1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 1998
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
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At March 31, 1998, there were 3,168,519 shares outstanding of the Registrant's
common stock, $0.01 par value per share.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 1998
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1998 (Unaudited) and June 30, 1997 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months and nine months ended
March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Nine months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) March 31, 1998 6-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 11
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 June 30, 1997
(Unaudited) (*)
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ASSETS
Current Assets:
Cash $ 2,190 $ 32,551
Accounts receivable 7,940,701 6,992,513
Inventories 18,449,538 14,547,653
Prepaid expenses 581,010 603,997
Income taxes receivable -- 65,493
Deferred income taxes 756,946 756,946
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Total current assets 27,730,385 22,999,153
Property and Equipment, net 2,023,677 2,477,529
Deferred Income Taxes 258,135 258,135
Intangible and Other Assets 602,173 598,106
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$30,614,370 $26,332,923
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 634,742 $ 741,646
Accrued liabilities 913,688 994,877
Deferred revenue -- 473,482
Income taxes payable 677,270 --
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Total current liabilities 2,225,700 2,210,005
Long-Term Debt 6,336,000 1,221,000
Deferred Compensation and Other Liabilities 1,223,734 1,137,424
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 19,338,936 20,274,494
=================================================================================================================
$30,614,370 $26,332,923
=================================================================================================================
* The balance sheet at June 30, 1997, has been prepared from the audited
financial statements at that date.
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Nine Months
Period Ended March 31 1998 1997 1998 1997
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Net sales $ 8,089,590 $ 8,583,303 $ 30,222,866 $ 31,766,272
Cost of goods sold 5,571,898 5,660,609 19,970,576 21,011,785
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Gross profit 2,517,692 2,922,694 10,252,290 10,754,487
Selling, general and
administrative expense 1,718,331 2,169,313 5,999,461 6,660,273
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Income from operations 799,361 753,381 4,252,829 4,094,214
Other income (expense)
Royalty income 373,371 212,244 1,004,048 908,619
Interest income 45,219 30,085 55,234 89,201
Interest expense (92,847) (77,099) (173,098) (254,527)
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Income before income tax provision 1,125,104 918,611 5,139,013 4,837,507
Provision for income taxes 463,496 387,059 1,991,546 1,984,487
================================================================================================================================
Net income $ 661,608 $ 531,552 $ 3,147,467 $ 2,853,020
================================================================================================================================
Earnings per common share:
Basic $ 0.21 $ 0.16 $ 0.96 $ 0.86
Diluted $ 0.20 $ 0.15 $ 0.93 $ 0.85
================================================================================================================================
Dividends per common share None None None None
================================================================================================================================
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31 1998 1997
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 3,147,467 $ 2,853,020
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Depreciation and amortization 594,371 516,998
Deferred compensation 86,310 86,310
Net changes in operating assets and
liabilities (4,781,669) (4,258,900)
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Net cash used in operating
activities (953,521) (802,572)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (109,715) (672,002)
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Net cash used in
investing activities (109,715) (672,002)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (17,406,000) (16,169,000)
Borrowings under line of credit agreements 22,521,000 17,765,000
Purchase and retirement of common stock (6,983,562) (352,692)
Exercise of stock options 2,901,437 336,375
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Net cash provided
by financing activities 1,032,875 1,579,683
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Net (decrease) increase in cash (30,361) 105,109
Cash at beginning of year 32,551 27,001
==========================================================================================================
Cash at end of period $ 2,190 $ 132,110
==========================================================================================================
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
March 31, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements presented herein are based on interim amounts
and are subject to audit. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows at
March 31, 1998 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 nine months ended March 31, 1998 is
not necessarily indicative of the operating results for the full year.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share," (SFAS 128). This Statement establishes new standards for
computing and presenting earnings per share. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997
and requires restatement of all prior-period earnings per share data.
The Company's adoption of the provisions of SFAS 128 resulted in the
dual presentation of basic and diluted per share amounts on the
Company's income statement.
Basic earnings per share are computed based on the weighted average
number of common shares outstanding. When dilutive, stock options are
included as share equivalents using the Treasury stock method. Common
stock equivalents of 39,958 and 140,757 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 March
31, 1998 and 1997, respectively. Common stock equivalents of 78,426 and
96,702 related to stock option grants were included in the computation
of the average number of shares outstanding for diluted earnings per
share for the nine months ended March 31, 1998 and 1997, respectively.
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3. INVENTORIES
The classification of inventories is as follows:
March 31, 1998 June 30, 1997
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Raw materials and
work in process $7,368,189 $7,485,887
Finished goods 11,538,833 7,519,250
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18,907,022 15,005,137
LIFO Reserve (457,484) (457,484)
===============================================================================
$18,449,538 $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 March 31, 1998 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 March 31, 1998 and June 30, 1997,
respectively, the related liabilities in the amounts of $737,610 and
$651,300 have been included in deferred compensation on the
accompanying balance sheets.
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6. COMPREHENSIVE INCOME
In June, 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", (SFAS 130). This
Statement requires that certain items recognized under accounting
principles as components of comprehensive income be reported in an
annual financial statement that is displayed with the same prominence
of other financial statements.
Total comprehensive income totaled $660,708 and $443,637 for the
quarter ended March 31, 1998 and 1997, respectively. Total
comprehensive income for the quarter ended March 31, 1998 and 1997, is
comprised of net income of $661,608 and $531,552, respectively, and
other comprehensive income (loss) of $(900) and $(87,915),
respectively. Other comprehensive income (loss) is comprised solely of
foreign currency translation adjustments.
Total comprehensive income totaled $3,146,567 and $2,746,062 for the
nine months ended March 31, 1998 and 1997, respectively. Total
comprehensive income for the nine months ended March 31, 1998 and 1997,
is comprised of net income of $3,147,467 and $2,853,020, respectively,
and other comprehensive income (loss) of $(900) and $(106,958),
respectively. Other comprehensive income (loss) is comprised solely of
foreign currency translation adjustments.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q - March 31, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash used in activities during the nine months ended March 31, 1998 amounted to
$(953,521). Working capital was $25,504,685 at March 31, 1998. The increase of
$4,715,537 from the balance at June 30, 1997 consists primarily of an increase
in inventory. The increase in inventory is a result of anticipated higher sales
for certain product lines in the last quarter of fiscal year 1998. The cash
necessary to fund the Company's operating activities fluctuates from time to
time; however, as a general rule, the Company expects to generate adequate
amounts of cash to meet future operating needs. The Company maintains sufficient
borrowing capacity to fund any shortfall.
Capital expenditures for new property and equipment (including production
tooling) were $109,715 for the nine 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 $19,338,936 at March 31, 1998, 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 March 31, 1998 totaled $6,336,000, 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 March 31, 1998 is the result of increased
inventory purchases due to anticipated higher sales volume in certain product
lines.
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.
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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 one or more privately negotiated
transactions, and intends to finance all stock purchases through its own cash
flow or by borrowing for such purchases. For the quarter ended March 31, 1998,
the Company purchased 155,000 shares of its common stock at an average gross
purchase price of $10.80 per share, and retired all such shares. For the nine
months ended March 31, 1998, the Company purchased 547,772 shares of its common
stock at an average gross purchase price of $12.75 per share (and an average net
purchase price of $7.96 per share), and retired all such shares. For the quarter
ended March 31, 1998, the Company did not purchase any shares of its common
stock for allocation to the Company's Employee Stock Ownership Plan and Trust
("ESOP"). For the nine months ended March 31, 1998, the Company purchased 5,000
shares of its common stock for allocation to the ESOP at an average price of
$13.06 per share.
From the commencement of the Company's stock repurchase program through March
31, 1998, the Company has purchased and retired a total of 891,348 shares at a
total gross purchase price of $9,108,577 (representing an average gross purchase
price of $10.22 per share) and a total net purchase price of $6,485,677
(representing an average net purchase price of $7.28 per share). The difference
between the total gross purchase price and the total net purchase price is the
result of the Company repurchasing certain shares acquired by employees pursuant
to the Company stock option program.
Results of Operations
Net sales for the third quarter ended March 31, 1998 fell 6% to $8,089,590 from
$8,583,303 for the same period in 1997. Net sales for the nine months ended
March 31, 1998 were $30,222,866, down 5% compared with $31,766,272 during the
same nine 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 31% for the quarter ended March 31,
1998 compared with 34% for the same period in the prior year. For the nine month
period ended March 31, 1998 and 1997, the gross profit percentage was 34%.
Shifts in product mix resulted in the decrease in gross profit for the three
month period as compared to last year.
Selling, general and administrative expenses for the quarter ended March 31,
1998 were $1,718,331 or 21% of net sales, as against $2,169,313 or 25% of net
sales for the same period in 1997. For the nine month period ended March 31,
1998, such expenses were $5,999,461 or 20% of net sales, as against $6,660,273
or 21% of net sales for the same period in 1997.
For the third quarter ended March 31, 1998, income from operations was $799,361
versus $753,381 for the same period in the prior year. Income from operations
for the nine months ended March 31, 1998 was $4,252,829 as compared to
$4,094,214 for the same period in 1997. The increase is primarily related to the
increase in gross margin and from lower selling, general and administrative
expenses.
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Interest expense amounted to $92,847 for the quarter as compared to $77,099 for
the same period in the prior year. For the nine month period, the interest
expense amounted to $173,098 compared with $254,527 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.
The Company had a License Agreement with Trabelco N.V., a Netherlands, Antilles
company and a subsidiary of Hagemeyer, N.V., a diverse international trading
company based in the Netherlands. This License Agreement covered North America,
Central America, and South America. Effective as of March 31, 1997, the Company
assigned this License Agreement to Jiangsu Electronics Industries Limited
("Jiangsu"), a subsidiary of Orient Power Holdings Limited. Orient Power is
based in Hong Kong and has an extensive portfolio of audio and video products.
Pursuant to this assignment, Jiangsu has agreed to make royalty payments through
December 31, 2000, subject to certain minimum royalty amounts due for the years
1998, 1999, and 2000. 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 March 31, 1998 was $373,371 as compared to $212,244 for the same period in
1997. For the nine month period ended March 31, 1998, royalty income was
$1,004,048 compared to $908,619 for the same period in the prior year.
The License Agreement between the Company and Trabelco N.V. covering certain
European countries remains in place. Although no sales have been reported under
this License Agreement to date, certain minimum royalties are due for calendar
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 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: 5/14/98 /s/ Michael J. Koss
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Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 5/14/98 /s/ Sue Sachdeva
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Sue Sachdeva
Vice President--Finance
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3-MOS
JUN-30-1998
JUL-01-1997
MAR-31-1998
2190
0
7940701
0
18449538
27730385
13569764
(11546087)
30614370
2225700
0
0
0
33238
16015136
30614370
8089590
8089590
5571898
5571898
1718331
0
92847
1125104
463496
0
0
0
0
661608
.21
.20
