1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-3295
- -------------------------------------------------------------------------------
KOSS CORPORATION
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
A DELAWARE CORPORATION 39-1168275
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-- --
At December 31, 1997, there were 3,322,269 shares outstanding of the
Registrant's common stock, $0.01 par value per share.
1 of 11
2
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
December 31, 1997
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1997 (Unaudited) and June 30, 1997 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months and six months ended
December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Six months ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) December 31, 1997 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security-Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
2 of 11
3
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1997 June 30, 1997
(Unaudited) (*)
----------------------------------------
ASSETS
Current Assets:
Cash $ 2,892 $ 32,551
Accounts receivable 9,485,079 6,992,513
Inventories 15,074,572 14,547,653
Prepaid expenses 853,004 603.997
Income taxes receivable -- 65,493
Deferred income taxes 756,946 756,946
----------------------------------------------------------------------------------------------------------------
Total current assets 26,172,493 22,999,153
Property and Equipment, net 2,113,745 2,477,529
Deferred Income Taxes 258,135 258,135
Intangible and Other Assets 578,147 598,106
----------------------------------------------------------------------------------------------------------------
$ 29,122,520 $ 26,332,923
================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,971,460 $ 741,646
Accrued liabilities 1,356,701 994,877
Deferred revenue -- 473,482
Income taxes payable 213,911 --
----------------------------------------------------------------------------------------------------------------
Total current liabilities 3,542,072 2,210,005
Long-Term Debt 2,550,000 1,221,000
Deferred Compensation and Other Liabilities 1,194,964 1,137,424
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 20,345,484 20,274,494
----------------------------------------------------------------------------------------------------------------
$ 29,122,520 $ 26,332,923
================================================================================================================
* The balance sheet at June 30, 1997, has been prepared from the audited
finanical statements at that date.
See accompanying notes.
3 of 11
4
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Period Ended December 31 1997 1996 1997 1996
---------------------------------------------------------------------------------------------------------------------
Net sales $10,378,151 $13,320,166 $22,133,276 $23,182,969
Cost of goods sold 7,068,010 8,776,051 14,398,678 15,351,176
---------------------------------------------------------------------------------------------------------------------
Gross profit 3,310,141 4,544,115 7,734,598 7,831,793
Selling, general and
administrative expense 2,079,962 2,394,291 4,281,130 4,490,960
---------------------------------------------------------------------------------------------------------------------
Income from operations 1,230,179 2,149,824 3,453,468 3,340,833
Other income (expense)
Royalty income 460,381 427,890 630,677 696,375
Interest income 6,077 55,082 10,015 59,116
Interest expense (59,895) (135,149) (80,251) (177,428)
---------------------------------------------------------------------------------------------------------------------
Income before income tax provision 1,636,742 2,497,647 4,013,909 3,918,896
Provision for income taxes 552,306 1,015,169 1,528,050 1,597,428
---------------------------------------------------------------------------------------------------------------------
Net income $ 1,084,436 $ 1,482,478 $ 2,485,859 $ 2,321,468
=====================================================================================================================
Earnings per common share:
Basic $0.33 $0.45 $0.74 $0.70
Diluted $0.32 $0.45 $0.72 $0.70
=====================================================================================================================
Dividends per common share None None None None
=====================================================================================================================
See accompanying notes.
4 of 11
5
KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended December 31 1997 1996
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 2,485,859 $ 2,321,468
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Depreciation and amortization 429,958 439,078
Deferred compensation 57,540 57,540
Net changes in operating assets and
liabilities (1,870,933) (4,818,836)
-----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 1,102,424 (2,000,750)
------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (46,214) (495,902)
------------------------------------------------------------------------------------------------
Net cash used in
investing activities (46,214) (495,902)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (11,421,000) (9,659,000)
Borrowings under line of credit agreements 12,750,000 12,475,000
Purchase and retirement of common stock (5,309,656) (352,692)
Exercise of stock options 2,894,787 18,750
------------------------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (1,085,869) 2,482,058
Net decrease in cash (29,659) (14,594)
Cash at beginning of year 32,551 27,001
------------------------------------------------------------------------------------------------
Cash at end of period $ 2,892 $ 12,407
================================================================================================
See accompanying notes.
5 of 11
6
KOSS CORPORATION AND SUBSIDIARIES
December 31, 1997
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements presented herein are based on interim amounts
and are subject to audit. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial position, results of operations and
cash flows at December 31 1997 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, 1997, Annual Report on Form 10-K. The
income from operations for the quarter and six months ended December
31, 1997 is not necessarily indicative of the operating results for
the full year.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share," (SFAS 128). This Statement
establishes new standards for computing and presenting earnings per
share. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997 and requires restatement of all
prior-period earnings per share data. The Company's adoption of the
provisions of SFAS 128 resulted in the dual presentation of basic and
diluted per share amounts on the Company's income statement.
Basic earnings per share are computed based on the weighted average
number of common shares outstanding. When dilutive, stock options are
included as share equivalents using the Treasury stock method. Common
stock equivalents of 63,482 and 38,939 related to stock option grants
were included in the computation of the average number of shares
outstanding for diluted earnings per share for the quarters ended
December 31, 1997 and 1996, respectively. Common stock equivalents of
99,714 and 42,326 related to stock option grants were included in the
computation of the average number of shares outstanding for diluted
earnings per share for the six months ended December 31, 1997 and
1996, respectively.
6 of 11
7
3. INVENTORIES
The classification of inventories is as follows:
December 31, 1997 June 30, 1997
---------------------------------------------------------------------------
Raw materials and
work in process $6,928,566 $7,485,887
Finished goods 8,603,490 7,519,250
---------------------------------------------------------------------------
15,532,056 15,005,137
LIFO Reserve (457,484) (457,484)
---------------------------------------------------------------------------
$15,074,572 $14,547,653
===========================================================================
4. STOCK PURCHASE AGREEMENT
The Company has an agreement with its Chairman to repurchase stock
from his estate in the event of his death. The repurchase price is
95% of the fair market value of the common stock on the date that
notice to repurchase is provided to the Company. The total number of
shares to be repurchased shall be sufficient to provide proceeds which
are the lesser of $2,500,000 or the amount of estate taxes and
administrative expenses incurred by his estate. The Company is
obligated to pay in cash 25% of the total amount due and to execute a
promissory note at the prime rate of interest for the balance. The
Company maintains a $1,150,000 life insurance policy to fund a
substantial portion of this obligation. At December 31, 1997 and June
30, 1997, $1,490,000 has been classified as a Contingently Redeemable
Equity Interest reflecting the estimated obligation in the event of
execution of the agreement.
5. DEFERRED COMPENSATION
In 1991, the Board of Directors agreed to continue John C. Koss'
current base salary in the event he becomes disabled prior to age 70.
After age 70, Mr. Koss shall receive his current base salary for the
remainder of his life, whether or not he becomes disabled. The
Company is currently recognizing an annual expense of $115,080 in
connection with this agreement, which represents the present value of
the anticipated future payments. At December 31, 1997 and June 30,
1997, respectively, the related liabilities in the amounts of $708,840
and $651,300 have been included in deferred compensation on the
accompanying balance sheets.
7 of 11
8
KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q - December 31, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash generated by operating activities during the six months ended December 31,
1997 amounted to $1,102,424. Working capital was $22,630,421 at December 31,
1997. The increase of $1,841,273 from the balance at June 30, 1997 consists
primarily of an increase in receivables and payables. The increase in
receivables and payables is a result of higher sales as compared to the last
quarter in 1997. 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 $46,214 for the six months. For the fiscal year ending June 30,
1998, the Company expects its capital expenditures to be approximately
$1,252,000. The Company expects to generate sufficient operating funds to
fulfill these expenditures.
Stockholders' investment decreased to $20,132,266 at December 31, 1997, from
$20,274,494 at June 30, 1997. The decrease reflects primarily the net effect
of income, shares purchased and retired and stock options exercised.
The Company has an unsecured working capital line of credit with a bank which
runs through November 1, 1999. This credit facility provides for borrowings up
to a maximum of $8,000,000. Borrowings under this credit facility bear
interest at the bank's prime rate, or LIBOR plus 2.25%. This credit facility
includes certain 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 December 31, 1997 totaled
$2,550,000, consisting solely of borrowings. Utilization of this credit
facility as of June 30, 1997 was $1,274,386, consisting of $1,221,000 in
borrowings and $53,386 in foreign letters of credit. The increase as of
December 31, 1997 is the result of increased inventory purchases due to
anticipated higher sales volume.
The Company has also reinstated a $2,000,000 credit facility which can be used
by the Company to purchase shares of its own stock pursuant to the Company's
stock repurchase program. This credit facility also extends through November
1, 1999.
8 of 11
9
In January of 1998, the Board of Directors authorized an additional $2,000,000
to be used for purchasing the Company's common stock for its own account,
increasing the total net amount of the Company's stock repurchase program from
$5,000,000 to $7,000,000. The Company intends to effectuate all stock
purchases either on the open market or through privately negotiated
transactions, and intends to finance all stock purchases through its own
cash flow or by borrowing for such purchases. For the quarter ended December
31, 1997, the Company purchased 39,622 shares of its common stock at an average
price of $13.78 per share, and retired all such shares. For the six months
ended December 31, 1997, the Company purchased 392,772 shares of its common
stock at an average price of $13.52 per share, and retired all such shares.
The Company also purchased 5,000 shares of its common stock for allocation to
the Company's Employee Stock Ownership Plan and Trust ("ESOP") for the quarter
and six months ended December 31, 1997, at an average price of $13.06 per
share.
From the commencement of the Company's stock repurchase program through
December 31, 1997, the Company has purchased and retired a total of 736,348
shares for a total gross purchase price of $7,434,671, representing an average
gross purchase price of $10.10 per share.
Results of Operations
Net sales for the second quarter ended December 31, 1997 fell 22% to
$10,378,151 from $13,320,166 for the same period in 1996. Net sales for the
six months ended December 31, 1997 were $22,133,276, down 5% compared with
$23,182,969 during the same six months one year ago. This decrease was
primarily a result of weak orders through the second quarter.
Gross profit as a percent of net sales was 32% for the quarter ended December
31, 1997 compared with 34% for the same period in the prior year. For the six
month period ended December 31, 1997, the gross profit percentage was 35%
compared with 34% for the same period in 1996. Shifts in product mix resulted
in the increase in gross profit for the six month period as compared to last
year.
Selling, general and administrative expenses for the quarter ended December 31,
1997 were $2,079,962 or 20% of net sales, as against $2,394,291 or 18% of net
sales, for the same period in 1996. For the six month period ended December
31, 1997, such expenses were $4,281,130 or 19% of net sales, as against
$4,490,960 or 19% of net sales, for the same period in 1996.
For the second quarter ended December 31, 1997, income from operations was
$1,230,179 versus $2,149,824 for the same period in the prior year. Income
from operations for the six months ended December 31, 1997 was $3,453,468 as
compared to $3,340,833 for the same period in 1996. The increase is primarily
related to the increase in gross margin resulting from shifts in product mix
and lower selling, general and administrative expenses.
Net interest expense amounted to $59,895 for the quarter as compared to
$135,149 for the same period in the prior year. For the six month period, the
interest expense amounted to $80,251 compared with $177,428 for the same period
in the prior year. The decrease is a result of the Company borrowing at much
lower levels as compared to the same periods last year.
9 of 11
10
The Company had a License Agreement with Trabelco N.V., a Netherlands, Antilles
company and a subsidiary of Hagemeyer, N.V., a diverse international trading
company based in the Netherlands. This License Agreement covered North
America, Central America, and South America. Effective as of March 31, 1997,
the Company assigned this License Agreement with Trabelco N.V. to Jiangsu
Electronics Industries Limited ("Jiangsu"), a subsidiary of Orient Power
Holdings Limited. Orient Power is based in Hong Kong and has an extensive
portfolio of audio and video products. Pursuant to this assignment, Jiangsu
has agreed to make royalty payments through December 31, 2000, subject to
certain minimum royalty amounts due for the years 1998, 1999, and 2000. The
Company and Jiangsu are currently negotiating the possibility of expanding the
products covered by this License Agreement to include mobile electronics and to
increase the minimum royalties due for the years 1998, 1999, and 2000. This
License Agreement is subject to renewal for additional 3 year periods.
Royalty income earned in connection with this License Agreement for the quarter
ended December 31, 1997 was $460,381 as compared to $427,890 for the same
period in 1996. For the six month period ended December 31, 1997, royalty
income was $630,677 compared to $696,375 for the same period in the prior year.
The License Agreement with Trabelco N.V. covering many European countries
remains in place. Although no sales have been reported under this License
Agreement to date, certain minimum royalties are due for calendar years 1997
and 1998. This License Agreement expires on December 31, 1998; however,
Trabelco N.V. has the option to renew this License Agreement for additional 3
year periods.
PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security-Holders
The information reported under Part II, Item 4 (Submission of
Matters to Vote of Security Holders) in the Form 10-Q filed
for the period ended September 30, 1997 is incorporated herein
by reference.
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.
10 of 11
11
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
KOSS CORPORATION
Dated: 2/13/98 /s/ Michael J. Koss
------------ -------------------
Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 2/13/98 /s/ Sue Sachdeva
------------ ----------------
Sue Sachdeva
Vice President--Finance
11 of 11
5
6-MOS
JUN-30-1998
JUL-01-1997
DEC-31-1997
2892
0
9485079
0
15074572
26172493
13506263
(11392518)
29122520
3542072
0
0
0
33238
20312246
29122520
22133276
22133276
14398678
14398678
3650453
0
70236
4013909
1528050
0
0
0
0
2485859
.74
.72
