<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-3295
- --------------------------------------------------------------------------------
KOSS CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
A DELAWARE CORPORATION 39-1168275
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
At December 31, 1999, there were 2,570,369 shares outstanding of the
Registrant's common stock, $0.01 par value per share.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
December 31, 1999
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1999 (Unaudited) and June 30, 1999 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months and six months ended
December 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Six months ended December 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) December 31, 1999 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security-Holders 10-11
Item 6 Exhibits and Reports on Form 8-K 11
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<PAGE> 3
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
(Unaudited) (*)
---------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 1,198,601 $ 1,171,504
Accounts receivable 8,522,085 7,407,539
Inventories 11,773,077 12,955,118
Income taxes receivable 566,265 266,329
Other current assets 920,060 867,846
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 22,980,088 22,668,336
Property and Equipment, net 1,681,178 1,869,598
Intangible and Other Assets 1,161,776 1,183,762
- ---------------------------------------------------------------------------------------------------------------------
$25,823,042 $25,721,696
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 742,784 $ 791,785
Accrued liabilities 1,081,829 891,392
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,824,613 1,683,177
Deferred Compensation and Other Liabilities 1,425,124 1,367,584
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 21,083,305 21,180,935
=====================================================================================================================
$25,823,042 $25,721,696
=====================================================================================================================
</TABLE>
* The balance sheet at June 30, 1999 has been prepared from the audited
financial statements at that date.
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Period Ended December 31 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 8,582,606 $ 8,386,879 $16,975,859 $17,417,922
Cost of goods sold 5,286,557 5,052,274 10,199,834 10,110,378
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 3,296,049 3,334,605 6,776,025 7,307,544
Selling, general and
administrative expense 1,927,023 2,049,987 3,757,610 4,106,754
- -----------------------------------------------------------------------------------------------------------------------
Income from operations 1,369,026 1,284,618 3,018,415 3,200,790
Other income (expense)
Royalty income 456,747 456,404 731,379 709,718
Interest income 18,573 1,418 35,372 5,356
Interest expense 0 (5,667) 0 (56,617)
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax provision 1,844,346 1,736,773 3,785,166 3,859,247
Provision for income taxes 705,137 703,158 1,462,340 1,534,171
=======================================================================================================================
Net income $ 1,139,209 $ 1,033,615 $ 2,322,826 $ 2,325,076
=======================================================================================================================
Earnings per common share:
Basic $0.43 $0.33 $0.87 $0.73
Diluted $0.42 $0.32 $0.85 $0.72
=======================================================================================================================
Dividends per common share None None None None
=======================================================================================================================
</TABLE>
See accompanying notes.
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<PAGE> 5
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended December 31 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 2,322,826 $ 2,325,076
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 426,740 391,305
Deferred compensation 57,540 57,540
Net changes in operating assets and
liabilities (132,950) 174,271
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 2,674,156 2,948,192
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (226,603) (238,318)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements -- (9,443,000)
Borrowings under line of credit agreements -- 6,697,000
Purchase and retirement of common stock (2,648,580) --
Exercise of stock options 228,124 43,875
- ---------------------------------------------------------------------------------------------------
Net cash used in financing
activities (2,420,456) (2,702,125)
- ---------------------------------------------------------------------------------------------------
Net increase in cash 27,097 7,749
Cash at beginning of period 1,171,504 14,778
===================================================================================================
Cash at end of period $ 1,198,601 $ 22,527
===================================================================================================
</TABLE>
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
December 31, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements presented herein are based on interim amounts
and are subject to audit. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows at
December 31, 1999 and for all periods presented have been made. The
income from operations for the quarter ended December 31, 1999 is not
necessarily indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in
the Registrant's June 30, 1999, Annual Report on Form 10-K.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings per share are computed based on the weighted
average number of common shares outstanding. The weighted average
number of common shares outstanding for the quarters ending December
31, 1999 and 1998 were 2,636,092 and 3,179,457, respectively. For the
six months ended December 31, 1999 and 1998, weighted average number of
common shares outstanding were 2,661,442 and 3,178,355, respectively.
When dilutive, stock options are included as share equivalents using
the treasury stock method. Common stock equivalents of 57,639 and
34,525 related to stock option grants were included in the computation
of the average number of shares outstanding for diluted earnings per
share for the quarters ended December 31, 1999 and 1998, respectively.
Common stock equivalents of 58,375 and 36,546 related to stock option
grants were included in the computation of the average number of shares
outstanding for diluted earnings per share for the six months ended
December 31, 1999 and 1998, respectively.
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3. INVENTORIES
The classification of inventories is as follows:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
-----------------------------------------------------------------------
<S> <C> <C>
Raw materials and
work in process $4,425,013 $4,642,396
Finished goods 8,409,333 9,334,805
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12,834,346 13,977,201
LIFO Reserve (1,061,269) (1,022,083)
=======================================================================
$11,773,077 $12,955,118
=======================================================================
</TABLE>
4. STOCK PURCHASE AGREEMENT
The Company has an agreement with its Chairman to repurchase stock from
his estate in the event of his death. The repurchase price is 95% of
the fair market value of the common stock on the date that notice to
repurchase is provided to the Company. The total number of shares to be
repurchased shall be sufficient to provide proceeds which are the
lesser of $2,500,000 or the amount of estate taxes and administrative
expenses incurred by his estate. The Company is obligated to pay in
cash 25% of the total amount due and to execute a promissory note at
the prime rate of interest for the balance. The Company maintains a
$1,150,000 life insurance policy to fund a substantial portion of this
obligation. At December 31, 1999 and June 30, 1999, $1,490,000 has been
classified as a Contingently Redeemable Equity Interest reflecting the
estimated obligation in the event of execution of the agreement.
5. DEFERRED COMPENSATION
In 1991, the Board of Directors agreed to continue John C. Koss'
current base salary in the event he becomes disabled prior to age 70.
After age 70, Mr. Koss shall receive his current base salary for the
remainder of his life, whether or not he becomes disabled. The Company
is currently recognizing an annual expense of $115,080 in connection
with this agreement, which represents the present value of the
anticipated future payments. At December 31, 1999 and June 30, 1999,
respectively, the related liabilities in the amounts of $939,000 and
$881,460 have been included in deferred compensation and other
liabilities on the accompanying balance sheets.
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<PAGE> 8
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
December 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash generated by operating activities during the six months ended December 31,
1999 amounted to $2,674,156. Working capital was $21,155,475 at December 31,
1999, an increase of $170,316 from the balance at June 30, 1999. The cash
necessary to fund the Company's operating activities fluctuates from time to
time; however, as a general rule, the Company expects to generate adequate
amounts of cash to meet future operating needs. The Company maintains sufficient
borrowing capacity to fund any shortfall.
Capital expenditures for new property and equipment (including production
tooling) were $226,603 for the six months. Budgeted capital expenditures for
fiscal year 2000 are $832,100. The Company expects to generate sufficient
operating funds to fulfill these expenditures.
Stockholders' investment decreased to $21,083,305 at December 31, 1999, from
$21,180,935 at June 30, 1999. The decrease reflects the effect of net income,
the purchase and retirement of common stock, and the exercise of stock options
for the six months.
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. This credit
facility was increased from $8,000,000 to $10,000,000 as a 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
December 31, 1999.
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 a $1,000,000 increase in the stock repurchase program, increasing the
total amount from $2,000,000 to $3,000,000. In July of 1997, the Board of
Directors approved a $2,000,000 increase in the stock repurchase program,
increasing the total amount 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, increasing the program from $7,000,000 to
$10,000,000. In April of 1999, the Board of Directors increased the stock
repurchase program by $5,000,000 from $10,000,000 to $15,000,000. In October of
1999, the Board of Directors increased the stock repurchase program by another
$5,000,000, up to a
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maximum of $20,000,000. 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 quarter ended December 31, 1999, the Company
purchased 116,250 shares of its common stock at an average gross price of $14.78
per share (and an average net price of $13.95 per share), and retired all such
shares.
From the commencement of the Company's stock repurchase program through December
31, 1999, the Company has purchased and retired a total of 1,564,498 shares for
a total gross purchase price of $17,699,876 (representing an average gross
purchase price of $11.31 per share) and a total net purchase price of
$14,560,154 (representing an average net purchase price of $9.31 per share). The
difference between the total gross purchase price and the total net purchase
price reflects the lower cost to the Company from purchasing stock from certain
employees who have exercised stock options pursuant to the Company's stock
option program. In determining the total dollar amount available for 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.
The Company also has an Employee Stock Ownership and Trust ("ESOP") pursuant to
which shares of the Company's stock are purchased by the ESOP for allocation to
the accounts of ESOP participants. For the quarter ended December 31, 1999, the
ESOP did not purchase any shares of the Company's stock.
Results of Operations
Net sales for the second quarter ended December 31, 1999 rose 2% to $8,582,606
from $8,386,879 for the same period in 1998. Net sales for the six months ended
December 31, 1999 were $16,975,859 down 3% compared with $17,417,922 during the
same six months one year ago.
Gross profit as a percent of net sales was 38% for the quarter ended December
31, 1999 compared with 40% for the same period in the prior year. For the six
month period ended December 31, 1999, the gross profit percentage was 40%
compared with 42% for the same period in 1998. Shifts in product mix resulted in
the decrease in gross profit for the six month period as compared to last year.
Selling, general and administrative expenses for the quarter ended December 31,
1999 were $1,927,023 or 22% of net sales, as against $2,049,987 or 24% of net
sales for the same period in 1998. For the six month period ended December 31,
1999, such expenses were $3,757,610 or 22% of net sales, as against $4,106,754
or 24% of net sales, for the same period in 1998.
For the second quarter ended December 31, 1999, income from operations was
$1,369,026 versus $1,284,618 for the same period in the prior year. Income from
operations for the six months ended December 31, 1999 was $3,018,415 as compared
to $3,200,790 for the same period in 1998. The decrease is primarily related to
the decrease in gross margin.
Interest expense amounted to $0 for the quarter as compared to $5,667 for the
same period in the prior year. For the six month period, the interest expense
amounted to $0 compared with $56,617 for the same period in the prior year. The
decrease is a result of no borrowing activity this year as compared to the same
period last year.
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<PAGE> 10
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.
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.
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<PAGE> 11
PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security-Holders
(a) On October 21, 1999 an Annual Meeting of Stockholders was held.
(b) Proxies for the election of directors were solicited pursuant to
Regulation 14. There was no solicitation in opposition to
management's nominees, and all such nominees were elected
(c) There were 2,682,669 shares of common stock eligible to vote at
the Annual Meeting, of which 2,450,924 shares were present at the
Annual Meeting in person or by proxy, which constituted a quorum.
The following is a summary of the results of the voting:
<TABLE>
<CAPTION>
Number of Votes Broker
--------------- ------
For Withheld Non-Votes
--- -------- ---------
<S> <C> <C> <C>
Election of Directors:
nominees for 1-year
terms ending in 2000:
John C. Koss 2,420,167 30,757 0
Thomas L. Doerr 2,420,491 30,433 0
Victor L. Hunter 2,420,304 30,020 0
Michael J. Koss 2,420,357 30,567 0
Lawrence S. Mattson 2,420,289 30,655 0
Martin F. Stein 2,421,657 29,267 0
John J. Stollenwerk 2,421,480 29,438 0
</TABLE>
<TABLE>
<CAPTION>
Number of Votes Broker
--------------- ------
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Appointment of
PricewaterhouseCoopers LLP
as independent auditors
for the year ended
June 30, 2000 2,424,394 2,233 24,297 0
</TABLE>
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits Filed
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
period covered by this report.
11 of 12
<PAGE> 12
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
KOSS CORPORATION
Dated: 2/14/00 /s/ Michael J. Koss
------------ --------------------------
Michael J. Koss
Vice Chairman, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 2/14/00 /s/ Sue Sachdeva
------------ --------------------------
Sue Sachdeva
Vice President--Finance
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,198,601
<SECURITIES> 0
<RECEIVABLES> 8,522,085
<ALLOWANCES> 0
<INVENTORY> 11,773,077
<CURRENT-ASSETS> 22,980,088
<PP&E> 1,681,178
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,823,042
<CURRENT-LIABILITIES> 1,824,613
<BONDS> 0
0
0
<COMMON> 27,111
<OTHER-SE> 21,056,194
<TOTAL-LIABILITY-AND-EQUITY> 25,823,042
<SALES> 16,975,859
<TOTAL-REVENUES> 0
<CGS> 10,199,834
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,199,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35,372)
<INCOME-PRETAX> 3,785,166
<INCOME-TAX> 1,462,340
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,322,826
<EPS-BASIC> .87
<EPS-DILUTED> .85
</TABLE>
