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, 1999
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
---------------------------
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 March 31, 1999, there were 2,956,419 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, 1999
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 (Unaudited) and June 30, 1998 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months and nine months ended
March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Nine months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) March 31, 1999 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 10
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 June 30, 1998
(Unaudited) (*)
----------------------------------
ASSETS
Current Assets:
Cash $ 639,583 $ 14,778
Accounts receivable 8,013,459 8,387,839
Inventories 14,673,691 19,486,058
Income taxes receivable 361,441 --
Other current assets 1,014,000 1,104,838
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Total current assets 24,702,174 28,993,513
Property and Equipment, net 1,805,140 2,062,531
Intangible and Other Assets 1,204,183 972,725
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$27,711,497 $32,028,769
============================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 560,400 $ 1,956,877
Accrued liabilities 1,268,002 1,314,701
Income taxes payable -- 677,527
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Total current liabilities 1,828,402 3,949,105
Long-Term Debt -- 2,746,000
Deferred Compensation and Other Liabilities 1,338,814 1,252,504
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 23,054,281 22,591,160
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$27,711,497 $32,028,769
============================================================================================================
* The balance sheet at June 30, 1998 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 1999 1998 1999 1998
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Net sales $ 7,679,636 $ 8,089,590 $25,097,558 $30,222,866
Cost of goods sold 4,607,716 5,571,898 14,718,094 19,970,576
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Gross profit 3,071,920 2,517,692 10,379,464 10,252,290
Selling, general and
administrative expense 1,857,875 1,718,331 5,964,629 5,999,461
- ----------------------------------------------------------------------------------------------------------------------------
Income from operations 1,214,045 799,361 4,414,835 4,252,829
Other income (expense)
Royalty income 102,414 373,371 812,132 1,004,048
Interest income 12,319 45,219 17,675 55,234
Interest expense (3,282) (92,847) (59,899) (173,098)
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Income before income tax provision 1,325,496 1,125,104 5,184,743 5,139,013
Provision for income taxes 519,338 463,496 2,053,509 1,991,546
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Net income $ 806,158 $ 661,608 $ 3,131,234 $ 3,147,467
============================================================================================================================
Earnings per common share:
Basic $0.26 $0.21 $0.99 $0.96
Diluted $0.26 $0.20 $0.98 $0.93
============================================================================================================================
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 1999 1998
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 3,131,234 $ 3,147,467
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 611,783 594,371
Deferred compensation 86,310 86,310
Net changes in operating assets and
liabilities 2,544,001 (4,781,669)
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Net cash provided by (used in) operating
activities 6,373,328 (953,521)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (334,410) (109,715)
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Net cash used in
investing activities (334,410) (109,715)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (9,443,000) (17,406,000)
Borrowings under line of credit agreements 6,697,000 22,521,000
Purchase and retirement of common stock (2,724,738) (6,983,562)
Exercise of stock options 56,625 2,901,437
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Net cash (used in) provided by
financing activities (5,414,113) 1,032,875
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Net increase (decrease) in cash 624,805 (30,361)
Cash at beginning of year 14,778 32,551
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Cash at end of period $ 639,583 $ 2,190
=======================================================================================================
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
March 31, 1999
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, 1999 and for all periods presented have been made. The income
from operations for the quarter ended March 31, 1999 is not necessarily
indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in
the Registrant's June 30, 1998, Annual Report on Form 10-K.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings per share are computed based on the weighted average
number of common shares outstanding. The weighted average number of
common shares outstanding for the quarters ending March 31, 1999 and
1998 were 3,091,447 and 3,201,644, respectively. For the nine months
ended March 31, 1999 and 1998, weighted average number of common shares
outstanding were 3,150,144 and 3,293,767, respectively. When dilutive,
stock options are included as share equivalents using the treasury
stock method. Common stock equivalents of 42,801 and 39,958 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, 1999 and 1998, respectively. Common stock
equivalents of 38,765 and 78,426 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, 1999
and 1998, respectively.
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3. INVENTORIES
The classification of inventories is as follows:
March 31, 1999 June 30, 1998
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Raw materials and
work in process $ 4,945,968 $6,700,168
Finished goods 10,188,890 13,247,057
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15,134,858 19,947,225
LIFO Reserve (461,167) (461,167)
=================================================================================
$14,673,691 $19,486,058
=================================================================================
4. STOCK PURCHASE AGREEMENT
The Company has an agreement with its Chairman to repurchase stock from
his estate in the event of his death. The repurchase price is 95% of
the fair market value of the common stock on the date that notice to
repurchase is provided to the Company. The total number of shares to be
repurchased shall be sufficient to provide proceeds which are the
lesser of $2,500,000 or the amount of estate taxes and administrative
expenses incurred by his estate. The Company is obligated to pay in
cash 25% of the total amount due and to execute a promissory note at
the prime rate of interest for the balance. The Company maintains a
$1,150,000 life insurance policy to fund a substantial portion of this
obligation. At March 31, 1999 and June 30, 1998, $1,490,000 has been
classified as a Contingently Redeemable Equity Interest reflecting the
estimated obligation in the event of execution of the agreement.
5. DEFERRED COMPENSATION
In 1991, the Board of Directors agreed to continue John C. Koss'
current base salary in the event he becomes disabled prior to age 70.
After age 70, Mr. Koss shall receive his current base salary for the
remainder of his life, whether or not he becomes disabled. The Company
is currently recognizing an annual expense of $115,080 in connection
with this agreement, which represents the present value of the
anticipated future payments. At March 31, 1999 and June 30, 1998,
respectively, the related liabilities in the amounts of $852,690 and
$766,380 have been included in deferred compensation on the
accompanying balance sheets.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash generated by operating activities during the nine months ended March 31,
1999 amounted to $6,373,328. Working capital was $22,873,772 at March 31, 1999,
a decrease of $2,170,636 from the balance at June 30, 1998. The decrease in
working capital is primarily attributable to the net effect of decreases in
inventory and accounts payable. 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 $334,410 for the nine months. For the fiscal year ending June 30,
1999, the Company expects its capital expenditures to be approximately
$1,100,000. The Company expects to generate sufficient operating funds to
fulfill these expenditures.
Stockholders' investment increased to $23,054,281 at March 31, 1999, from
$22,591,160 at June 30, 1998. The increase reflects the net effect of income,
shares purchased and retired, and stock options exercised.
The Company amended its existing credit facility in April 1999, extending the
maturity date of the unsecured line of credit to November 1, 2000. This credit
facility provides for borrowings up to a maximum of $10,000,000. The Company can
use this credit facility for working capital purposes or for the
purchase of its own stock pursuant to the Company's stock repurchase program.
The increase in this credit facility from $8,000,000 to $10,000,000 is the
result of combining the Company's $8,000,000 working capital credit facility
with the Company's $2,000,000 stock repurchase credit facility. Borrowings under
this credit facility bear interest at the bank's prime rate, or LIBOR plus
1.75%. This credit facility includes certain financial covenants that require
the Company to maintain a minimum tangible net worth and specified current,
interest coverage, and leverage ratios. There was no utilization of this credit
facility at March 31, 1999. Utilization of this credit facility as of June 30,
1998 was $2,746,000. The decrease as of March 31, 1999 is the result of
decreased inventory purchases.
In April 1999, the Board of Directors authorized an additional $5,000,000 to be
used for purchasing the Company's common stock for its own account, increasing
the total cumulative net amount of the Company's stock repurchase program to
$15,000,000. 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 under the credit facility discussed above. For the quarter
and nine months ended March 31, 1999, the Company purchased 227,100 shares of
its common stock for $2,724,738.
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From the commencement of the Company's stock repurchase program in June of 1995
through March 31, 1999, the Company has purchased and retired a total of
1,118,448 shares at a total gross purchase price of $11,833,315 (representing an
average gross purchase price of $10.58 per share) and a total net purchase price
of $9,210,415 (representing an average net purchase price of $6.34 per share).
The difference between the total gross purchase price and the total net purchase
price reflects the savings to the Company as a result of repurchasing certain
shares from employees who acquired Company stock pursuant to the Company's stock
option program.
The Company also has an Employee Stock Ownership Plan and Trust ("ESOP") under
which shares of Company stock are purchased by the ESOP for allocation to the
accounts of ESOP participants. For the quarter ended March 31, 1999, the ESOP
did not purchase any shares of its common stock for allocation to the ESOP.
Results of Operations
Net sales for the third quarter ended March 31, 1999 fell 5% to $7,679,636 from
$8,089,590 for the same period in 1998. Net sales for the nine months ended
March 31, 1999 were $25,097,558, down 17% compared with $30,222,866 during the
same nine months one year ago. This decrease was primarily a result of the
Company's decision to withdraw from the speaker business.
Gross profit as a percent of net sales was 40% for the quarter ended March 31,
1999 compared with 31% for the same period in the prior year. For the nine month
period ended March 31, 1999, the gross profit percentage was 41% compared with
34% for the same period in 1998. Shifts in product mix and the Company's
decision to withdraw from the speaker business resulted in the increase in
gross profit for the nine month period as compared to last year.
Selling, general and administrative expenses for the quarter ended March 31,
1999 were $1,857,875 or 24% of net sales, as against $1,718,331 or 21% of net
sales for the same period in 1998. For the nine month period ended March 31,
1999, such expenses were $5,964,629 or 24% of net sales, as against $5,999,461
or 20% of net sales for the same period in 1998.
For the third quarter ended March 31, 1999, income from operations was
$1,214,045 versus $799,361 for the same period in the prior year. Income from
operations for the nine months ended March 31, 1999 was $4,414,835 as compared
to $4,252,829 for the same period in 1998. The increase is primarily related to
the increase in gross margin.
Interest expense amounted to $3,282 for the quarter as compared to $92,847 for
the same period in the prior year. For the nine month period, the interest
expense amounted to $59,899 compared with $173,098 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 has a License Agreement with Jiangsu Electronics Industries Limited
("Jiangsu"), a subsidiary of Orient Power Holdings Limited, by way of an
assignment of a previously existing License Agreement with Trabelco N.V. Orient
Power is based in Hong Kong and has an extensive portfolio of audio and video
products. This License Agreement covers North America, Central America, and
South America. Pursuant to this License Agreement, 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 products covered by this
License Agreement include various consumer electronics products. This License
Agreement is subject to renewal for additional 3 year periods.
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The Company also had a License Agreement with Trabelco N.V. covering certain
European countries. Although no sales were ever reported under this License
Agreement, certain minimum royalties were due for calendar year 1998. This
License Agreement expired on December 31, 1998.
Effective July 1, 1998, the Company entered into a License Agreement and an
Addendum thereto with Logitech Electronics Inc. ("Logitech") of Ontario, Canada
whereby the Company licensed to Logitech the right to sell multimedia/computer
speakers under the Koss brand name. This License Agreement covers North America
and certain countries in South America and Europe. This License Agreement
extends for 5 years and includes a 5 year renewal option at the Company's
discretion. This License Agreement requires royalty payments by Logitech through
June 30, 2003, subject to certain minimum royalty amounts due each year.
Year 2000 Readiness Disclosure
The Company has implemented a comprehensive Year 2000 initiative to identify
and address issues associated with the Year 2000. A team of internal staff is
managing the initiative, along with the assistance of outside consultants.
The Company has completed the assessment phase of both its information
technology and non-information technology systems associated with the Year 2000.
The assessment indicated that several of the Company's systems would be
vulnerable to Year 2000 issues. The Company is in the process of remedying the
systems identified as vulnerable during the assessment phase.
The Company is also working with its significant suppliers and financial
institutions to ascertain whether or not those parties have appropriate plans
to remedy Year 2000 issues with their systems that may impact the Company's
operations. The Company has communicated in writing, a Year 2000 compliance
letter and survey, to all our customers doing over $10,000 annually in sales,
along with all significant suppliers and vendors. The Company does not
anticipate any adverse material effects due to its ability to deliver product
to customers.
The Company's Year 2000 initiative is under way, and is expected to be
completed prior to December 31, 1999. The Company has not identified a need to
develop an extensive contingency plan for non-remedied issues. In the event of
any adverse conditions caused by unforeseen Year 2000 issues, the Company will
devote the necessary resources to resolve any significant Year 2000 issues in a
timely manner.
The Company's assessments to date indicate the cost of the Year 2000 initiative
is estimated to be $80,000.
The cost of the project and the date the Company believes it will be complete
are forward-looking statements and are based on the Company's best estimates.
Factors that may cause the actual results to differ include the availability
and retention of skilled professionals, and the ability to identify all Year
2000 issues.
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: /s/ Michael J. Koss
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Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated: /s/ Sue Sachdeva
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Sue Sachdeva
Vice President--Finance
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3-MOS
JUN-30-1999
JUL-01-1998
MAR-31-1999
639,538
0
8,013,459
0
14,673,691
24,702,174
1,805,140
0
27,711,497
1,828,402
0
0
0
33,071
23,021,210
27,711,497
25,097,558
25,097,558
14,718,094
14,718,094
5,964,629
0
41,324
5,184,743
2,053,509
3,131,234
0
0
0
3,131,234
.99
.98
