1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-3295
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KOSS CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
A DELAWARE CORPORATION 39-1168275
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
At September 30, 1996, there were 3,288,098 shares outstanding of the
Registrant's common stock, $0.01 par value per share.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1996
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1996 (Unaudited) and June 30, 1996 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Three months ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) September 30, 1996 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security-Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1996 June 30, 1996
(Unaudited) (*)
------------------------------------
ASSETS
Current Assets:
Cash $440,311 $27,001
Accounts receivable 9,413,549 8,965,213
Inventories 11,451,637 8,777,216
Prepaid expenses 516,854 382,137
Deferred income taxes 517,946 517,946
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Total current assets 22,340,297 18,669,513
Property and Equipment, net 2,416,724 2,344,341
Deferred Income Taxes 422,603 422,603
Intangible and Other Assets 555,276 568,800
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$25,734,900 $22,005,257
======================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $1,050,200 $1,327,915
Accrued liabilities 805,073 786,353
Income taxes payable 591,806 361,855
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Total current liabilities 2,447,079 2,476,123
Long-Term Debt 3,620,000 470,000
Deferred Compensation and Other Liabilities 1,051,114 1,022,344
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 17,126,707 16,546,790
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$25,734,900 $22,005,257
======================================================================================
* The balance sheet at June 30, 1996, has been prepared from the audited
financial statements at that date.
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30 1996 1995
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Net sales $9,862,803 $9,588,544
Cost of goods sold 6,575,125 6,443,923
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Gross profit 3,287,678 3,144,621
Selling, general and
administrative expense 2,096,669 2,140,745
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Income from operations 1,191,009 1,003,876
Other income (expense)
Royalty income 268,485 388,992
Interest income 4,034 4,125
Interest expense (42,279) (27,168)
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Income before income tax provision 1,421,249 1,369,825
Provision for income taxes 582,259 561,713
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Net income $838,990 $808,112
================================================================
Number of common and common
equivalent shares used in
computing earnings per share 3,350,768 3,565,202
================================================================
Earnings per common and common
equivalent share $0.25 $0.23
================================================================
Dividends per common share None None
================================================================
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended September 30 1996 1995
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $838,990 $808,112
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Depreciation and amortization 225,290 225,746
Deferred compensation and other liabilities 28,770 28,770
Net changes in operating assets and
liabilities (3,310,497) (2,667,654)
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Net cash used in operating activities: (2,217,447) (1,605,026)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (277,673) (92,553)
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Net cash used in
investing activities (277,673) (92,553)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (3,395,000) (2,650,000)
Borrowings under line of credit agreements 6,545,000 4,255,000
Purchase and retirement of common stock (260,320) --
Exercise of stock options 18,750 48,750
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Net cash provided
by financing activities 2,908,430 1,653,750
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Net increase (decrease) in cash 413,310 (43,829)
Cash at beginning of year 27,001 49,227
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Cash at end of quarter $440,311 $5,398
=====================================================================================
See accompanying notes
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KOSS CORPORATION AND SUBSIDIARIES
September 30, 1996
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements presented herein are based on interim figures
and are subject to audit. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows at
September 30, 1996, and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in
the Registrant's June 30, 1996, Annual Report on Form 10-K. The income
from operations for the quarter ended September 30, 1996 is not
necessarily indicative of the operating results for the full year.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per share are computed based on the average number of common and
common share equivalents outstanding. When dilutive, stock options are
included as share equivalents using the Treasury stock method. Common
stock equivalents of 45,919 and 68,070 related to stock option grants
were included in the computation of the average number of shares
outstanding in 1996 and 1995 respectively.
3. INVENTORIES
The classification of inventories is as follows:
September 30, 1996 June 30, 1996
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Raw materials and
work in process $7,189,409 $4,751,156
Finished goods 4,900,010 4,663,842
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12,089,419 9,414,998
LIFO Reserve (637,782) (637,782)
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$11,451,637 $8,777,216
=====================================================
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4. STOCK PURCHASE AGREEMENT
The Company has an agreement with its Chairman to repurchase stock from
his estate in the event of his death. The repurchase price is 95% of the
fair market value of the common stock on the date that notice to
repurchase is provided to the Company. The total number of shares to be
repurchased shall be sufficient to provide proceeds which are the lesser
of $2,500,000 or the amount of estate taxes and administrative expenses
incurred by his estate. The Company is obligated to pay in cash 25% of
the total amount due and to execute a promissory note at a prime rate of
interest for the balance. The Company maintains a $1,150,000 life
insurance policy to fund a substantial portion of this obligation. At
September 30, 1996 and June 30, 1996, $1,490,000 has been classified as a
Contingently Redeemable Equity Interest reflecting the estimated
obligation in the event of execution of the agreement.
5. DEFERRED COMPENSATION
In 1991, the Board of Directors agreed to continue John C. Koss' current
base salary in the event he becomes disabled prior to age 70. After age
70, Mr. Koss shall receive his current base salary for the remainder of
his life, whether or not he becomes disabled. The Company is currently
recognizing an annual expense of $115,080 in connection with this
agreement, which represents the present value of the anticipated future
payments. At September 30, 1996 and June 30, 1996, respectively, the
related liabilities in the amounts of $564,990 and $536,220 have been
included in deferred compensation on the accompanying balance sheets.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash used by operating activities during the three months ended September 30,
1996 amounted to $2,217,447. Working capital was $19,893,218 at September 30,
1996. The increase of $3,699,828 from the balance at June 30, 1996 consists
primarily of an increase in inventory. This increase is the result of
anticipated higher sales volume in the upcoming Christmas season. 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 $277,673 for the quarter. For the fiscal year ending June 30,
1997, the Company expects its capital expenditures to be approximately
$1,500,000. The Company expects to generate sufficient operating funds to
fulfill these expenditures.
Stockholders' investment increased to $17,126,707 at September 30, 1996, from
$16,546,790 at June 30, 1996. The increase reflects primarily the income for
the quarter. 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, 1998. This credit facility provides for borrowings up
to a maximum of $8,000,000. Borrowings under this credit facility bear
interest at the bank's prime rate, or LIBOR plus 2.25%. This credit facility
includes certain covenants that require the Company to maintain a minimum
tangible net worth and specified current, interest coverage, and leverage
ratios. Utilization of this credit facility as of September 30, 1996 totaled
$3,827,938, consisting of $3,620,000 in borrowings and $207,938 in commitments
for foreign letters of credit. Utilization of this credit facility as of June
30, 1996 was $944,784, consisting of $470,000 in borrowings of $474,784 in
foreign letters of credit. The increase as of September 30, 1996 is the result
of an increase in inventory due to anticipated higher sales volume for the
upcoming Christmas season. The Company also has a $2,000,000 credit facility
which can be used by the Company in the event the Company desires to purchase
shares of its own stock. This credit facility runs through March
15, 1997. The Company can also use up to $1,000,000 of its working capital
credit facility to purchase shares of its own stock.
The Company's Canadian subsidiary has a line of credit of $550,000, which is
guaranteed by the Company. Borrowings under this credit facility bear interest
at the bank's prime rate plus 1.5%. This credit facility is subject to the
availability of qualifying receivables and inventories which serve as security
for the borrowings. As of September 30, 1996, there were no borrowings
outstanding against this line of credit. The due date for the line is October
31, 1997.
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In April, 1995 the Board of Directors authorized the Company's purchase from
time to time of its common stock for its own account utilizing the
aforementioned $2,000,000 credit facility. In January of 1996, the Board of
Directors approved an increase in the total amount of potential stock purchases
for the Company's own account from $2,000,000 to $3,000,000. The Company
intends to effectuate all stock purchases either on the open market or through
privately negotiated transactions, and intends to finance all stock purchases
through its own cash flow or by borrowing for such purchases. For the quarter
ended September 30, 1996, the Company purchased 17,000 shares of its common
stock at a price of $6.975 per share, and retired all such shares. The Company
also purchased 9,678 shares of its common stock for allocation to the Company's
Employee Stock Ownership Plan and Trust, for the fiscal year ended June 30,
1996, at a price of $6.975 per share.
Results of Operations
Net sales for the quarter ended September 30, 1996 were $9,862,803 compared
with $9,588,544 for the same period in 1995, an increase of $274,259. Strong
orders primarily in August and September resulted in the increase for the
quarter.
Gross profit as a percent of net sales was 33% for the quarter ended September
30, 1996 compared with 33% in the prior year.
Selling, general and administrative expenses were $2,096,669 or 21% as against
$2,140,745 or 22% in 1995.
For the quarter ended September 30, 1996, income from operations was $1,191,009
versus $1,003,876 in 1995. The $187,133 increase is primarily related to the
increased sales volume.
Net interest expense amounted to $42,279 for the quarter as compared to $27,168
for the same period in the prior year. This increase is a result of increased
borrowing for the quarter as compared to the same period last year.
The Company has a license agreement with Trabelco N.V., a subsidiary of
Hagemeyer, N.V., a diverse international trading company based in the
Netherlands, which 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 this license agreement for the quarter
ended September 30, 1996 was $268,485 as compared to $388,992 for the same
period in 1995. This decrease in royalty income is a result of Trabelco N.V.
experiencing lower sales volumes on products under the license agreement. The
license agreement expires December 31, 1997; however, it can be renewed for
additional three year periods at the option of Trabelco N.V.
On September 29, 1995, the Company entered into a second License Agreement with
Trabelco N.V. covering most European countries. At this time, no sales have
been reported under this License Agreement.
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PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security-Holders
(a) On October 24, 1996 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 3,288,098 shares of common stock
eligible to vote at the Annual Meeting, of which 2,845,065
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:
Number of Votes Broker
--------------- ------
For Withheld Non-Votes
--- -------- ---------
Nominees for 1-year
terms ending in 1997:
John C. Koss 2,822,647 22,418 0
Thomas L. Doerr 2,818,359 26,706 0
Victor L. Hunter 2,822,947 22,118 0
Michael J. Koss 2,822,347 22,718 0
Lawrence S. Mattson 2,818,859 26,206 0
Martin F. Stein 2,822,447 22,618 0
John J. Stollenwerk 2,822,947 22,118 0
Number of Votes Broker
--------------- ------
For Against Abstain Non-Votes
--- ------- ------- ---------
Appointment of Price
Waterhouse L.L.P.
as independent auditors
for the year ended
June 30, 1997 2,828,987 4,270 11,808 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.
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto authorized.
KOSS CORPORATION
Dated: 11/13/96 /s/ John C. Koss
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John C. Koss, Chairman
on behalf of the Registrant
Dated: 11/13/96 /s/ Michael J. Koss
--------------- --------------------------------
Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
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3-MOS
JUN-30-1997
JUL-01-1996
SEP-30-1996
440311
0
9413549
0
11451637
22340297
12955435
10538711
25734900
2447079
0
0
0
33180
25701720
25734900
9862803
9862803
6575125
2096669
(268485)
0
42279
1421249
582259
0
0
0
0
838950
0
.25
