," "the Loans," in the Loan Agreement shall include the loan amendments
made hereunder. All references to "the Documents" in the Loan Agreement shall
include this Amendment, the amendment to the Revolving Note and any other
instrument or document required hereunder, whether now existing or at any time
hereafter arising. All references to "the Revolving Note" and in Loan
Agreement shall include the amendments thereto.
10. All of the agreements, representations, covenants and
obligations set forth in the Loan Agreement are hereby reaffirmed and restated
as of the date of this Amendment. All representations and warranties contained
in the Loan Agreement remain true and correct as of the date of this Amendment.
11. Borrower agrees to pay all fees and out-of-pocket expenses of
Lender including, without limitation, outside counsel to the Lender in
connection with the preparation of this Amendment, and any and all agreements,
instruments and documents required or contemplated by this Amendment.
12. Except as specifically amended and modified by this Amendment:
(a) the Loan Agreement shall remain in full force and effect and is hereby
restated and incorporated herein by this reference; and (b) all terms defined
in the Loan Agreement shall have the same meanings herein as therein.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 4 to
be duly executed and delivered at Chicago, Illinois, as of the date first above
written.
LaSALLE NATIONAL BANK KOSS CORPORATION
By: /s/ Jim Hess By: /s/ Michael J. Koss
---------------------------- --------------------
Title: Assistant Vice President Title: CEO/President
------------------------- -----------------
ATTEST:
By: /s/ Richard W. Silverthorn
---------------------------------
Title: Secretary & General Counsel
------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1171504
<SECURITIES> 0
<RECEIVABLES> 7855183
<ALLOWANCES> (447644)
<INVENTORY> 12955118
<CURRENT-ASSETS> 22668336
<PP&E> 14102860
<DEPRECIATION> 12233262
<TOTAL-ASSETS> 25721696
<CURRENT-LIABILITIES> 1683177
<BONDS> 0
0
0
<COMMON> 27111
<OTHER-SE> 21153824
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