e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2005
OR
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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)
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Delaware
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391168275 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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4129 North Port Washington Avenue, Milwaukee, Wisconsin
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53212 |
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(Address of principal executive offices
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(Zip Code) |
Registrants telephone number, including area code: (414) 964-5000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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NONE
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NONE |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.005 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 þ NO o
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 registrants 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. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12(b)-2). YES o NO þ
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
The aggregate market value of the common voting stock held by nonaffiliates of the registrant
as of December 31, 2004 was approximately $14,119,495 (based on the $19.46 per share closing price
of the Companys common stock as reported on the NASDAQ Stock Market on December 31, 2004). In
determining who are affiliates of the Company for purposes of this computation, it is assumed that
directors, officers, and any persons who held on December 31, 2004 more than 5% of the issued and
outstanding common stock of the Company are affiliates of the Company. The characterization of
such directors, officers, and other persons as affiliates is for purposes of this computation only
and should not be construed as a determination or admission for any other purpose that any of such
persons are, in fact, affiliates of the Company.
On September 22, 2005, 3,744,525 shares of voting common stock were outstanding.
Documents Incorporated by Reference
Part III incorporates by reference information from Koss Corporations Proxy Statement for its 2005
Annual Meeting of Stockholders filed with the Commission under Regulation 14A within 120 days of
the end of the fiscal year covered by this Report.
2
TABLE OF CONTENTS
PART I
Item 1. BUSINESS.
GENERAL
As used herein, the term Company means Koss Corporation and its consolidated subsidiaries, unless
the context otherwise requires. The Company was incorporated in Delaware in 1971.
The Company operates in the audio/video industry segment of the home entertainment industry through
its design, manufacture and sale of stereo headphones and related accessory products.
The Company does not report its finances by segment, as the Companys principal business line is
the design, manufacture, and sale of stereo headphones and related accessories. The percentage of
total revenues related to this central business line over the past three fiscal years was:
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2005 |
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2004 |
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2003 |
Stereophones |
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100 |
% |
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100 |
% |
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100 |
% |
The Companys products are sold through audio specialty stores, the Internet, direct mail catalogs,
regional department store chains, discount department stores, military exchanges, prisons, and
national retailers under the Koss name and dual label. The Company also sells products to
distributors for resale to school systems, and directly to other manufactures for inclusion with
their own products. The Company has more than 1,600 domestic dealers and its products are carried
in approximately 16,000 domestic retail outlets. International markets are served by domestic
sales representatives and a sales office in Switzerland which utilizes independent distributors in
several foreign countries.
In May of 2003, the Company purchased the assets of ADDAX Sound, a company that specializes in the
development of communications headsets. ADDAX is principally a design and source operation
utilizing contract manufacturers in Asia. The assets of ADDAX included inventory, receivables,
tooling, furniture and fixtures as well as patents on designs for telecommunications products.
ADDAX has been renamed Bi Audio and services the public safety market through distributors. Bi
Audio develops and sells headsets and microphones for communication via two-way radio by police,
fire, and security personnel. Bi Audio also sells a line of telephone headsets for the small
office and home office as well as for the call center industry. These products are developed on an
original equipment manufacturer (OEM) basis and are sold to other companies for distribution at
retail or direct to consumers.
Bi Audio also markets headsets to be used with cellular telephones and cordless home telephones.
These products are developed on an OEM basis for sale to other companies who redistribute the
products through retail channels or direct to consumers.
The Bi Audio category of products represents less than 5% of the Companys total revenue and is
further split into products for three categories Public Safety, Call Center, and Cellular
telephone.
Ninety five percent of the Companys products are stereo headphones for listening to music. The
products are not significantly differentiated by channel or application with the exception of
products sold to school systems, which sometimes include a microphone. Sales in this application
represent less than 5% of the Companys revenue. There are no other product line differentiations
other than the quality of
3
the sound produced by the stereo headphone itself, which is highly subjective. The business could
also be classified by distribution channel. Consumers purchase more than 95% of the Koss
stereophone range of product through some form of retail channel or reseller.
The Company maintains a sales office in Switzerland. The Company sells its products to independent
distributors in countries outside the United States (see Foreign Sales section below), including
Western and Eastern Europe, Scandinavia, The Middle East, Africa, Asia, South America, Latin
America, the Caribbean, and Mexico. The Company sells products in the Canadian market directly to
retailers, and also through a distributor who services smaller specialty accounts. During the last
three fiscal years, foreign sales of all Koss products, including the products of Bi Audio (since
its acquisition), were as follows:
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2005 |
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2004 |
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2003 |
Percentage of Revenue |
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Derived from the Export of
Koss Products |
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28 |
% |
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15.7 |
% |
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12.5 |
% |
Management believes that it has sources of raw materials that are adequate for its needs.
No employment or compensation agreement exists between the Company and its dealers. The Company
has two independent manufacturers representatives for distribution. The Company typically signs
one year contracts with these manufacturers representatives. These agreements are seldom renewed
in writing.
The Company has a manufacturers representative agreement with a firm in Detroit to work
exclusively in the automotive arena. The sales from these agreements accounted for approximately
12% of the Companys total revenue in 2005. The automotive representative was paid 5% for all
business in this area in 2005, and will be paid 4% in 2006, 3% in 2007, and 2% thereafter.
The Companys remaining agreements with distributors, past or present, pertain to geographic
countries without compensation attached. The Company has the right to terminate these agreements
with foreign distributors without cause.
INTELLECTUAL PROPERTY
John Koss has been recognized for creating the stereophone industry with the first SP3 stereophone
in 1958. The Company regularly applies for registration of its trademarks in many countries around
the world in which it does business, and over the years the Company has had numerous trademarks
registered and patents issued in countries in North America, South America, Asia, Europe, Africa,
and Australia. The Company currently has 193 trademarks registered in 65 countries around the
world and patents in 25 countries. The Company has trademarks to protect the brand name Koss and
its logo on its products. These trademarks are maintained throughout the countries in which the
Company sells its products. The Company also holds many design patents that protect the unique
visual appearance of some of its products. These trademarks and patents are important to
differentiate the Company from its competitors. Certain of the Companys trademarks are of
material value and importance to the conduct of its business. The Company considers protection of
its proprietary developments important; however, the Companys business is not, in the opinion of
management, materially dependent upon any single trademark or patent.
4
See Part II, Item 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS herein for information relating to the Companys license agreements.
SEASONALITY
Although retail sales of consumer electronics are typically higher during the holiday season,
stereophones have also seen increased interest as gift items over the years. Management of the
Company is of the opinion that its business and industry segment are no longer seasonal as
evidenced by the fact that 47% of sales occurred in the first six months of the fiscal year ended
June 30, 2005, and 53% of sales occurred in the latter six months of that fiscal year. Management
believes that the reason for this level performance of sales to retailers is related to the fact
that stereo headphones have become replacement items for portable electronic products. Therefore
upgrades and replacements appear to have as much interest over the course of the year as gifts of
stereophones.
WORKING CAPITAL AND BACKLOG
The Companys 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. From time to time, although rarely, the Company may extend
payment terms to its dealers for a special promotion. For instance, the Company has in the past
offered a 90-120 day payment period for certain customers, such as computer retailers and office
supply stores. Based on historical trends, management does not expect these practices to have any
material effect on net sales or net income. The Companys current backlog of orders is not deemed
material in relation to net sales during fiscal 2005.
CUSTOMERS
The Company markets a line of products used by consumers to listen to music. The Company
distributes these products through retail channels in the U.S. and independent distributors
throughout the rest of the world. The Company markets its products to approximately 2,000
retailers and distributors worldwide. During 2005, the Companys sales to its largest single
customer, Wal-Mart Stores Inc., were approximately 15% of total gross sales. The Company is
dependent upon its ability to retain a base of retailers and distributors to sell the Companys
line of products. Loss of retailers and distributors means loss of product placement. The Company
has broad distribution across many channels including specialty stores, mass merchants, electronics
stores, and computer retailers. Management believes that any loss of Wal-Marts revenues would be
partially offset by a corresponding decrease, on a percentage basis, in expenses, thereby partially
reducing the impact on the Companys operating income. The five largest customers of the Company
(including Wal-Mart) accounted for approximately 42% of total sales in 2005.
COMPETITION
The Company focuses on the headphone industry. The acquisition of ADDAX in 2003, now Bi Audio,
expands the Companys investment into additional categories of headsets, headphones, and
stereophones. 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 Companys single product focus is unique in the marketplace. The
extent to which retailers view the Company as an innovative vendor of high quality headphone
products, and a provider of excellent after sales customer service, is the extent to which the
Company maintains a competitive advantage. The Company relies upon its unique sound, quality
workmanship, brand identification, engineering skills, and customer service to maintain its
competitive position.
5
RESEARCH AND DEVELOPMENT
The amount spent on engineering and research activities relating to the development of new products
or the improvement of existing products was $173,000 during fiscal 2005 as compared with $125,000
during fiscal 2004 and $134,000 during fiscal 2003. These activities were conducted by both
Company personnel and outside consultants.
ENVIRONMENTAL MATTERS
The Company believes that it has materially complied with all currently existing federal, state and
local statutes and regulations regarding environmental standards and occupational safety and health
matters to which it is subject. During fiscal 2005, 2004 and 2003, the amounts incurred in
complying with federal, state and local statutes and regulations pertaining to environmental
standards and occupational safety and health laws and regulations did not materially affect the
Companys earnings or financial condition.
EMPLOYEES
As of June 30, 2005, the Company employed 95 people. The Company also utilizes temporary personnel
to meet seasonal production demands.
FOREIGN SALES
International markets are serviced through manufacturers representatives or independent
distributors with product produced in the United States. The countries are too numerous to mention
here but include countries in the following regions: Western and Eastern Europe, Scandinavia, The
Middle East, Africa, Asia, South America, Latin America, the Caribbean, and Mexico. The Company
sells products in the Canadian market directly to retailers, and also through a distributor who
services smaller specialty accounts.
In the opinion of management, the Companys competitive position and risks relating to the conduct
of its business in such markets are comparable to the domestic market. In addition, the
governments of foreign nations may elect to erect trade barriers on imports. The creation of such
barriers would reduce the Companys revenue and profit. In addition, any fluctuations in currency
exchange rates could affect the pricing of the Companys products and cause customers to purchase
lower-priced, less profitable products. For further information, see Part II, Item 7 and Note 11
to the consolidated financial statements accompanying this Form 10-K.
The Company operates a small sales office in Switzerland to service the international export
marketplace. The Company is aware of no material risks in maintaining this operation. Loss of
this office would result in a transfer of sales and marketing responsibility. The Company uses
contract manufacturing facilities in the Peoples Republic of China, Taiwan, and South Korea. These
independent supplier entities are distant from the Company, which means that we are at risk of
business interruptions due to natural disaster, war, disease, and government intervention through
tariffs or trade restrictions. The Company maintains finished goods inventory in its US facility
to mitigate this risk. Finished goods inventory is stocked at an average of approximately 90 days
demand per item. Recovery of a single facility through a replacement of supplier in the event of a
disaster or suspension of supply could take 120 days. The Company believes that it could restore
production of its top twelve selling models (which represent 75% of the Companys sales revenue)
within 1 year. The Company is also at risk if the trade restrictions are introduced on its
products based upon country of origin. In addition, any increase in tariffs and freight charges
would not be acceptable to pass along to the Companys customers and would directly impact the
Companys profits.
6
AVAILABLE INFORMATION
Our internet website is http://www.koss.com. The Company makes available free of charge through
its internet website the Companys annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, Proxy Statements and all amendments to those reports as soon as
reasonably practicable after they are electronically filed with (or furnished to) the Securities
and Exchange Commission (SEC). Reports, Proxy Statements and other information regarding the
Company are also contained on the SECs internet website at http://www.sec.gov.
Item 2. PROPERTIES.
The Company leases its main plant and offices in Milwaukee, Wisconsin from its Chairman, John C.
Koss. On May 28, 2003, the lease was renewed for a period of five years, and is being accounted
for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per
year. At anytime during this period the Company has the option to renew the lease for an
additional five years for the period commencing July 1, 2008 and ending June 30, 2013 under the
same terms and conditions. The lease is on terms no less favorable to the Company than those that
could be obtained from an independent party. The Company is responsible for all property
maintenance, insurance, taxes, and other normal expenses related to ownership.
All facilities are in good repair and, in the opinion of management, are suitable for the Companys
business purposes.
Item 3. LEGAL PROCEEDINGS.
From time to time the Company is involved in routine litigation; however, neither the Company nor
its subsidiaries are subject to any material legal proceedings in managements opinion.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year
ended June 30, 2005.
PART II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION ON COMMON STOCK
The Companys common stock is traded on The Nasdaq Stock Market under the trading symbol KOSS.
There were approximately 779 record holders of the Companys common stock as of August 1, 2005.
This number does not include individual participants in security position listings. The quarterly
high and low sale prices of the Companys common stock for the last two fiscal years as well as
dividends paid are shown below.
7
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Per Share |
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Quarter Ended |
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High |
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Low |
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Dividend |
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September 30, 2003 |
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$ |
20.50 |
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$ |
17.50 |
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$ |
0.13 |
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December 31, 2003 |
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$ |
20.70 |
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$ |
16.25 |
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$ |
0.13 |
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March 31, 2004 |
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$ |
26.50 |
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$ |
19.50 |
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$ |
0.13 |
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June 30, 2004 |
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$ |
26.00 |
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$ |
20.38 |
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$ |
0.13 |
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September 30, 2004 |
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$ |
23.96 |
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$ |
20.00 |
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$ |
0.13 |
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December 31, 2004 |
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$ |
23.00 |
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$ |
18.15 |
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$ |
0.13 |
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March 31, 2005 |
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$ |
21.45 |
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$ |
18.25 |
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$ |
0.13 |
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June 30, 2005 |
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$ |
20.76 |
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$ |
16.80 |
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$ |
0.13 |
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The Companys stockholders are entitled to receive dividends as may be declared by the Board of
Directors and paid out of funds legally available therefore. The Company began paying dividends
for the quarter ended September 30, 2002 and has paid a dividend for each quarter since, including
the last fiscal quarter ending June 30, 2005. On June 15, 2005, the Company announced its
quarterly dividend of $0.13 per share for stockholders of record on June 30, 2005. Although the
Company anticipates it will continue to pay a quarterly dividend, the decision to pay dividends and
the amount of such dividends are within the sole discretion of the Board of Directors, who meet
quarterly. The decision to pay dividends will depend on the Companys operating results, financial
condition, tax considerations, alternative uses for such funds, and other factors the Board of
Directors deem relevant, and there can be no assurance that dividends will be paid in the future.
See Part III, Item 12 for information relating to the Companys equity compensation plan
information.
COMPANY REPURCHASES OF EQUITY SECURITIES
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Total Number of |
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Approximate Dollar |
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Total # of |
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Average |
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Shares Purchased as |
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Value of |
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Shares |
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Price Paid |
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Part of Publicly |
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Shares Available under |
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Period (2005) |
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Purchased |
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per Share |
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Announced Plan (1) |
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Repurchase Plan |
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April 1April 30 |
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$ |
2,244,421 |
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May 1May 31 |
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$ |
2,244,421 |
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June 1June 30 |
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5,000 |
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$ |
17.25 |
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5,000 |
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$ |
2,158,171 |
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(1) In April of 1995, the Board of Directors approved a stock repurchase program authorizing the
Company to purchase from time to time up to $2,000,000 of its common stock for its own account.
Subsequently, the Board of Directors periodically has approved increases in the stock repurchase
program. The most recently approved increase was for additional purchases of $2,000,000, which
occurred in October of 2004, for an aggregate maximum of $40,500,000, of which $36,521,800 had been
expended through June 30, 2005.
8
Item 6. SELECTED FINANCIAL DATA.
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June 30, 2005 |
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June 30, 2004 |
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June 30, 2003 |
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June 30, 2002 |
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June 30, 2001 |
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Net sales |
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$ |
40,286,691 |
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$ |
40,493,211 |
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$ |
33,802,634 |
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$ |
36,571,303 |
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$ |
38,609,335 |
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Income before cumulative effect
of accounting change |
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$ |
4,493,827 |
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$ |
5,448,147 |
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$ |
4,169,411 |
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$ |
5,041,343 |
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$ |
5,687,521 |
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Net income |
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$ |
4,493,827 |
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$ |
5,372,272 |
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$ |
4,169,411 |
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$ |
5,041,343 |
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$ |
5,687,521 |
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Basic earnings per common share: |
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Before cumulative effect
of accounting change |
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$ |
1.21 |
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$ |
1.45 |
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$ |
1.14 |
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$ |
1.36 |
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$ |
1.35 |
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Accounting change |
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$ |
(0.02 |
) |
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Basic earnings per
common share |
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$ |
1.21 |
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$ |
1.43 |
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$ |
1.14 |
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$ |
1.36 |
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$ |
1.35 |
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Diluted earnings per common
share: |
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Before cumulative effect
of accounting change |
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$ |
1.14 |
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$ |
1.39 |
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$ |
1.08 |
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$ |
1.28 |
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$ |
1.28 |
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Accounting change |
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$ |
(0.02 |
) |
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Diluted earnings per
common share |
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$ |
1.14 |
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$ |
1.37 |
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$ |
1.08 |
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$ |
1.28 |
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$ |
1.35 |
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Total assets |
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$ |
29,241,461 |
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$ |
25,679,556 |
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$ |
23,786,818 |
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$ |
20,326,134 |
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$ |
21,496,328 |
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Contingently redeemable
common stock |
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$ |
1,490,000 |
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$ |
1,490,000 |
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$ |
1,490,000 |
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Cash dividends per
common share |
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$ |
0.52 |
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$ |
0.52 |
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$ |
0.52 |
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See Part II, Item 7 and Consolidated Financial Statements and Notes to the Consolidated
Financial Statements for more information relating to Selected Financial Data.
9
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2005, cash provided by operations was $7,963,037. Working capital was $17,532,194 at
June 30, 2005. The net increase in working capital of $724,960 from June 30, 2004 represents
primarily the net effect of an increase in cash, accounts payables, income taxes and accrued
liabilities. The increase in the Companys accounts receivable is attributable to higher sales
experienced in the last quarter.
Capital expenditures for new property and equipment (including production tooling) were $1,170,494,
$1,344,169, and $627,567, in fiscal 2005, 2004, and 2003, respectively. Depreciation charges
totaled $816,857, $590,414, and $569,776, for the same fiscal years. Budgeted capital expenditures
for fiscal 2006 are $1,723,700. The Company expects to generate sufficient funds through
operations to fund these expenditures.
Stockholders investment increased to $22,121,242 at June 30, 2005 from $21,089,787 at June 30,
2004. The increase reflects net income of $4,493,827. On June 15, 2005, the Company declared a
quarterly cash dividend of $0.13 per share, $486,918 payable on July 15, 2005 to stockholders of
record on June 30, 2005, which is recorded as dividends payable.
The Companys credit facility matures on November 1, 2005. This unsecured 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 common stock pursuant to the Companys
stock repurchase program. Borrowings under this credit facility bear interest at the banks 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. The maximum leverage of the Company, which consists of the ratio of its total
liabilities to its tangible net worth, must not exceed 1.50 to 1.0. The tangible net worth of the
Company must not fall below $12.5 million at any time. The fixed charge ratio of the Company,
which consists of the ratio of its earnings before interest, income taxes, depreciation,
amortization, and other non-cash charges to its total interest expense, must not be less than 2.10
to 1.0. The current ratio of the Company, which is the ratio of its current assets to its current
liabilities, must exceed 2.50 to 1.0. The Company has been and is well within these requirements.
However, if the Company at some point in the future fails to meet the financial covenants, the
lender may accelerate the debt and allow creditors to foreclose on the assets. The Company uses
its credit facility from time to time, although there was no utilization of this credit facility at
June 30, 2005 or June 30, 2004.
In April of 1995, the Board of Directors approved a stock repurchase program authorizing the
Company to purchase from time to time up to $2,000,000 of its common stock for its own account.
Subsequently, the Board of Directors periodically has approved increases in the stock repurchase
program. The most recently approved increase was for additional purchases of $2,000,000, which
occurred in October of 2004, for an aggregate maximum of $40,500,000. The Company intends to
effect 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. The Company will continue to repurchase its shares from the market when the board
determines the shares to be undervalued. The Company may elect to use the purchase of these shares
to minimize the dilutive effects to its stockholders when the Companys stock is used in
acquisitions as consideration. The Company has no immediate plans to make another acquisition at
this time.
10
For fiscal 2005, the Company purchased 99,250 shares of its common stock at an average net price of
$22.33 per share, for a total purchase price of $2,216,875. As of the date hereof, the Companys
Board of Directors has authorized the repurchase by the Company of up to $3,978,200 in Company
common stock at the discretion of the Chief Executive Officer of the Company.
From the commencement of the Companys stock repurchase program through June 30, 2005, the Company
has purchased a total of 5,074,084 shares for a total gross purchase price of $42,998,735
(representing an average gross purchase price of $8.48 per share) and a total net purchase price of
$36,521,800 (representing an average net purchase price of $7.20 per share). The difference
between the total gross purchase price and the total net purchase price is the result of the
Company purchasing from certain employees shares of the Companys stock acquired by such employees
pursuant to the Companys stock option program. In determining the dollar amount available for
additional purchases under the stock repurchase program, the Company uses the total net purchase
price paid by the Company for all stock purchases, as authorized by the Board of Directors.
2005 RESULTS OF OPERATIONS COMPARED WITH 2004
Net sales for 2005 were $40,286,691 compared with $40,493,211 in 2004, a decrease of $206,520 or
less than 1%. This was due to the Company experiencing a decline in segments of its domestic
retail sales , which was partially offset by growth in segments of Europe where shipments were up
82% for the fiscal year.
Gross profit, as a percentage of net sales, was $15,069,931 or 37% in 2005 compared with
$15,961,953 or 40% in 2004. The decrease is primarily due to the Company experiencing higher
freight costs on incoming shipments of supplies.
Selling, general, and administrative expenses for 2005 were $8,544,383 compared with $8,089,765 in
2004, an increase of $454,618 or 6%. The increase was a result of the Company experiencing higher
marketing expenses associated with participation in the Consumer Electronics Show held in January
2005.
Income from operations was $7,395,828 in 2005 compared with $8,965,177 in 2004, a decrease of 21%.
Interest income was $64,795 in 2005 compared with $22,311 in 2004, an increase of 191%. Interest
income fluctuates in relation to cash balances on hand throughout the year and fluctuations in
interest rates earned.
Royalty income was $805,485 in 2005 compared with $1,071,638 in 2004, a decrease of 25%. The
decrease in royalty income was primarily a result of the Company terminating a License Agreement
with Jiangsu Electronics Industries Limited (Jiangsu). Effective November 23, 2004 the Company
terminated the License Agreement dated November 15, 1991, as subsequently amended between the
Company and Jiangsu. As a result of the termination, other than Jiangsus post-termination right
to sell Company-approved licensed products, as set forth in the License Agreement, Jiangsu no
longer has the right to use certain Company trademarks in connection with the manufacture,
marketing and distribution of Jiangsus products under this license agreement. Royalty income on
all previously approved products, which are already in the pipeline, will still be owed to the
Company.
Effective June 30, 2003, the Company entered into a License Agreement (the License Agreement)
with Sonigem Products, Inc. (Sonigem) of Ontario, Canada whereby the Company licensed to Sonigem
the right to sell video and communications products under the Koss brand name. This License
Agreement covers Canada, requiring royalty payments by Sonigem through June 30, 2010, subject to
certain minimum annual royalty amounts. To further enhance the relationship between the Company
and
11
Sonigem, on June 30, 2005, the Company announced the extension of its licensing agreement for
electronics products with Sonigem. The Amendment to the License Agreement with Sonigem was
effective August 1, 2005 (the Amendment). The Amendment provides Sonigem with the exclusive
right and license to use certain Company trademarks in Canada in connection with the manufacture,
production, distribution and sale of an increased number of licensed products, with the prior
approval of the Company. In consideration for these increased rights, the Amendment also provides
for increased minimum royalty payments payable to the Company, which may partially offset the
previously discussed reductions in royalty income.
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, requiring royalty payments
by Logitech through June 30, 2008, subject to certain minimum annual royalty amounts.
The provision for income taxes was $2,902,001 and $3,517,030 in 2005 and 2004, respectively. The
effective tax rate was 39% in 2005 and 39% in 2004.
2004 RESULTS OF OPERATIONS COMPARED WITH 2003
Net sales for 2004 were $40,493,211 compared with $33,802,634 in 2003, an increase of $6,690,577 or
20%. This was due to the Company experiencing growth in segments of its domestic retail sales and
Europe where shipments were up 72% for the fiscal year.
Gross profit, as a percentage of net sales, was $15,961,953 or 39% in 2004 compared with
$13,848,039 or 41% in 2003. The slight decrease is due to shifts in the Companys model mix.
Selling, general, and administrative expenses for 2004 were $8,089,765 compared with $7,737,030 in
2003, an increase of $352,735 or 5%. The increase was a result of the Company experiencing higher
selling expenses associated with higher sales for the fiscal year.
Income from operations was $7,872,188 in 2004 compared with $6,111,009 in 2003, an increase of 28%.
Interest income was $22,311 in 2004 compared with $12,711 in 2003, an increase of 76%. Interest
income fluctuates in relation to cash balances on hand throughout the year and fluctuations in
interest rates earned. Interest expense for 2004 was $960 compared with $14,572 in 2003. The
decrease in interest expense is due to the Companys lack of borrowing activity under its unsecured
line of credit during the fiscal year.
On May 1, 2003, the Company acquired certain assets of ADDAX Sound Company (ADDAX) in exchange
for 19,875 shares of common stock of the Company (value on May 1, 2003 of $317,603 based upon a
market price of $15.98) plus $100 in cash and assumed certain liabilities of ADDAX.
Royalty income was $1,071,638 in 2004 compared with $755,364 in 2003, an increase of 42%. The
increase in royalty income was primarily a result of increases in sales by licensees under certain
royalty agreements with Jiangsu, Sonigem, and Logitech.
The provision for income taxes was $3,517,030 and $2,695,101 in 2004 and 2003, respectively. The
effective tax rate was 39% in 2004 and 39% in 2003
12
OFF-BALANCE SHEET FINANCING
The Company has no off-balance sheet financing arrangements.
DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS
The Company has the following long term lease obligations as of June 30, 2005:
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Obligations Due by Period (in thousands) |
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Less than 1 year |
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1-3 years |
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3-5 years |
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5 years |
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Operating Lease
Obligations |
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$ |
3,420 |
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$ |
380 |
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$ |
1,140 |
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1,900 |
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DISCLOSURE ABOUT CERTAIN TRADING ACTIVITIES THAT INCLUDE NON-EXCHANGE TRADED CONTRACTS
ACCOUNTED FOR AT FAIR VALUE
The Company does not have any trading activities that include non-exchange traded contracts
accounted for at fair value.
DISCLOSURE ABOUT EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
The Company has an agreement with its Chairman, John C. Koss, in the event of his death, at the
request of the executor of his estate, to repurchase his Company common stock from his estate. 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 will be
sufficient to provide proceeds which are the lesser of $2,500,000 or the amount of estate taxes and
administrative expenses incurred by the Chairmans estate. The Company may elect to pay the
purchase price in cash or may elect to pay cash equal to 25% of the total amount due and to execute
a promissory note for the balance, payable over four years, at the prime rate of interest. The
Company maintains a $1,150,000 life insurance policy to fund a substantial portion of this
obligation.
In 1991, the Board of Directors agreed to continue the Chairmans current base salary in the event
he becomes disabled prior to age 70. After age 70, he shall receive his current base salary for
the remainder of his life, whether he becomes disabled or not. The Chairman has turned 70. The
Company has a deferred compensation liability of $400,000 recorded as of June 30, 2005, and
$520,000 as of June 30, 2004 for this arrangement.
The Company leases its main plant and offices in Milwaukee, Wisconsin from its Chairman. On May
28, 2003, the lease was renewed for a period of five years, and is being accounted for as an
operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per year. At
anytime during this period the Company has the option to renew the lease for an additional five
years for the period commencing July 1, 2008 and ending June 30, 2013 under the same terms and
conditions. In the opinion of the independent directors of the Board, 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 of the property.
All facilities are in good repair and, in the opinion of management, are suitable for the Companys
purposes.
13
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
The Companys more critical accounting policies include revenue recognition, royalty income, and
the use of estimates (which inherently involve judgment and uncertainties) in valuing inventory and
accounts receivable.
Revenue Recognition
The Company recognizes revenue when all of the following criteria are met: persuasive evidence of
an arrangement exists; delivery has occurred (either FOB shipping point or delivery taken at the
Companys dock); the sellers price to the buyer is fixed and determinable (pricing is finalized
through the purchase order); and collectibility is reasonably assured. These criteria are
generally satisfied and the Company recognizes revenue upon shipment. The Company also offers
certain of its customers the right to return products that do not meet the standards agreed with
the customer. The Company continuously monitors such product returns and while such returns have
historically been minimal, the Company cannot guarantee that they will continue to experience the
same return rates that they have experienced in the past. Any significant increase in product
quality failure rates and the resulting credit returns could have a material adverse impact on the
Companys operating results for the period or periods in which such returns materialize.
The Company provides for certain sales incentives, which include sales rebates. The Company
records a provision for estimated incentives based upon the incentives offered to customers on
product related sales in the same period as the related revenues are recorded. The Company also
records a provision for estimated sales returns and allowances on product related sales in the same
period as the related revenues are recorded. These estimates are based on historical sales
returns, analysis of credit memo data and other known factors. If the historical data the Company
uses to calculate these estimates does not properly reflect future returns, adjustments may be
required in future periods.
Products sold are covered by a lifetime warranty. The Company accrues a warranty reserve for
estimated costs to provide warranty services. The Companys estimate of costs to service its
warranty obligations is based on historical experience and expectation of future conditions. To
the extent the Company experiences increased warranty claim activity or increased costs associated
with servicing those claims, its warranty accrual will increase accordingly and result in decreased
gross profit.
Royalty Income
The Companys net income is significantly affected by the levels of royalty income generated in any
given period. Royalty income is recognized when earned under the terms of the Companys license
agreements. These agreements require minimum annual royalty payments. The Company currently has
two royalty agreements, which expire in 2008 and 2010, respectively. The inability of the Company
to negotiate favorable royalty arrangements and renew current agreements could have a material
adverse impact on the Companys results for the period. Based upon the favorable relationships the
Company has with the parties under these license agreements, termination, non-renewal or a
renegotiation toward more unfavorable terms under the current agreements is not considered likely.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based
upon payment history and the customers current credit worthiness, as determined by the review of
the customers current credit information. The Company continuously monitors collections and payments
from customers and maintains a provision for estimated credit losses based upon the Companys
14
historical experience and any specific customer collection issues that have been identified. The
Company values accounts receivable net of an allowance for uncollectible accounts. The allowance
is calculated based upon the Companys evaluation of specific customer accounts where the Company
has information that the customer may have an inability to meet its financial obligations
(bankruptcy, etc.). In these cases, the Company uses its judgment, based on the best available
facts and circumstances, and records a specific reserve for that customer against amounts due to
reduce the receivable to the amount that is expected to be collected. These specific reserves are
re-evaluated and adjusted as additional information is received that impacts the amount reserved.
However, the ultimate collectibility of a receivable is dependent upon the financial condition of
an individual customer, which could change rapidly and without advance warning.
Inventories
The Company values its inventories at the lower of cost or market. Cost is determined using the
last-in, first-out method. Valuing inventories at the lower of cost or market requires the use of
estimates and judgment. Our customers may cancel their orders or change purchase volumes. Any of
these, or certain additional actions, could create excess inventory levels, which would impact the
valuation of our inventories. The Company continues to use the same techniques to value inventory
as have been used in the past. Any actions taken by our customers that could impact the value of
our inventory are considered when determining the lower of cost or market valuations. The Company
regularly reviews inventory quantities on hand and records a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and production requirements
for the next twelve months. If the Company is not able to achieve its expectations of the net
realizable value of the inventory at its current value, the Company would have to adjust its
reserves accordingly.
RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
During May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which establishes standards for the classification
and measurement of certain financial instruments with characteristics of both liabilities and
equity. The Company adopted SFAS No. 150 effective July 1, 2003. Upon adoption, the Company
recorded a derivative liability for the fair value of a written put option of $125,000 on the
balance sheet and a cumulative effect of change in accounting principle of $75,875 (net of the tax
effect equal to $49,125) on the income statement. In addition, a contingently redeemable equity
interest of $1,490,000, as of July 1, 2003, was reclassified into equity.
During December 2004, the FASB issued SFAS No. 123R, Share-Based Payments, which changed the
accounting for equity compensation programs. Under SFAS No. 123R, companies that award share-based
payments to employees, including stock options, must begin to recognize the expense of these awards
in the financial statements at the time the employee receives the award. As allowed by SFAS 123
and SFAS 148, the Company elected to follow APB Opinion No. 25 in accounting for its stock option
plan until the effective date of SFAS 123R. The accounting as provided by SFAS 123R will be
effective for the Company beginning July 1, 2005, which is the beginning of the Companys next
fiscal year.
Under APB 25s intrinsic value method, no compensation cost for employee stock options is
recognized. Accordingly, the adoption of SFAS 123Rs fair value method will have an impact on the
Companys results of operations, although it will not have an impact on the overall financial
position. The impact of the adoption of SFAS 123R will depend on levels of share-based payments
granted in the future and is
expected to reduce pre-tax earning by approximately $330,000 in fiscal 2006. SFAS 123R also
requires the benefits of tax deductions in excess of recognized compensation cost to be reported as
a financing
15
cash flow, rather than as an operating cash flow as required under the current
standards. This requirement will reduce the net cash provided by operating activities and increase
the net cash from financing activities in periods after adoption. While the Company cannot
estimate what these amounts will be in the future because it will depend on, among other things,
when employees exercise stock options, the amount of cash flows from operating activities in prior
periods for such excess tax deductions were approximately $105,000, $330,000 and zero in fiscal
years 2005, 2004 and 2003, respectively.
RISK FACTORS
Investing in our common stock involves a high degree of risk. Any of the following risks could have
a material adverse effect on our financial condition, liquidity, and results of operations or
prospects, financial or otherwise. Reference to these factors in the context of a forward-looking
statement or statements will be deemed to be a statement that any one or more of the following
factors may cause actual results to differ materially from those in such forward-looking statement
or statements.
REDUCTION IN PRESENT LEVELS OF CASH FLOW COULD ADVERSELY AFFECT THE COMPANYS BUSINESS
The Companys primary source of liquidity over the past twelve months has been operating cash
flows. The Companys future cash flows from operations (on both a short term and long term basis)
are dependent upon, but not limited to:
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the Companys ability to attract new customers that will sell the Companys
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the Companys ability to retain the Companys existing customers at the level of
sales previously produced, |
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the volume of sales for these customers, |
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the loss of business of one or more primary customers, |
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changes in types of products that the customers purchase in their sales mix, |
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the volume of royalty income paid to the Company by its licensees based upon the
terms of each royalty agreement, including the inability to negotiate favorable
royalty arrangements and renew current arrangements with certain existing favorable
terms, |
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poor or deteriorating economic conditions which would directly impact the
ability of the Companys customers to remain in business and pay for their products
on a timely basis, |
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managements ability to hold the line on any requests for increases in material
or labor cost increases, and |
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the ability to collect in full and in a timely manner, amounts due to the
Company. |
In addition, as noted above, the Companys cash flow is also dependent, to some extent, upon
the ability to maintain operating margins. If there were a general downturn in economic
conditions or
16
other events that caused the Companys customers to turn to lower-priced,
lower-margin products, the Companys cash flow and profitability could be materially and
adversely affected.
FAILURE TO ATTRACT AND RETAIN CUSTOMERS TO SELL THE COMPANYS PRODUCTS COULD ADVERSELY AFFECT SALES
VOLUME AND FUTURE PROFITABILITY
The Company markets a line of products used by consumers to listen to music. The Company
distributes these products through retail channels in the U.S. and independent distributors
throughout the rest of the world. The Company is dependent upon the Companys ability to retain an
existing base of customers to sell the Companys line of products. Loss of customers means loss of
product placement. The Company has broad distribution across many channels including specialty
stores, mass merchants, electronics stores and computer retailers. Since distribution is broadly
based, any loss of a customer directly translates into a reduction in sales volume which can only
be replaced by replacing a similar number of representative retail outlets. The inability of the
Companys sales and marketing staff to obtain new distribution outlets translates into a lack of
future growth and possibly a setback in sales volumes when loss of current customers occurs. For
example, the loss of a customer representing 10% of the Companys business would translate into a
reduction in revenues of up to 10% based upon the point through the fiscal year that the customer
was lost. Attracting a new customer during the course of a fiscal year could have a positive
impact or simply replace an account which has been lost. In addition, a customer can decide to
make a change in the models that it decides to offer for sale. Such changes can take place
arbitrarily throughout the course of a year which can cause reductions in sales revenues in
proportion to the number of retail outlets that the store represents in the market. The Company
may not be able to maintain customers or model selections and therefore experience a reduction in
its sales revenue until a model is restored to the mix or a customer is replaced by a new customer.
A reduction in sales volume would cause a reduction in profitability. The Companys failure to
retain existing customers, obtain new customers or develop new product lines that customers would
choose to offer to consumers could significantly affect the Companys future profitability. The
loss of business of one or more principal customers or a change in the sales volume from a
particular customer could have a material adverse effect on the Companys sales volume and
profitability.
SHIFT IN CUSTOMER SPECIFICATIONS TO LOWER PRICED ITEMS CAN REDUCE PROFIT MARGINS NEGATIVELY
IMPACTING PROFITABILITY
The Company sells a line of products with a suggested retail price ranging from less than $10 to
$1,000. The gross margin for each of these models is unique in terms of percentages. The price
range of the products also produces a different level of actual dollar contribution per unit. For
example a product with a gross margin contribution of 50% might yield a $5.00 contribution for one
item, while another item may feature a 30% gross margin which could yield $50.00. The Company
finds the low priced portion of the market most competitive and therefore most subject to pressure
on gross margin percentages, which tends to lower profit contributions. Retail preference for
lower priced items can reduce profit margins and contributions. The risk is that a shift in retail
customer specifications toward lower priced items can lead to lower gross margins and lower profit
contributions per unit of sale. Due to the range of products that the Company sells, the product
sales mix can produce a variation in terms of a range of profit margins. Some customers sell a
limited range of products that yield lower profit margins than others. Most notably, the budget
priced headphone segment of the market below $10.00 retail which is distributed through computer
stores, office supply stores, and mass market retailers tend to yield the lowest gross margins. An
increase in business with these types of accounts, if coupled with a simultaneous reduction in
sales to customers with higher gross margins would reduce profit margins and profitability.
17
POOR ECONOMIC CONDITIONS CAN RESTRICT OR LIMIT PRODUCT PLACEMENT, SALES AND REPLENISHMENT WHICH
COULD DECREASE PROFITS
Deteriorating or weak economic conditions, or a forecast for the same, can trigger changes in
inventory stocking at retail. This may in turn lead to a reduction in model offerings and to out
of stock situations. If a retail customer of the Company does not have adequate stocks of the
Companys products to offer for sale in a retail store, consumers may choose another competitive
model instead. Customers operating retail stores anticipate future sales demands and inventory
products accordingly. Whenever a general economic slowdown occurs, at both the domestic or foreign
level, sales volume levels and re-orders change. These changes directly impact the Companys sales
and profitability. The Company is not in a position to determine how it will be affected by these
circumstances, how extensive the effects may be, or for how long the Company may be impacted by
these circumstances. The Companys customers respond to changes in economic conditions and any
adverse changes in economic conditions can therefore restrict product placement, availability,
sales, replenishment and ultimately profitability. These conditions exist domestically and
internationally.
MANAGEMENT IS SUBJECT TO DECISIONS MADE OUTSIDE ITS CONTROL WHICH COULD DIRECTLY AFFECT FUTURE
PROFITABILITY
Retail customers determine which products they will stock for resale. The Company competes with
other manufacturers to secure shelf space in retail stores for the Companys products. During the
course of a year, changes in the customers management personnel can ultimately lead to changes in
the stock assortment offered to consumers. These changes are often arbitrary. In addition to
changes in personnel within the Companys customers, it is also possible that a strategic decision
can be made by a retail customer to consolidate vendors, or to discontinue certain product
categories altogether. In these instances, the Companys management team may not able to convince
customers to reverse such decisions. The Companys management team is also engaged in the
effective procurement, assembly, and manufacture of products. The ability to negotiate with
suppliers, maintain productivity, and hold the line on cost increases can be subjected to pressures
outside the control of management. For example, increases in fuel costs can increase rates of
freight. Increases of this nature can seldom be avoided and the Company may not be able to pass
such increases along to its customers. Managements effective control of the manufacturing
processes will have a direct impact on the Companys future profitability. The Company regularly
makes decisions that affect production schedules, shipping schedules, employee levels, and
inventory levels. The Companys ability to make effective decisions in managing these areas has a
direct effect on future profitability.
ACCOUNTS RECEIVABLE AMOUNTS DUE FROM OUR CUSTOMERS CAN BE LOST AS A RESULT OF CUSTOMER BANKRUPTCY,
OPERATIONAL DIFFICULTY, OR FAILURE TO PAY NEGATIVELY IMPACTING FUTURE PROFITABILITY
The Company has significant accounts receivable or other amounts due from the Companys customers
or other parties. The accounts receivable balance at the end of the last 4 quarters averaged
approximately $8 million. Terms of payment for customers generally range from cash in advance to
net 90 day credit terms. These credit arrangements are negotiated at unspecified and irregular
intervals. The largest customers generate the largest receivable balances. If a customer develops
operational difficulty it is not uncommon to temporarily suspend payment to vendors. The Company
is subject to this risk in the retail marketplace. From time to time a customer may develop severe
operating losses which can lead to a bankruptcy. In these cases, the Company may lose most of the
outstanding balance due. Occasionally, the Company has been current with a customer at the time
such an event occurs. The more material risk is that losing the revenue of the customer which
might be more onerous than losing the current outstanding accounts receivable. In addition, many
companies that will insure accounts receivables will
18
not do so for the Companys largest mass market customers. An example of such a loss was KMART
Corporation. The Company recorded a loss of approximately $500,000 of which $37,000 has been
repaid in 2005 and $312,000 in 2004, when KMART filed for re-organization. KMART was current with
the Company at the time that KMART filed Chapter 11 bankruptcy. The Company continued to supply
KMART during its post petition re-organization and continues to supply the customer profitably
today. The risk is that the Company derives most of the Companys sales revenue and profits from
selling products to retailers for resale to consumers. The failure of the Companys customers to
pay in full amounts due to the Company could negatively affect future profitability.
COMPANY PROFITS CAN SUFFER FROM INTERRUPTIONS IN SUPPLY CHAIN
The Company operates a small sales office in Switzerland to service the international export
marketplace. The Company is aware of no material risks in maintaining this operation. Loss of
this office would result in a transfer of sales and marketing responsibility. The Company uses
contract manufacturing facilities in Mainland China, Taiwan, and South Korea. These independent
supplier entities are distant from the Company which means that the Company is at risk of business
interruptions due to natural disaster, war, disease, and government intervention through tariffs or
trade restrictions that do not affect the domestic market. The Company maintains a finished goods
inventory level in the Companys US facility to mitigate this risk. The approximate level of
finished goods inventory is stocked at an average of 90 days demand per item. Recovery of a single
facility through a replacement of supplier in the event of disaster or suspension of supply could
take approximately 120 days. The Company believes that it could restore production of its top
fourteen selling models (which represent 75% of the Companys sales revenue) within 1 year. The
Company is also at risk if trade restrictions are imposed on the Companys products based upon
country of origin. In addition, any increase in tariffs and freight charges may not be acceptable
to pass along to the Companys customers and could directly impact the Companys profits.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES COULD AFFECT PRICING OF PRODUCTS AND CAUSE CUSTOMERS TO
PURCHASE LOWER-PRICED, LESS PROFITABLE PRODUCTS
The Company receives a material portion of its revenue and profits from business in Canada and the
European Union. To the extent that value of the U.S. dollar increases relative to currencies in
those jurisdictions, it increases the cost of the Companys products in those jurisdictions, which
could create negative pressure on the demand for the Companys products. To the extent that
increased prices arising from currency fluctuations decreases the Companys sales or moves
customers to purchase lower-priced, lower profit products, the Companys revenues, profits, and
cash flows could be adversely affected.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In managements opinion, the Company does not engage in any material market risk sensitive
activities and does not have any market risk sensitive instruments, other than the Companys
commercial credit facility used for working capital purposes and stock repurchases.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MANAGEMENTS 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 accounting principles
generally accepted
19
in the United States of America appropriate under 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.
Oversight of managements financial reporting and internal accounting control responsibilities is
exercised by the Board of Directors, through an Audit Committee that is comprised solely of
independent directors. The Audit Committee is also responsible for the selection and appointment
of the independent auditors and reviews the scope of their audit and their findings. The
independent auditors have direct access to the Audit Committee, without the presence of management
representatives, to discuss the scope and the results of their audit work.
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.
Consolidated financial statements of the Company at June 30, 2005 and 2004 and for each of the
quarters in the period ended June 30, 2005 and the notes thereto, and the reports of independent
auditors thereon are set forth on pages 24 to 39.
Selected unaudited quarterly financial data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
2005 |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
Net sales |
|
$ |
8,972,580 |
|
|
$ |
10,225,079 |
|
|
$ |
9,772,686 |
|
|
$ |
11,316,346 |
|
Gross profit |
|
|
3,422,973 |
|
|
|
3,958,618 |
|
|
|
3,613,481 |
|
|
|
4,074,859 |
|
Net income |
|
|
889,911 |
|
|
|
1,219,442 |
|
|
|
885,976 |
|
|
|
1,498,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
$ |
0.24 |
|
|
$ |
0.33 |
|
|
$ |
0.24 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
$ |
0.23 |
|
|
$ |
0.31 |
|
|
$ |
0.23 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
2004 |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
Net sales |
|
$ |
9,164,691 |
|
|
$ |
9,839,572 |
|
|
$ |
10,547,180 |
|
|
$ |
10,941,768 |
|
Gross profit |
|
|
3,497,645 |
|
|
|
3,742,000 |
|
|
|
4,247,511 |
|
|
|
4,474,797 |
|
Income before cumulative effect of
accounting change |
|
|
1,020,504 |
|
|
|
1,295,476 |
|
|
|
1,157,816 |
|
|
|
1,974,351 |
|
Net income |
|
|
944,629 |
|
|
|
1,295,476 |
|
|
|
1,157,816 |
|
|
|
1,974,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of accounting
change |
|
$ |
0.27 |
|
|
$ |
0.34 |
|
|
$ |
0.31 |
|
|
$ |
0.52 |
|
Accounting change |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share (1) |
|
|
0.25 |
|
|
|
0.34 |
|
|
|
0.31 |
|
|
|
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of accounting
change |
|
$ |
0.26 |
|
|
$ |
0.33 |
|
|
$ |
0.29 |
|
|
$ |
0.50 |
|
Accounting change |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share (1) |
|
|
0.24 |
|
|
|
0.33 |
|
|
|
0.29 |
|
|
|
0.50 |
|
20
|
|
|
(1) |
|
Due to the use of weighted-average shares outstanding each quarter for computing
earnings per share, the sum of the quarterly per share amounts may not equal the per share
amount for the year. |
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On March 15, 2004, the Company dismissed PricewaterhouseCoopers LLP (PWC) as its independent
public accountants and appointed Grant Thornton LLP as its new independent public accountants. The
decision to dismiss PWC and to retain Grant Thornton LLP was made by the Companys Audit Committee.
The decision to dismiss PWC did not involve a dispute with the Company over accounting policies or
practices.
During the fiscal years ended June 30, 2002 and 2003 and the interim period through March 15,
2004, there were no disagreements with PWC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved
to PWCs satisfaction, would have caused PWC to make reference to the subject matter of the
disagreement in connection with its reports on the financial statements for such years, and there
were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
Item 9A. Controls and Procedures.
(a) |
|
Evaluation of Disclosure Controls and Procedures. The Company maintains a system of
disclosure controls and procedures that are designed to provide reasonable assurance that
information, which is required to be timely disclosed, is accumulated and communicated to
management in a timely fashion. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system
are met. The Company, under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer/Chief Financial Officer, after
evaluating the effectiveness of the Companys disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by this report, have concluded that the
Companys disclosure controls and procedures are effective to provide reasonable assurance
that information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the Companys management,
including its principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure and are effective to provide reasonable
assurance that such information is recorded, processed, summarized, and reported within the
time periods specified in the SECs rules and forms. |
(b) |
|
Changes in Internal Controls. The Companys internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) is designed to provide reasonable
assurances regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial
reporting. However, because of the inherent limitations in all control systems, no evaluation
of controls can provide |
21
|
|
absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. |
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, ELECTION OF DIRECTORS Beneficial
Ownership of Company Securities and the ELECTION OF DIRECTORS Executive Officers contained in
the Koss Corporation Proxy Statement for its 2005 Annual Meeting of Stockholders (the 2005 Proxy
Statement), which 2005 Proxy Statement was 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.
The Companys executive officers are paid base salaries commensurate with their responsibilities,
after comparison with base salaries of executive officers of other light assembly or manufacturing
companies taken from data in an annual national survey.
Executive officers are also eligible for annual bonuses based upon individual performance and
overall Company performance and profitability. Factors relevant to determining such bonuses
include attainment of corporate revenue and earnings goals and the development of new accounts.
The Companys Chairman is eligible to receive a bonus calculated as a percentage of the Companys
earnings before interest and taxes. The Companys Vice President-Sales is entitled to receive a
bonus based upon increases in sales over the prior year, and a bonus for obtaining new accounts
from a predetermined list of potential new accounts, and for adding new product lines to current
accounts. The Companys Vice President Europe is entitled to receive a bonus based upon the
Companys sales in export markets.
The Compensation Committee annually reviews and determines the compensation of the Chief Executive
Officer. The CEOs salary is based on his experience, responsibilities, historical salary levels
for himself/herself and other executive officers of the Company, and the salaries of Chief
Executive Officers of other light assembly or manufacturing companies.
The CEOs cash bonus is strictly based upon a quantitative measure of performance. If the CEO does
not achieve profitability, the cash bonus is not paid. The CEO is eligible to receive a bonus
calculated as a fixed percentage of the Companys earnings before interest and taxes. The CEO also
participates in the Companys Flexible Incentive Plan.
Further information relating to executive compensation is incorporated herein by reference from the
ELECTION OF DIRECTORS Executive Compensation and Related Matters section of the 2005 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 Beneficial Ownership of Company
Securities section of the 2005 Proxy Statement.
22
Equity Compensation Plan Information. The table set forth below provides certain information with
respect to the Companys equity compensation plans as of the end of the most recently completed
fiscal year ended June 30, 2005, under which equity securities of the Company are authorized for
issuance.
Equity Compensation Plan Information Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
Number of securities |
|
|
Weighted-average |
|
|
remaining available for |
|
|
|
to be issued upon |
|
|
exercise price of |
|
|
future issuance under |
|
|
|
exercise of |
|
|
outstanding |
|
|
equity compensation plans |
|
|
|
outstanding options, |
|
|
options, warrants |
|
|
(excluding securities |
|
|
|
warrants and rights |
|
and rights |
|
reflected in column (a)) |
|
Plan
category |
|
(a) |
|
(b) |
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
765,000 |
|
|
$ |
18.87 |
|
|
|
667,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
Not applicable |
|
Not applicable |
|
Not applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
765,000 |
|
|
$ |
18.87 |
|
|
|
667,308 |
|
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 2005 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information relating to the principle accountant fees and services is incorporated herein by
reference from the RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS section of the 2005
proxy statement.
23
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
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 25 to 29: |
|
|
|
|
Reports of Independent Registered Public Accounting Firms |
|
|
25 |
|
Consolidated Statements of Income for the Years Ended
June 30, 2005, 2004, and 2003 |
|
|
27 |
|
Consolidated Balance Sheets as of June 30, 2005 and 2004 |
|
|
28 |
|
Consolidated Statements of Cash Flows for the Years
Ended June 30, 2005, 2004, and 2003 |
|
|
29 |
|
Consolidated Statements of Stockholders Investment for
the Years Ended June 30, 2005, 2004, and 2003 |
|
|
30 |
|
Notes to Consolidated Financial Statements |
|
|
31 |
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
See Exhibit Index attached hereto. |
|
|
|
|
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
KOSS CORPORATION
We have audited the accompanying consolidated balance sheets of KOSS CORPORATION and subsidiaries
as of June 30, 2005 and 2004, and the related consolidated statements of income, stockholders
investment, and cash flows for the years then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements of Koss
Corporation and subsidiaries as of June 30, 2003 and for the year then ended, were audited by other
auditors. Those auditors expressed an unqualified opinion on those financial statements in their
report dual dated July 11, 2003 and February 13, 2004.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of KOSS CORPORATION and subsidiaries as of June 30, 2005 and 2004, and the
results of their operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, New Accounting Pronouncements, the Company
adopted Statement of Financial Accounting Standards No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity in fiscal 2004.
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Milwaukee, Wisconsin
July 7, 2005
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Koss Corporation:
In our opinion, the accompanying consolidated statements of income, stockholders investment and
cash flows for the year ended June 30, 2003 present fairly, in all material respects, the results
of operations and cash flows of Koss Corporation and its subsidiaries for the year ended June 30,
2003, in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards 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 audit
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 11, 2003, except as to the restatement described in Note 14 (not presented herein),
which is as of February 13, 2004
26
KOSS
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net sales |
|
$ |
40,286,691 |
|
|
$ |
40,493,211 |
|
|
$ |
33,802,634 |
|
Cost of goods sold |
|
|
25,216,760 |
|
|
|
24,531,258 |
|
|
|
19,954,595 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
15,069,931 |
|
|
|
15,961,953 |
|
|
|
13,848,039 |
|
Selling, general, and
administrative expense |
|
|
8,544,383 |
|
|
|
8,089,765 |
|
|
|
7,737,030 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
6,525,548 |
|
|
|
7,872,188 |
|
|
|
6,111,009 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income |
|
|
805,485 |
|
|
|
1,071,638 |
|
|
|
755,364 |
|
Interest income |
|
|
64,795 |
|
|
|
22,311 |
|
|
|
12,711 |
|
Interest expense |
|
|
|
|
|
|
(960 |
) |
|
|
(14,572 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income tax provision and
cumulative effect of change in
accounting principles |
|
|
7,395,828 |
|
|
|
8,965,177 |
|
|
|
6,864,512 |
|
Provision for income taxes (Note 5) |
|
|
2,902,001 |
|
|
|
3,517,030 |
|
|
|
2,695,101 |
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principles |
|
|
4,493,827 |
|
|
|
5,448,147 |
|
|
|
4,169,411 |
|
Cumulative effect of change in
accounting principles (net of tax
effect of $49,125) |
|
|
|
|
|
|
(75,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,493,827 |
|
|
$ |
5,372,272 |
|
|
$ |
4,169,411 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of
accounting change |
|
$ |
1.21 |
|
|
$ |
1.45 |
|
|
$ |
1.14 |
|
Accounting change |
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
|
1.21 |
|
|
|
1.43 |
|
|
|
1.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of
accounting change |
|
$ |
1.14 |
|
|
$ |
1.39 |
|
|
$ |
1.08 |
|
Accounting change |
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
|
1.14 |
|
|
|
1.37 |
|
|
|
1.08 |
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share |
|
$ |
0.52 |
|
|
$ |
0.52 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
27
KOSS
CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
As of June 30, |
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
5,218,698 |
|
|
$ |
2,110,917 |
|
Accounts receivable, less allowances of $583,671
and 738,995, respectively (Note 13) |
|
|
8,763,968 |
|
|
|
9,340,091 |
|
Inventories |
|
|
7,595,803 |
|
|
|
7,315,359 |
|
Prepaid expenses |
|
|
1,129,939 |
|
|
|
659,135 |
|
Deferred income taxes (Note 5) |
|
|
857,840 |
|
|
|
861,236 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
23,566,248 |
|
|
|
20,286,738 |
|
|
|
|
|
|
|
|
Equipment and Leasehold Improvements, at cost: |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
1,662,506 |
|
|
|
1,163,318 |
|
Machinery, equipment, furniture, and fixtures |
|
|
5,068,368 |
|
|
|
4,956,821 |
|
Tools, dies, molds, and patterns |
|
|
11,198,723 |
|
|
|
11,013,042 |
|
|
|
|
|
|
|
|
|
|
|
17,929,597 |
|
|
|
17,133,181 |
|
Lessaccumulated depreciation |
|
|
14,935,897 |
|
|
|
14,435,868 |
|
|
|
|
|
|
|
|
|
|
|
2,993,700 |
|
|
|
2,697,313 |
|
Deferred Income Taxes (Note 5) |
|
|
315,531 |
|
|
|
250,260 |
|
Other Assets |
|
|
2,365,982 |
|
|
|
2,445,245 |
|
|
|
|
|
|
|
|
|
|
$ |
29,241,461 |
|
|
$ |
25,679,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS INVESTMENT |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,012,736 |
|
|
$ |
1,049,406 |
|
Accrued liabilities (Note 7) |
|
|
1,841,862 |
|
|
|
1,754,038 |
|
Dividends payable |
|
|
486,918 |
|
|
|
490,070 |
|
Income taxes payable |
|
|
692,538 |
|
|
|
185,990 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,034,054 |
|
|
|
3,479,504 |
|
|
|
|
|
|
|
|
Deferred Compensation |
|
|
961,165 |
|
|
|
985,265 |
|
Derivative Liability |
|
|
125,000 |
|
|
|
125,000 |
|
Stockholders Investment: |
|
|
|
|
|
|
|
|
Common stock, $0.005 par value, authorized
8,500,000 shares; issued and outstanding
3,745,525 and 3,769,429 shares, respectively |
|
|
18,728 |
|
|
|
18,849 |
|
Retained earnings |
|
|
22,102,514 |
|
|
|
21,070,938 |
|
|
|
|
|
|
|
|
Total stockholders investment |
|
|
22,121,242 |
|
|
|
21,089,787 |
|
|
|
|
|
|
|
|
|
|
$ |
29,241,461 |
|
|
$ |
25,679,556 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
28
KOSS
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
2005 |
|
|
2004 |
|
|
2003 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,493,827 |
|
|
$ |
5,372,272 |
|
|
$ |
4,169,411 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
155,324 |
|
|
|
236,694 |
|
|
|
198,846 |
|
Depreciation and amortization |
|
|
1,043,951 |
|
|
|
660,805 |
|
|
|
584,761 |
|
Deferred income taxes |
|
|
(61,875 |
) |
|
|
91,504 |
|
|
|
24,000 |
|
Tax benefit of non-qualified stock options |
|
|
104,749 |
|
|
|
330,019 |
|
|
|
|
|
Deferred compensation |
|
|
(24,100 |
) |
|
|
(28,902 |
) |
|
|
(105,744 |
) |
Net changes in operating assets and
liabilities (Note 8) |
|
|
2,251,161 |
|
|
|
(2,160,704 |
) |
|
|
(2,074,658 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
7,963,037 |
|
|
|
4,501,688 |
|
|
|
2,796,616 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of ADDAX, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
8,648 |
|
Acquisition of equipment and leasehold improvements |
|
|
(1,170,494 |
) |
|
|
(1,344,169 |
) |
|
|
(627,567 |
) |
|
|
|
|
|
|
|
|
|
|
Net change in cash surrender value of
insurance and long-term investments |
|
|
(177,641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,288,135 |
) |
|
|
(1,344,169 |
) |
|
|
(618,919 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
(1,926,938 |
) |
|
|
(1,959,563 |
) |
|
|
(1,866,782 |
) |
Purchase of common stock |
|
|
(2,217,371 |
) |
|
|
(1,004,068 |
) |
|
|
(340,000 |
) |
Exercise of stock options |
|
|
577,188 |
|
|
|
359,925 |
|
|
|
533,825 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(3,567,121 |
) |
|
|
(2,603,706 |
) |
|
|
(1,672,957 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
3,107,781 |
|
|
|
553,813 |
|
|
|
504,740 |
|
Cash at beginning of year |
|
|
2,110,917 |
|
|
|
1,557,104 |
|
|
|
1,052,364 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
5,218,698 |
|
|
$ |
2,110,917 |
|
|
$ |
1,557,104 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
29
KOSS
CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Retained |
|
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
Balance, June 30, 2002 |
|
|
3,670,554 |
|
|
$ |
18,353 |
|
|
$ |
15,207,181 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
4,169,411 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(1,915,172 |
) |
Common stock issued in conjunction with
the acquisition of ADDAX |
|
|
19,875 |
|
|
|
99 |
|
|
|
317,504 |
|
Exercise of stock options |
|
|
90,000 |
|
|
|
450 |
|
|
|
533,376 |
|
Purchase and retirement of treasury stock |
|
|
(20,000 |
) |
|
|
(100 |
) |
|
|
(339,900 |
) |
|
|
|
Balance, June 30, 2003 |
|
|
3,760,429 |
|
|
|
18,802 |
|
|
|
17,972,400 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
5,372,272 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(1,959,563 |
) |
Exercise of stock options |
|
|
60,000 |
|
|
|
300 |
|
|
|
689,644 |
|
Purchase and retirement of treasury stock |
|
|
(50,654 |
) |
|
|
(253 |
) |
|
|
(1,003,815 |
) |
|
|
|
Balance, June 30, 2004 |
|
|
3,769,775 |
|
|
|
18,849 |
|
|
|
21,070,938 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
4,493,827 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(1,926,938 |
) |
Exercise of stock options |
|
|
75,000 |
|
|
|
375 |
|
|
|
681,562 |
|
Purchase and retirement of treasury stock |
|
|
(99,250 |
) |
|
|
(496 |
) |
|
|
(2,216,875 |
) |
|
|
|
Balance, June 30, 2005 |
|
|
3,745,525 |
|
|
$ |
18,728 |
|
|
$ |
22,102,514 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
30
KOSS
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
CONCENTRATION OF CREDIT RISKThe Company operates in the audio/video industry segment of the home
entertainment industry through its design, manufacture, and sale of stereo headphones and related
accessory products. The Companys products are sold through audio specialty stores, the Internet,
direct mail catalogs, 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 approximately 16,000 domestic retail outlets. International markets are
served by domestic sales representatives 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 21% and 12% of the Companys accounts receivable at June 30, 2005 and 2004,
respectively, were foreign receivables.
BASIS OF CONSOLIDATIONThe 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.
REVENUE RECOGNITIONRevenue is recognized by the Company when all of the following criteria are
met: persuasive evidence of an arrangement exists; delivery has occurred (either FOB shipping
point or delivery taken at the Companys dock); the sellers price to the buyer is fixed and
determinable (pricing is finalized through the purchase order); and collectibility is reasonably
assured. These criteria are generally satisfied upon shipment of the Companys products. The
Company may offer slotting fees, cooperative advertising programs and sales discounts from time to
time and the estimated costs for these items are accrued for at the time revenue is recognized.
These amounts are recorded as a reduction to sales.
ROYALTY INCOMEThe Company recognizes royalty income when earned under the terms of two license
agreements, which expire in 2008 and 2010. This agreement requires minimum annual royalty
payments. Royalty income owed to the Company is calculated by the licensee and then verified by
the Company. Royalty payments are calculated based upon predetermined percentages of net sales of
the licensed products or based upon minimum annual royalty payments, as set forth in the Companys
license agreements. Royalty income is booked monthly, on an accrual basis. When the royalty
payments are received each quarter, the Company then reduces the accounts receivable accordingly.
INVENTORIESSubstantially all of the Companys inventories are valued at the lower of last-in,
first-out (LIFO) cost or market. If the first-in, first-out (FIFO) method of inventory accounting
had been used by the Company for inventories valued at LIFO, inventories would have been $873,393
and $949,207 higher than reported at June 30, 2005 and 2004, respectively. The Company did not
maintain any work-in-process inventories at June 30, 2005 and June 30, 2004.
31
The components of inventories at June 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Raw materials |
|
$ |
3,254,155 |
|
|
$ |
1,630,651 |
|
Finished goods |
|
|
4,341,648 |
|
|
|
5,684,708 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,595,803 |
|
|
$ |
7,315,359 |
|
|
|
|
|
|
|
|
DISTRIBUTION NETWORKThe Company includes inbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs, internal transfer costs, and other costs of distribution in
the cost of goods sold line item.
EQUIPMENT AND LEASEHOLD IMPROVEMENTSDepreciation is provided on a straight-line basis over the
estimated useful life of the asset as follows:
|
|
|
|
|
Leasehold improvements |
|
10-15 years |
Machinery, equipment, furniture, and fixtures |
|
3-10 years |
Tools, dies, molds, and patterns |
|
4-5 years |
RESEARCH AND DEVELOPMENTResearch and development expenditures charged to operations amounted to
approximately $173,000 in 2005, $125,000 in 2004, and $134,000 in 2003.
SHIPPING AND HANDLING FEES AND COSTSShipping and handling fees charged to customers are included
in net sales, and shipping and handling costs incurred by the Company are included in cost of goods
sold within the accompanying consolidated statements of income.
FAIR VALUE OF FINANCIAL INSTRUMENTSCash, accounts receivable, and accounts payable recorded in the
consolidated balance sheets approximate fair value based on the short maturity of these
instruments.
USE OF ESTIMATESThe preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTSDuring May 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, which establishes
standards for the classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. The Company adopted SFAS No. 150 effective July 1,
2003. Upon adoption, the Company recorded a derivative liability for the fair value of a written
put option of $125,000 on the balance sheet and a cumulative effect of change in accounting
principle of $75,875 (net of the tax effect equal to $49,125) on the income statement.
During December 2004, the FASB issued SFAS No. 123R, Share-Based Payments, which changed the
accounting for equity compensation programs. Under SFAS No. 123R, companies that award share-based
payments to employees, including stock options, must begin to recognize the expense of these awards
in the financial statements at the time the employee receives the award. As allowed by SFAS 123
and SFAS 148, the Company elected to follow APB Opinion No. 25 in accounting for its stock option
32
plan until the effective date of SFAS 123R. The accounting as provided by SFAS 123R will be
effective for the Company beginning July 1, 2005, which is the beginning of the Companys next
fiscal year.
Under APB 25s intrinsic value method, no compensation cost for employee stock options is
recognized. Accordingly, the adoption of SFAS 123Rs fair value method will have an impact on the
Companys results of operations, although it will not have an impact on the overall financial
position. The impact of the adoption of SFAS 123R will depend on levels of share-based payments
granted in the future and is expected to reduce pre-tax earning by approximately $330,000 in fiscal
2006. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash flow as required
under the current standards. This requirement will reduce the net cash provided by operating
activities and increase the net cash from financing activities in periods after adoption. While
the Company cannot estimate what these amounts will be in the future because it will depend on,
among other things, when employees exercise stock options, the amount of cash flows from operating
activities in prior periods for such excess tax deductions were approximately $105,000, $330,000
and zero in fiscal years 2005, 2004 and 2003, respectively.
RECLASSIFICATIONSCertain amounts in the prior year financial statements have been reclassified to
conform to current year presentation.
STOCK-BASED COMPENSATIONAt June 30, 2005, the Company has a stock-based employee compensation
plan, which is described more fully in Note 4. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. All options granted under the plan had an exercise price
equal to the market value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net income, as reported |
|
$ |
4,493,827 |
|
|
$ |
5,372,272 |
|
|
$ |
4,169,411 |
|
Add: Total stock-based
employee compensation recorded |
|
|
104,749 |
|
|
|
330,019 |
|
|
|
351,764 |
|
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards
outstanding |
|
|
341,192 |
|
|
|
531,403 |
|
|
|
447,679 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
4,257,114 |
|
|
$ |
5,170,888 |
|
|
$ |
4,073,496 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basicas reported |
|
$ |
1.21 |
|
|
$ |
1.43 |
|
|
$ |
1.14 |
|
Basicpro forma |
|
$ |
1.15 |
|
|
$ |
1.37 |
|
|
$ |
1.11 |
|
Dilutedas reported |
|
$ |
1.14 |
|
|
$ |
1.37 |
|
|
$ |
1.08 |
|
Dilutedpro forma |
|
$ |
1.08 |
|
|
$ |
1.32 |
|
|
$ |
1.06 |
|
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 fiscal years ended
June 30, 2005, 2004, and 2003, were 3,711,821, 3,769,033, and 3,671,585, respectively. When
dilutive, stock options are included in earnings per share as share equivalents using the treasury
stock method. Common stock equivalents of 226,787, 158,657, and 173,010 related to stock option
grants were included in the computation of the weighted-average number of shares outstanding for
diluted earnings per share for the fiscal years ended June 30, 2005, 2004, and 2003, respectively.
33
3. CREDIT FACILITY
The Company amended its existing credit facility in November 2003, extending the maturity date of
the unsecured line of credit to November 1, 2005. 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 common stock pursuant to the Companys stock repurchase program.
Borrowings under this credit facility bear interest at the banks prime rate, or LIBOR plus 1.75%.
This credit facility includes certain financial covenants, which require the Company to maintain a
minimum tangible net worth, and specified current, interest coverage, and leverage ratios. There
were no borrowings under this credit facility at June 30, 2005 or 2004.
4. STOCK OPTIONS AND STOCK PURCHASE AGREEMENTS
In 1990, pursuant to the recommendation of the Board of Directors, the stockholders ratified the
creation of the Companys 1990 Flexible Incentive 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
Plans 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 for the 1990 Plan, which was approved by the stockholders. In 1993, the Board of Directors
authorized the reservation of an additional 300,000 shares for the 1990 Plan, which was approved by
the stockholders. In 1997, the Board of Directors authorized the reservation of an additional
300,000 shares for the 1990 Plan, which was approved by the stockholders. In 2001, the Board of
Directors authorized the reservation of an additional 300,000 shares for the 1990 Plan, which was
also approved by the stockholders. Options generally vest at 25% each anniversary date after
grant, with a maximum term of five to ten years.
The following table identifies options granted, exercised, cancelled, or available for exercise
pursuant to the above mentioned Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise |
|
|
Weighted |
|
|
|
Number of |
|
|
Prices per |
|
|
Average |
|
|
|
Shares |
|
|
Share |
|
|
Exercise Price |
|
Shares under option
at June 30, 2002 |
|
|
607,500 |
|
|
$ |
5.10$18.48 |
|
|
$ |
12.20 |
|
Granted |
|
|
180,000 |
|
|
$ |
15.75$17.32 |
|
|
$ |
16.62 |
|
Exercised |
|
|
(90,000 |
) |
|
$ |
5.38$6.73 |
|
|
$ |
5.97 |
|
Settled |
|
|
(47,500 |
) |
|
$ |
5.38$6.73 |
|
|
$ |
5.97 |
|
|
|
|
|
|
|
|
|
|
|
Shares under option
at June 30, 2003 |
|
|
650,000 |
|
|
$ |
5.10$18.48 |
|
|
$ |
14.75 |
|
Granted |
|
|
250,000 |
|
|
$ |
22.01$24.21 |
|
|
$ |
23.15 |
|
Exercised |
|
|
(15,000 |
) |
|
$ |
5.38$6.73 |
|
|
$ |
6.23 |
|
Settled |
|
|
(45,000 |
) |
|
$ |
5.92 |
|
|
$ |
5.92 |
|
|
|
|
|
|
|
|
|
|
|
Shares under option
at June 30, 2004 |
|
|
840,000 |
|
|
$ |
5.10$24.21 |
|
|
$ |
17.88 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(75,000 |
) |
|
$ |
6.73$16.80 |
|
|
$ |
7.69 |
|
Settled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
at June 30, 2005 |
|
|
765,000 |
|
|
$ |
5.10$24.21 |
|
|
$ |
18.87 |
|
|
|
|
|
|
|
|
|
|
|
The range of options as of June 30, 2005 is as follows:
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of Options |
|
|
Weighted Average Exercise |
|
|
Remaining |
|
|
|
Outstanding/Exercisable |
|
|
Price Outstanding/Exercisable |
|
|
Contractual Life (In Years) |
|
$ 5.10
$ 6.73 |
|
|
27,500 / 27,500 |
|
|
$ |
5.97 / $5.97 |
|
|
|
4.1 |
|
$15.75 $18.48 |
|
|
487,500 / 360,625 |
|
|
$ |
17.41 / $17.55 |
|
|
|
4.0 |
|
$22.01 $24.21 |
|
|
250,000 / 62,500 |
|
|
$ |
23.15 / $23.15 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18.87 / $17.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options granted in 2005. The weighted-average fair value at date of grant for
options whose exercise price exceeded the market price of the stock on the grant date during 2004
and 2003 was $4.56 and $3.69, respectively. There were no options granted in 2004 or 2003 for
which the exercise price was less than the market price on the date of grant. The weighted-average
fair value at date of grant for options whose exercise price was equal to the market price of the
stock on the grant date during 2004 and 2003 was $2.87 and $5.94, respectively. As of June 30,
2005, the weighted-average remaining contractual life of all outstanding options approximates 4.21
years.
For the pro forma information disclosed in Note 1, the fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Expected stock price volatility |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
43.40 |
% |
Risk free interest rate |
|
|
3.69 |
% |
|
|
3.69 |
% |
|
|
2.84 |
% |
Expected dividend yield |
|
|
2.27 |
% |
|
|
2.27 |
% |
|
|
3.30 |
% |
Expected life of options |
|
|
4.21 |
years |
|
|
5.21 |
years |
|
|
5.33 |
years |
The Company has an agreement with its Chairman, John C. Koss, in the event of his death, at the
request of the executor of his estate, to repurchase his Company common stock from his estate. The
Company does not have the right to require the estate to sell stock to the Company. As such, this
arrangement is accounted for as a written put option with the fair value of the put option recorded
as a derivative liability. The fair value of the option at June 30, 2005 and 2004 was $125,000.
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 will be
sufficient to provide proceeds which are the lesser of $2,500,000 or the amount of estate taxes and
administrative expenses incurred by the Chairmans estate. The Company may elect to pay the
purchase price in cash or may elect to pay cash equal to 25% of the total amount due and to execute
a promissory note for the balance, payable over four years, at the prime rate of interest. The
Company maintains a $1,150,000 life insurance policy to fund a substantial portion of this
obligation.
5. INCOME TAXES
The Company utilizes the liability method of accounting for income taxes. The liability method
measures the expected income tax impact of future taxable income and deductions implicit in the
consolidated balance sheets. The provision for income taxes in 2005, 2004, and 2003 consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2,527,001 |
|
|
$ |
2,888,401 |
|
|
$ |
2,170,101 |
|
State |
|
|
486,000 |
|
|
|
488,000 |
|
|
|
501,000 |
|
Deferred |
|
|
(111,000 |
) |
|
|
140,629 |
|
|
|
24,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,902,001 |
|
|
$ |
3,517,030 |
|
|
$ |
2,695,101 |
|
|
|
|
|
|
|
|
|
|
|
35
The 2005, 2004, and 2003 tax provision results in an effective rate different than the federal
statutory rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Federal income tax at statutory rate |
|
$ |
2,514,582 |
|
|
$ |
3,048,160 |
|
|
$ |
2,333,934 |
|
State income taxes, net of federal tax
Benefit |
|
|
354,247 |
|
|
|
371,531 |
|
|
|
331,000 |
|
Other |
|
|
33,172 |
|
|
|
97,339 |
|
|
|
30,167 |
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
2,902,001 |
|
|
$ |
3,517,030 |
|
|
$ |
2,695,101 |
|
|
|
|
|
|
|
|
|
|
|
Temporary differences which give rise to deferred income tax assets and liabilities at June 30
include:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Deferred Income Tax Assets: |
|
|
|
|
|
|
|
|
Deferred compensation |
|
$ |
157,000 |
|
|
$ |
204,000 |
|
Accrued expenses and reserves |
|
|
859,000 |
|
|
|
660,000 |
|
Package design and trademarks |
|
|
251,000 |
|
|
|
188,000 |
|
Other |
|
|
48,000 |
|
|
|
99,000 |
|
|
|
|
|
|
|
|
|
|
|
1,315,000 |
|
|
|
1,151,000 |
|
|
|
|
|
|
|
|
|
|
Deferred Income Tax Liabilities: |
|
|
|
|
|
|
|
|
Royalties receivable/deferred |
|
|
|
|
|
|
|
|
Equipment and leasehold improvements |
|
|
(140,000 |
) |
|
|
(40,000 |
) |
|
|
|
|
|
|
|
Net deferred income tax asset |
|
$ |
1,175,000 |
|
|
$ |
1,111,000 |
|
|
|
|
|
|
|
|
36
6. INTANGIBLE ASSETS
A summary of intangibles included in other assets in the accompanying balance sheets as of June 30,
2005 and 2004 and their respective estimated useful lives is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated useful |
|
|
|
2005 |
|
|
2004 |
|
|
lives |
|
|
Patents |
|
$ |
710,291 |
|
|
$ |
710,291 |
|
|
15 years |
Customer lists and other |
|
|
188,811 |
|
|
|
188,811 |
|
|
15 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
899,102 |
|
|
|
899,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated
amortization |
|
|
294,456 |
|
|
|
97,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
604,646 |
|
|
$ |
801,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Employee compensation |
|
$ |
411,294 |
|
|
$ |
538,605 |
|
Cooperative advertising and
promotion allowances |
|
|
870,378 |
|
|
|
674,713 |
|
Payroll taxes and other employee
benefits |
|
|
169,377 |
|
|
|
203,913 |
|
Other |
|
|
390,813 |
|
|
|
336,807 |
|
|
|
|
|
|
|
|
|
|
$ |
1,841,862 |
|
|
$ |
1,754,038 |
|
|
|
|
|
|
|
|
8. ADDITIONAL CASH FLOW INFORMATION
The net changes in cash as a result of changes in operating assets and liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Accounts receivable |
|
$ |
420,799 |
|
|
$ |
(881,232 |
) |
|
$ |
(153,589 |
) |
Inventories |
|
|
(280,444 |
) |
|
|
18,413 |
|
|
|
(854,186 |
) |
Prepaid expenses and other assets |
|
|
(443,744 |
) |
|
|
(302,811 |
) |
|
|
(102,554 |
) |
Income taxes |
|
|
506,548 |
|
|
|
367,861 |
|
|
|
(662,538 |
) |
Accounts payable |
|
|
1,963,330 |
|
|
|
(1,744,144 |
) |
|
|
939,234 |
|
Accrued liabilities |
|
|
84,672 |
|
|
|
381,209 |
|
|
|
(1,241,025 |
) |
|
|
|
|
|
|
|
|
|
|
Net change |
|
$ |
2,251,161 |
|
|
$ |
(2,160,704 |
) |
|
$ |
(2,074,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
960 |
|
|
$ |
14,572 |
|
Income taxes |
|
$ |
1,388,822 |
|
|
$ |
2,872,155 |
|
|
$ |
3,332,091 |
|
37
9. EMPLOYEE BENEFIT PLANS
Substantially all domestic employees are participants in the Companys Employee Stock Ownership
Plan and Trust 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 approximated
$54,000 in 2005, $-0- in 2004, and $49,000 in 2003.
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 Board of Directors. For calendar years 2005,
2004, and 2003, the matching contribution was 100% of employee contributions to the plan, not to
exceed 10% of the employees annual compensation. Vesting of Company contributions occurs
immediately. Company contributions were approximately $307,000, $269,000, and $281,000 during
2005, 2004, and 2003, respectively.
10. DEFERRED COMPENSATION
The Company has deferred compensation agreements with a former and current officer.
The Board of Directors has entered into an agreement to continue the Chairmans current base salary
for the remainder of his life. The Company has a deferred compensation liability of $400,000 and
$520,000 recorded as of June 30, 2005 and 2004, respectively.
The Board of Directors has approved a supplemental retirement plan with an officer that calls for
annual cash compensation following retirement from the Company in an amount equal to 2% of base
salary multiplied by the number of years of service to the Company. The retirement payments are to
be paid monthly to the officer until his death and then to his surviving spouse monthly until her
death. The Company has a deferred compensation liability of $561,165 and $465,265 recorded as of
June 30, 2005 and 2004, respectively.
11. INDUSTRY SEGMENT INFORMATION, FOREIGN SALES AND SIGNIFICANT CUSTOMERS
The Company has one line of businessthe design, manufacture, and sale of stereophones and related
accessories.
The Companys export sales amounted to $11,404,941 during 2005, $7,008,448 during 2004, and
$4,205,683 during 2003.
Sales during 2005, 2004 and 2003 to the Companys five largest customers represented approximately
42%, 43% and 50% of the Companys total sales, respectively. Included in these percentages, sales
to a single customer represented approximately 15%, 19%, and 20% of the Companys total sales
during 2005, 2004, and 2003, respectively. These customers generally are large, national
retailers.
12. COMMITMENTS AND CONTINGENCIES
The Company leases its main plant and offices in Milwaukee, Wisconsin from its Chairman. On May
28, 2003, the lease was renewed for a period of five years, and is being accounted for as an
operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per year. At
anytime during this period the Company has the option to renew the lease for an additional five
years for the period commencing July 1, 2008 and ending June 30, 2013 under the same terms and
conditions. The lease is on
38
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. Total rent expense, which includes this lease, approximated
$416,000 in 2005, $416,000 in 2004, and $426,000 in 2003.
13. SUPPLEMENTARY INFORMATION
Changes in the allowance for doubtful accounts for 2005, 2004, and 2003 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
Balance at Beginning |
|
|
Charges Against/ |
|
|
|
|
|
|
Balance at End of |
|
Ending |
|
Of Period |
|
|
(Credits To) Income |
|
|
Deductions* |
|
|
Period |
|
2005 |
|
$ |
738,995 |
|
|
$ |
(202,193 |
) |
|
$ |
357,517 |
|
|
$ |
583,671 |
|
2004 |
|
$ |
975,689 |
|
|
$ |
(237,938 |
) |
|
$ |
1,244 |
|
|
$ |
738,995 |
|
2003 |
|
$ |
801,055 |
|
|
$ |
198,846 |
|
|
$ |
(24,212 |
) |
|
$ |
975,689 |
|
|
*Represents charges against the allowance, net of recoveries. |
Advertising costs included within selling, general, and administrative expenses in the accompanying
statements of income were $46,000 in 2005, $76,000 in 2004, and $97,000 in 2003. Such costs are
expensed as incurred.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of that term
in the Private Securities Litigation Reform Act of 1995 (the Act) (Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral
forward-looking statements may be made by the Company from time to time in filings with the
Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form
10-K that are not historical facts are forward-looking statements made pursuant to the safe harbor
provisions of the Act. Forward-looking statements may include, but are not limited to, projections
of revenue, income or loss and capital expenditures, statements regarding future operations,
anticipated financing needs, compliance with financial covenants in loan agreements, plans for
acquisitions or sales of assets or businesses, plans relating to products or services of the
Company, assessments of materiality, predictions of future events, the effects of pending and
possible litigation, and assumptions relating to the foregoing. In addition, when used in this
Form 10-K, the words anticipates, believes, or estimates, expects, intends, plans and
variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot
be predicted or quantified based on current expectations. Consequently, future events and actual
results could differ materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained in this Form 10-K, or in other Company filings, press
releases, or otherwise. In addition to the factors discussed in this Form 10-K, other factors that
could contribute to or cause such differences include, but are not limited to, developments in any
one or more of the following areas: future fluctuations in economic conditions, the receptivity of
consumers to new consumer electronics technologies, the rate and consumer acceptance of new product
introductions, competition, pricing, the number and nature of customers and their product orders,
production by third party vendors, foreign manufacturing, sourcing, and sales (including foreign
government regulation, trade, and importation concerns), borrowing costs, changes in tax rates,
pending or threatened litigation and investigations, and
39
other risk factors which may be detailed from time to time in the Companys Securities and Exchange
Commission filings.
Readers are cautioned not to place undue reliance on any forward-looking statements contained
herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of unexpected events.
40
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: September 28, 2005 |
|
|
|
|
|
|
|
Michael J. Koss, |
|
|
|
|
Vice Chairman |
|
|
|
|
President |
|
|
|
|
Chief Executive Officer |
|
|
|
|
Chief Operating Officer and |
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
By:
|
|
/s/ Sujata Sachdeva
|
|
Dated: September 28, 2005 |
|
|
|
|
|
|
|
Sujata Sachdeva, |
|
|
|
|
Vice President Finance |
|
|
|
|
Principal Accounting Officer
Secretary |
|
|
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 indicated
on September 28, 2005:
|
|
|
/s/ John C. Koss
|
|
/s/ Michael J. Koss |
|
|
|
John C. Koss, Director
|
|
Michael J. Koss, Director |
|
|
|
/s/ Martin F. Stein
|
|
/s/ John J. Stollenwerk |
|
|
|
Martin F. Stein, Director
|
|
John J. Stollenwerk, Director |
|
|
|
/s/ Thomas L. Doerr
|
|
/s/ Lawrence S. Mattson |
|
|
|
Thomas L. Doerr, Director
|
|
Lawrence S. Mattson, Director |
The signatures of the above directors constitute a majority of the Board of Directors of Koss
Corporation.
41
OFFICERS AND SENIOR MANAGEMENT
John C. Koss
Chairman of the Board
Michael J. Koss
Vice Chairman
President
Chief Executive Officer
Chief Operating Officer
Chief Financial Officer
John C. Koss, Jr.
Vice President-Sales
Sujata Sachdeva
Vice President-Finance/Secretary
Jill McCurdy
Vice President-Product Development
Lenore Lillie
Vice President-Operations
Cheryl Mike
Vice President-Human Resources/Customer Relations
Declan Hanley
Vice President-International Sales
ANNUAL MEETING
October 12, 2005 9:00a.m.
Milwaukee River Hilton Inn
4700 N. Port Washington Rd.
Milwaukee, WI 53212
INDEPENDENT AUDITORS
Grant Thornton LLP
Milwaukee, Wisconsin
LEGAL COUNSEL
Hughes & Luce, L.L.P.
Dallas, Texas
DIRECTORS
John C. Koss
Chairman of the Board
Koss Corporation
42
Thomas L. Doerr
President
Doerr Corporation
Michael J. Koss
Vice Chairman, President
C.E.O. C.O.O., C.F.O.
Koss Corporation
Lawrence S. Mattson
Retired President
Oster Company
Martin F. Stein
Chairman
Eyecare One Inc.
John J. Stollenwerk
President
Allen-Edmonds Shoe Corporation
TRANSFER AGENT
Questions regarding change of address, stock transfer, lost certificate, or information on a particular account
should be directed in writing to:
American Stock Transfer
& Trust Company
59 Maiden Lane
New York, NY 10038
W176 N9743 Rivercrest Drive
Germantown, WI 53022
Attn: Barbara Bahr
Shareholders Toll-free: 1-800-937-5449
43
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Exhibit Description |
|
3.1
|
|
Certificate of Incorporation of Koss Corporation. Filed as Exhibit 3.1 to the
Companys Annual Report on Form 10-K for the year ended June 30, 1996 and
incorporated herein by reference. |
|
|
|
3.2
|
|
By-Laws of Koss Corporation, as in effect on September 25, 1996. Filed as
Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year ended June
30, 1996 and incorporated herein by reference. |
|
|
|
10.1
|
|
Death Benefit Agreement with John C. Koss. Filed as Exhibit 10.4 to the
Companys Annual Report on Form 10-K for the year ended June 30, 1996 and
incorporated herein by reference. |
|
|
|
10.2
|
|
Stock Purchase Agreement with John C. Koss. Filed as Exhibit 10.5 to the
Companys Annual Report on Form 10-K for the year ended June 30, 1996 and
incorporated herein by reference. |
|
|
|
10.3
|
|
Salary Continuation Resolution for John C . Koss. Filed as Exhibit 10.6 to the
Companys Annual Report on Form 10-K for the year ended June 30, 1996 and
incorporated herein by reference. |
|
|
|
10.4
|
|
1983 Incentive Stock Option Plan. Filed as Exhibit 10.7 to the Companys
Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated
herein by reference. |
|
|
|
10.5
|
|
Assignment of Lease to John C. Koss. Filed as Exhibit 10.7 to the Companys
Annual Report on Form 10-K for the year ended June 30, 1988 and incorporated
herein by reference. |
|
|
|
10.6
|
|
Addendum to Lease. Filed as Exhibit 10.8 to the Companys Annual Report on
Form 10-K for the year ended June 30, 1988 and incorporated herein by
reference. |
|
|
|
10.7
|
|
Amendment to Lease. Filed as Exhibit 10.22 to the Companys Annual Report on
Form 10-K for the year ended June 30, 2000 and incorporated herein by
reference. |
|
|
|
10.8
|
|
Partial Assignment, Termination and Modification of Lease. Filed as Exhibit
10.25 to the Companys Annual Report on Form 10-K for the year ended June 30,
2001 and incorporated herein by reference. |
|
|
|
10.9
|
|
Restated Lease. Filed as Exhibit 10.26 to the Companys Annual Report on Form
10-K for the year ended June 30, 2001 and incorporated herein by reference. |
|
|
|
10.10
|
|
1990 Flexible Incentive Plan. Filed as Exhibit 25 to the Companys Annual
Report on Form 10-K for the year ended June 30, 1990 and incorporated herein by
reference. |
|
|
|
10.11
|
|
Consent of Directors (Supplemental Executive Retirement Plan for Michael J.
Koss dated March 7, 1997). Filed as Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated
herein by reference. |
44
|
|
|
Exhibit No. |
|
Exhibit Description |
|
10.12
|
|
Loan Agreement, effective as of February 17, 1995. Filed as Exhibit 10 to the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
and incorporated herein by reference. |
|
|
|
10.13
|
|
Amendment to Loan Agreement dated June 15, 1995, effective as of February 17,
1995. Filed as Exhibit 10.13 to the Companys Annual Report on Form 10-K for
the year ended June 30, 1995 and incorporated herein by reference. |
|
|
|
10.14
|
|
Amendment to Loan Agreement dated April 29, 1999. Filed as Exhibit 10.14 to
the Companys Annual Report on Form 10-K for the year ended June 30, 1999 and
incorporated herein by reference. |
|
|
|
10.15
|
|
Amendment to Loan Agreement dated December 15, 1999. Filed as Exhibit 10.15 to
the Companys Annual Report on Form 10-K for the year ended June 30, 2000 and
incorporated herein by reference. |
|
|
|
10.16
|
|
Amendment to Loan Agreement dated October 10, 2001. Filed as Exhibit 10.16 to
the Companys Quarterly Report on Form 10-Q for the quarter ended December 31,
2001 and incorporated herein by reference. |
|
|
|
10.17
|
|
License Agreement dated June 30, 1998 between Koss Corporation and Logitech
Electronics Inc. (including Addendum to License Agreement dated June 30, 1998).
Filed as Exhibit 10.18 to the Companys Annual Report on Form 10-K for the
year ended June 30, 1998 and incorporated herein by reference. |
|
|
|
10.18
|
|
Amendment and Extension Agreement between Koss Corporation and Logitech
Electronics Inc. dated May 1, 2001. Filed as Exhibit 10.3 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and
incorporated herein by reference. |
|
|
|
10.19
|
|
License Agreement dated June 30, 2003 between Koss Corporation and Sonigem
Products, Inc. * |
|
|
|
10.20
|
|
Amendment to License Agreement dated August 1, 2005, between Koss Corporation
and Sonigem Products, Inc. * |
|
|
|
14
|
|
Koss Corporation Code of Ethics. Filed as Exhibit 14 to the Companys Annual
Report on Form 10-K for the year ended June 30, 2004 and incorporated herein by
reference. |
|
|
|
21
|
|
List of Subsidiaries of Koss Corporation * |
|
|
|
23.1
|
|
Consent of Grant Thornton LLP * |
|
|
|
23.2
|
|
Consent of PricewaterhouseCoopers LLP * |
|
|
|
31
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer/Chief
Financial Officer * |
|
|
|
32
|
|
Section 1350 Certification of Chief Executive Officer/Chief Financial Officer ** |
|
|
|
|
*
|
|
Filed herewith |
|
|
|
**
|
|
Furnished herewith |
45
exv10w19
Exhibit 10.19
LICENSE AGREEMENT
THIS AGREEMENT is made this 30th day of June, 2003 (the Effective Date) by and between KOSS
CORPORATION, a Delaware corporation with its principal place of business at 4129 North Port
Washington Avenue, Milwaukee, WI 53212 (the LICENSOR) and SONIGEM PRODUCTS, INC., a corporation
organized under the laws of the Province of Ontario, with its principal place of business at 300
Alden Road, Markham, Ontario L3R 4C1(the LICENSEE).
WHEREAS, LICENSEE desires to obtain the right to use certain trademarks of LICENSOR in
connection with the marketing and sale of certain of LICENSEEs products; and
WHEREAS, LICENSOR is willing to grant such rights to LICENSEE upon the terms and conditions
set forth below;
NOW, THEREFORE, for and in consideration of the premises and of the mutual promises and
conditions herein contained, the parties hereby agree as follows:
For purposes of this Agreement, unless the context otherwise requires, the following terms
shall have the meanings set forth below:
1.1 Licensed Trademarks mean the Koss trademarks listed on Exhibit A to this
Agreement.
1.2 Products mean the consumer electronic products of LICENSEE set forth on Exhibit
B to this Agreement.
1.3 Licensed Products mean all Products of LICENSEE that have the Licensed Trademarks
affixed or attached thereto in any manner.
1.4 Territory means Canada.
1.5 Contract Period means the period beginning on the Effective Date and ending on June 30,
2008 and any applicable renewal period.
1.6 Contract Year means the fiscal year of Koss Corporation (July 1-June 30).
1.7 Calendar Quarter means each three-month period during the term of this Agreement, with
the first Calendar Quarter beginning on July 1, 2003 (i.e., July 1, 2003 through September 30,
2003; October 1, 2003 though January 31, 2004, etc.).
2. |
|
GRANT OF LICENSE; LICENSORS SALES. |
2.1 Subject to the terms and conditions of this Agreement, LICENSOR hereby grants to LICENSEE
the exclusive right and license to use the Licensed Trademarks within the
Territory during the Contract Period in connection with, and only with, the manufacture,
promotion, distribution and sale of the Licensed Products.
2.2 LICENSEE will not make or authorize any use, direct or indirect, of the Licensed
Trademarks outside of the Territory; provided, however, that subject to the provisions of Section
2.3 below, LICENSEE has the right to have the Licensed Products manufactured outside the Territory
solely for sale by LICENSEE inside the Territory.
2.3 LICENSEE has the right to subcontract the manufacture of the Licensed Products to another
entity, provided that such entity executes a letter agreement in form substantially similar to
Exhibit C attached hereto. LICENSEE shall not grant any other subcontracting rights other
than as provided in this Section 2.3.
2.4 LICENSEE agrees to sell Products and Licensed Products to LICENSOR at a price equal to the
price LICENSEE pays for such Products or Licensed Products, plus ten percent (10%), payment terms
of net ninety (90) days. Notwithstanding anything to the contrary set forth in this Agreement, any
schedule or Exhibit hereto, or any other document, LICENSOR and LICENSEE acknowledge and agree that
LICENSOR has the right, without any restrictions and on terms acceptable to LICENSOR in its sole
discretion, to sell Products or Licensed Products (i) within the Territory or outside of the
Territory to the U.S. military or U.S. government or any other military or governmental agency (ii)
by direct mail or out of any of LICENSORs outlet stores existing now or in the future, or (iii)
directly to customers or end-users through LICENSORs web site or otherwise via the Internet.
3. |
|
LICENSEES OBLIGATIONS. |
3.1 LICENSEE will not manufacture, advertise, promote, distribute or sell any Licensed
Products:
|
(a) |
|
in violation of any law or regulatory restriction; or |
|
|
(b) |
|
in any manner that damages the image, reputation or goodwill of
the Licensed Trademarks or of LICENSOR or portrays LICENSOR or the Licensed
Products in a false or poor light. |
3.2 During the Contract Period, LICENSEE will diligently manufacture, promote, distribute and
sell Licensed Products and make and maintain adequate arrangements for the distribution, repair and
servicing of the Licensed Products throughout the Territory. LICENSEE and LICENSOR shall each
inform the other party of their respective toll-free customer service telephone numbers, and shall
inform customers who have mistakenly telephoned one party of the other partys customer service
telephone number.
3.3 LICENSEE will not sell refurbished Products labeled with the Licensed Trademarks unless
such Products are clearly and conspicuously labeled as refurbished merchandise.
3.4 At the request of LICENSOR, LICENSEE will pay to LICENSOR in advance all translation
costs, filing fees and all other fees, costs and expenses associated with registered user filings
within the Territory.
3.5 A breach of LICENSEEs obligations regarding the Licensed Trademarks may result in
irreparable injury for which there may be no adequate remedy at law. Therefore, in the event of
any breach or threatened breach of LICENSEEs obligations regarding the Licensed Trademarks,
LICENSOR will be entitled to seek equitable relief in addition to its other available legal
remedies in a court of competent jurisdiction.
4. |
|
APPROVAL OF LICENSED PRODUCTS. |
4.1 LICENSOR has the right to approve or disapprove, in the manner provided herein in advance
of sale, the quality, style, appearance, material and workmanship of all Licensed Products and the
packaging therefor, and to approve or disapprove in advance any and all trademarks, trade names,
designs and logos (whether included in the Licensed Trademarks or not) used in connection with the
Licensed Products. LICENSEE shall not advertise, distribute or sell any such Licensed Product that
has not been approved by LICENSOR. Before selling or distributing any Licensed Product, LICENSEE
shall submit to LICENSOR for its approval, artist renderings of the proposed Products and/or
mock-ups with full engineering specifications together with packaging, labels and the like. Within
twenty (20) business days after receipt of each of the renderings and/or mock-ups, LICENSOR will
approve or disapprove such Products in writing, failing which such products shall be deemed to have
been approved. After LICENSOR has approved the proposed Products and LICENSEE has obtained tooling
for the proposed Products, LICENSEE shall provide LICENSOR with off-tool and/or production samples
of the Products and LICENSOR shall disapprove such samples in writing within twenty (20) business
days after LICENSORs receipt of such items or else LICENSOR shall be deemed to have approved them.
LICENSEE shall also provide to LICENSOR, at no cost to LICENSOR, three (3) working samples of each
Product within thirty (30) days of the commencement of production of such Product. Licensed
Products that are sold or distributed by LICENSEE under this Agreement will be of no lesser quality
than the corresponding samples approved by LICENSOR. LICENSOR will not unreasonably withhold
approval required by LICENSOR under this Section 4.1.
4.2 During the Contract Period, LICENSEE shall take all actions reasonably necessary to cure
any defects in the Licensed Products and will act to preserve the image, reputation and goodwill of
the Licensed Trademarks and of LICENSOR.
4.3 LICENSEE shall make such warranties as are legally required in connection with the sale of
the Licensed Products, including all manufacturers warranties to customers.
5. |
|
APPROVAL OF ADVERTISING, APPEARANCE AND USE OF LICENSED TRADEMARKS. |
5.1 LICENSOR has the right to approve or disapprove, in advance of LICENSEEs commercial use
of the Licensed Products, the contents, appearance and presentation of all advertising materials
that incorporate the Licensed Trademarks or that make reference in any
way to the Licensed Trademarks or Licensed Products. Before producing, publishing or
distributing any advertising materials hereunder, LICENSEE shall submit to LICENSOR, for its
approval, line art and color specifications for the materials. LICENSOR will, within twenty (20)
business days after receipt, approve or disapprove such material in writing, failing which such
material shall be deemed to have been approved, provided that LICENSORs approval shall be subject
to submission and approval of LICENSEEs final packaging materials. LICENSOR will not unreasonably
withhold approval required by LICENSOR under this
Section 5.1.
5.2 LICENSEE agrees to protect, indemnify and save harmless LICENSOR, LICENSORs parent,
subsidiaries and affiliates and all officers, directors, agents, employees and representatives
thereof, from and against any and all expenses, damages, claims, suits, actions, judgments and
costs whatsoever, including reasonable attorneys fees, arising out of, or in any way connected
with, any claim or action relating to the contents of LICENSEEs advertising or of the Licensed
Products, whether or not approved by LICENSOR hereunder, but not including claims that the Licensed
Trademarks infringe a third partys intellectual property rights.
5.3 LICENSOR has the right to include a full line catalog of LICENSORs products within each
Product to which the Licensed Trademarks are affixed and distributed by LICENSEE. A sample of the
full line catalog will be provided to LICENSEE, who shall instruct LICENSOR on a quarterly basis as
to the quantity of full line catalogs needed and the destination where they should be shipped for
LICENSEEs packaging purposes. LICENSOR also has the right to include promotional coupons for
certain of LICENSORs products on a quarterly basis except as prohibited by specific retailers.
Such coupons shall be provided in a manner similar to that set forth above for the full line
catalog and are to be included in every product bearing the Licensed Trademarks and distributed by
LICENSEE.
5.4 LICENSEE will provide to LICENSOR a copy of LICENSEEs most recent list of holders of
warranties on all Products distributed by LICENSEE. LICENSOR agrees to keep such information
confidential and to use it solely for soliciting direct mail consumer sales.
6. |
|
ROYALTIES; PAYMENT; RENEWAL. |
6.1 During each Calendar Quarter of the term of this Agreement, LICENSEE will pay to LICENSOR
as royalties (Royalties) the greater of (1) the royalty rate percentage of net sales of the
Licensed Products as set forth in Exhibit B to this Agreement, and (2) the Minimum
Quarterly Royalty in Section 6.2 below. The term net sales with respect to the Licensed Products
means the total amount invoiced by LICENSEE for sales of the Licensed Products less (a) the total
amount of returns of the Licensed Products, as exemplified on Exhibit D to this Agreement,
(b) volume rebate credits and co-operative advertising allowances (which LICENSEE shall provide to
LICENSOR on the quarterly commission schedule), and (c) any sales taxes (i.e., provincial sales tax
and GST) included in the price of the Licensed Products. No Royalties will be due on sales of
products from LICENSEE to LICENSOR.
6.2 During the applicable Contract Year, the minimum quarterly Royalties (Minimum Quarterly
Royalties) for each Calendar Quarter during that Contract Year are as follows:
|
|
|
Contract Year |
|
Minimum Quarterly Royalties |
July 1,
2003 June 30, 2004 |
|
U.S. $12,500 |
July 1,
2004 June 30, 2005 |
|
U.S. $18,750 |
July 1,
2005 June 30, 2006 |
|
U.S. $25,000 |
July 1,
2006 June 30, 2007 |
|
U.S. $31,250 |
July 1,
2007 June 30, 2008 |
|
The greater of U.S. $37,500 or the
Minimum Quarterly Royalties paid by LICENSEE for July 1, 2006 June 30, 2007 |
If at the end of any Calendar Quarter, the cumulative total Royalties paid by
LICENSEE to LICENSOR do not equal or exceed the cumulative Royalty for such Calendar
Quarter as set forth in Exhibit E, then LICENSEE shall pay to LICENSOR the
difference between the Minimum Quarterly Royalties for such Calendar Quarter and the
Royalties paid by LICENSEE to LICENSOR for such Calendar Quarter within thirty (30)
days following the end of such Calendar Quarter.
6.3 If as of June 30, 2008, LICENSOR elects to renew this Agreement as hereinafter provided
for an additional two (2) year period, LICENSEE shall pay to LICENSOR the following Minimum
Quarterly Royalties:
|
|
|
Contract Year |
|
Minimum Quarterly Royalties |
July 1, 2008 June 30, 2009
|
|
The greater of U.S.
$39,375 or the Minimum
Quarterly Royalties paid
by LICENSEE for July 1,
2007 June 30, 2008 |
July 1, 2009 June 30, 2010
|
|
The greater of U.S.
$41,344 or the Minimum
Quarterly Royalties paid
by LICENSEE for July 1,
2008 June 30, 2009 |
If at the end of any Calendar Quarter, the cumulative total Royalties paid by LICENSEE to
LICENSOR do not equal or exceed the cumulative Royalty for such Calendar Quarter as set
forth in Exhibit E, then LICENSEE shall pay to LICENSOR the difference between the
Minimum Quarterly Royalties for such Calendar Quarter and the Royalties paid by LICENSEE to
LICENSOR for such Calendar Quarter within thirty (30) days following the end of such
Calendar Quarter.
6.4 LICENSEE shall make payment of Royalties quarterly on or before the 20th day following the
end of each Calendar Quarter of each Contract Year during the term of this Agreement (i.e., January
20, April 20, July 20 and October 20) and within thirty (30) days after the expiration or earlier
termination of this Agreement, in respect of all Licensed Products shipped during such quarter.
6.5 LICENSEEs payment of all Royalties must be in United States dollars. The late payment of
any Royalties will bear interest at the rate of one and one-half percent (1-1/2%) per month, or at
the highest rate permitted by applicable state law, whichever is lower.
7. |
|
BOOKS, RECORDS, AND STATEMENTS. |
7.1 LICENSEE shall maintain for three (3) years following the close of each Contract Year
accurate books and records that disclose, at a minimum, the following: the cost of sales of the
Licensed Products, the amount of sales of the Licensed Products, the amount of credits for returns,
trade discounts and customers shipping costs, the amount of all Royalties payable hereunder by
LICENSEE and the manner in which such Royalties were determined.
7.2 LICENSEE shall deliver to LICENSOR with each quarterly payment a detailed accounting
statement showing the calculation of such Royalties payment. Such statement must be in sufficient
detail to be audited from the books of LICENSEE maintained pursuant to Section 7.1. By the 15th
day of each month during each Contract Year during the term of this Agreement, LICENSEE shall also
provide LICENSOR with a preliminary tabulation of the sales and returns by customer and by Product
model number for the prior month, for LICENSORs use and analysis.
7.3 Within ninety (90) days after the close of each Contract Year, LICENSEE shall furnish to
LICENSOR a statement, certified to be true and correct by LICENSEEs Chief Financial Officer, that
the accounting for sales is complete and correct, and the total sales of the Licensed Products to
each retail account.
7.4 LICENSOR, at its expense, has the right at any time during regular business hours after
the end of any Contract Year, upon five (5) days written notice to LICENSEE, to have a
representative of LICENSOR examine or audit the books, accounts and records of LICENSEE that
pertain to the manufacture, distribution and sale of the Licensed Products and the amount of credit
for returns, trade discounts and customers shipping costs with respect thereto, and other books
and records as they may be reasonably required by LICENSORs accountants to verify the figures
reported in any statements furnished to LICENSOR pursuant to this Section 7. LICENSEE shall make
such books of account and records available to LICENSOR and its accountants at LICENSEEs office
located as herein stated or such other place as the parties mutually agree. LICENSEE shall render
all possible assistance to LICENSOR and its accountants for the purpose of facilitating the
checking or auditing of net sales and of the figures set forth in any of LICENSEEs statements. If
the examination or audit reveals the underpayment of any Royalties, LICENSEE shall immediately pay
LICENSOR the amount of the deficiency with interest, and if the deficiency exceeds five percent
(5%) of the amount of Royalties paid with respect to such year or years audited, LICENSEE shall pay
the cost of the examination or audit.
8.1 LICENSEE will imprint irremovably and legibly on each Licensed Product manufactured,
distributed or sold under this Agreement (including, but not limited to, advertising, promotional,
packaging and wrapping material and any other such material wherein
the Licensed Trademarks may appear), the appropriate trademark and/or copyright notices, as
designated in writing in advance by LICENSOR. LICENSEE will deliver to LICENSOR upon request, free
of cost, samples of each Licensed Product together with their packaging and wrapping material for
approval and for trademark and/or copyright registration purposes.
8.2 LICENSEE will not, during the term of this Agreement or thereafter, file any application
for trademark registration or otherwise obtain or attempt to obtain ownership of any name, design,
logo, trademark or trade name, within the Territory or in any other country of the world, which
includes or is confusingly similar to or suggestive of the Licensed Trademarks.
8.3. LICENSEE will not, directly or indirectly, challenge or contest LICENSORs ownership of
or rights in the Licensed Trademarks, whether for the Licensed Products or otherwise.
8.4 All use of the Licensed Trademarks by LICENSEE inure to the benefit of LICENSOR, and
LICENSEE does not and will not acquire any rights therein adverse to LICENSOR.
9. |
|
MAINTENANCE OF LICENSED TRADEMARKS. |
LICENSEE shall promptly notify LICENSOR in writing of any infringement by others of the
Licensed Trademarks on articles similar to the Licensed Products if and when such infringement
becomes known to LICENSEE and shall provide LICENSOR with any available evidence of such
infringement. Only LICENSOR has the right to commence legal proceedings against such infringer.
In any infringement action, proceeding or claim brought by LICENSOR, LICENSEE, at its expense,
shall make available to LICENSOR any relevant books, records, papers, information, designs,
samples, specimens, and the like and shall cause any of LICENSEEs employees to be deposed or to
testify, whenever requested to do so by LICENSOR.
10. |
|
INDEMNIFICATION AND INSURANCE. |
10.1 LICENSEE shall protect, indemnify and save harmless LICENSOR, LICENSORs parent,
subsidiaries and affiliates and all officers, directors, agents, employees and representatives
thereof, and any of them, from and against any and all expenses, damages, claims, suits, actions,
judgments and costs whatsoever, including reasonable attorneys fees, arising out of, or in any way
connected with, any claim or action for the violation by LICENSEE of any statutory or regulatory
obligation, any claim or action for injury or damage to property, personal injury, death or other
cause of action involving alleged defects in Licensed Products, and any other claim or action
arising out of LICENSEEs activities pursuant to this Agreement or other conduct of its business,
including infringement claims.
10.2 LICENSEE shall, within thirty (30) calendar days after the execution of this Agreement,
obtain from an insurance company reasonably acceptable to LICENSOR, and maintain during the term of
this Agreement and for a period of twenty-four (24) months following the expiration or termination
of this Agreement, public and products liability insurance with a limit of liability of not less
than Two Million ($2,000,000) U.S. dollars per occurrence to protect LICENSOR against any
liabilities with which it may be charged because of damage or
injuries suffered by any servants, agents, contractors, employees or customers of LICENSEE or
by the general public, resulting from the use or sale of the Licensed Products manufactured,
distributed, advertised, leased or sold by LICENSEE or by LICENSEEs contractor. LICENSEE shall
include LICENSORs name in such policy as an additional named insured and an additional loss payee,
and shall deliver to LICENSOR a certificate thereof. Said insurance shall provide that it cannot
be canceled without the insurer first giving LICENSOR twenty (20) calendar days advance written
notice thereof. LICENSEE shall furnish or cause to be furnished to LICENSOR evidence of the
maintenance and renewal of the insurance required herein, including, but not limited to, copies of
policies, certificates of insurance, with applicable riders and endorsements, and proof of premium
payments.
11. |
|
DEFAULT; TERMINATION. |
11.1 In the event of a default by either party in the performance of any of its obligations
pursuant to this Agreement, the non-defaulting party shall give written notice of such default to
the defaulting party. Within 30 days of its receipt of such notice, the defaulting party shall
cure the default. If the defaulting party does not take such corrective actions or cure the
default within 30 days, the non-defaulting party has the right to terminate this Agreement by
providing written notice to the defaulting party. The right to remedy a default does not apply to
LICENSEEs breach of Sections 4, 5, 6 or 7 of this Agreement, which will give LICENSOR the right to
treat such breach as a non-curable default and to terminate this Agreement.
11.2 Either party has the right to terminate this Agreement upon ten (10) days prior notice
upon the occurrence of any of the following events:
|
(a) |
|
If the other party becomes insolvent or makes an assignment for
the benefit of creditors or becomes the subject of receivership, bankruptcy or
other insolvency or debtor relief proceedings, or any similar proceedings; |
|
|
(b) |
|
If the other party ceases to do business; or |
|
|
(c) |
|
Except as permitted under Section 14 below, if the other party
attempts to assign any of its rights under this Agreement. |
A partys exercise of its right, pursuant to this Section 11.2, to terminate this Agreement is
without prejudice to any other legal or equitable remedy such party may hold against the other
party by reason of the other partys breach of any term or condition of this Agreement.
11.3 LICENSEE has the right to terminate this Agreement at any time by giving written notice
to LICENSOR during the course of any Contract Year, in which case this Agreement will continue in
full force and effect for an additional one (1) Contract Year after December 31 of the Contract
Year in which the notice of termination was given. The Minimum Quarterly Royalties in effect at
the time of the notice of termination will remain constant for the remaining Contract Years of this
Agreement.
11.4 Commencing with the Contract Year starting January 1, 2005, LICENSOR has the right to
terminate this Agreement during the Course of any Contract Year if one of the following thresholds
is not met with regard to the Royalties paid by LICENSEE for the periods
referenced below: (i) LICENSEEs average Royalties from the two (2) most recent Contract Years
do not exceed 110% of the average annual Minimum Quarterly Royalties from the same two (2) year
period, or (ii) LICENSEEs actual Royalties for the most recent Contract Year do not exceed 70% of
the actual Royalties for the immediately preceding Contract Year. In the event of such notice of
termination from LICENSOR, this Agreement will continue in full force and effect for an additional
one (1) Contract Year after December 31 of the Contract Year in which the notice of termination was
given. The Minimum Quarterly Royalties in effect at the time of the notice of termination will
remain constant for the remaining Contract Years of this Agreement.
11.5 No assignee for the benefit of creditors, receiver, liquidator, trustee in bankruptcy,
sheriff or any other officer of the court or official charged with taking over custody of
LICENSEEs assets or business, has any right to continue performance of this Agreement, and this
Agreement may not be assigned by operation of law.
11.6 Failure to terminate this Agreement pursuant to this Section 11 does not effect or
constitute a waiver of any remedies the non-defaulting party is entitled to demand, whether by way
of damages, termination or otherwise. Termination of this Agreement is without prejudice to the
rights and liabilities of either party to the other in respect of any matter arising under this
Agreement.
12. |
|
RIGHTS AFTER TERMINATION. |
12.1 Except as provided in Section 12.2 below, from and after the termination of this
Agreement, whether because of non-renewal, default or otherwise, all of the rights of LICENSEE to
the use of the Licensed Trademarks will, except as hereinafter expressly provided, cease
absolutely, and LICENSEE must not thereafter manufacture, advertise, promote, distribute or sell
any item in connection with the Licensed Trademarks. It is further agreed that following such
termination, LICENSEE shall not manufacture, advertise, promote, distribute or sell any item in
connection with the use of any name, figure, design, logo, trademark or trade name similar to or
suggestive of the Licensed Trademarks.
12.2 Notwithstanding Section 12.1 above, so long as LICENSOR does not terminate this Agreement
as set forth in Sections 11.1 and 11.2 above, any Licensed Products for which as of the date of any
other termination LICENSEE has non-cancelable open orders may be sold by LICENSEE on a
non-exclusive basis during the 9-month period following the date of termination. LICENSEE shall
continue to pay Royalties to LICENSOR with respect to such sales at the rate and in the manner
specified in this Agreement. Within 30 days of the date of termination, LICENSEE shall provide to
LICENSOR a complete listing of the inventory in transit and the warehoused inventory. LICENSEE has
no right to manufacture any additional Licensed Products after the date of termination.
All notices required or provided for in this Agreement must be in writing and must be given by
registered mail, prepaid and properly addressed to the last known address of the party to be served
herewith, or by telecopy facsimile and confirmed by regular mail, and will be deemed
to have been given on the third (3rd) day after mailing or on the same day as the
facsimile transmission is received. Notices sent to LICENSOR shall be addressed as follows:
KOSS Corporation
4129 North Port Washington Avenue
Milwaukee, WI 53212
Attn: President
Fax No.: (414) 967-1537
Notices sent to LICENSEE shall be addressed as follows:
Sonigem Products, Inc.
300 Alden Road
Markham, Ontario L3R 4C1
Attn: President
Fax No.: 905-940-4411
This Agreement binds and inures to the benefit of LICENSOR, and the successors and assigns of
LICENSOR. The rights granted LICENSEE hereunder are exclusive to it and may not, without the prior
written consent of LICENSOR, be transferred or assigned to any other entity. In the event of the
merger or consolidation of LICENSEE with any other entity, LICENSOR has the right to terminate this
Agreement by so notifying LICENSEE in writing on or before sixty (60) days after LICENSOR has
received written notice of such merger or consolidation.
15. |
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INDEPENDENT CONTRACTORS. |
The relationship of LICENSOR and LICENSEE established by this Agreement is that of independent
contractors, and nothing contained in this Agreement will be construed to (a) give either party the
power to direct and control the day-to-day activities of the other, (b) constitute the parties as
partners, joint venturers, co-owners, or otherwise as participants in a joint or common
undertaking, or (c) allow LICENSEE or LICENSOR to create or assume any obligation on behalf of the
other party for any purpose whatsoever, unless otherwise expressly provided in this Agreement.
16.1 Definition of Confidential Information. Each party may receive (the Recipient)
confidential or proprietary information from the other party (the Disclosing Party) in the course
of performing its obligations under this Agreement. Confidential information includes the terms of
this Agreement and any information from the Disclosing Party that: (i) is marked as Confidential
or Proprietary, (ii) is reasonably identifiable as the confidential information of the Disclosing
Party, (iii) is not generally known in the businesses and industries in which the Recipient is
engaged, or (iv) under the circumstances of the disclosure should reasonably be considered as
confidential or proprietary information of the Disclosing Party. Confidential information does not
include any information that is: (a) rightly and lawfully known to the Recipient before receipt
from
the Disclosing Party; (b) publicly available through no fault of the Recipient; (c) rightly
and lawfully received by the Recipient from a third party without a duty of confidentiality; or (d)
independently developed by the Recipient without use of or access to the Disclosing Partys
confidential information.
16.2 Obligations of Confidentiality. Both parties will take reasonable care, but in
no event less care than the party uses to protect its own confidential information, to preserve in
strict confidence any confidential or proprietary information obtained by them, their agents or
employees. Each party will use the confidential information only in the course of performing its
obligations under this Agreement, unless otherwise agreed to by the Disclosing Party in writing.
Disclosure of confidential information required by a government body or court of law is not a
violation of this Section 16 if the Recipient gives prompt notice of the required disclosure to the
Disclosing Party (and a reasonable opportunity for the Disclosing Party to obtain a protective
order) and the Recipient discloses only the amount of confidential information required to comply
with the government body or court of law.
16.3 Obligations Upon Termination. Each party shall at its own expense return to the
other party or otherwise dispose as the Disclosing Party may instruct, any information sent by the
Disclosing Party (including electronically sent) to the Recipient.
17.1 Section headings contained herein are solely for the purpose of aiding in location of
subject matter and are not to be given weight in the construction of this Agreement.
17.2 This writing constitutes the entire Agreement between the parties regarding the subject
matter of this Agreement and may not be changed or modified except by a writing signed by the
parties to this Agreement.
17.3 If and to the extent that any provisions of this Agreement are prohibited or
unenforceable under any applicable law, such provisions shall be ineffective to the extent of such
prohibition or unenforceable without invalidating the remaining provisions hereof or affecting the
validity or enforceability of any other provision hereof.
17.4 The failure of either party at any time or times to demand strict performance by the
other of any of the terms, covenants or conditions set forth herein shall not be construed as a
continuing waiver or relinquishment thereof and each may at any time demand strict and complete
performance by the other of said terms, covenants and conditions.
17.5 This Agreement is governed by the substantive laws of the State of Wisconsin (regardless
of laws that might be applicable under principles of conflicts of laws) as to all matters,
including but not limited to matters of validity, construction, effect and performance. Resolution
of any and all disputes between LICENSOR and LICENSEE arising from or in connection with this
Agreement, whether based on contract, tort, common law, equity, statute, regulation, order or
otherwise, will be governed by and settled in accordance with binding arbitration by three (3)
arbitrators; provided, however, that the three arbitrators selected must each have extensive
knowledge in the area of federal trademark law. If the parties cannot agree on the selection of
three arbitrators, each party shall select one arbitrator, and those two
arbitrators together shall select the third arbitrator, and the three arbitrators, shall
resolve the dispute as provided herein. The arbitrators findings and decisions must be limited to
the subject matter of the dispute, and such findings and decisions must be in writing and are final
and binding on the parties hereto, and must specify the reasons for and facts on which such
findings and decisions were reached. The parties hereto shall bear equally the arbitrators fees
and charges, and each party shall bear its other costs and expenses for the arbitration, including
attorneys fees. The arbitration must be conducted in Milwaukee, Wisconsin. To the extent that
the parties hereto need to enforce the arbitration provisions in this Agreement or need to enforce
or otherwise give effect to any arbitration finding, decision or award, any such action or
proceeding must be adjudicated before a federal or state court located in Milwaukee, Wisconsin, and
the parties hereby submit to the exclusive jurisdiction of the courts of the State of Wisconsin
located in Milwaukee, Wisconsin, and of the federal courts located in Milwaukee, Wisconsin, with
respect to any such action or proceeding commenced by either party. The parties hereto irrevocably
waive any objection they now or hereafter may have respecting the venue of any such action or
proceeding brought in such a court or respecting the fact that such court is an inconvenient forum,
and hereby consent to the service of process in any such action or proceeding by means of
registered or certified mail, return receipt requested, in care of the applicable address set forth
under the notice provisions in this Agreement.
17.6 No delay, failure or default in performance of any obligation by either party will
constitute a breach of this Agreement to the extent caused by an act of God, natural disaster,
civil disturbance or other cause beyond the partys reasonable control and that the party could not
have prevented by reasonable precautions. If a force majeure event prevents LICENSEE from
performing under this Agreement for more than 90 days, LICENSOR may terminate this Agreement by
providing written notice of such termination to LICENSEE.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed as of the
Effective Date.
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KOSS CORPORATION |
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By: /s/ Michael J. Koss |
|
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Michael J. Koss |
|
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Title: President and CEO |
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SONIGEM PRODUCTS, INC. |
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By: /s/ Reuben Klein |
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Reuben Klein |
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Title: President and CEO |
EXHIBIT A
KOSS (Plain Block Letters) (as shown in U.S. Registration No. 1,821,035)
KOSS (Stylized) (as shown in U.S. Registration No. 1,850,556)
KOSS & Design (as shown in U.S. Registration No. 2,070,098)
EXHIBIT B
Description of Products to be sold under LICENSORs Trademark.
1. Video Products. Includes, but is not limited to (i) Televisions using Cathode Ray
Tube, Liquid Crystal Display, Plasma and Projection Technology, and (2) Video Cassette
Recorders/Players (VCRs).
2. Communications Products. Includes, but is not limited to (i) Telephones (line
operated whether corded or cordless handsets), (ii) Answering Machines with or without an
Integrated Telephone, and (iii) Two-way Radios whether in FRS, GMRS or MURS Technology Formats.
EXHIBIT C
TO:
FROM: (Subcontractor) Manufacturing Factory
RE: Use of the Koss Brandname
The purpose of this letter is to acknowledge that has the right to manufacture
Licensed Products, as defined in the License Agreement between Sonigem Products, Inc. (Sonigem)
and Koss Corporation dated , 2003 (License Agreement), bearing the Koss
brandname and trademarks only for the account of Sonigem and only as a subcontract manufacturer
pursuant to Sections 2.2 and 2.3 of the License Agreement and for no other purpose. We agree that
we will not use the Koss name on any products other than those manufactured for Sonigems
account. agrees that neither it nor any affiliated or related individual or entity
(i) will, at any time, file any application for trademark registration or otherwise obtain or
attempt to obtain ownership of the Koss brandname or trademarks, or any name or mark that is
confusingly similar thereto, anywhere in the world or (ii) directly or indirectly challenge or
contest Koss Corporations ownership of or rights in the Koss brandname and tradenames, whether
for the Licensed Products or otherwise.
EXHIBIT D
Calculation of Quarterly Royalties Payment (in U.S. Dollars)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
Total Sales |
|
Returns |
|
Net Sales |
|
Royalty Rate |
Video Products |
|
$ |
_____ |
|
|
$ |
_____ |
|
|
$ |
_____ |
|
|
|
1 |
% |
|
Communications
Products |
|
$ |
_____ |
|
|
$ |
_____ |
|
|
$ |
_____ |
|
|
|
1.5 |
% |
TOTAL ROYALTIES PAYMENT U.S. $
EXHIBIT E
Cumulative Royalty Schedule
|
|
|
|
|
Calendar Quarter |
|
Cumulative Royalty |
July 1, 2003 September 30, 2003 |
|
$ |
12,500 |
|
October 1, 2003 December 31, 2003 |
|
$ |
25,000 |
|
January 1, 2004 March 31, 2004 |
|
$ |
37,500 |
|
April 1, 2004 June 30, 2004 |
|
$ |
50,000 |
|
|
|
|
|
|
July 1, 2004 September 30, 2004 |
|
$ |
68,750 |
|
October 1, 2004 December 31, 2004 |
|
$ |
87,500 |
|
January 1, 2005 March 31, 2005 |
|
$ |
106,250 |
|
April 1, 2005 June 30, 2005 |
|
$ |
125,000 |
|
|
|
|
|
|
July 1, 2005 September 30, 2005 |
|
$ |
150,000 |
|
October 1, 2005 December 31, 2005 |
|
$ |
175,000 |
|
January 1, 2006 March 31, 2006 |
|
$ |
200,000 |
|
April 1, 2006 June 30, 2006 |
|
$ |
225,000 |
|
|
|
|
|
|
July 1, 2006 September 30, 2006 |
|
$ |
256,250 |
|
October 1, 2006 December 31, 2006 |
|
$ |
287,500 |
|
January 1, 2007 March 31, 2007 |
|
$ |
318,750 |
|
April 1, 2007 June 30, 2007 |
|
$ |
350,000 |
|
|
|
|
July 1, 2007 September 30, 2007
|
|
The greater of $387,500 or $350,000 +
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2006 June 30, 2007 (the 17th
Minimum Quarterly Royalty) |
|
|
|
October 1, 2007 December 31, 2007
|
|
The 17th Minimum Quarterly Royalty +
the greater of (i) $37,500 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2006 June 30, 2007 (the 18th
Minimum Quarterly Royalty) |
|
|
|
January 1, 2008 March 31, 2008
|
|
The 18th Minimum Quarterly Royalty +
the greater of (i) $37,500 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2006 June 30, 2007 (the 19th
Minimum Quarterly Royalty) |
|
|
|
April 1, 2008 June 30, 2008
|
|
The 19th Minimum Quarterly Royalty +
the greater of (i) $37,500 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2006 June 30, 2007 (the 20th
Minimum Quarterly Royalty) |
|
|
|
Calendar Quarter |
|
Cumulative Royalty |
July 1, 2008 September 30, 2008
|
|
The 20th Minimum Quarterly Royalty +
the greater of (i) $39,375 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2007 June 30, 2008 (the 21st
Minimum Quarterly Royalty) |
|
|
|
October 1, 2008 December 31, 2008
|
|
The 21st Minimum Quarterly Royalty +
the greater of (i) $39,375 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2007 June 30, 2008 (the 22nd
Minimum Quarterly Royalty) |
|
|
|
January 1, 2009 March 31, 2009
|
|
The 22nd Minimum Quarterly Royalty +
the greater of (i) $39,375 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2007 June 30, 2008 (the 23rd
Minimum Quarterly Royalty) |
|
|
|
April 1, 2009 June 30, 2009
|
|
The 23rd Minimum Quarterly Royalty +
the greater of (i) $39,375 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2007 June 30, 2008 (the 24th
Minimum Quarterly Royalty) |
|
|
|
July 1, 2009 September 30, 2009
|
|
The 24th Minimum Quarterly Royalty +
the greater of (i) $41,344 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2008 June 30, 2009 (the 25th
Minimum Quarterly Royalty) |
|
|
|
October 1, 2009 December 31, 2009
|
|
The 25th Minimum Quarterly Royalty +
the greater of (i) $41,344 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2008 June 30, 2009 (the 26th
Minimum Quarterly Royalty) |
|
|
|
January 1, 2010 March 31, 2010
|
|
The 26th Minimum Quarterly Royalty +
the greater of (i) $41,344 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2008 June 30, 2009 (the 27th
Minimum Quarterly Royalty) |
|
|
|
April 1, 2010 June 30, 2010
|
|
The 27th Minimum Quarterly Royalty +
the greater of (i) $41,344 and (ii)
the average Minimum Quarterly
Royalties paid by LICENSEE for July 1,
2008 June 30, 2009 (the 28th
Minimum Quarterly Royalty) |
exv10w20
Exhibit 10.20
AMENDMENT TO LICENSE AGREEMENT
This Amendment to License Agreement (this Amendment) is made and entered into this 1st day of
August, 2005 (the Amendment Effective Date) by and between Koss Corporation, a Delaware
corporation (Licensor), and Sonigem Products, Inc., a corporation organized under the laws of the
Province of Ontario (Licensee). The License Agreement amended by this Amendment is referred to
in this Amendment as the Agreement.
For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree to amend the Agreement as follows as of the Amendment Effective Date:
1. Section 2.4 of the Agreement is amended so that (i) the phrase Products or Licensed Products
is deleted from line 6 of Section 2.4 of the Agreement and is replaced with Products, Licensed
Products, and any other items, and (ii) the phrase through LICENSORs web site or otherwise via
the Internet at the end of Section 2.4 of the Agreement is deleted.
2. Section 3.2 of the Agreement is amended so that the following is added as the second sentence of
that section:
LICENSEE shall repair and service the Licensed Products in a professional and workmanlike
manner consistent with the highest industry standards.
3. Section 6.2 of the Agreement is deleted in its entirety and replaced with the following:
6.2 During the applicable Contract Year, the minimum quarterly Royalties (Minimum Quarterly
Royalties) for each Calendar Quarter during that Contract Year are as follows:
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|
|
Contract Year |
|
Minimum Quarterly Royalties |
|
|
|
July 1, 2003 June 30, 2004
|
|
U.S. $12,500 |
July 1, 2004 June 30, 2005
|
|
U.S. $18,750 |
July 1, 2005 June 30, 2006
|
|
U.S. $75,000 |
July 1, 2006 June 30, 2007
|
|
U.S. $81,250 |
July 1, 2007 June 30, 2008
|
|
The greater of U.S. $87,500 or the
Minimum Quarterly Royalties paid by
LICENSEE for July 1, 2006 June 30,
2007 |
If at the end of any Calendar Quarter, the cumulative total Royalties paid by LICENSEE to
LICENSOR do not equal or exceed the cumulative Royalty for such Calendar Quarter as set
forth in Exhibit E, then, within thirty (30) days following the end of such Calendar
Quarter, LICENSEE shall pay to LICENSOR the difference between the Minimum Quarterly
Royalties for such Calendar Quarter and the Royalties paid by LICENSEE to LICENSOR for such
Calendar Quarter.
4. Section 6.3 of the Agreement is deleted in its entirety and replaced with the following:
6.3 If as of June 30, 2008, LICENSOR elects to renew this Agreement as hereinafter provided
for an additional two (2) year period, LICENSEE shall pay to LICENSOR the following Minimum
Quarterly Royalties:
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|
|
Contract Year |
|
Minimum Quarterly Royalties |
|
|
|
July 1, 2008 June 30, 2009
|
|
The greater of U.S. $89,375 or the
Minimum Quarterly Royalties paid by
LICENSEE for July 1, 2007 June 30,
2008 |
|
|
|
July 1, 2009 June 30, 2010
|
|
The greater of U.S. $91,344 or the
Minimum Quarterly Royalties paid by
LICENSEE for July 1, 2008 June 30,
2009 |
If at the end of any Calendar Quarter, the cumulative total Royalties paid by LICENSEE to
LICENSOR do not equal or exceed the cumulative Royalty for such Calendar Quarter as set
forth in Exhibit E, then, within thirty (30) days following the end of such Calendar
Quarter, LICENSEE shall pay to LICENSOR the difference between the Minimum Quarterly
Royalties for such Calendar Quarter and the Royalties paid by LICENSEE to LICENSOR for such
Calendar Quarter.
5. The following provision is added to the Agreement as new Section 7.5
During the term of this Agreement, by the 10th day of each calendar month after
the Amendment Effective Date, LICENSEE will provide LICENSOR with (i) the inventory of
Products and Licensed Products as of the last day of the previous calendar month, (ii) a
list of all Products and Licensed Products in transit, (iii) a list of purchase orders
received by LICENSEE for the previous month, and (iv) a list of companies that LICENSEE has
subcontracted the manufacture of Licensed Products under Section 2.3 of this Agreement.
6. Exhibit B to the Agreement is deleted in its entirety and replaced with Exhibit B to this
Amendment.
7. Exhibit D to the Agreement is deleted in its entirety and replaced with Exhibit D to this
Amendment.
8. Exhibit E to the Agreement is deleted in its entirety and replaced with Exhibit E to this
Amendment.
9. This Amendment has been jointly drafted by the parties, reflects the parties mutual intent, and
no terms shall be construed more or less favorably to either party on the grounds that is was
drafted by such party.
10. Except as set forth in this Amendment, the Agreement remains in full force and effect.
|
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|
|
KOSS CORPORATION |
|
|
|
|
|
|
|
By: /s/ Michael J. Koss |
|
|
|
|
Michael J. Koss |
|
|
|
|
Title: President and CEO |
|
|
|
|
|
|
|
SONIGEM PRODUCTS, INC. |
|
|
|
|
|
|
|
By: /s/ Reuben Klein |
|
|
|
|
Reuben Klein |
|
|
|
|
Title: President and CEO |
EXHIBIT B
A. Description of Licensed Products to be sold under LICENSORs Trademark.
1. Video Products. LICENSEE may only sell the following video products:
a. DVD players
b. Portable DVD players (TV/DVD)
c. DVD combos
d. VCR
e. Mobile video
f. Home theatre in a box with or without a DVD player
g. Television (CRT and LCD)
h. Personal media player / recorder
2. Audio Products & Telephones. LICENSEE may only sell the following audio products
and telephones:
a. Radios
b. Personal CD players
c. MP3 player / recorder in flash and hard drive formats
d. Boomboxes
e. Home stereo
f. Automotive audio
g. Telephones only (i.e., the device can have no other functionality other than as a
telephone)
h. Satellite radio
3. GPS Navigational Devices. LICENSEE may only sell the following GPS navigational
devices:
a. Portable
b. Mobile
4. Speakers. LICENSEE may only sell speakers for the following:
a. Special MP3/IPOD style speaker
b. Car
5. LICENSEE may include headphones and earbuds as part of a system only when the product being
sold does not include a speaker. For example, headphones and earbuds may be included as part of a
portable or mobile personal media player, portable or mobile personal CD player, portable or mobile
personal MP3 player, and a radio without a speaker.
B. For clarification, other than as set forth in Section A.5 of this Exhibit B, LICENSEE may not,
under any circumstances, sell or provide headphones, stereophones, or headsets, including wireless
headphones, stereophones and headsets.
C. The royalty rates for the Licensed Products listed on this Exhibit B are set forth in Exhibit D
to this Agreement.
EXHIBIT D
Calculation of Quarterly Royalties Payment (in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensed Products |
|
Total Sales |
|
|
Returns |
|
|
Net Sales |
|
|
Royalty Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video Products |
|
$ |
_____ |
|
|
$ |
_____ |
|
|
$ |
_____ |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audio Products &
Telephones |
|
$ |
_____ |
|
|
$ |
_____ |
|
|
$ |
_____ |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GPS Navigational
Devices |
|
$ |
_____ |
|
|
$ |
_____ |
|
|
$ |
_____ |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Speakers |
|
$ |
_____ |
|
|
$ |
_____ |
|
|
$ |
_____ |
|
|
|
5.0 |
% |
TOTAL ROYALTIES PAYMENT U.S. $___
EXHIBIT E
Cumulative Royalty Schedule
|
|
|
|
|
Calendar Quarter |
|
Cumulative Royalty |
|
|
|
|
|
|
July 1, 2003 September 30, 2003 |
|
$ |
12,500 |
|
October 1, 2003 December 31, 2003 |
|
$ |
25,000 |
|
January 1, 2004 March 31, 2004 |
|
$ |
37,500 |
|
April 1, 2004 June 30, 2004 |
|
$ |
50,000 |
|
|
|
|
|
|
July 1, 2004 September 30, 2004 |
|
$ |
68,750 |
|
October 1, 2004 December 31, 2004 |
|
$ |
87,500 |
|
January 1, 2005 March 31, 2005 |
|
$ |
106,250 |
|
April 1, 2005 June 30, 2005 |
|
$ |
125,000 |
|
|
|
|
|
|
July 1, 2005 September 30, 2005 |
|
$ |
200,000 |
|
October 1, 2005 December 31, 2005 |
|
$ |
275,000 |
|
January 1, 2006 March 31, 2006 |
|
$ |
350,000 |
|
April 1, 2006 June 30, 2006 |
|
$ |
425,000 |
|
|
|
|
|
|
July 1, 2006 September 30, 2006 |
|
$ |
506,250 |
|
October 1, 2006 December 31, 2006 |
|
$ |
587,500 |
|
January 1, 2007 March 31, 2007 |
|
$ |
668,750 |
|
April 1, 2007 June 30, 2007 |
|
$ |
750,000 |
|
|
|
|
July 1, 2007 September 30, 2007
|
|
The greater of $837,500 or $750,000 + the average
Minimum Quarterly Royalties paid by LICENSEE for July 1, 2006 June 30, 2007 (the
17th Minimum Quarterly Royalty) |
|
|
|
October 1, 2007 December 31, 2007
|
|
The 17th Minimum Quarterly Royalty + the greater of (i)
$87,500 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for July 1,
2006 June 30, 2007 (the 18th Minimum Quarterly Royalty) |
|
|
|
January 1, 2008 March 31, 2008
|
|
The 18th Minimum Quarterly Royalty + the greater of (i)
$87,500 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for July 1,
2006 June 30, 2007 (the 19th Minimum Quarterly Royalty) |
|
|
|
April 1, 2008 June 30, 2008
|
|
The 19th Minimum Quarterly Royalty + the greater of
(i) $87,500 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for July
1, 2006 June 30, 2007 (the 20th Minimum Quarterly Royalty) |
|
|
|
Calendar Quarter |
|
Cumulative Royalty |
|
July 1, 2008 September 30, 2008
|
|
The 20th Minimum Quarterly Royalty + the greater
of (i) $89,375 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for
July 1, 2007 June 30, 2008 (the 21st Minimum Quarterly Royalty) |
|
|
|
October 1, 2008 December 31, 2008
|
|
The 21st Minimum Quarterly Royalty + the greater of (i)
$89,375 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for July 1,
2007 June 30, 2008 (the 22nd Minimum Quarterly Royalty) |
|
|
|
January 1, 2009 March 31, 2009
|
|
The 22nd Minimum Quarterly Royalty + the greater of (i)
$89,375 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for July 1,
2007 June 30, 2008 (the 23rd Minimum Quarterly Royalty) |
|
|
|
April 1, 2009 June 30, 2009
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The 23rd Minimum Quarterly Royalty + the greater of
(i) $89,375 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for July
1, 2007 June 30, 2008 (the 24th Minimum Quarterly Royalty) |
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|
July 1, 2009 September 30, 2009
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The 24th Minimum Quarterly Royalty + the greater
of (i) $91,344 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for
July 1, 2008 June 30, 2009 (the 25th Minimum Quarterly Royalty) |
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October 1, 2009 December 31, 2009
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The 25th Minimum Quarterly Royalty + the greater of (i)
$91,344 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for July 1,
2008 June 30, 2009 (the 26th Minimum Quarterly Royalty) |
|
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|
January 1, 2010 March 31, 2010
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The 26th Minimum Quarterly Royalty + the greater of (i)
$91,344 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for July 1,
2008 June 30, 2009 (the 27th Minimum Quarterly Royalty) |
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April 1, 2010 June 30, 2010
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The 27th Minimum Quarterly Royalty + the greater of
(i) $91,344 and (ii) the average Minimum Quarterly Royalties paid by LICENSEE for July
1, 2008 June 30, 2009 (the 28th Minimum Quarterly Royalty) |
exv21
Exhibit 21
List of Subsidiaries of Koss Corporation
Bi-Audio
Koss Classics
exv23w1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
We have issued our report dated July 7, 2005, accompanying the consolidated financial statements
and schedules incorporated by reference in the Annual Report of Koss Corporation on Form 10-K for
the years ended June 30, 2005 and 2004. We hereby consent to the incorporation by reference of
said reports in the Registration Statement of KOSS CORPORATION on Forms S-8 (File No. 333-89872,
33-60804, 333-37986 and 333-20405).
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Milwaukee, Wisconsin
September 28, 2005
exv23w2
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8
(Nos. 333-89872, 33-60804, 333-37986 and 333-20405) of Koss Corporation of our report dated July
11, 2003, except as to the restatement described in Note 14 (not presented herein), which is as of
February 13, 2004, relating to the financial statements which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
September 26, 2005
exv31
Exhibit 31
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael J. Koss, certify that:
1. I have reviewed this annual report on Form 10-K of Koss Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under my supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report my conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date: September 28, 2005
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Michael J. Koss |
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Chief Executive Officer, President and |
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Chief Financial Officer |
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exv32
Exhibit 32
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002,
the following certifications are being made to accompany the Registrants annual report on Form
10-K for the fiscal year ended June 30, 2005:
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
I, Michael J. Koss, Chief Executive Officer and Chief Financial Officer of Koss Corporation (the
Company) hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, that:
(i) the Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2005 (the
Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of
the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: September 28, 2005
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Michael J. Koss |
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Chief Executive Officer, President and |
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Chief Financial Officer |
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