1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
KOSS CORPORATION Commission file number 0-3295
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
A Delaware Corporation 391168275
- --------------------------------------------------------------------------------
(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 offices) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
---------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value (voting)
--------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $13,537,000 on September 15, 1995 based upon a
closing price on such date of $7.25 per share as listed in the Wall Street
Journal.
On September 15, 1995, 3,322,507 shares of voting common stock were outstanding.
Documents Incorporated by Reference
-----------------------------------
Part III incorporates by reference information from Koss Corporation's Proxy
Statement for its 1995 Annual Meeting of Stockholders to be filed within 120
days of the end of the fiscal year covered by this Report (General Instruction
G(3)). The exhibits hereto incorporate by reference information from the
Company's Annual Report on Form 10-K for the fiscal years ended June 30, 1986,
1988, 1989, and 1990, and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
2
PART I
Item 1. BUSINESS.
As used herein, the term "Company" means Koss Corporation and its consolidated
subsidiaries, unless the context otherwise requires.
The Company operates in the audio/video industry segment of the home
entertainment industry through its design, manufacture and sale of stereo
headphones, audio/video loudspeakers, and related accessory products.
The Company's principal product is the design, manufacture, and sale of
stereophones and related accessories. The percentage of total revenues related
to the product line over the past three years was:
1995 1994 1993
---- ---- ----
Stereophones 77% 74% 78%
The Company's products are sold through audio specialty stores, catalog
showrooms, regional department store chains, military exchanges and national
retailers under the "Koss" name and dual label. The Company has more than
1,600 domestic dealers and its products are carried in more than 11,000
domestic retail outlets. International markets are served by a foreign sales
subsidiary in Canada and a sales office in Switzerland which utilizes
independent distributors in several foreign countries.
Management believes that it has sources of raw materials that are adequate for
its needs.
The Company regularly applies for registration of its trademarks and has
numerous patents. Certain of its trademarks are of material value and
importance to the conduct of its business. Although the Company considers
protection of its proprietary developments important, the Company's business is
not, in the opinion of management, materially dependent upon any single patent.
Although retail sales of consumer electronics are predictably higher during the
holiday season, management of the Company is of the opinion that its business
and industry segment are not seasonal as evidenced by the fact that 54% of
sales occurred in the first six months of the fiscal year and 46% of sales
occurred in the latter six months of the fiscal year.
The Company's working capital needs do not differ substantially from those of
its competitors in the industry and generally reflect the need to carry
significant amounts of inventory to meet delivery requirements of its
customers. The Company provides extended payment terms for product sales to
certain customers. Based on historical trends, management does not expect
these practices to have any material effect on net sales or revenues. The
Company's current backlog of orders is not material in relation to annual net
sales.
The Company markets its products to approximately 2,000 customers worldwide.
During 1995 the Company's sales to its largest single customer, Tandy
Corporation, were 18% of total sales. Management believes that any loss of
this customer's revenues would be partially offset by a corresponding decrease,
on a percentage basis, in expenses thereby dampening the impact on the
Company's operating income. Although perhaps initially material, management
believes this impact would be offset in future years by expanded sales to both
existing and new customers. The five largest customers of the Company
accounted for approximately 33% of total sales in 1995.
2
3
Although competition in the stereophone market has increased this past year,
the Company has maintained its competitive position as a leading marketer and
producer of high fidelity stereophones in the United States. In the
stereophone market, the Company competes directly with approximately five major
competitors, several of which are large and diversified and have greater total
assets and resources than the Company.
The amount spent on engineering and research activities relating to the
development of new products or the improvement of existing products was
$306,000 during fiscal 1995 as compared with $310,000 during fiscal 1994 and
$316,000 during fiscal 1993. These activities were conducted by both Company
personnel and outside consultants. The Company relies upon its unique sound,
quality workmanship, brand identification, engineering skills and customer
service to maintain its competitive position.
As of June 30, 1995, the Company employed 148 people. The Company also
utilizes temporary personnel to meet seasonal production demands.
Foreign Sales.
The Company services the Canadian market through its wholly-owned subsidiary
Koss Ltd., a Canadian corporation. Other international markets are serviced
through manufacturers representatives or independent distributors with product
produced in the United States. In the opinion of management, the Company's
competitive position and risks attendant to the conduct of its business in such
markets are comparable to the domestic market. For further information, see
Note 8 to consolidated financial statements accompanying this Form 10-K.
Item 2. PROPERTIES.
The Company leases its main plant and offices in Milwaukee, Wisconsin from its
Chairman, John C. Koss. On June 25, 1993, the lease was renewed for a period
of ten years, and is being accounted for as an operating lease. The new lease
extension increases the rent from $280,000 per year (plus Consumer Price Index
increase in 1994) to a fixed rate of $350,000 per year for three years and
$380,000 for the seven years thereafter. The lease is on terms no less
favorable to the Company than those that could be obtained from an independent
party. The Company is responsible for all property maintenance, insurance,
taxes and other normal expenses related to ownership. The Company leases
approximately 6,500 square feet of office, service and warehouse space in
Canada.
All facilities are in good repair and, in the opinion of management, are
suitable for the Company's purposes.
Item 3. LEGAL PROCEEDINGS.
Neither Koss nor its subsidiaries are subject to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth quarter
of the fiscal year ended June 30, 1995.
3
4
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION ON COMMON STOCK
The Company's common stock is traded on The Nasdaq Stock Market under the
trading symbol "KOSS". There were approximately 1,240 holders of the Company's
common stock as of September 15, 1995. The Company's previous lending
agreement prohibited the payment of cash dividends on the common stock. No
cash dividends have been paid for the years ended June 30, 1995, 1994, and
1993. (See note 2 to the financial statements accompanying this report.) The
quarterly high and low sale prices of the Company's common stock for the last
two fiscal years are shown below.
Fiscal Year 1995 Fiscal Year 1994
---------------- ------------------
Quarter High Low High Low
------- --------------- ------------------
First $13-1/4 $8-0/0 $20-3/4 $10-1/2
Second $13-3/4 $9-0/0 $20-1/4 $11-3/4
Third $10-7/8 $6-1/2 $15-1/4 $9-0/0
Fourth $ 7-1/4 $5-0/0 $14-3/4 $9-3/4
4
5
Item 6. SELECTED FINANCIAL DATA.
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
Net sales $33,432,344 $35,561,322 $32,137,448 $26,020,624 $24,325,513
Income before
extraordinary
credit $2,087,994 $2,800,855 $2,790,759 $744,328 $416,603
Per share of
common stock:
Income before
extraordinary
credit $0.58 $0.75 $0.82 $0.23 $0.13
Total assets $20,972,923 $19,220,406 $17,542,085 $13,252,217 $14,669,992
Long-term debt $570,000 $2,068,741 $3,286,632 $3,158,741 $4,005,464
5
6
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL CONDITION AND LIQUIDITY
During 1995, cash provided by operations was $1,751,464. Working capital was
$15,462,600 at June 30, 1995. The increase of $964,954 from the balance at
June 30, 1994 represents primarily the net effect of an increase of $1,558,596
in inventory, an increase of $132,521 in prepaid expenses, an increase of
$160,181 in other assets, an increase in accounts payable of $460,158, an
increase in accrued liabilities of $196,584 and a decrease of $154,040 in
accounts receivable. The increase in inventory is primarily due to an
unexpected decline in computer speaker sales. Volume is expected to be
sufficient in fiscal year 1996 to profitably decrease the current level of
computer speakers.
Capital expenditures for new property and equipment including production
tooling were $806,551, $370,839, and $699,235 in 1995, 1994, and 1993,
respectively. Depreciation charges aggregated $691,492, $638,125, and $728,156
for the same fiscal years. Budgeted capital expenditures for fiscal year 1996
are $1,600,000. The Company expects to generate sufficient funds through
operations to fulfill these expenditures.
Stockholders' investment increased to $15,341,426 at June 30, 1995 from
$12,658,628 at June 30, 1994. The increase reflects primarily net income and
the exercise of stock options for the year. 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 which
runs through March 15, 1997. This credit facility provides for borrowings up
to a maximum of $8 million. 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 June 30, 1995 totaled
$682,808, consisting of $570,000 in borrowings and $112,808 in commitments for
foreign letters of credit. In addition, the Company recently negotiated a $2
million credit facility which can be used by the Company in the event the
Company desires to purchase shares of its own stock. In April, 1995 the Board
of Directors authorized the Company's purchase from time to time of its Common
Stock utilizing the aforementioned $2 million line of credit. If the Company
decides to make any such purchases, it may do so from time to time as
conditions warrant either in open-market transactions or privately-negotiated
purchases.
The Company's Canadian subsidiary has a line of credit of $550,000. Borrowings
under this credit facility bear interest at the bank's prime rate plus 1.25%.
This credit facility is subject to the availability of qualifying receivables
and inventories which serve as security for the borrowings. As of June 30,
1995, $550,000 was available, of which none was being utilized. The due date
for the line is October 31, 1995 and the Company expects the line will be
renewed on substantially the same terms.
6
7
1995 RESULTS COMPARED WITH 1994
Net sales for 1995 were $33,432,344 compared with $35,561,322 in 1994, a
decrease of $2,128,978 or 6%. This decrease was the result of a decline in
computer speaker sales as compared to the previous year and an increase in
sales returns by dealers for repairs and credit. Sources indicate that credit
returns were common throughout the retail industry and not limited to the
Company.
Gross profit was $10,622,307 or 31.8% in 1995 compared with $11,874,351 or
33.4% in 1994. The decrease relates to higher than expected labor costs
related to newer customized items and a less profitable mix of products in the
last two quarters of the fiscal year.
Selling, general and administrative expenses increased from $8,191,504 in 1994
to $8,376,204 in 1995. This increase is mainly attributed to higher
professional fees including the cost related to maintaining the company's
worldwide patents and trademarks.
Income from operations was $2,246,103 in 1995 compared with $3,682,847 in 1994,
a decrease of 39%. Interest expense for 1995 was $317,922 compared with
$246,911 in 1994. The increase is primarily due to increased levels of
borrowings during the fiscal year.
The Company has a license agreement with Trabelco N.V., a subsidiary of
Hagemeyer, N.V. Hagemeyer, N.V., a diverse international trading company based
in the Netherlands, has business interests in food, appliances,
electromechanical and automobile distribution as well as a solid base of
consumer electronic distribution business in Asia, Europe and North America.
Royalty income earned in connection with the license agreement in 1995 was
$1,412,723 as compared to $1,108,458 in 1994. This increase in royalty income
is a result of Trabelco N.V. experiencing higher sales volumes on products
under the license agreement. The license agreement expires December 31, 1997,
however, can be renewed for additional three year periods at the option of
Trabelco N.V.
7
8
1994 RESULTS COMPARED WITH 1993
Net sales for 1994 were $35,561,322 compared with $32,137,448 in 1993, an
increase of $3,423,874 or 11%. This increase was the result of higher sales of
current products as well as the introduction of new products.
Gross profit was $11,874,351 or 33.4% of net sales in 1994 compared with
$11,351,328 or 35.3% in 1993. Increased customer demand during this fiscal
year for some product lines resulted in the company spending more on air
freight than anticipated. This in turn directly affected the decrease in gross
profit for the year.
Selling, general and administrative expenses increased from $7,177,946 in 1993
to $8,191,504 in 1994. This increase is directly attributed to higher
promotional activities related to new products and trade show activities in the
computer market.
Income from operations was $3,682,847 in 1994 compared with $4,173,382 in 1993,
a decrease of 12%. Interest expense for 1994 was $246,911 compared with
$312,501 in 1993. The decrease is due to lower levels of borrowing throughout
the fiscal year.
The Company has a license agreement with Trabelco N.V., a subsidiary of
Hagemeyer, N.V. Hagemeyer N.V., a diverse international trading company based
in the Netherlands, has business interests in food, appliances,
electromechanical and automobile distribution as well as a solid base of
consumer electronic distribution business in Asia, Europe and North America.
Royalty income earned in connection with the license agreement in 1994 was
$1,108,458 as compared to $610,795 in 1993. This increase in royalty income is
a result of Trabelco N.V. experiencing higher sales volumes on products under
the license agreement.
8
9
MANAGEMENT'S REPORT
The consolidated financial statements and related financial information
included in this report are the responsibility of management as to preparation,
presentation and reliability. Management believes that the financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and necessarily include amounts
that are based on best estimates and judgments.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that the books and records
reflect the authorized transactions of the Company.
The Board of Directors, acting through the Audit Committee, is responsible for
the selection and appointment of the independent auditors and reviews the scope
of their audit and the findings. The independent auditors have direct access
to the Audit Committee, with or without the presence of management
representatives, to discuss the scope and the results of their audit work. The
Audit Committee is comprised solely of non-employee directors.
The independent auditors provide an objective assessment of the degree to which
management meets its responsibility for fairness of financial reporting. They
evaluate the system of internal accounting controls in connection with their
audit and perform such tests and procedures as they deem necessary to reach and
express an opinion on the fairness of the financial statements.
9
10
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of the Company at June 30, 1995 and 1994 and
for each of the three years in the period ended June 30, 1995 and the notes
thereto, and the report of independent accountants thereon are set forth on
pages 14 to 25.
Selected unaudited quarterly financial data is as follows:
Quarter
-------
1995 First Second Third Fourth
---- ----- ------- ----- ------
Net sales $8,372,902 $9,805,952 $7,671,860 $7,581,630
Gross profit 2,865,103 3,386,999 1,950,470 2,419,735
Net income 710,378 989,837 235,393 152,386
Earnings per common
and common equivalent
share. .19 .27 .06 .04
Quarter
-------
1994 First Second Third Fourth
---- ----- ------- ----- ------
Net sales $10,076,798 $9,958,249 $7,290,126 $8,236,149
Gross profit 3,503,153 3,236,283 2,350,620 2,784,295
Net income 928,802 932,376 565,759 373,918
Earnings per common
and common equivalent share. .24 .25 .15 .10
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
10
11
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the directors of Koss Corporation is incorporated
herein by reference from the "ELECTION OF DIRECTORS -- Information As To
Nominees" section of the Koss Corporation Proxy Statement for its 1995 Annual
Meeting of Stockholders (the "1995 Proxy Statement"), which 1995 Proxy
Statement is to be filed within 120 days of the end of the fiscal year covered
by this Report pursuant to General Instruction G(3) of Form 10-K.
Item 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is incorporated herein by
reference from the "ELECTION OF DIRECTORS -- Executive Compensation And Related
Matters" section of the 1995 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to the security ownership of certain beneficial owners and
management is incorporated herein by reference from the "ELECTION OF DIRECTORS
- -- Information As To Nominees" and "ELECTION OF DIRECTORS -- Beneficial
Ownership Of Company Securities" sections of the 1995 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to related transactions is incorporated herein by
reference from the "ELECTION OF DIRECTORS -- Executive Compensation And Related
Matters" and "ELECTION OF DIRECTORS -- Related Transactions" sections of the
1995 Proxy Statement.
11
12
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. The following documents are filed as part of this report:
1. Financial Statements
The following consolidated financial statements of Koss Corporation
are set forth on pages 14 to 25:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Consolidated Statements of Income for the Years
Ended June 30, 1995, 1994, and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 15
Consolidated Balance Sheets as of June 30, 1995 and 1994 . . . . . . . . . . . . . . . 16
Consolidated Statements of Cash Flows
for the Years Ended June 30, 1995, 1994, and 1993 . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Stockholders' Investment
for the Years Ended June 30, 1995, 1994, and 1993 . . . . . . . . . . . . . . . . . 18
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 19
2. Financial Statement Schedules
All schedules have been omitted because the information is not
applicable or is not material or because the information required is
included in the financial statements or the notes thereto.
3. Exhibits Filed
3.5 Articles of Koss Corporation, as amended and in effect on
February 6, 1987.
3.7 By-Laws of Koss Corporation, as amended and in effect on
February 6, 1987.
4.1 Articles of Incorporation of Koss Corporation.
(see Exhibit 3.5)
4.2 By-Laws of Koss Corporation. (see Exhibit 3.7)
10.1 Officer Loan Policy.
10.2 Directors' Stock Purchase Plan.
10.3 Supplemental Medical Care Reimbursement Plan.
10.4 Death Benefit Agreement with John C. Koss.
10.5 Stock Repurchase Agreement with John C. Koss.
10.6 Salary Continuation Resolution for John C. Koss.
10.7 1983 Incentive Stock Option Plan.
10.8 Assignment of Lease to John C. Koss.
10.9 Addendum to Lease.
12
13
10.10 1990 Flexible Incentive Stock Plan.
10.12 Loan Agreement, effective as of February 17, 1995.
10.13 Amendment dated June 15, 1995 to Loan Agreement effective
as of February 17, 1995.
22. List of Subsidiaries of Koss Corporation.
27. Financial Data Schedule.
b. No reports on Form 8-K were filed by the Company during the last quarter
of the period covered by this report.
13
14
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KOSS CORPORATION
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 12 present fairly, in all material
respects, the financial position of Koss Corporation and its subsidiaries at
June 30, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
July 20, 1995
14
15
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Net sales $33,432,344 $35,561,322 $32,137,448
Cost of goods sold 22,810,037 23,686,971 20,786,120
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 10,622,307 11,874,351 11,351,328
Selling, general and
administrative expense 8,376,204 8,191,504 7,177,946
- -----------------------------------------------------------------------------------------------------------------------
Income from operations 2,246,103 3,682,847 4,173,382
Other income (expense)
Interest income 98,090 56,461 44,083
Interest expense (317,922) (246,911) (312,501)
Royalty income 1,412,723 1,108,458 610,795
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,438,994 4,600,855 4,515,759
Provision for income taxes (note 4 ) 1,351,000 1,800,000 1,725,000
- -----------------------------------------------------------------------------------------------------------------------
Net income $2,087,994 $2,800,855 $2,790,759
=======================================================================================================================
Number of common and common
equivalent shares used in
computing earnings per share 3,631,364 3,751,514 3,392,713
=======================================================================================================================
Earnings per common and
common equivalent share $.58 $.75 $.82
=======================================================================================================================
See accompanying notes.
15
16
CONSOLIDATED BALANCE SHEETS
As of June 30, 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 49,227 $ 37,355
Accounts receivable, less allowances of
$289,217 and $229,230, respectively (note 10) 7,242,862 7,396,902
Inventories 9,395,915 7,837,319
Prepaid expenses 676,874 544,353
Income taxes receivable 376,147 426,236
Prepaid income taxes (note 4) 378,946 268,486
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 18,119,971 16,510,651
- -----------------------------------------------------------------------------------------------------------------------
Equipment and Leasehold Improvements, at cost:
Leasehold improvements 585,952 575,397
Machinery, equipment, furniture and fixtures 4,299,822 4,229,162
Tools, dies, molds and patterns 7,309,609 6,600,289
- -----------------------------------------------------------------------------------------------------------------------
12,195,383 11,404,848
Less--accumulated depreciation 9,911,989 9,236,513
- -----------------------------------------------------------------------------------------------------------------------
2,283,394 2,168,335
Intangible and Other Assets 569,558 541,420
- -----------------------------------------------------------------------------------------------------------------------
$20,972,923 $19,220,406
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,726,711 $ 1,266,553
Accrued liabilities (note 5) 930,660 734,076
Current maturities of
long-term debt (note 2) -- 12,376
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,657,371 2,013,005
- -----------------------------------------------------------------------------------------------------------------------
Long-Term Debt (note 2) 570,000 2,068,741
- -----------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes (note 4) 6,862 87,202
- -----------------------------------------------------------------------------------------------------------------------
Deferred Compensation and Other Liabilities (note 9) 907,264 902,830
- -----------------------------------------------------------------------------------------------------------------------
Contigently Redeemable Equity Interest (note 1) 1,490,000 1,490,000
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' Investment (note 3):
Common stock, $.01 par value,
authorized 8,500,000 shares;
issued and outstanding 3,486,080
and 3,231,080 shares, respectively 34,861 32,311
Paid in capital 3,336,431 2,760,905
Contingently redeemable common stock (note 1) (1,490,000) (1,490,000)
Cumulative translation adjustment (65,116) (81,844)
Retained earnings 13,525,250 11,437,256
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 15,341,426 12,658,628
- -----------------------------------------------------------------------------------------------------------------------
$20,972,923 $19,220,406
=======================================================================================================================
See accompanying notes.
16
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $2,087,994 $2,800,855 $2,790,759
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Depreciation and amortization 823,535 722,323 784,202
Deferred income taxes (190,800) (51,720) 45,000
Deferred compensation and other liabilities 4,434 75,850 115,080
Net changes in operating assets and
liabilities (note 6) (973,699) (2,998,260) (3,132,335)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 1,751,464 549,048 602,706
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (806,551) (370,839) (669,235)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in
investing activities (806,551) (370,839) (669,235)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (14,336,741) (13,400,000) (4,401,995)
Borrowings under line of credit agreements 12,838,000 12,193,000 4,180,349
Principal payments on
long-term debt (12,376) (17,186) (18,671)
Exercise of stock options 803,079 892,884 376,485
Purchase and retirement of common stock (225,003)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided
by financing activities (933,041) (331,302) 136,168
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 11,872 (153,093) 69,639
Cash at beginning of year 37,355 190,448 120,809
- --------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 49,227 $ 37,355 $ 190,448
=========================================================================================================================
See accompanying notes.
17
18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
Cumulative
Common Paid In Retained Translation
Stock Capital Earnings Adjustment
- ---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1992 30,468 1,493,379 5,845,642 44,469
Net income -- -- 2,790,759 --
Translation adjustment -- -- -- (55,527)
Exercise of stock options 855 375,630 -- --
- ---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993 31,323 1,869,009 8,636,401 (11,058)
Net income -- -- 2,800,855 --
Translation adjustment -- -- -- (70,786)
Exercise of stock options 988 891,896 -- --
- ---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 32,311 2,760,905 11,437,256 (81,844)
Net income -- -- 2,087,994 --
Translation adjustment -- -- -- 16,728
Purchase and retirement of treasury stock (400) (224,603) -- --
Exercise of stock options 2,950 800,129 -- --
- ---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $ 34,861 $ 3,336,431 $13,525,250 $ (65,116)
=====================================================================================================================
See accompanying notes.
18
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
CONCENTRATION OF CREDIT RISK--The Company operates in the audio/video industry
segment of the home entertainment industry through its design, manufacture and
sale of stereo headphones, audio/video loudspeakers and related accessory
products. The Company's products are sold through audio specialty stores,
catalog showrooms, regional department store chains, military exchanges and
national retailers under the "Koss" name and dual label. The Company has more
than 1,600 domestic dealers and its products are carried in more than 11,000
domestic retail outlets. International markets are served by a foreign sales
subsidiary in Canada and a sales office in Switzerland, which utilizes
independent distributors in several foreign countries. The Company grants
credit to its domestic and Canadian customers. Collection is dependent on the
retailing industry economy. International customers outside of Canada are sold
on a cash against documents or letter of credit basis. Approximately 25% and
23% of the Company's accounts receivable at June 30, 1995 and 1994,
respectively, were foreign receivables.
BASIS OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly-owned.
All significant intercompany accounts and transactions have been eliminated.
ROYALTY INCOME--The Company recognizes royalty income when earned under terms
of a license agreement. The agreement expires December 31, 1997, however,
contains renewal options for additional three year periods.
INVENTORIES--At June 30, 1995 and 1994, approximately 88% and 80%,
respectively, of the Company's inventories were valued at the lower of last-in,
first-out (LIFO) cost or market. All other inventories are valued at the lower
of first-in, first-out (FIFO) cost, or market. If the FIFO method of inventory
accounting had been used by the Company for inventories valued at LIFO,
inventories would have been $685,679, and $578,314 higher than reported at June
30, 1995 and 1994, respectively.
The components of inventories at June 30, is as follows:
1995 1994
-------------------------------------------------
Raw materials and
work in process $3,624,299 $3,999,407
Finished goods 5,771,616 3,837,912
-------------------------------------------------
$9,395,915 $7,837,319
=================================================
PROPERTY AND EQUIPMENT--Depreciation is provided on a straight-line basis over
the estimated useful life of the asset as follows:
Leasehold Improvements 15 years
Machinery, Equipment,
Furniture and Fixtures 3-10 years
Tools, Dies, Molds
and Patterns 4-5 years
19
20
RESEARCH AND DEVELOPMENT--Research and development expenditures charged to
operations amounted to approximately $306,000 in 1995, $310,000 in 1994 and
$316,000 in 1993.
EARNINGS PER 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.
RECLASSIFICATION--Certain reclassifications have been made to the 1994
financial statements to conform with current presentation, including the
reclassification of $1,490,000 from Stockholders' Investment to Contingently
Redeemable Equity Interest in the June 30, 1995 and 1994 balance sheets. The
amount reclassified reflects the estimated net obligation in the event of
execution of the stock repurchase agreement between the Company and its
Chairman (see Note 3).
2. NOTES PAYABLE AND LONG TERM DEBT
The Company has an unsecured credit facility with a bank providing up to a
maximum of $8 million through March 15, 1997. Borrowings under the credit
facility bear interest at the bank's prime rate or LIBOR plus 2.25%. Interest
is payable monthly. The 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 the available
line as of June 30, 1995 totaled $682,808, consisting of $570,000 in borrowings
and $112,808 in commitments for foreign letters of credit. Subsequent to June
30, 1995, the credit facility was amended to provide an additional $2 million
of available borrowings. Terms of the credit facility were not amended.
The Company's Canadian subsidiary has a line of credit of $550,000. The due
date for the loan is October 31, 1995 and it is renewable annually. The
interest rate is the prime rate plus one and one half percent. The credit
facility is subject to the availability of qualifying receivables and
inventories which serve as security for the borrowings. Loan advances against
the line were $0 at June 30, 1995 and 1994.
Long term debt at June 30, 1995 and 1994 is as follows:
1995 1994
-----------------------------------------------------------------------------------------
Bank lines of credit $570,000 $2,068,741
Other -- 12,376
Less current maturities: -- (12,376)
-----------------------------------------------------------------------------------------
Total long-term debt $570,000 $2,068,741
=========================================================================================
Maturities of long term debt in subsequent fiscal years are as follows: 1997 -
$570,000.
3. STOCK OPTIONS AND STOCK PURCHASE AGREEMENTS
As of June 30, 1995, there were stock options outstanding granted pursuant to
the Company's 1983 Incentive Stock Option Plan (the "1983 Plan"). The 1983
Plan provides for the granting of options to certain officers and key employees
to purchase up to 200,000 shares of the Company's common stock at a price not
less than the market value of the stock on the date of grant. The options are
exercisable at varying times and expire no later than ten years after the date
of grant. All of the authorized shares available for grant pursuant to the
1983 Plan have been granted.
20
21
In 1990, pursuant to the recommendation of the Board of Directors, the
stockholders ratified the creation of the Company's 1990 Flexible Incentive
Stock Plan (the "1990 Plan"). The 1990 Plan is administered by a committee of
the Board of Directors and provides for the granting of various stock-based
awards including stock options to eligible participants, primarily officers and
certain key employees. A total of 225,000 shares of common stock were
available in the first year of the Plan's existence. Each year thereafter
additional shares equal to .25% of the shares outstanding as of the first day
of the applicable fiscal year were reserved for issuance pursuant to the 1990
Plan. On July 22, 1992, the Board of Directors authorized the reservation of
an additional 250,000 shares to the 1990 Plan, which was approved by the
stockholders.
On April 3, 1995 and May 19, 1993, the Board of Directors authorized the grant
of 52,500 and 375,000 incentive stock options, respectively, under the 1990
Plan.
On April 12, 1995, the Company's Chairman exercised an option for the purchase
of 250,000 shares of the Company's common stock at a price of $1.00 per share.
The following table identifies options granted, exercised, cancelled or
available for exercise pursuant to the above mentioned Plans:
Number of Price per
Shares Share
-----------------------------------------------------------------------------------
Shares under option at June 30, 1992 573,000 $1.00-6.47
Granted 490,000 $2.50-8.25
Exercised (85,500) $1.75-5.88
Cancelled (27,500) $1.75-2.50
-----------------------------------------------------------------------------------
Shares under option at June 30, 1993 950,000 $1.00-8.25
Granted 10,000 $10.55
Exercised (98,750) $1.75-3.85
Cancelled (82,500) $1.75-7.50
-----------------------------------------------------------------------------------
Shares under option at June 30, 1994 778,750 $1.00-10.55
Granted 52,500 $7.35-$8.08
Exercised (295,000) $1.00-$7.50
-----------------------------------------------------------------------------------
Shares under option at June 30, 1995 536,250 $1.75-$10.55
==================================================================================
Options exercisable at June 30, 1995 198,750 $1.92-$10.55
==================================================================================
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.
21
22
4. INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the use of the liability method of accounting for income taxes. The
liability method measures the expected tax impact of future taxable income and
deductions implicit in the consolidated balance sheet. The adoption of this
statement did not have a significant effect on the Company's financial position
or results of operations.
The Company provision for income taxes in 1995, 1994, and 1993 consists of the
following:
Year Ended June 30 1995 1994 1993
------------------------------------------------------------------------------------------------------
Current:
U.S. federal $1,486,000 $1,611,000 $1,367,000
State 286,000 283,000 248,000
Foreign (230,000) (43,000) 65,000
Deferred (191,000) (51,000) 45,000
------------------------------------------------------------------------------------------------------
$1,351,000 $1,800,000 $1,725,000
======================================================================================================
The 1995, 1994 and 1993 tax provision results in an effective rate different
than the federal statutory rate due to the following:
Year Ended June 30 1995 1994 1993
------------------------------------------------------------------------------------------------------
Federal income tax at
statutory rate $1,169,000 $1,564,000 $1,535,000
State income taxes, net of
federal tax benefit 189,000 187,000 167,000
Foreign income taxed at
other than U.S. rate (54,000) (9,000) 14,000
Other 47,000 58,000 9,000
------------------------------------------------------------------------------------------------------
Total provision for
income taxes $1,351,000 $1,800,000 $1,725,000
======================================================================================================
Income (loss) before taxes for United States operations was $4,042,437 in 1995,
$4,700,339 in 1994, and $4,366,374 in 1993. Such amounts for foreign
operations were $(603,443), $(99,484), and $149,385 for the respective years.
22
23
Temporary differences which give rise to deferred tax assets and liabilities at
June 30 include:
1995 1994
- -------------------------------------------------------------------------------------------------------
Deferred Tax Assets
Deferred compensation $178,000 $229,000
Accrued expenses and reserves 323,000 208,000
Royalties receivable 47,000 52,000
Other 68,000 38,000
- -------------------------------------------------------------------------------------------------------
$616,000 $527,000
Deferred Tax Liabilities
Property and equipment (240,000) (341,000)
Other (4,000) (5,000)
- -------------------------------------------------------------------------------------------------------
(244,000) (346,000)
- -------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 372,000 $181,000
=======================================================================================================
The net deferred tax asset at June 30, 1995 is comprised of a current asset,
prepaid income taxes of $378,946 and a long term liability, deferred income
taxes of $6,862. The net deferred tax asset at June 30, 1994 is comprised of a
current asset, prepaid income taxes of $268,486 and a long term liability,
deferred income taxes of $87,202.
5. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of the following:
1995 1994
- -------------------------------------------------------------------------------------------------------
Salaries and wages $243,842 $166,385
Warranty claims 100,000 100,000
Cooperative advertising
and promotion allowances 101,376 91,368
Payroll taxes and
employee benefits 281,465 184,128
Other 203,977 192,195
- -------------------------------------------------------------------------------------------------------
$930,660 $734,076
=======================================================================================================
6. ADDITIONAL CASH FLOW INFORMATION
The net changes in cash as a result of changes in operating assets and
liabilities, other than cash and indebtedness, consist of the following:
1995 1994 1993
- -------------------------------------------------------------------------------------------------------
Accounts receivable $ 154,040 $ (759,891) $(1,747,798)
Inventories (1,541,868) (495,461) (2,321,641)
Prepaid expenses (132,521) (218,411) (27,217)
Income taxes receivable 50,089 (455,613) 1,377
Other assets (160,181) (214,763) (164,504)
Accounts payable 460,158 (576,281) 1,071,685
Accrued liabilities 196,584 (277,840) 55,763
- -------------------------------------------------------------------------------------------------------
Net change $ (973,699) $(2,998,260) $(3,132,335)
=======================================================================================================
23
24
Net cash paid during the year for: 1995 1994 1993
---- ---- ----
Interest $321,353 $255,510 $297,551
Income taxes $1,312,000 $1,770,000 $1,697,299
7. EMPLOYEE BENEFIT PLANS
Substantially all domestic employees are participants in the Company's Employee
Stock Ownership Plan and Trust (KESOT) under which an annual contribution in
either cash or common stock may be made at the discretion of the Board of
Directors. The expense recorded for such contributions amounted to $205,000 in
1995 and $0 in 1994 and 1993.
The Company maintains a retirement savings plan under Section 401(k) of the
Internal Revenue Code. This plan covers all employees of the Company who have
completed six months of service. Matching contributions can be made at the
discretion of the Company's Board of Directors. For calendar years 1995, 1994,
and 1993, the matching contribution was 100% of employee contributions to the
plan, not to exceed 10% of the employee's annual compensation. Vesting of
Company contributions occurs immediately. Contributions for the years ended
June 30, 1995, 1994, and 1993 were $144,000, $141,700, and $120,501,
respectively.
8. INDUSTRY SEGMENT INFORMATION, FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
The Company has one line of business--the design, manufacture and sale of
stereophones and related accessories. The table below summarizes certain
information regarding the Company's United States and Canadian operations for
the years ended June 30, 1995, 1994, and 1993.
000's Omitted United
States Canada Eliminations Consolidated
- ---------------------------------------------------------------------------------------------
1995:
- ---------------------------------------------------------------------------------------------
Net sales $ 28,977 $ 4,455 -- $ 33,432
Intercompany transfers 3,019 9 (3,028) --
- ---------------------------------------------------------------------------------------------
Total $ 31,996 $ 4,464 $ (3,028) $ 33,432
- ---------------------------------------------------------------------------------------------
Income from operations $ 2,736 $ (532) $ 42 $ 2,246
- ---------------------------------------------------------------------------------------------
Assets $ 19,350 $ 1,702 $ (79) $ 20,973
=============================================================================================
1994:
- ---------------------------------------------------------------------------------------------
Net sales $ 31,127 $ 4,434 $ -- $ 35,561
Intercompany transfers 2,058 87 (2,145) --
- ---------------------------------------------------------------------------------------------
Total $ 33,185 $ 4,521 $ (2,145) $ 35,561
- ---------------------------------------------------------------------------------------------
Income from operations $ 3,805 $ (64) $ (58) $ 3,683
- ---------------------------------------------------------------------------------------------
Assets $ 17,008 $ 2,276 $ (64) $ 19,220
=============================================================================================
1993:
- ---------------------------------------------------------------------------------------------
Net sales $ 27,488 $ 4,649 $ -- $ 32,137
Intercompany transfers 1,671 7 (1,678) --
- ---------------------------------------------------------------------------------------------
Total $ 29,159 $ 4,656 $ (1,678) $ 32,137
- ---------------------------------------------------------------------------------------------
Income from operations $ 3,888 $ 200 $ 85 $ 4,173
- ---------------------------------------------------------------------------------------------
Assets $ 15,181 $ 2,393 $ (32) $ 17,542
=============================================================================================
24
25
The Company ships directly to independent distributors from its domestic plant.
The Company's export sales to customers in foreign countries amounted to
$2,231,509 during 1995, $1,951,212 during 1994, and $1,675,517 during 1993.
Sales to one customer, Tandy Corporation, were approximately 18%, 16%, and 16%
of total sales for 1995, 1994, and 1993, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its main plant and offices in Milwaukee, Wisconsin from its
Chairman, John C. Koss. On June 25, 1993, the lease was renewed for a period
of ten years, and is being accounted for as an operating lease. The new lease
extension increases the rent from $280,000 per year (plus Consumer Price Index
increase in 1994) to a fixed rate of $350,000 per year for three years and
$380,000 for the seven years thereafter. The lease is on terms no less
favorable to the Company than those that could be obtained from an independent
party. The Company is responsible for all property maintenance, insurance,
taxes and other normal expenses related to ownership. The Company also leases
approximately 6,500 square feet of office, service and warehouse space in
Canada of which a significant portion is subleased to a third party. In
addition, the Company leases certain property which requires payments of
$84,000 in 1996.
In 1980, the Company entered into an agreement with John C. Koss that if he
dies prior to attaining 70 years of age, the Company will pay to his spouse or
other designated beneficiary the sum of $50,000 every six months until the
total benefits paid equal $700,000. The agreement is null and void if he
reaches age 70.
In 1991, the Board of Directors agreed to continue John C. Koss' current base
salary in the event he becomes disabled prior to age 70. After age 70, Mr.
Koss shall receive his current base salary for the remainder of his life,
whether he becomes disabled or not. The Company is currently recognizing an
annual expense of $115,080 in connection with this agreement, which represents
the present value of the anticipated future payments. At June 30, 1995 and
1994, respectively, the related liabilities in the amounts of $421,140 and
$306,060 have been included in deferred compensation in the accompanying
balance sheets.
10. SUPPLEMENTARY INFORMATION
Changes in the allowance for doubtful accounts for the years ended June 30,
1995, 1994, and 1993 are summarized as follows:
Year Balance at Beginning Charges Against Balance at End of
Ending of Period Income Deductions* Period
------ --------- ------ ----------- ------
1995 $229,230 $143,261 $ 83,274 $289,217
1994 $381,030 $ 9,428 $ 161,228 $229,230
1993 $309,000 $204,758 $ 132,728 $381,030
*Represents charges against the allowance, net of recoveries.
The amounts included for advertising in selling, general and administrative
expenses on the accompanying statements of income were $630,181 in 1995,
$756,956 in 1994, and $503,285 in 1993.
25
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KOSS CORPORATION
By: /s/ Michael J. Koss Dated: 9/25/95
--------------------------- -------
Michael J. Koss, President,
Chief Executive Officer
Chief Operating Officer and
Chief Financial Officer
By: /s/ Sujata Sachdeva Dated: 9/25/95
--------------------------- -------
Sujata Sachdeva,
Vice President - Finance
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Michael J. Koss
------------------------- ---------------------------
John C. Koss, Director Michael J. Koss, Director
Dated: Dated: 9/25/95
------- -------
/s/ Martin F. Stein /s/ Victor L. Hunter
------------------------- ---------------------------
Martin F. Stein, Director Victor L. Hunter, Director
Dated: 9/25/95 Dated: 9/25/95
------- -------
/s/ John J. Stollenwerk /s/ Lawrence S. Mattson
------------------------- ---------------------------
John J. Stollenwerk, Director Lawrence S. Mattson, Director
Dated: 9/25/95 Dated: 9/25/95
------- -------
-------------------------
Thomas L. Doerr, Director
Dated:
-------
The signatures of the above directors constitute a majority of the Board of
Directors of Koss Corporation.
26
27
OFFICERS AND DIRECTORS
SENIOR MANAGEMENT
John C. Koss John C. Koss
Chairman of the Board Chairman of the Board
Koss Corporation
Michael J. Koss
President Thomas L. Doerr
Chief Executive Officer President
Chief Operating Officer Doerr Corporation
Chief Financial Officer
Victor L. Hunter
John C. Koss, Jr. President
Vice President--Sales Hunter Business Direct
Daniel Esposito Michael J. Koss
Vice President--Corporate Systems President, C.E.O.,
C.O.O., C.F.O.
Sujata Sachdeva
Vice President--Finance Lawrence S. Mattson
Retired President
Richard W. Silverthorn Oster Company
Secretary
General Counsel Martin F. Stein
Chairman
Declan Hanley Eyecare One Inc.
Vice President--International Sales
John J. Stollenwerk
President
ANNUAL MEETING Allen-Edmonds Shoe Corporation
October 19, 1995
Performance Center
Koss Corporation
4129 N. Port Washington Avenue
Milwaukee, WI 53212
TRANSFER AGENT INDEPENDENT ACCOUNTANTS
Questions regarding change of address, Price Waterhouse LLP
stock transfer, lost certificate, or Milwaukee, Wisconsin
information on a particular account
should be directed in writing to:
LEGAL COUNSEL
Firstar Trust Company
Box 2077 Whyte Hirschboeck Dudek S.C.
Milwaukee, WI 53201
Attn: Mr. Eugene R. Lee
27
28
EXHIBIT INDEX
Designation Incorporation
of Exhibit Exhibit Title by Reference
- ---------- ------------- -------------
3.5 Articles of Incorporation of Koss Corporation, (1)
as amended and in effect on February 6, 1987
3.7 By-Laws of Koss Corporation, as amended and in (1)
effect on February 6, 1987.
4.1 Articles of Incorporation of Koss Corporation. (2)
4.2 By-Laws of Koss Corporation. (2)
10.1 Officer Loan Policy. --
10.2 Directors' Stock Purchase Plan. --
10.3 Supplemental Medical Care Reimbursement Plan. --
10.4 Death Benefit Agreement with John C. Koss. --
10.5 Stock Purchase Agreement with John C. Koss. --
10.6 Salary Continuation Resolution for John C. Koss. --
10.7 1983 Incentive Stock Option Plan. --
10.8 Assignment of Lease to John C. Koss. (3)
10.9 Addendum to Lease. (3)
10.10 1990 Flexible Incentive Stock Plan. (4)
10.12 Loan Agreement effective as of February 17, 1995. (5)
10.13 Amendment dated June 15, 1995 to Loan Agreement
effective February 17, 1995.
(filed herewith)
22. List of Subsidiaries of Koss Corporation. (3)
27. Financial Data Schedule (filed herewith)
(1) Incorporated by reference from Form 10-K for year ended June 30,
1986.
(2) Incorporated by reference from Exhibits 3.1 - 3.7 of Form 10-K for
year ended June 30, 1989.
28
29
(3) Incorporated by reference from Form 10-K for year ended June 30,
1988.
(4) Incorporated by reference from Form 10-K for year ended June 30,
1990.
(5) Incorporated by reference from Form 10-Q for quarter ended March 31,
1995.
29
1
AMENDMENT NO. 1 TO LOAN AGREEMENT
THIS AMENDMENT NO. 1 TO LOAN AGREEMENT (the "Amendment") is made and
entered into this 15th day of June, 1995, by and among LASALLE NATIONAL BANK,
a national banking association (the "Lender"), and KOSS CORPORATION, a Delaware
corporation (the "Borrower").
W I T N E S S E T H:
WHEREAS, Borrower and Lender entered into that certain Loan Agreement dated
February 17, 1995 (the "Loan Agreement"), pursuant to which Lender agreed to
provide Borrower with a revolving line of credit up to $8,000,000.00 (the
"Revolving Loan"); and
WHEREAS, Borrower has requested Lender to lend an additional
$2,000,000.00 to Borrower until March 15, 1997, and Lender has agreed to do so
provided, among other things, Borrower executes and delivers this Amendment.
NOW THEREFORE, in consideration of the premises which are
incorporated herein by this reference, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Subsection 2.1(A)(iv) of the Agreement shall be deleted in its
entirety and replaced with the following new Subsection 2.1(A)(iv):
(iv) commencing July 1, 1995, for a period of at least 30 consecutive
days during each fiscal year of Borrower, the amount of Revolving
Loans outstanding shall not exceed $2,000,000.00; provided, however,
the amount of Special Loans and Term Loans (both as hereinafter
defined) from time to time outstanding shall not be included in
determining the amount of Revolving Loans outstanding.
2. A new Section 2.1(C) shall be added to the Loan Agreement to be
and read as follows:
Section 2.1(C) Subject to the terms and conditions of this Agreement,
Lender agrees to loan up to $2,000,000.00 to Borrower from time to
time (each such loan shall be referred to individually as a "Special
Loan," and collectively as the "Special Loans"); provided, however,
that: (i) each borrowing by Borrower hereunder with respect to any
Special Loan shall be in the aggregate principal amount of at least
$10,000.00; (ii) Lender's commitment to make Special Loans shall
remain in effect for a period to and including March 15, 1997 (the
"Special Loan Termination Date"); and (iii) notwithstanding any
provision herein to the contrary (1) upon the
2
occurrence and continuance of any Event of Default, and in each
such event, the Lender may, in its sole discretion, immediately cease
to make Special Loans; and (2) on the Special Loan Termination Date,
Borrower shall repay to the Lender all Special Loans, plus interest
accrued to the date of payment. The proceeds of such Special Loans
shall be used to repurchase shares of the Borrower's common stock.
Upon the earlier to occur of: (i) the expiration of each six month
period commencing with the date hereof; or (ii) the date that the
outstanding balance of Special Loans shall reach $500,000.00 in the
aggregate, the outstanding balance of the Special Loans shall be
converted into a term loan (individually, a "Term Loan," and
collectively, the "Terms Loans") that shall be due and payable on
March 15, 1997.
3. New Sections 2.3(A) and 2.3(B) shall be added to the Loan
Agreement to follow Section 2.3 thereof, to be and read as follows:
2.3(A) SPECIAL REVOLVING NOTE. The Special Loans shall be
evidenced by promissory note (herein called the "Special Revolving
Note") in the form attached hereto and made a part hereof, as Exhibit
2.3(A), dated the date of this Amendment No. 1 to Loan Agreement,
payable to the order of the Lender, in the principal amount of
$2,000,000.00. The date and amount of each Special Loan made by the
Lender and of each repayment of principal thereon received by the
Lender shall be recorded by the Lender in the records of the Lender
and the aggregate unpaid principal amount shown on such records shall
be rebuttable, presumptive evidence of the principal owing and
unpaid on such Special Revolving Note. The failure to record
any such amount on such records shall not, however, limit or
otherwise affect the obligations of Borrower hereunder or under the
Special Revolving Note to repay the principal amount of the Special
Loans together with all interest accruing thereon. The unpaid
principal amount from time to time outstanding on the Special
Revolving Note shall, at Borrower's choice, bear interest at either:
(a) the Prime Rate, adjusted as of each change of the Prime Rate
(each Special Loan bearing interest at such rate a "Prime Rate
Loan"); or (b) provided that an Event of Default has not occurred and
is not continuing, a rate per annum that shall be 225 basis points in
excess of the per annum rate of interest at which U.S. dollar
deposits of an amount comparable to the amount of the Special Loan
and for a period equal to the relevant Interest Period (as
hereinafter defined) are offered generally to Lender (rounded upward
if necessary, to the nearest 1/16 of 1.0%) in the London Interbank
Eurodollar market at
2
3
10:00 a.m. (London time) two Business Days prior to the commencement
of each Interest Period ("LIBOR" and each Special Loan bearing
interest at such rate a "LIBOR Loan"), such rate to remain fixed for
such Interest Period. "Interest Period" shall mean one-month,
two-month or three-month periods as selected from time to time by the
Borrower by irrevocable notice (in writing, by telex, telegram or
cable) given to Lender not less than two Business Days prior to the
first day of each respective Interest Period commencing on the date
hereof, provided that: (i) each such Interest Period may be continued
upon its expiration by Borrower by irrevocable notice (in writing, by
facsimile) given to Lender not less than two Business Days prior to
the expiration thereof, which notice shall specify that such Interest
Period shall continue for a one-month, two month or three month
period; (ii) the final Interest Period shall be such that its
expiration occurs on or before the stated maturity date hereof; (iii)
if for any reason the Borrower shall fail to select a time period,
then interest on such LIBOR Loan shall accrue and be payable at the
Prime Rate; and (iv) each such LIBOR Loan shall be in an amount of at
least $1,000,000.00, and shall be in $100,000.00 increments.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banks in London, England, and Chicago, Illinois, are
required or permitted by law to close.
The Lender's determination of LIBOR as provided above shall be
conclusive, absent manifest error. Further, if Lender determines in
good faith (which determination shall be conclusive, absent manifest
error), prior to the commencement of any Interest Period that: (a)
U.S. dollar deposits of sufficient amount and maturity for funding
the Special Loan are not available to Lender in the London Interbank
Eurodollar market in the ordinary course of business; or (b) by
reason of circumstances that affect the London Interbank Eurodollar
market, adequate and fair means do not exist to ascertain the rate of
interest to be applicable to the Special Loan, Lender may, at its
sole and absolute option, promptly notify the Borrower that interest
on the Special Loan shall be determined using the Prime Rate.
If, after the date hereof, the introduction of, or any change in any
applicable law, treaty, rule, regulation or guideline or in the
interpretation or administration thereof by any governmental
authority or any central bank or other fiscal, monetary or other
authority having jurisdiction over the Lender or its lending office
(a "Regulatory Change"), shall, in the opinion of counsel to Lender,
make it unlawful for the Lender to make or maintain the Special Loan
evidenced hereby, then Lender may, at its sole and absolute option,
3
4
promptly notify the Borrower that interest on the Special Loan shall
be determined using the Prime Rate. If, for any reason, the Special
Loan is paid prior to the last Business Day of any Interest Period,
the Borrower agrees to indemnify Lender against any loss, including
any loss on redeployment of the funds repaid, cost or expense
incurred by Lender as a result of such prepayment. If any Regulatory
Change, whether or not having the force of law, shall (a) impose,
modify or deem applicable any assessment, reserve, special deposit or
similar requirement against assets held by, or deposits in or for the
account of or loans by, or any other acquisition of funds or
disbursements by, Lender; (b) subject Lender or the Special Loan to
any tax, duty, charge, stamp tax, or fee or change the basis of
taxation of payments to Lender of principal or interest due from the
Borrower to the Lender hereunder (other than a change in the taxation
of the overall net income of Lender); or (c) impose on the Lender any
other condition regarding the Special Loan or the Lender's funding
thereof, and the Lender shall determine (which determination shall be
conclusive absent manifest error) that the result of the foregoing is
to increase the cost to Lender of making or maintaining the Special
Loan or to reduce.the amount of principal and interest received by
the Lender hereunder, then the Borrower shall pay to the Lender, on
demand, such additional amounts as the Lender shall, from time to
time, determine are sufficient to compensate and indemnify the Lender
for such increased costs or reduced amount.
Notwithstanding any provision in this Section 2.3(A) to the contrary,
upon the occurrence and continuance of an Event of Default, the
Special Revolving Note shall bear interest at a rate 2% in excess of
the rate on LIBOR Loans. The accrued interest on (i) Prime Rate
Loans shall be payable monthly on the first day of each month
commencing with the first day of the month while such Prime Rate Loan
is outstanding; and (ii) LIBOR Loans shall be payable the last day of
the Interest Period applicable thereto. Upon the earlier to occur
of: (i) the expiration of each six month period commencing with the
date of the Special Revolving Note; or (ii) the date that the
outstanding balance of the Special Loans shall be converted into a
Term Loan, the outstanding balance of the Special Revolving Note
shall be immediately reduced by the aggregate amounts of each such
Term Loan.
2.3(B) TERM NOTES. Each Term Loan shall be evidenced by a term
note (each herein called a "Term Note") in the form attached hereto
and made a part hereof, as Exhibit 2.3(B), dated the date of the
applicable Term Loan, payable to the order of the Lender, in the
4
5
principal amount of the applicable Term Loan. Each Term Note shall
provide for monthly payments of principal in the amount of 1/60th of
the outstanding principal balance, plus accrued interest, with a final
payment due on March 15, 1997, of the entire balance of the Term
Note, plus accrued interest. The unpaid principal amount from time
to time outstanding on each Term Note shall, at Borrower's choice,
bear interest at either: (a) the Prime Rate, adjusted as of each
change of the Prime Rate (each Term Loan bearing interest at such
rate a "Prime Rate Loan"); or (b) provided that an Event of Default
has not occurred and is not continuing, a rate per annum that shall
be 225 basis points in excess of the per annum rate of interest at
which U.S. dollar deposits of an amount comparable to the amount of
the Term Loan and for a period equal to the relevant Interest Period
(as hereinafter defined) are offered generally to Lender (rounded
upward if necessary, to the nearest 1/16 of 1.0%) in the London
Interbank Eurodollar market at 10:00 a.m. (London time) two Business
Days prior to the commencement of each Interest Period ("LIBOR" and
each Term Loan bearing interest at such rate a "LIBOR Loan"), such
rate to remain fixed for such Interest Period. "Interest Period"
shall mean one-month, two-month or three-month periods as selected
from time to time by the Borrower by irrevocable notice (in writing,
by facsimile) given to Lender not less than two Business Days prior
to the first day of each respective Interest Period commencing on the
date hereof; provided that: (i) each such Interest Period may be
continued upon its expiration by Borrower by irrevocable notice (in
writing, by facsimile) given to Lender not less than two Business
Days prior to the expiration thereof, which notice shall specify that
such Interest Period shall continue for a one-month, two-month or
three-month period; (ii) the final Interest Period shall be such that
its expiration occurs on or before the stated maturity date hereof;
(iii) if for any reason the Borrower shall fail to select time a
period, then interest on such LIBOR Loan shall accrue and be payable
at the Prime Rate; and (iv) each such LIBOR Loan shall be in an
amount of at least $1,000,000.00, and shall be in $100,000.00
increments. "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banks in London, England, and Chicago,
Illinois, are required or permitted by law to close.
The Lender's determination of LIBOR as provided above shall be
conclusive, absent manifest error. Further, if Lender determines in
good faith (which determination shall be conclusive, absent manifest
error), prior to the commencement of any Interest Period that: (a)
U.S. dollar deposits of sufficient amount and maturity for funding
the Term Loan are not available to Lender in the London Interbank
5
6
Eurodollar market in the ordinary course of business; or (b) by
reason of circumstances that affect the London Interbank Eurodollar
market, adequate and fair means do not exist to ascertain the rate of
interest to be applicable to the Term Loan, Lender may, at its sole
and absolute option, promptly notify the Borrower that interest on
the Term Loan shall be determined using the Prime Rate.
If, after the date hereof, the introduction of, or any change in any
applicable law, treaty, rule, regulation or guideline or in the
interpretation or administration thereof by any governmental
authority or any central bank or other fiscal, monetary or other
authority having jurisdiction over the Lender or its lending office
(a "Regulatory Change"), shall, in the opinion of counsel to Lender,
make it unlawful for the Lender to make or maintain the Term Loan
evidenced hereby, then Lender may, at its sole and absolute option,
promptly notify the Borrower that interest on the Term Loan shall be
determined using the Prime Rate. If, for any reason, the Term Loan
is paid prior to the last Business Day of any Interest Period, the
Borrower agrees to indemnify Lender against any loss, including any
loss on redeployment of the funds repaid, cost or expense incurred by
Lender as a result of such prepayment. If any Regulatory Change,
whether or not having the force of law, shall (a) impose, modify or
deem applicable any assessment, reserve, special deposit or similar
requirement against assets held by, or deposits in or for the account
of or loans by, or any other acquisition of funds or disbursements
by, Lender; (b) subject Lender or the Term Loan to any tax, duty,
charge, stamp tax, or fee or change the basis of taxation of payments
to Lender of principal or interest due from the Borrower to the
Lender hereunder (other than a change in the taxation of the overall
net income of Lender); or (c) impose on the Lender any other
condition regarding the Term Loan or the Lender's funding thereof,
and the Lender shall determine (which determination shall be
conclusive absent manifest error) that the result of the foregoing is
to increase the cost to Lender of making or maintaining the Term
Loan or to reduce the amount of principal and interest received by
the Lender hereunder, then the Borrower shall pay to the Lender, on
demand, such additional amounts as the Lender shall, from time to
time, determine are sufficient to compensate and indemnify the Lender
for such increased costs or reduced amount.
Notwithstanding any provision in this Section 2.3(B) to the contrary,
upon the occurrence and continuance of an Event of Default, each Term
Note shall bear interest at a rate 2% in excess of the rate on LIBOR
Loans. The accrued interest on (i) Prime Rate Loans shall be
6
7
payable monthly on the first day of each month commencing with the
first day of the month while such Prime Rate Loan is outstanding; and
(ii) LIBOR Loans shall be payable the last day of the Interest Period
applicable thereto.
4. Section 7.1(A) of the Agreement shall be deleted in its entirety
and replaced with the following new Section 7.1(A):
(A) Borrower shall default in the payment when due of any amount due
and owing by Borrower to Lender under the Revolving Note, Letters of
Credit, the Special Revolving Note or any Term Note; or
5. Borrower shall pay to Lender a $20,000.00 nonrefundable
commitment fee. Further, Borrower shall deliver to Lender as a condition to
Lender's obligation to make the Special Loans, a directors' consent,
secretary's certificate and such other documents as Lender shall request, each
in form and substance satisfactory to Lender and its counsel.
6. All references to "the Agreement" in the Agreement shall mean
the Agreement as amended by this Amendment. All references to "the Loan" or
"the Loans" in the Agreement shall include the loans made hereunder. All
references to "the Documents" in the Agreement shall include this Amendment,
the Special Revolving Note, the Term Notes and any other instrument or document
required hereunder, whether now existing or at any time hereafter arising. All
references to "the Note" in the Agreement shall include the Special Revolving
Note and the Term Notes.
7. All of the agreements, representations, covenants and
obligations set forth in the Agreement are hereby reaffirmed and restated as of
the date of this Amendment. All representations and warranties contained in
the Agreement remain true and correct as of the date of this Amendment.
8. Borrower agrees to pay all fees and out-of-pocket expenses of
Lender including, without limitation, outside counsel to the Bank in connection
with the preparation of this Amendment, and any and all agreements, instruments
and documents required or contemplated by this Amendment.
9. Except as specifically amended and modified by this Amendment:
(a) the Agreement shall remain in full force and effect and is hereby restated
and incorporated herein by this reference; and (b) all terms defined in the
Agreement shall have the same meanings herein as therein.
7
8
IN WITNESS, whereof the parties hereto have caused this Amendment to be
duly executed and delivered at Chicago, Illinois, as of the date first above
written.
KOSS CORPORATION
By: /s/ Michael J. Koss
------------------------------
Title: CEO
---------------------------
ATTEST:
By: /s/ Richard W. Silverthorn
------------------------------
Title: Secretary & General Counsel
---------------------------
LASALLE NATIONAL BANK
By: /s/ Mark Pressler
------------------------------
Title: Assistant Vice President
---------------------------
8
5
YEAR
JUN-30-1995
JUL-1-1994
JUN-30-1995
49227
0
7532079
289217
9395915
18119971
12195383
9911989
20972923
2657371
0
34861
0
0
15306565
20972923
33432344
34845067
22810037
8376204
0
0
219832
3438994
1351000
2087994
0
0
0
2087994
.58
0
