1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-3295 - -------------------------------------------------------------------------------- KOSS CORPORATION - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) A DELAWARE CORPORATION 39-1168275 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (414) 964-5000 --------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- At March 31, 2001, there were 2,002,678 shares outstanding of the Registrant's common stock, $0.01 par value per share. 1 of 11
2 KOSS CORPORATION AND SUBSIDIARIES FORM 10-Q March 31, 2001 INDEX <TABLE> <CAPTION> Page PART I FINANCIAL INFORMATION <S> <C> Item 1 Financial Statements Condensed Consolidated Balance Sheets March 31, 2001 (Unaudited) and June 30, 2000 3 Condensed Consolidated Statements of Income (Unaudited) Three months and nine months ended March 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2001 6-7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 11 </TABLE> 2 of 11
3 KOSS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> March 31, 2001 June 30, 2000 (Unaudited) ----------------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash $ 644,617 $ 3,164,401 Accounts receivable 7,321,632 8,228,185 Inventories 8,357,527 9,414,036 Income taxes receivable 687,219 244,755 Other current assets 1,131,644 1,201,001 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 18,142,639 22,252,378 Property and Equipment, net 1,630,681 1,564,302 Intangible and Other Assets 1,284,223 1,227,627 - ------------------------------------------------------------------------------------------------------------------------- $21,057,543 $25,044,307 ========================================================================================================================= LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Accounts payable $ 644,906 $ 570,567 Accrued liabilities 1,204,851 1,007,443 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,849,757 1,578,010 Deferred compensation and other liabilities 1,568,974 1,482,664 Contingently redeemable equity interest 1,490,000 1,490,000 Stockholders' investment 16,148,812 20,493,633 - ------------------------------------------------------------------------------------------------------------------------- $21,057,543 $25,044,307 ========================================================================================================================= </TABLE> See accompanying notes. 3 of 11
4 KOSS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Nine Months Period Ended March 31 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 8,035,929 $ 8,289,742 $28,018,086 $25,265,601 Cost of goods sold 4,619,742 4,748,926 16,571,510 14,948,760 - --------------------------------------------------------------------------------------------------------------- Gross profit 3,416,187 3,540,816 11,446,576 10,316,841 Selling, general and administrative expense 1,553,013 1,999,384 5,841,620 5,756,994 - --------------------------------------------------------------------------------------------------------------- Income from operations 1,863,174 1,541,432 5,604,956 4,559,847 Other income (expense) Royalty income 116,277 240,802 789,969 972,181 Interest income 21,965 22,363 80,847 57,735 Interest expense (3,282) 0 (14,479) 0 - --------------------------------------------------------------------------------------------------------------- Income before income tax provision 1,998,134 1,804,597 6,461,293 5,589,763 Provision for income taxes 762,432 701,949 2,466,649 2,164,289 - --------------------------------------------------------------------------------------------------------------- Net income $ 1,235,702 $ 1,102,648 $ 3,994,644 $ 3,425,474 =============================================================================================================== Earnings per common share: Basic $ 0.59 $ 0.45 $ 1.86 $ 1.32 Diluted $ 0.56 $ 0.44 $ 1.76 $ 1.29 - --------------------------------------------------------------------------------------------------------------- Dividends per common share None None None None - --------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes. 4 of 11
5 KOSS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Nine Months Ended March 31 2001 2000 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,994,644 $ 3,425,474 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 468,337 635,011 Deferred compensation 86,310 86,310 Net changes in operating assets and liabilities 1,788,635 2,145,325 - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 6,337,926 6,292,120 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of equipment and leasehold improvements (518,245) (279,405) - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase and retirement of common stock (8,512,653) (5,392,754) Exercise of stock options 173,188 482,080 - ------------------------------------------------------------------------------------------------------- Net cash used in financing activities (8,339,465) (4,910,674) - ------------------------------------------------------------------------------------------------------- Net decrease in cash (2,519,784) 1,102,041 Cash at beginning of period 3,164,401 1,171,504 - ------------------------------------------------------------------------------------------------------- Cash at end of period $ 644,617 $ 2,273,545 ======================================================================================================= </TABLE> See accompanying notes. 5 of 11
6 KOSS CORPORATION AND SUBSIDIARIES March 31, 2001 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The financial statements presented herein are based on interim amounts and are subject to audit. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2001 and for all periods presented have been made. The income from operations for the quarter ended March 31, 2001 is not necessarily indicative of the operating results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Registrant's June 30, 2000, Annual Report on Form 10-K. 2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Basic earnings per share are computed based on the weighted average number of common shares outstanding. The weighted average number of common shares outstanding for the quarters ending March 31, 2001 and 2000 were 2,083,638 and 2,460,567, respectively. For the nine months ended March 31, 2001 and 2000, weighted average number of common shares outstanding were 2,150,456 and 2,595,184, respectively. When dilutive, stock options are included as share equivalents using the treasury stock method. Common stock equivalents of 130,398 and 60,052 related to stock option grants were included in the computation of the average number of shares outstanding for diluted earnings per share for the quarters ended March 31, 2001 and 2000, respectively. Common stock equivalents of 116,310 and 59,432 related to stock option grants were included in the computation of the average number of shares outstanding for diluted earnings per share for the nine months ended March 31, 2001 and 2000, respectively. 6 of 11
7 3. INVENTORIES The classification of inventories is as follows: <TABLE> <CAPTION> March 31, 2001 June 30, 2000 --------------------------------------------------------------------------------- <S> <C> <C> Raw materials and work in process $3,552,970 $ 4,355,016 Finished goods 5,880,668 6,135,131 --------------------------------------------------------------------------------- 9,433,638 10,490,147 LIFO Reserve (1,076,111) (1,076,111) --------------------------------------------------------------------------------- $8,357,527 $ 9,414,036 ================================================================================= </TABLE> 4. STOCK PURCHASE AGREEMENT The Company has an agreement with its Chairman to repurchase stock from his estate in the event of his death. The repurchase price is 95% of the fair market value of the common stock on the date that notice to repurchase is provided to the Company. The total number of shares to be repurchased shall be sufficient to provide proceeds which are the lesser of $2,500,000 or the amount of estate taxes and administrative expenses incurred by his estate. The Company is obligated to pay in cash 25% of the total amount due and to execute a promissory note, payable over 4 years, at the prime rate of interest for the balance. The Company maintains a $1,150,000 life insurance policy to fund a substantial portion of this obligation. At March 31, 2001 and June 30, 2000, $1,490,000 has been classified as a Contingently Redeemable Equity Interest reflecting the estimated obligation in the event of execution of the agreement. 5. DEFERRED COMPENSATION In 1991, the Board of Directors agreed that after age 70, Mr. John C. Koss shall receive his current base salary for the remainder of his life. Mr. Koss has turned 70 and the Company is currently recognizing an annual expense of $150,000 in connection with this agreement. At March 31, 2001 and June 30, 2000, respectively, the related liabilities in the amounts of $1,131,620 and $1,045,310 have been included in deferred compensation and other liabilities on the accompanying balance sheets. 7 of 11
8 KOSS CORPORATION AND SUBSIDIARIES FORM 10-Q March 31, 2001 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition and Liquidity Cash used by operating activities during the nine months ended March 31, 2001 amounted to $6,337,926. The decrease in working capital of $4,381,486 from the balance at June 30, 2000 represents primarily the net effect of a decrease in cash, inventories and accounts receivable with an increase in accounts payable and accrued liabilities. Capital expenditures for new property and equipment (including production tooling) were $518,245 for the nine months. Budgeted capital expenditures for fiscal year 2001 are $1,123,100. The Company expects to generate sufficient funds through operations to fund these expenditures. Stockholders' investment decreased to $16,148,812 at March 31, 2001, from $20,493,633 at June 30, 2000. The decrease reflects the effect of net income, the purchase and retirement of common stock, and the exercise of stock options for the quarter. The Company amended its existing credit facility in December 1999, extending the maturity date of the unsecured line of credit to November 1, 2001. This credit facility provides for borrowings up to a maximum of $10,000,000. The Company can use this credit facility for working capital purposes or for the purchase of its own stock pursuant to the Company's stock repurchase program. Borrowings under this credit facility bear interest at the bank's prime rate, or LIBOR plus 1.75%. This credit facility includes certain financial covenants that require the Company to maintain a minimum tangible net worth and specified current, interest coverage, and leverage ratios. There was no utilization of this credit facility at March 31, 2001 and June 30, 2000. 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. In January of 1996, the Board of Directors approved an increase in the stock repurchase program from $2,000,000 to $3,000,000. In July of 1997, the Board of Directors again approved an increase in the stock repurchase program from $3,000,000 to $5,000,000. In January of 1998, the Board of Directors approved an increase of an additional $2,000,000, increasing the total stock repurchase program from $5,000,000 to $7,000,000. In August of 1998, the Board of Directors approved an increase of $3,000,000 in the Company's stock repurchase program, thereby increasing the total amount of stock repurchases from $7,000,000 to $10,000,000. In April of 1999, the Board of Directors again approved an increase in the stock repurchase program from $10,000,000 to $15,000,000. In October of 1999, the Board of Directors increased the stock repurchase program by another $5,000,000, up to a maximum of $20,000,000, and in July of 2000 the Board increased the program by an additional $5,000,000, for a maximum of $25,000,000. In January of 2001, the Board of Directors approved an additional $3,000,000 for the stock repurchase program, increasing the maximum amount of repurchases under the entire repurchase program to $28,000,000, calculated on a net purchase price basis. The Company intends to effectuate all stock purchases either on the open market or through privately negotiated transactions, and intends to finance all stock purchases through its own cash flow or by borrowing for such purchases. All shares repurchased by the Company are retired and returned to the status of authorized but unissued shares. 8 of 11
9 For the quarter ended March 31, 2001, the Company purchased 116,441 shares of its common stock in multiple transactions for a total purchase price of $3,462,689, representing an average price of $29.73 per share. From the commencement of the Company's stock repurchase program through March 31, 2001, the Company has purchased and retired a total of 2,185,939 shares for a total gross purchase price of $30,047,308 (representing an average gross purchase price of $11.21 per share) and a total net purchase price of $27,150,586 (representing an average net purchase price of $10.13 per share). The difference between the total gross purchase price and the total net purchase price reflects the lower cost to the Company of purchasing stock from certain employees who have exercised stock options pursuant to the Company's stock option program. In determining the total dollar amount available for 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. The Company also has an Employee Stock Ownership and Trust ("ESOP") pursuant to which shares of the Company's stock are purchased by the ESOP for allocation to the accounts of ESOP participants. For the quarter ended March 31, 2001, the ESOP did not purchase any shares of the Company's stock. Results of Operations Net sales for the third quarter ended March 31, 2001 fell 3% to $8,035,925 from $8,289,742 for the same period in 2000. Net sales for the nine months ended March 31, 2001 were $28,018,086 up 11% compared with $25,265,601 during the same nine months one year ago. Gross profit as a percent of net sales was 43% for the quarter ended March 31, 2001 compared with 43% for the same period in the prior year. For the nine month period ended March 31, 2001, the gross profit percentage was 41% compared with 41% for the same period in 2000. Selling, general and administrative expenses for the quarter ended March 31, 2001 were $1,553,013 or 19% of net sales, as against $1,999,384 or 24% of net sales for the same period in 2000. For the nine month period ended March 31, 2001, such expenses were $5,841,620 or 21% of net sales, as against $5,756,994 or 23% of net sales, for the same period in 2000. For the third quarter ended March 31, 2001, income from operations was $1,863,174 versus $1,541,432 for the same period in the prior year. Income from operations for the nine months ended March 31, 2001 was $5,604,956 as compared to $4,559,847 for the same period in 2000. Interest expense amounted to $3,282 for the quarter as compared to $0 for the same period in the prior year. For the nine month period, the interest expense amounted to $14,479 compared with $0 for the same period in the prior year. 9 of 11
10 The Company has a License Agreement with Jiangsu Electronics Industries Limited ("Jiangsu"), a subsidiary of Orient Power Holdings Limited, by way of an assignment of a previously existing License Agreement with Trabelco N.V. Orient Power is based in Hong Kong and has an extensive portfolio of audio and video products. This License Agreement was recently amended to cover the territories of the United States, Canada and Mexico. This License Agreement was also renewed through December 31, 2001, and is subject to renewal for additional 1 year periods upon mutual agreement of the parties thereto. The products covered by this License Agreement include various consumer electronics products. Effective July 1, 1998, the Company entered into a License Agreement and an Addendum thereto with Logitech Electronics Inc. ("Logitech") of Ontario, Canada whereby the Company licensed to Logitech the right to sell multimedia/computer speakers under the Koss brand name. This License Agreement covers North America and certain countries in South America and Europe. This License Agreement was recently amended and extended, and requires royalty payments by Logitech through June 30, 2008, subject to certain minimum royalty amounts due each year. 10 of 11
11 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K (a) Exhibits Filed Fifth Amendment to License Agreement Consent of Guarantor Amendment and Extension Agreement (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the period covered by this report. Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized. KOSS CORPORATION Dated: 5/14/01 /s/ Michael J. Koss ------- --------------------------- Michael J. Koss Vice Chairman, President, Chief Executive Officer, Chief Financial Officer Dated: 5/14/01 /s/ Sue Sachdeva ------- --------------------------- Sue Sachdeva Vice President--Finance 11 of 11