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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-3295
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KOSS CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
A DELAWARE CORPORATION 39-1168275
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4129 North Port Washington Avenue,
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Milwaukee, Wisconsin 53212
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
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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
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At March 31, 1997, there were 3,316,291 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
March 31, 1997
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1997 (Unaudited) and June 30, 1996 3
Condensed Consolidated Statements
of Income (Unaudited)
Quarter and nine months ended
March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Nine months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) March 31, 1997 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 10
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1997 June 30, 1996
(Unaudited) (*)
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ASSETS
Current Assets:
Cash $ 132,110 $ 27,001
Accounts receivable 7,363,338 8,965,213
Inventories 13,977,012 8,777,216
Prepaid expenses 305,710 382,137
Income taxes receivable 497,347 --
Deferred income taxes 517,946 517,946
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Total current assets 22,793,463 18,669,513
Property and Equipment, net 2,550,321 2,344,341
Deferred Income Taxes 422,603 422,603
Intangible and Other Assets 517,823 568,800
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$26,284,210 $22,005,257
==================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,457,823 $ 1,327,915
Accrued liabilities 885,198 786,353
Income taxes payable -- 361,855
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Total current liabilities 2,343,021 2,476,123
Long-Term Debt 2,066,000 470,000
Deferred Compensation and Other Liabilities 1,108,654 1,022,344
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 19,276,535 16,546,790
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$26,284,210 $22,005,257
==================================================================================
* The balance sheet at June 30, 1996, 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)
Three Months Nine Months
Period Ended March 31 1997 1996 1997 1996
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Net sales $8,583,303 $8,482,620 $31,766,272 $27,941,603
Cost of goods sold 5,660,609 6,018,141 21,011,785 19,450,431
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Gross profit 2,922,694 2,464,479 10,754,487 8,491,172
Selling, general and
administrative expense 2,169,313 2,160,599 6,660,273 6,529,139
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Income from operations 753,381 303,880 4,094,214 1,962,033
Other income (expense)
Royalty income 212,244 43,769 908,619 1,112,498
Interest income 30,085 4,063 89,201 12,511
Interest expense (77,099) (12,109) (254,527) (72,458)
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Income before income tax provision 918,611 339,603 4,837,507 3,014,584
Provision for income taxes 387,059 140,501 1,984,487 1,236,964
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Net income $ 531,552 $ 199,102 $ 2,853,020 $ 1,777,620
=======================================================================================
Number of common and common
equivalent shares used in
computing earnings per share 3,463,071 3,478,695 3,347,605 3,536,361
=======================================================================================
Earnings per common and common
equivalent share $ 0.15 $ 0.06 $ 0.85 $ 0.50
=======================================================================================
Dividends per common share None None None None
=======================================================================================
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31 1997 1996
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 2,853,020 $1,777,620
Adjustments to reconcile net
income to net cash (used) provided
by operating activities:
Depreciation and amortization 516,998 434,167
Deferred compensation and other liabilities 86,310 86,310
Net changes in operating assets and
liabilities (4,258,900) (2,585,989)
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Net cash used in operating activities: (802,572) (287,892)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (672,002) (242,043)
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Net cash used in
investing activities (672,002) (242,043)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings under line of credit agreements 17,765,000 11,971,000
Repayments under line of credit agreements (16,169,000) (11,541,000)
Purchase and retirement of common stock (352,692) --
Exercise of stock options 336,375 72,500
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Net cash provided
by financing activities 1,579,683 502,500
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Net increase (decrease) in cash 105,109 (27,435)
Cash at beginning of year 27,001 49,227
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Cash at end of period $ 132,110 $ 21,792
===============================================================================
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
March 31, 1997
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements presented herein are based on interim figures
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
March 31, 1997, and for all periods presented have been made. The income
from operations for the quarter and nine months ended March 31, 1997 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, 1996, Annual Report on Form 10-K.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per share are computed based on the average number of common and
common share equivalents outstanding. When dilutive, stock options are
included as share equivalents using the Treasury stock method. Common
stock equivalents of 152,433 and 54,070 related to stock option grants
were included in the computation of the average number of shares
outstanding for the quarter ended March 31, 1997 and 1996, respectively.
Common stock equivalent of 48,681 and 62,082 were outstanding for the
nine months ended March 31, 1997 and 1996, respectively.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
SFAS 128 replaces primary EPS with basic EPS, which excludes dilution,
and requires presentation of both basic and diluted EPS on the face of
the income statement. Diluted EPS is computed similarly to the current
fully diluted EPS. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, and requires restatement of
all prior-period EPS data presented. The adoption of this statement is
not expected to materially affect either future or prior-period EPS.
3. INVENTORIES
The classification of inventories is as follows:
March 31, 1997 June 30, 1996
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Raw materials and
work in process $ 6,847,695 $4,751,156
Finished goods 7,767,099 4,663,842
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14,614,794 9,414,998
LIFO Reserve (637,782) (637,782)
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$13,977,012 $8,777,216
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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 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. At
March 31, 1997 and June 30, 1996, $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 March 31, 1997 and June 30, 1996, respectively, the related
liabilities in the amounts of $622,530 and $536,220 have been included in
deferred compensation in the accompanying balance sheets.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q - March 31, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash used in operating activities during the nine months ended March 31, 1997
amounted to $802,572. Working capital was $20,450,442 at March 31, 1997. The
increase in working capital of $4,257,052 from the balance at June 30, 1996
reflects the net effect of an increase in inventory partially offset by
increased payables. These increases are the result of anticipated higher sales
volume in the upcoming quarter. 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 $672,002 for the nine months ended March 31, 1997. Depreciation
and amortization aggregated $516,998 for the nine months. For the fiscal year
ending June 30, 1997, the Company expects its capital expenditures to be
approximately $1,500,000. The Company expects to generate sufficient operating
funds to fulfill these expenditures.
Stockholders' investment increased to $19,276,535 at March 31, 1997, from
$16,546,790 at June 30, 1996. The increase reflects primarily the income for
the nine month period ending March 31, 1997. No cash dividends have been paid
since the first quarter of fiscal 1984.
The Company has an unsecured working capital credit facility with a bank. This
credit facility provides for borrowings up to a maximum of $8,000,000.
Borrowings under this credit facility bear interest at the bank's prime rate,
or LIBOR plus 2.25%. This credit facility includes certain covenants that
require the Company to maintain a minimum tangible net worth and specified
current, interest coverage, and leverage ratios. Utilization of this credit
facility as of March 31, 1997 totaled $2,160,567, consisting of $2,066,000 in
borrowings and $94,567 in commitments for foreign letters of credit.
Utilization of this credit facility as of June 30, 1996 was $944,784,
consisting of $470,000 in borrowings and $474,784 in foreign letters of credit.
The increase as of March 31, 1997 is the result of an increase in inventory due
to anticipated higher sales volume for the upcoming quarter. The Company can
also use up to $1,000,000 of its working capital credit facility to purchase
shares of its own stock.
The Company's Canadian subsidiary has a line of credit of $550,000, which is
guaranteed by the Company. Borrowings under this credit facility bear interest
at the bank's prime rate plus 1.5%. The credit facility is subject to the
availability of qualifying receivables and inventories which serve as security
for the borrowings. As of March 31, 1997 or June 30, 1996, there were no
borrowings outstanding against this line of credit. The due date for the line
is October 31, 1997.
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Pursuant to the Company's stock repurchase program, for the nine month period
ended March 31, 1997, the Company purchased 51,629 shares of its common stock
at an average price of $6.83 per share. All 51,629 shares were retired. Since
the commencement of the Company's stock repurchase program, the Company has
purchased 343,576 shares of its common stock for a total of $2,125,014,
representing an average price of $6.18 per share.
For the nine month period ended March 31, 1997, the Company's Employee
Stock Ownership Plan and Trust ("ESOP") purchased 27,371 shares of the
Company's common stock for the ESOP at an average price of $8.38 per share.
For the quarter ended March 31, 1997, the ESOP purchased 10,000 shares of the
Company's common stock for the ESOP at an average price of $11.18 per share.
Results of Operations
Net sales for the third quarter ended March 31, 1997 were $8,583,303 compared
to $8,482,620 for the same period in 1996. Net sales for the nine months ended
March 31, 1997 were $31,766,272, up 14% compared with $27,941,603 during the
same nine months one year ago. This increase was primarily a result of strong
orders throughout the period.
Gross profit as a percent of net sales was 34% for the quarter ended March 31,
1997 compared with 29% for the same period in the prior year. For the nine
month period ended March 31, 1997, the gross profit percentage was 34% compared
with 30% for the same period in 1996. Shifts in product mix resulted in the
increase in gross profit as compared to last year.
Selling, general and administrative expenses for the quarter ended March 31,
1997 were $2,169,313 or 25%, as against $2,160,599 or 25% for the same period
in 1996. For the nine month period ended March 31, 1997, such expenses were
$6,660,273 or 21%, as against $6,529,139 or 23% for the same period in 1996.
The percentage decrease is a direct result of higher sales.
For the third quarter ended March 31, 1997, income from operations was $753,381
versus $303,880 for the same period in the prior year. Income from operations
for the nine months ended March 31, 1997 was $4,094,214 as compared to
$1,962,033 for the same period in 1996. The increase is primarily related to
higher sales and to the increase in gross margin resulting from shifts in
product mix.
Net interest expense amounted to $77,099 for the quarter as compared to $12,109
for the same period in the prior year. For the nine month period, interest
expense amounted to $254,527 compared with $72,458 for the same period in the
prior year. The increase is a result of the Company borrowing at much higher
levels as compared to the same periods last year. The higher level of
borrowing was the result of increased inventory purchases to support the
increase in sales.
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The Company recently agreed to an amendment and assignment of its License
Agreement with Trabelco N.V., covering North America, Central America, and
South America, to Jiangsu Electronics Industries Limited, a subsidiary of
Orient Power Holdings Limited. The assignment was effective as of March 31,
1997. Orient Power has guaranteed Jiangsu's obligations under the License
Agreement, as amended. Orient Power is based in Hong Kong and has an extensive
portfolio of audio and video products. Pursuant to this assignment, Jiangsu has
agreed to make royalty payments through December 31, 2000, subject to certain
minimum royalty amounts due for the years 1998, 1999, and 2000. This license
arrangement is subject to renewal for additional 3 year periods.
Royalty income earned in connection with this License Agreement for the quarter
ended March 31, 1997 was $212,244 as compared to $43,769 for the same period in
1996. For the nine month period, royalty income was $908,619 compared to
$1,112,498 at March 31, 1996. The Company recognizes royalty income when
earned. The decrease in royalty income for the nine month period is the result
of lower sales volume by Trabelco N.V. 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 will be due for calendar years 1997
and 1998. This License Agreement expires on December 31, 1998. Trabelco N.V.
has the option to renew this License Agreement for additional 3 year periods.
PART II OTHER INFORMATION
Item 6 (a) Exhibits Filed
10.1 Third Amendment and Assignment of License Agreement
10.2 Consent of Directors (Supplemental Executive Retirement
Plan)
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.
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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: 5/14/97 /s/ Michael J. Koss
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Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 5/14/97 /s/ Sue Sachdeva
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Sue Sachdeva
Vice President -- Finance
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THIRD AMENDMENT AND ASSIGNMENT OF LICENSE AGREEMENT
THIS THIRD AMENDMENT AND ASSIGNMENT ("Assignment") made and entered
into as of the 31st day of March, 1997, by and among TRABELCO, N.V., a
Netherlands Antilles company ("Assignor"), JIANGSU ELECTRONICS INDUSTRIES
LIMITED, a British Virgin Islands company ("Assignee"), HAGEMEYER ELECTRONICS
(N.A.), Inc. ("HENA"), HAGEMEYER CONSUMER PRODUCTS, INC. d/b/a Koss Electronic
Products, a Missouri corporation ("KEP"), KCP LIMITED, a British Virgin Islands
Company ("KCP"), and KOSS CORPORATION, a Delaware corporation ("Koss").
WITNESSETH, THAT:
WHEREAS, Assignee and Assignor, along with KEP and KCP (KEP, KCP and
Assignor are sometimes hereinafter referred to collectively as "Seller"), have
entered into a certain Asset Purchase Agreement dated as of March 31, 1997 (the
"Purchase Agreement"), pursuant to which Seller has agreed to sell and convey
and Assignee has agreed to purchase and acquire certain assets of Seller; and
WHEREAS, the execution and delivery of this Assignment is a condition
precedent to the obligation of Assignee to consummate the transactions
contemplated by the Purchase Agreement; and
WHEREAS, Assignor and Koss are parties to a certain License Agreement
dated November 15, 1991, as amended by Amendment to License Agreement dated
November 15, 1991, and a Second Amendment to License Agreement dated September
29, 1995 (as amended, the "License Agreement"); and
WHEREAS, Assignor desires to assign and Assignee desires to accept such
assignment and assume all of Assignor's right, title and interest in and to and
obligations under said License Agreement; and
WHEREAS, Koss, Assignor and Assignee desire to amend certain terms and
provisions of the License Agreement as hereinafter provided.
NOW, THEREFORE, Assignor and Assignee have agreed that in exchange for
a payment being made to Assignor of Ten Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Assignor and Assignee agree as follows:
1. Assignor hereby assigns to Assignee as of the Closing Date (as
defined in the Purchase Agreement) all of its right, title and interest in and
to and obligations under the License Agreement, a copy of which is attached
hereto as Exhibit A.
2. Assignor warrants that it is the Licensee under the License
Agreement; that the License Agreement is in full force and effect without
modification or amendment, except as hereinabove referenced; that no default
exists to the knowledge of Assignor,
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and no fact, circumstance or condition exists, to the knowledge of Assignor,
that with the passage of time or notice, or both, would constitute a default
under the License Agreement; and that, subject to the consent of Koss, it has
full right, power and authority to freely assign its interest under the License
Agreement pursuant to this Assignment. Assignor further warrants that its
interest under the License Agreement is free and clear of any and all liens and
encumbrances and that Assignee acquires Assignor's rights as Licensee under the
License Agreement subject only to, and as limited by the terms hereof, the
obligations of Assignee to perform the obligations of Licensee under the
License Agreement. Each of the warranties contained in this Section 2 are true
and correct on the date hereof and shall be true and correct on the Closing
Date (as defined in the Purchase Agreement).
3. Assignee, by acceptance of this Assignment, and as limited by the
terms hereof, assumes as of the Closing Date (as defined in the Purchase
Agreement) all of the rights, duties, obligations and covenants of Assignor
under the License Agreement. Notwithstanding the foregoing, Assignor shall
remain liable for the Minimum Royalty under the License Agreement for 1997.
Assignor shall make payment to Koss of such 1997 Minimum Royalty on the Closing
Date or immediately thereafter, but in no event later than May 9, 1997. Assignee
shall make payment of all Royalties during 1997 to Assignor until Assignor has
received all amounts paid to Koss representing the 1997 Minimum Royalty.
Thereafter, Royalties shall be paid to Koss in accordance with the terms of the
License Agreement.
4. No royalties will be payable to Koss with respect to any sales of
Licensed Products by Seller to Assignee.
5. For purposes of calculating the Royalties payable by Assignee to
Koss pursuant to Section 7 of the License Agreement, "net sales" shall be
determined based upon (i) Assignee's gross sales of each category of the
Licensed Products, less (ii) returned goods of each category of the Licensed
Products received by Assignor and its affiliate, Hagemeyer Service Center, Inc.
during 1997 and thereafter by Assignee.
6. Seller, to the extent of their rights as licensee or sub-licensee,
may continue to sell Licensed Products only in connection with (a) the sale of
new Licensed Products which were pledged to KEP as collateral under a Line of
Credit Agreement dated May 6, 1997, and foreclosed by KEP after default by
Assignee, and (b) the sale (without warranty) of "as is" Licensed Products
returned to Seller through December 31, 1997 and repaired prior to May 1, 1998.
All sales of Licensed Products pursuant to subsection (a) shall be made only in
the Territory and shall be made pursuant to normal distribution channels for
such new Licensed Products. Seller shall have no right to continue sales
pursuant to subsections (a) and (b) hereof after December 31, 1998. All sales of
Licensed Products pursuant to subsection (b) hereof
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shall be made only in the Territory and in markets and by use of distribution
channels other than these used by Assignor and/or Assignee to sell new Licensed
Products. In the event of any sales of Licensed Products by Seller pursuant to
this Section 6, Seller shall pay to Koss Royalties with respect to Seller's
sales of Licensed Products in the Territory. All Royalties paid by Seller
after the Effective Date (as defined in the Purchase Agreement) for any such
sales through December 31, 1997, shall be applied toward the Minimum Royalty
due under the License Agreement for 1997. Notwithstanding Section 13.3 of the
License Agreement, in the event Licensor terminates the License Agreement due
to Assignee's default under the terms of this License Agreement, Koss shall
have the right to immediately negotiate and implement a new license with any
other third party for the Licensed Products and/or sell the Licensed Products
itself.
7. Seller and their affiliate, Hagemeyer Service Center, Inc., to the
extent of their rights as licensee or sub-licensee, may continue to use the
trade name "Koss Electronic Products" only in connection with (a) the collection
of accounts receivable arising from sales before March 31, 1997, (b) the
receipt of returned goods and the servicing of warranty repair claims as
provided herein, and (c) sales pursuant to Section 6 hereof. In no event shall
Seller or any of its affiliates have the right to use the tradename "Koss
Electronic Products" after December 31, 1998.
8. Without limiting any other provision of this Assignment, Assignor
shall remain liable (a) for the payment of Royalties with regard to the sale of
new Licensed Products pursuant to subsection (a) of Section 6 above and (b) for
all obligations of Assignor pursuant to the License Agreement which arose prior
to the Closing Date (as defined in the Purchase Agreement).
9. Koss acknowledges the value of this agreement and the adequacy and
sufficiency of the consideration received, and hereby consents to the terms of
this Assignment and agrees that the License Agreement shall remain in full force
and effect and that following this Assignment Koss will continue to act as
licensor pursuant to the terms of the License Agreement as amended herein with
Assignee as licensee thereunder.
10. Other than as set forth herein, Assignor shall have no liability with
regard to Royalties pursuant to the License Agreement. Koss and Assignee
hereby agree that Assignee shall pay to Koss the following Minimum Royalties
for the Contract Years set forth below:
Year Minimum Royalties
---- -----------------
1998 $700,000
1999 $725,000
2000 $750,000
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11. Assignee shall have the right to grant a sublicense under the
License Agreement pursuant to Section 2.3 of the License Agreement as amended
by Section 16(b) hereof.
12. After payment to Koss of the Minimum Royalty for 1997, Seller
shall have no obligation to make any additional payment required to renew the
License Agreement upon the expiration of the current term and the parties
acknowledge that the payment by Seller of 1997 Minimum Royalty, as provided in
Section 3 hereof, satisfies Assignee's renewal obligation pursuant to the
License Agreement.
13. Assignee's affiliates, J.S. International, Inc. and Jiangsu
International Limited, shall have the right to use the tradename "Koss Audio &
Video Electronics" in connection with the manufacture, promotion, distribution
and sale of Licensed Products, the collection of related accounts receivable,
the receipt of related returned goods and the servicing of related warranty
repair claims.
14. After the Closing Date (as defined in the Purchase Agreement),
the liability of Assignor pursuant to the terms of the License Agreement and
the liability of HENA under its Guaranty attached to the License Agreement
shall continue in full force and effect as to all occurrences and events prior
to December 31, 1997.
15, Assignee agrees to comply with the insurance coverage
provisions of Section 11.3 of the License Agreement at the Closing Date (as
defined in the Purchase Agreement).
16. The License Agreement is hereby amended as follows:
(a) Section 2.1 is hereby deleted in its entirety and the
following inserted in its place:
Subject to all the terms and conditions of this Agreement, Licensor
hereby grants to Licensee the exclusive right and license to use the
Licensed Trademarks within the Territory during the Contract Period in
connection with, and only with, the manufacture, promotion,
distribution and sale of the Products. Notwithstanding anything herein
to the contrary, Licensee shall not manufacture, distribute or sell
headphones except as a prepackaged component of an audio system that is
commonly expected by the consuming public to include headphones with
such audio system.
(b) Section 2.3 is hereby deleted in its entirety and the
following inserted in its place:
Licensee shall have the right to grant a sublicense under this
Agreement to any entity in which Licensee owns at least a 51% equity
interest, permitting such entity to manufacture, promote, distribute and
sell the Licensed Products subject to the terms of this Agreement,
provided that Licensee first executes a letter agreement undertaking to
recognize and uphold the Licensed Trademarks and otherwise comply with
and
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be bound by the terms of this Agreement. Further, Licensee shall have the
right to enter into an agreement with J.S. International, Inc. and Jiangsu
International Limited regarding the performance by such companies of
certain duties of Licensee under this Agreement. Licensee shall also have
the right, subject to the terms hereof, to subcontract the manufacture of
the Licensed products, provided that the subcontractor executes a letter
agreement in form substantially similar to Exhibit C attached hereto
undertaking to recognize and uphold the Licensed Trademarks and other
rights under this Agreement. Licensee shall not grant any other sublicense
under this Agreement other than as provided in this Section 2.3.
(c) Section 6.1 is hereby deleted in its entirety.
(d) Section 7.3 is hereby revised to provide that for all Contract Years
following 2000 the Minimum Royalty due for the year 2000 shall be the base upon
which all future Minimum Royalties shall be calculated in accordance with this
Section 7.3, but in no event shall any Minimum Royalty, so calculated, be less
than the Minimum Royalty applicable for any prior year.
(e) Section 8.1 is hereby deleted in its entirety and the following
inserted in its place:
J.S. International, Inc. shall maintain for Licensee and all sublicensees
of Licensee for five (5) years following the close of each Contract Year
accurate books and records which disclose: the cost of sales of the
Licensed Products, the amount of sales of the Licensed Products (ignoring
any sales to sublicensees by the Licensee or other sublicensees); the
amount of credits for returns, trade discounts and customer's shipping
costs; the amount of all Royalties payable hereunder by Licensee and all
sublicensees; and the manner in which such Royalties were determined.
(f) The second sentence of Section 8.4 is deleted in its entirety and
the following inserted in its place:
Such books of account and records shall be made available to Licensor and
its accountants at the office of J.S. International, Inc., located at 5320
Lemay Ferry Road, St. Louis, Missouri 63129 or at such other place as the
parties shall mutually agree.
(g) Section 11.1 is hereby revised to provide that Licensor's liability
to indemnify Licensee shall not exceed the sum of the amount of Royalties
received by Licensor relating to sales in the country in which the claim arose,
during the three (3) year period immediately preceding initiation of the
lawsuit to which the indemnification relates.
(h) Section 12.2(a) is hereby deleted in its entirety and the following
inserted in its place:
5
6
(a) If the other party shall become insolvent or shall make an
assignment for the benefit of creditors or become the subject of
receivership, bankruptcy or other insolvency or debtor relief
proceedings, or any similar proceedings.
(i) Section 12.3 shall be deleted in its entirety.
(j) Section 12.2(d) shall be deleted in its entirety.
(k) The first sentence of Section 13.2 is deleted in its
entirety and the following inserted in its place:
Any Licensed Products for which as of the date of termination Licensee
has non-cancellable open orders or which are in transit to the United
States may be sold to unrelated third parties by Licensee on a
non-exclusive basis during the twelve (12) month period following the
date of termination.
(l) The second sentence of Section 14.1 is hereby revised to
grant Koss the right to sell during any Contract Period, and at any time
thereafter (including but without limitation the one (1) year non-competition
period as provided in this Section 14.1), consumer electronic products
purchased from Assignee, notwithstanding the provisions of Section 13.3.
(m) The second sentence of Section 14.2 is hereby deleted in
its entirety and the following inserted in its place:
Licensee agrees to sell the Products to Licensor at the same price as
Licensee's most recent sale of such Products to a company related or
affiliated to Licensee, or at the manufacturer's cost for such Products
plus 10% F.O.B. Hong Kong if there are no such related or affiliated
company sales.
(n) Section 15 is hereby revised to provide that the address
for notices sent to Assignee, as Licensee, shall be addressed as follows:
Jiangsu Electronics Industries Limited
c/o 5320 Lemay Ferry Road
St. Louis, Missouri 63129
Attn: Attilio Cosgrove
(o) Section 16 is hereby deleted in its entirety and the
following inserted in its place:
16. Assignment. This Agreement shall bind and inure to the benefit
of Licensor, and the successors and assigns of Licensor. The rights
granted Licensee hereunder shall be exclusive to it and shall not,
without the prior written consent of Licensor, be transferred or
assigned to any other entity, provided that Licensee may assign this
Agreement to any parent corporation or wholly-owned subsidiary of
Licensee.
In the event of the merger or consolidation of Licensee with
6
7
any other entity, except for a wholly-owned subsidiary or parent of
Licensee, Licensor shall have the right to immediately terminate the
License Agreement by so notifying Licensee in writing on or before sixty
(60) days after Licensor has received notice of such merger or
consolidation.
(p) The references to various parties in the License Agreement
shall be revised as follows in each and every instance in which they appear:
(i) Hagemeyer Consumer Products, Inc. and/or HCP
shall be revised to Licensee; and
(ii) Without limiting Section 14 of the Assignment,
Hagemeyer Electronics (N.A.), Inc. shall be
revised to Orient Power Holdings Limited after
December 31, 1997. Notwithstanding the
foregoing, the guaranty of Orient Power
Holdings Limited shall be in effect upon the
execution and delivery of this Agreement.
(q) Section 18.3 is hereby deleted in its entirety and the
following inserted in its place:
This Agreement shall be governed by and construed according to the
internal laws of the State of Wisconsin (without regard to principles of
conflicts of law) as to all matters, including but not limited to matters of
validity, construction, effect and performance. If and to the extent that any
provisions of this Agreement are prohibited or unenforceable under any
applicable law, such provisions shall be innefective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof or affecting the validity or enforceability of any other provision
hereof.
(r) The following shall be inserted as a new Section 18.5:
18.5 Resolution of any and all disputes between Licensor and Licensee
arising from or in connection with this Agreement, whether based on
contract, tort, common law, equity, statute, regulation, order or
otherwise, shall be exclusively governed by and settled in accordance
with the arbitration rules of the American Arbitration Association, as
amended from time to time and such arbitration shall be final and
binding upon the parties, their respective successors and assigns. The
arbitration shall be conducted in Milwaukee, Wisconsin.
17. This Assignment shall be binding on, and inure to the benefit
of, the parties hereto and their respective successors and assigns.
18. This Assignment (including the Exhibit) contains the entire
understanding of the parties with respect to the subject
7
8
matter hereof and supersedes all prior written or oral commitments,
arrangements or understandings with respect thereto.
19. This Assignment shall not be modified or amended except pursuant to
an instrument in writing executed and delivered on behalf of each of the
parties hereto.
20. The parties hereto agree to take such acts and execute such
documents, as reasonably requested by the other party hereto to effectuate the
terms of this Assignment.
21. This Assignment shall be governed by the substantive laws of the
State of Wisconsin (regardless of laws that might be applicable under
principles of conflicts of laws) as to all matters, including but not limited
to matters of validity, construction, effect and performance. Resolution of
any and all disputes between Licensor and Licensee arising from or in
connection with this Assignment, whether based on contract, tort, common law,
equity, statute, regulation, order or otherwise, shall be exclusively governed
by and settled in accordance with the arbitration rules of the American
Arbitration Association, as amended from time to time and such arbitration
shall be final and binding upon the parties, their respective successors and
assigns. The arbitration shall be conducted in Milwaukee, Wisconsin. To the
extent that the parties hereto need to compel or enforce the binding
arbitration provisions in this Assignment or in the License Agreement or need
to enforce or otherwise give effect to any arbitration award, the parties
hereby agree that any such action or proceeding shall be adjudicated before a
federal or state court located in Milwaukee, Wisconsin and they hereby submit
to the exclusive jurisdiction of the courts of the State of Wisconsin located
in Milwaukee, Wisconsin, and of the federal courts located in Milwaukee,
Wisconsin with respect to any such action or proceeding commenced by any party,
and irrevocably waive any objection they now or hereafter may have respecting
the venue of any such action or proceeding brought in such a court or
respecting the fact that such court is an inconvenient forum, relating to or
arising out of this Assignment or the License Agreement and consent to the
service of process in any such action or proceeding by means of registered or
certified mail, return receipt requested, in care of the address set forth
herein, with regard to Assignee, and the License Agreement, with regard to
Koss, as Assignor.
22. This Assignment may be executed in two or more counterparts all of
which shall be considered one and the same agreement and each of which shall be
deemed an original.
23. In the event the terms of this Assignment conflict with the terms of
the License Agreement, the terms of this Assignment shall control.
24. Capitalized terms used but not otherwise defined herein shall have
the meanings ascribed to them in the License Agreement.
25. If and to the extent that any provisions of this Assignment are
prohibited or unenforceable under any applicable
8
9
law, such provisions shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of any other provision hereof.
[INTENTIONALLY OMITTED]
9
10
IN WITNESS WHEREOF, the parties hereto have duly executed this
Assignment as of the day and year first above written.
ASSIGNOR:
TRABELCO, N.V. HAGEMEYER ELECTRONICS (N.A.),
INC.
By: /s/ By: /s/
--------------------------- ---------------------------
Elaine N. Christiaans, Richard A. Proctor,
Managing Director President
ASSIGNEE: HAGEMEYER CONSUMER PRODUCTS, INC.
JIANGSU ELECTRONICS
INDUSTRIES LIMITED
By: /s/
By: /s/ ---------------------------
--------------------------- David A. Page, President
Title:
KCP LIMITED
By: /S/
---------------------------
David A. Page, Director
KOSS CORPORATION
By: /S/
---------------------------
Title:
11
GUARANTY
The undersigned, ORIENT POWER HOLDINGS LIMITED, a Bermuda company
("Orient Power"), for good and valuable consideration, the receipt of which is
hereby acknowledged, hereby guarantees the performance by JIANGSU ELECTRONICS
INDUSTRIES LIMITED ("Jiangsu Electronics") or any sublicensee of Jiangsu
Electronics (Jiangsu Electronics and any sublicensee are hereinafter
collectively referred to as "Jiangsu") of all of Jiangsu's obligations under
(a) the Third Amendment and Assignment of License Agreement dated as of March
31, 1997 between Trabelco N.V., Jiangsu Electronics Industries Limited,
Hagemeyer Electronics (N.A.), Inc., Hagemeyer Consumer Products, Inc. d/b/a
Koss Electronics Products, KCP Limited and Koss Corporation (the "Assignment")
and (b) that certain License Agreement between Koss Corporation, as Licensor,
and Trabelco N.V. as Licensee, dated November 15, 1991, as amended by an
Amendment to License Agreement dated November 15, 1991, and a Second Amendment
to License Agreement dated September 29,1995 (collectively,
that certain License Agreement and the amendments thereto are hereinafter
referred to as the "License Agreement"), and assigned to Jiangsu on the date
hereof. Orient Power also guarantees the payment to Koss Corporation of any
and all amounts owed to Koss Corporation by Jiangsu under the
Assignment and the License Agreement, including but not limited to, the
indemnity obligations of Jiangsu thereunder.
Dated: May 6, 1997
ORIENT POWER HOLDINGS LIMITED
By: /s/
-----------------------------
Name:
Title:
[SEAL]
11
1
EXHIBIT 10.2
UNANIMOUS CONSENT OF DIRECTORS OF
KOSS CORPORATION
The undersigned, constituting all of the directors of Koss Corporation,
a Delaware corporation (the "Company"), do hereby consent and agree to the
adoption of the following resolutions:
WHEREAS, the Compensation Committee has recommended that the following
Supplemental Executive Retirement Plan be approved for Michael J. Koss;
WHEREAS, the Board of Directors believes it is in the best interests of
the Company to adopt the following Supplemental Executive
Retirement Plan for Michael J. Koss;
NOW, THEREFORE, BE IT RESOLVED, that Michael J. Koss shall receive
annual cash compensation following his retirement from the Company
(the "Retirement Payments") in an amount equal to 2% of the base salary
of Michael J. Koss, multiplied by his number of years of service to the
Company (example 2% multiplied by 25 years is 50% of base salary). The
base salary shall be calculated using the average base salary for
Michael J. Koss during the three years preceding his retirement. The
Retirement Payments shall be paid to Michael J. Koss monthly until his
death, and after the death of Michael J. Koss the Company shall
continue to make the Retirement Payments monthly to the surviving
spouse of Michael J. Koss until her death.
This Unanimous Consent of Directors may be executed in one or more
counterparts each of which shall be deemed to be an original, and all of which
taken together shall constitute one and the same document.
Dated at Milwaukee, Wisconsin, this 7th day of March, 1997.
--- ------
/s/ /s/
-------------------- -----------------------
John C. Koss Thomas L. Doerr
/s/ /s/
---------------------- -----------------------
Lawrence S. Mattson John Stollenwerk
/s/ /s/
---------------------- -----------------------
Martin F. Stein Victor L. Hunter
5
9-MOS
JUN-30-1997
JUL-01-1996
MAR-31-1997
132,110
0
7,363,338
0
13,977,012
22,793,463
13,349,764
10,799,443
26,284,210
2,343,021
0
0
0
33,180
19,243,355
26,284,210
31,766,272
31,766,272
6,660,273
6,660,273
(997,820)
0
254,527
4,837,507
1,984,487
0
0
0
0
2,853,020
.85
0
