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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-3295 - -------------------------------------------------------------------------------- KOSS CORPORATION - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) A DELAWARE CORPORATION 39-1168275 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4129 North Port Washington Avenue, - -------------------------------------------------------------------------------- Milwaukee, Wisconsin 53212 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (414) 964-5000 ------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- At March 31, 1997, there were 3,316,291 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, 1997 INDEX Page PART I FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Balance Sheets March 31, 1997 (Unaudited) and June 30, 1996 3 Condensed Consolidated Statements of Income (Unaudited) Quarter and nine months ended March 31, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended March 31, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 1997 6-7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 10 2 of 11
3 KOSS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> March 31, 1997 June 30, 1996 (Unaudited) (*) ---------------- -------------- <S> <C> <C> ASSETS Current Assets: Cash $ 132,110 $ 27,001 Accounts receivable 7,363,338 8,965,213 Inventories 13,977,012 8,777,216 Prepaid expenses 305,710 382,137 Income taxes receivable 497,347 -- Deferred income taxes 517,946 517,946 - ---------------------------------------------------------------------------------- Total current assets 22,793,463 18,669,513 Property and Equipment, net 2,550,321 2,344,341 Deferred Income Taxes 422,603 422,603 Intangible and Other Assets 517,823 568,800 - ---------------------------------------------------------------------------------- $26,284,210 $22,005,257 ================================================================================== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Accounts payable $ 1,457,823 $ 1,327,915 Accrued liabilities 885,198 786,353 Income taxes payable -- 361,855 - ---------------------------------------------------------------------------------- Total current liabilities 2,343,021 2,476,123 Long-Term Debt 2,066,000 470,000 Deferred Compensation and Other Liabilities 1,108,654 1,022,344 Contingently Redeemable Equity Interest 1,490,000 1,490,000 Stockholders' Investment 19,276,535 16,546,790 - ---------------------------------------------------------------------------------- $26,284,210 $22,005,257 ================================================================================== </TABLE> * The balance sheet at June 30, 1996, has been prepared from the audited financial statements at that date. 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 1997 1996 1997 1996 - --------------------- ----------- ---------- ------------ ----------- <S> <C> <C> <C> <C> Net sales $8,583,303 $8,482,620 $31,766,272 $27,941,603 Cost of goods sold 5,660,609 6,018,141 21,011,785 19,450,431 - --------------------------------------------------------------------------------------- Gross profit 2,922,694 2,464,479 10,754,487 8,491,172 Selling, general and administrative expense 2,169,313 2,160,599 6,660,273 6,529,139 - --------------------------------------------------------------------------------------- Income from operations 753,381 303,880 4,094,214 1,962,033 Other income (expense) Royalty income 212,244 43,769 908,619 1,112,498 Interest income 30,085 4,063 89,201 12,511 Interest expense (77,099) (12,109) (254,527) (72,458) - --------------------------------------------------------------------------------------- Income before income tax provision 918,611 339,603 4,837,507 3,014,584 Provision for income taxes 387,059 140,501 1,984,487 1,236,964 - --------------------------------------------------------------------------------------- Net income $ 531,552 $ 199,102 $ 2,853,020 $ 1,777,620 ======================================================================================= Number of common and common equivalent shares used in computing earnings per share 3,463,071 3,478,695 3,347,605 3,536,361 ======================================================================================= Earnings per common and common equivalent share $ 0.15 $ 0.06 $ 0.85 $ 0.50 ======================================================================================= 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 1997 1996 - -------------------------- ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,853,020 $1,777,620 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization 516,998 434,167 Deferred compensation and other liabilities 86,310 86,310 Net changes in operating assets and liabilities (4,258,900) (2,585,989) - ------------------------------------------------------------------------------- Net cash used in operating activities: (802,572) (287,892) - ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of equipment and leasehold improvements (672,002) (242,043) - ------------------------------------------------------------------------------- Net cash used in investing activities (672,002) (242,043) - ------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit agreements 17,765,000 11,971,000 Repayments under line of credit agreements (16,169,000) (11,541,000) Purchase and retirement of common stock (352,692) -- Exercise of stock options 336,375 72,500 - ------------------------------------------------------------------------------- Net cash provided by financing activities 1,579,683 502,500 - ------------------------------------------------------------------------------- Net increase (decrease) in cash 105,109 (27,435) Cash at beginning of year 27,001 49,227 - ------------------------------------------------------------------------------- Cash at end of period $ 132,110 $ 21,792 =============================================================================== </TABLE> See accompanying notes. 5 of 11
6 KOSS CORPORATION AND SUBSIDIARIES March 31, 1997 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The financial statements presented herein are based on interim figures 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, 1997, and for all periods presented have been made. The income from operations for the quarter and nine months ended March 31, 1997 is not necessarily indicative of the operating results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Registrant's June 30, 1996, Annual Report on Form 10-K. 2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per share are computed based on the average number of common and common share equivalents outstanding. When dilutive, stock options are included as share equivalents using the Treasury stock method. Common stock equivalents of 152,433 and 54,070 related to stock option grants were included in the computation of the average number of shares outstanding for the quarter ended March 31, 1997 and 1996, respectively. Common stock equivalent of 48,681 and 62,082 were outstanding for the nine months ended March 31, 1997 and 1996, respectively. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 replaces primary EPS with basic EPS, which excludes dilution, and requires presentation of both basic and diluted EPS on the face of the income statement. Diluted EPS is computed similarly to the current fully diluted EPS. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, and requires restatement of all prior-period EPS data presented. The adoption of this statement is not expected to materially affect either future or prior-period EPS. 3. INVENTORIES The classification of inventories is as follows: <TABLE> <CAPTION> March 31, 1997 June 30, 1996 - ----------------------------------------------- <S> <C> <C> Raw materials and work in process $ 6,847,695 $4,751,156 Finished goods 7,767,099 4,663,842 - ---------------------------------------------- 14,614,794 9,414,998 LIFO Reserve (637,782) (637,782) - ---------------------------------------------- $13,977,012 $8,777,216 ============================================== </TABLE> 6 of 11
7 4. STOCK PURCHASE AGREEMENT The Company has an agreement with its Chairman to repurchase stock from his estate in the event of his death. The repurchase price is 95% of the fair market value of the common stock on the date that notice to repurchase is provided to the Company. The total number of shares to be repurchased shall be sufficient to provide proceeds which are the lesser of $2,500,000 or the amount of estate taxes and administrative expenses incurred by his estate. The Company is obligated to pay in cash 25% of the total amount due and to execute a promissory note at a 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, 1997 and June 30, 1996, $1,490,000 has been classified as a Contingently Redeemable Equity Interest reflecting the estimated obligation in the event of execution of the agreement. 5. DEFERRED COMPENSATION In 1991, the Board of Directors agreed to continue John C. Koss' current base salary in the event he becomes disabled prior to age 70. After age 70, Mr. Koss shall receive his current base salary for the remainder of his life, whether or not he becomes disabled. The Company is currently recognizing an annual expense of $115,080 in connection with this agreement, which represents the present value of the anticipated future payments. At March 31, 1997 and June 30, 1996, respectively, the related liabilities in the amounts of $622,530 and $536,220 have been included in deferred compensation in the accompanying balance sheets. 7 of 11
8 KOSS CORPORATION AND SUBSIDIARIES FORM 10-Q - March 31, 1997 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition and Liquidity Cash used in operating activities during the nine months ended March 31, 1997 amounted to $802,572. Working capital was $20,450,442 at March 31, 1997. The increase in working capital of $4,257,052 from the balance at June 30, 1996 reflects the net effect of an increase in inventory partially offset by increased payables. These increases are the result of anticipated higher sales volume in the upcoming quarter. The cash necessary to fund the Company's operating activities fluctuates from time to time; however, as a general rule the Company expects to generate adequate amounts of cash to meet future operating needs. The Company maintains sufficient borrowing capacity to fund any shortfall. Capital expenditures for new property and equipment (including production tooling) were $672,002 for the nine months ended March 31, 1997. Depreciation and amortization aggregated $516,998 for the nine months. For the fiscal year ending June 30, 1997, the Company expects its capital expenditures to be approximately $1,500,000. The Company expects to generate sufficient operating funds to fulfill these expenditures. Stockholders' investment increased to $19,276,535 at March 31, 1997, from $16,546,790 at June 30, 1996. The increase reflects primarily the income for the nine month period ending March 31, 1997. No cash dividends have been paid since the first quarter of fiscal 1984. The Company has an unsecured working capital credit facility with a bank. This credit facility provides for borrowings up to a maximum of $8,000,000. Borrowings under this credit facility bear interest at the bank's prime rate, or LIBOR plus 2.25%. This credit facility includes certain covenants that require the Company to maintain a minimum tangible net worth and specified current, interest coverage, and leverage ratios. Utilization of this credit facility as of March 31, 1997 totaled $2,160,567, consisting of $2,066,000 in borrowings and $94,567 in commitments for foreign letters of credit. Utilization of this credit facility as of June 30, 1996 was $944,784, consisting of $470,000 in borrowings and $474,784 in foreign letters of credit. The increase as of March 31, 1997 is the result of an increase in inventory due to anticipated higher sales volume for the upcoming quarter. The Company can also use up to $1,000,000 of its working capital credit facility to purchase shares of its own stock. The Company's Canadian subsidiary has a line of credit of $550,000, which is guaranteed by the Company. Borrowings under this credit facility bear interest at the bank's prime rate plus 1.5%. The credit facility is subject to the availability of qualifying receivables and inventories which serve as security for the borrowings. As of March 31, 1997 or June 30, 1996, there were no borrowings outstanding against this line of credit. The due date for the line is October 31, 1997. 8 of 11
9 Pursuant to the Company's stock repurchase program, for the nine month period ended March 31, 1997, the Company purchased 51,629 shares of its common stock at an average price of $6.83 per share. All 51,629 shares were retired. Since the commencement of the Company's stock repurchase program, the Company has purchased 343,576 shares of its common stock for a total of $2,125,014, representing an average price of $6.18 per share. For the nine month period ended March 31, 1997, the Company's Employee Stock Ownership Plan and Trust ("ESOP") purchased 27,371 shares of the Company's common stock for the ESOP at an average price of $8.38 per share. For the quarter ended March 31, 1997, the ESOP purchased 10,000 shares of the Company's common stock for the ESOP at an average price of $11.18 per share. Results of Operations Net sales for the third quarter ended March 31, 1997 were $8,583,303 compared to $8,482,620 for the same period in 1996. Net sales for the nine months ended March 31, 1997 were $31,766,272, up 14% compared with $27,941,603 during the same nine months one year ago. This increase was primarily a result of strong orders throughout the period. Gross profit as a percent of net sales was 34% for the quarter ended March 31, 1997 compared with 29% for the same period in the prior year. For the nine month period ended March 31, 1997, the gross profit percentage was 34% compared with 30% for the same period in 1996. Shifts in product mix resulted in the increase in gross profit as compared to last year. Selling, general and administrative expenses for the quarter ended March 31, 1997 were $2,169,313 or 25%, as against $2,160,599 or 25% for the same period in 1996. For the nine month period ended March 31, 1997, such expenses were $6,660,273 or 21%, as against $6,529,139 or 23% for the same period in 1996. The percentage decrease is a direct result of higher sales. For the third quarter ended March 31, 1997, income from operations was $753,381 versus $303,880 for the same period in the prior year. Income from operations for the nine months ended March 31, 1997 was $4,094,214 as compared to $1,962,033 for the same period in 1996. The increase is primarily related to higher sales and to the increase in gross margin resulting from shifts in product mix. Net interest expense amounted to $77,099 for the quarter as compared to $12,109 for the same period in the prior year. For the nine month period, interest expense amounted to $254,527 compared with $72,458 for the same period in the prior year. The increase is a result of the Company borrowing at much higher levels as compared to the same periods last year. The higher level of borrowing was the result of increased inventory purchases to support the increase in sales. 9 of 11
10 The Company recently agreed to an amendment and assignment of its License Agreement with Trabelco N.V., covering North America, Central America, and South America, to Jiangsu Electronics Industries Limited, a subsidiary of Orient Power Holdings Limited. The assignment was effective as of March 31, 1997. Orient Power has guaranteed Jiangsu's obligations under the License Agreement, as amended. Orient Power is based in Hong Kong and has an extensive portfolio of audio and video products. Pursuant to this assignment, Jiangsu has agreed to make royalty payments through December 31, 2000, subject to certain minimum royalty amounts due for the years 1998, 1999, and 2000. This license arrangement is subject to renewal for additional 3 year periods. Royalty income earned in connection with this License Agreement for the quarter ended March 31, 1997 was $212,244 as compared to $43,769 for the same period in 1996. For the nine month period, royalty income was $908,619 compared to $1,112,498 at March 31, 1996. The Company recognizes royalty income when earned. The decrease in royalty income for the nine month period is the result of lower sales volume by Trabelco N.V. in products covered under this License Agreement. The License Agreement with Trabelco N.V. covering many European countries remains in place. No sales have been reported under this License Agreement to date; however, certain minimum royalties will be due for calendar years 1997 and 1998. This License Agreement expires on December 31, 1998. Trabelco N.V. has the option to renew this License Agreement for additional 3 year periods. PART II OTHER INFORMATION Item 6 (a) Exhibits Filed 10.1 Third Amendment and Assignment of License Agreement 10.2 Consent of Directors (Supplemental Executive Retirement Plan) 27 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the period covered by this report. 10 of 11
11 Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized. KOSS CORPORATION Dated: 5/14/97 /s/ Michael J. Koss ---------------- ---------------------------- Michael J. Koss, President, Chief Executive Officer, Chief Financial Officer Dated: 5/14/97 /s/ Sue Sachdeva ---------------- ---------------------------- Sue Sachdeva Vice President -- Finance 11 of 11