Washington, D.C. 20549

                                    Form 10-Q

                  OF THE SECURITIES EXCHANGE ACT OF 1934
                  for the quarterly period ended September 30, 1998
                  OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-3295
- - -------------------------------------------------------------------------------

- - --------------------------------------------------------------------------------
(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 September 30, 1998, there were 3,177,269 shares  outstanding of the 
Registrant's  common stock,  $0.01 par value per share.

                                    1 of 12

                                    FORM 10-Q
                               September 30, 1998


Page PART I FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Balance Sheets September 30, 1998 (Unaudited) and June 30, 1998 3 Condensed Consolidated Statements of Income (Unaudited) Three months ended September 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended September 30, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 1998 6-7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security-Holders 10-11 Item 6 Exhibits and Reports on Form 8-K 11
September 30, 1998 June 30, 1998 (Unaudited) (*) ---------------------------------------------- ASSETS Current Assets: Cash $ 19,048 $ 14,778 Accounts receivable 9,950,184 8,387,839 Inventories 16,177,331 19,486,058 Other current assets 1,232,891 1,104,838 - - ----------------------------------------------------------------------------------------------------------------------- Total current assets 27,379,454 28,993,513 Property and Equipment, net 2,035,788 2,062,531 Intangible and Other Assets 965,655 772,725 - - ----------------------------------------------------------------------------------------------------------------------- $30,380,897 $32,028,769 ======================================================================================================================= LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Accounts payable $ 1,003,312 $ 1,956,877 Accrued liabilities 1,066,429 1,314,701 Income taxes payable 290,261 677,527 - - ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 2,360,002 3,949,105 Long-Term Debt 1,367,000 2,746,000 Deferred Compensation and Other Liabilities 1,281,274 1,252,504 Contingently Redeemable Equity Interest 1,490,000 1,490,000 Stockholders' Investment 23,882,621 22,591,160 ======================================================================================================================= $30,380,897 $32,028,769 =======================================================================================================================
* The balance sheet at June 30, 1998, has been prepared from the audited financial statements at that date. See accompanying notes. 3 of 12 4 KOSS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended September 30 1998 1997 - - -------------------------------------------------------------------------------------------------------------- Net sales $ 9,031,043 $11,755,125 Cost of goods sold 5,058,104 7,330,668 - - -------------------------------------------------------------------------------------------------------------- Gross profit 3,972,939 4,424,457 Selling, general and administrative expense 2,056,767 2,201,168 - - -------------------------------------------------------------------------------------------------------------- Income from operations 1,916,172 2,223,289 Other income (expense) Royalty income 253,314 170,296 Interest income 3,938 3,938 Interest expense (50,950) (20,356) - - -------------------------------------------------------------------------------------------------------------- Income before income tax provision 2,122,474 2,377,167 Provision for income taxes 831,013 975,744 ============================================================================================================== Net income $ 1,291,461 $ 1,401,423 ============================================================================================================== Earnings per common share: Basic $0.41 $0.42 Diluted $0.40 $0.41 ============================================================================================================== Dividends per common share None None ==============================================================================================================
Three Months Ended September 30 1998 1997 - - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,291,461 $ 1,401,423 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 173,638 216,312 Deferred compensation 28,770 28,770 Net changes in operating assets and liabilities 29,227 301,133 - - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 1,523,096 1,947,638 - - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of equipment and leasehold improvements (139,826) (22,619) - - ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (139,826) (22,619) - - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments under line of credit agreements (7,610,000) (4,716,000) Borrowings under line of credit agreements 6,231,000 4,940,000 Purchase and retirement of common stock -- (4,763,844) Exercise of stock options -- 2,681,050 - - ------------------------------------------------------------------------------------------------------ Net cash used in financing activities (1,379,000) (1,858,794) - - ------------------------------------------------------------------------------------------------------ Net increase in cash 4,270 66,225 Cash at beginning of year 14,778 32,551 ====================================================================================================== Cash at end of quarter $ 19,048 $ 98,776 ======================================================================================================
See accompanying notes. 5 of 12 6 KOSS CORPORATION AND SUBSIDIARIES September 30, 1998 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The financial statements presented herein are based on interim amounts and are subject to audit. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows at September 30, 1998 and for all periods presented have been made. The income from operations for the quarter ended September 30, 1998 is not necessarily indicative of the operating results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Registrant's June 30, 1998, Annual Report on Form 10-K. 2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," (SFAS 128). This Statement establishes new standards for computing and presenting earnings per share. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of all prior-period earnings per share data. The Company's adoption of the provisions of SFAS 128 resulted in the dual presentation of basic and diluted per share amounts on the Company's income statement. Basic earnings per share are computed based on the weighted average number of common shares outstanding. The weighted average number of common shares outstanding for the quarters ending September 30, 1998 and 1997 were 3,177,269 and 3,342,486, respectively. When dilutive, stock options are included as share equivalents using the Treasury stock method. Common stock equivalents of 38,769 and 110,510 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 September 30, 1998 and 1997, respectively. 6 of 12 7 3. INVENTORIES The classification of inventories is as follows:
September 30, 1998 June 30, 1998 ------------------------------------------------------------------------------- Raw materials and work in process $ 5,654,369 $ 6,700,168 Finished goods 10,984,129 13,247,057 ------------------------------------------------------------------------------- 16,638,498 19,947,225 LIFO Reserve (461,167) (461,167) =============================================================================== $16,177,331 $19,486,058 ===============================================================================
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 September 30, 1998 and June 30, 1998, $1,490,000 has been classified as a Contingently Redeemable Equity Interest reflecting the estimated obligation in the event of execution of the agreement. 5. DEFERRED COMPENSATION In 1991, the Board of Directors agreed to continue John C. Koss' current base salary in the event he becomes disabled prior to age 70. After age 70, Mr. Koss shall receive his current base salary for the remainder of his life, whether or not he becomes disabled. The Company is currently recognizing an annual expense of $115,080 in connection with this agreement, which represents the present value of the anticipated future payments. At September 30, 1998 and June 30, 1998, respectively, the related liabilities in the amounts of $795,150 and $766,380 have been included in deferred compensation on the accompanying balance sheets. 7 of 12 8 KOSS CORPORATION AND SUBSIDIARIES FORM 10-Q September 30, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition and Liquidity Cash generated by operating activities during the three months ended September 30, 1998 amounted to $1,523,096. Working capital was $25,019,452 at September 30, 1998, a decrease of $24,956 from the balance at June 30, 1998. The cash necessary to fund the Company's operating activities fluctuates from time to time; however, as a general rule, the Company expects to generate adequate amounts of cash to meet future operating needs. The Company maintains sufficient borrowing capacity to fund any shortfall. Capital expenditures for new property and equipment (including production tooling) were $139,826 for the quarter. For the fiscal year ending June 30, 1999, the Company expects its capital expenditures to be approximately $1,100,000. The Company expects to generate sufficient operating funds to fulfill these expenditures. Stockholders' investment increased to $23,882,621 at September 30, 1998, from $22,591,160 at June 30, 1998. The increase reflects primarily the net effect of income. The Company has an unsecured working capital line of credit with a bank which expires November 1, 1999. This credit facility provides for borrowings up to a maximum of $8,000,000. Borrowings under this credit facility bear interest at the bank's prime rate, or LIBOR plus 2.25%. This credit facility includes certain financial covenants that require the Company to maintain a minimum tangible net worth and specified current, interest coverage, and leverage ratios. Utilization of this credit facility as of September 30, 1998 and June 30, 1998 totaled $1,367,000 and $2,746,000, respectively, consisting solely of borrowings. The decrease as of September 30, 1998 is the result of decreased inventory purchases due to lower sales volumes. The Company has also reinstated a $2,000,000 credit facility which can be used by the Company to purchase shares of its own stock pursuant to the Company's stock repurchase program. This credit facility also expires November 1, 1999. In August 1998, the Board of Directors authorized an additional $3,000,000 to be used for purchasing the Company's common stock for its own account, increasing the total net amount of the Company's stock repurchase program from $7,000,000 to $10,000,000. The Company intends to effectuate all stock purchases either on the open market or through one or more privately negotiated transactions, and intends to finance all stock purchases through its own cash flow or by borrowing for such purchases. For the quarter ended September 30, 1998, the Company did not purchase any shares of its common stock pursuant to the Company's stock repurchase program. For the quarter ended September 30, 1998, the Company purchased 15,000 shares of its common stock for allocation to the Company's Employee Stock Ownership Plan and Trust ("ESOP") at an average price of $12.23 per share. 8 of 12 9 From the commencement of the Company's stock repurchase program through September 30, 1998, the Company has purchased and retired a total of 891,348 shares at a total gross purchase price of $9,108,577 (representing an average gross purchase price of $10.22 per share) and a total net purchase price of $6,485,677 (representing an average net purchase price of $7.28 per share). The difference between the total gross purchase price and the total net purchase price is the result of the Company repurchasing certain shares acquired by employees pursuant to the Company stock option program. Results of Operations Net sales for the quarter ended September 30, 1998 were $9,031,043 compared with $11,755,125 for the same period in 1997, a decrease of $2,724,082. This is the result of the Company's decision to withdraw from the speaker business. Gross profit as a percent of net sales was 44% for the quarter ended September 30, 1998 compared with 38% in the prior year. This improvement is primarily due to a change in product mix and withdrawal from the speaker business. Selling, general and administrative expenses for the quarter ended September 30, 1998 were $2,056,767 or 23% of net sales, as against $2,201,168 or 19% of net sales for the same period in 1997. For the quarter ended September 30, 1998, income from operations was $1,916,172 versus $2,223,289 for the same period in 1997, a decrease of $307,117. Interest expense amounted to $50,950 for the quarter as compared to $20,356 for the same period in the prior year. This increase is a result of increased borrowing activity for the quarter as compared to the same period last 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 as of March 31, 1997, the Company assigned this License Agreement to Jiangsu Electronics Industries Limited ("Jiangsu"), a subsidiary of Orient Power Holdings Limited. Orient Power is based in Hong Kong and has an extensive portfolio of audio and video products. Pursuant to this assignment, Jiangsu has agreed to make royalty payments through December 31, 2000, subject to certain minimum royalty amounts due for the years 1998, 1999, and 2000. In May of 1998, the Company and Jiangsu entered into an amendment to this License Agreement expanding the products covered by this License Agreement to include mobile electronics and increasing the minimum royalties due for the years 1998, 1999, and 2000. This License Agreement is subject to renewal for additional 3 year periods. Royalty income earned in connection with this License Agreement for the quarter ended September 30, 1998 was $253,314 as compared to $170,296 for the same period in 1997. The Company recognizes royalty income when earned. The increase in royalty income for the quarter was the result of higher sales volume in products covered under this License Agreement. 9 of 12 10 The License Agreement between the Company and Trabelco N.V. covering certain European countries remains in place. Although no sales have been reported under this License Agreement to date, 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. Year 2000 The Company is currently working to resolve the potential impact of the year 2000 on the processing of date sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using 2 digits to define the applicable year (as opposed to 4 digits). Any of the Company's programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or systems failure. Based on a review of the Company's software by the Chief Information Officer and outside consultants, the anticipated costs of addressing potential problems are not expected to have an adverse impact on the Company's financial position, results of operations or cash flows in future periods. The Company expects its computer systems will be year 2000 compliant by January 31, 1999. A year 2000 compliance letter and survey form has been sent to all our customers doing over $10,000 annually in sales. Responses will be analyzed to see if there are any adverse conditions that the Company may have overlooked in its year 2000 plan. The same procedure is being followed with our suppliers and vendors. The Company's current inventory levels and forecasting technique will insure product is available to support customer requirements. In the event there are any adverse conditions, the Company will devote necessary resources to resolve all significant year 2000 issues in a timely manner. PART II OTHER INFORMATION Item 4 Submission of Matters to Vote of Security-Holders (a) On October 22, 1998 an Annual Meeting of Stockholders was held. (b) Proxies for the election of directors were solicited pursuant to Regulation 14. There was no solicitation in opposition to management's nominees, and all such nominees were elected. (c) There were 3,177,269 shares of common stock eligible to vote at the Annual Meeting, of which 2,845,927 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: 10 of 12 11
Number of Votes Broker --------------- ------ For Withheld Non-Votes --- -------- --------- Nominees for 1-year terms ending in 1999: John C. Koss 2,828,644 17,555 0 Thomas L. Doerr 2,827,834 18,365 0 Victor L. Hunter 2,827,246 18,953 0 Michael J. Koss 2,828,423 17,776 0 Lawrence S. Mattson 2,827,096 19,103 0 Martin F. Stein 2,828,867 17,332 0 John J. Stollenwerk 2,828,779 17,420 0
Number of Votes Broker --------------- ------ For Against Abstain Non-Votes --- ------- ------- --------- Appointment of PricewaterhouseCoopers L.L.P. as independent auditors for the year ended June 30, 1999 2,842,456 1,927 1,816 0
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 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: 11/13/98 /s/ Michael J. Koss ----------------------------------- Michael J. Koss, President, Chief Executive Officer, Chief Financial Officer Dated: 11/13/98 /s/ Sue Sachdeva ----------------------------------- Sue Sachdeva Vice President--Finance 12 of 12

5 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 19,048 0 9,950,184 0 16,177,331 27,379,454 2,035,788 0 30,380,897 2,360,002 0 0 0 31,773 30,349,124 30,380,897 9,031,043 9,031,043 5,058,104 5,058,104 2,056,767 0 50,950 2,122,474 831,013 0 0 0 0 1,291,461 .41 .40