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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-3295
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KOSS CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
A DELAWARE CORPORATION 39-1168275
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
-----------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
At March 31, 2002, there were 3,648,054 shares outstanding of the Registrant's
common stock, $0.005 par value per share.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 2002
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2002 and June 30, 2001 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months and nine months ended
March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash
Flows (Unaudited)
Nine months ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) March 31, 2002 6-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-18
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 19
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2002 June 30, 2001
-------------- -------------
ASSETS
Current Assets:
Cash $ 111,666 $ 181,678
Accounts receivable 7,620,238 8,247,045
Inventories 7,674,520 8,496,010
Income taxes receivable 327,155 480,322
Other current assets 841,421 934,934
- ------------------------------------------------------------------------- ------------------------- --------------------
Total current assets 16,575,000 18,339,989
Property and Equipment, net 1,747,171 1,690,628
Other Assets 1,465,711 1,465,711
- ------------------------------------------------------------------------- ------------------------- --------------------
$19,787,882 $21,496,328
========================================================================= ========================= ====================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 357,658 $ 2,062,476
Accrued liabilities 1,149,532 1,551,679
Dividends payable 437,766 --
- ------------------------------------------------------------------------- ------------------------- --------------------
Total current liabilities 1,944,956 3,614,155
Long-Term Debt 2,453,500 --
Deferred Compensation 1,015,390 1,015,390
Other Liabilities 437,354 437,354
Contingently Redeemable Equity Interest 1,490,000 1,490,000
Stockholders' Investment 12,446,682 14,939,429
- ------------------------------------------------------------------------- ------------------------- --------------------
$19,787,882 $21,496,328
========================================================================= ========================= ====================
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Nine Months
Period Ended March 31 2002 2001 2002 2001
- ----------------------------------------------- ------------------- ----------------- ------------------- -------------------
Net sales $ 8,203,325 $ 8,195,114 $26,906,133 $28,423,228
Cost of goods sold 4,759,699 4,778,927 16,110,769 16,976,651
- ----------------------------------------------- ------------------- ----------------- ------------------- -------------------
Gross profit 3,443,626 3,416,187 10,795,364 11,446,577
Selling, general and
administrative expense 1,641,877 1,553,013 5,805,775 5,841,620
- ----------------------------------------------- ------------------- ----------------- ------------------- -------------------
Income from operations 1,801,749 1,863,174 4,989,589 5,604,957
Other income (expense)
Royalty income 137,258 116,277 570,805 789,969
Interest income 751 21,965 23,021 80,847
Interest expense (31,549) (3,282) (91,767) (14,479)
- ----------------------------------------------- ------------------- ----------------- ------------------- -------------------
Income before income tax provision 1,908,209 1,998,134 5,491,648 6,461,294
Provision for income taxes 665,370 762,432 2,063,735 2,466,649
- ----------------------------------------------- ------------------- ----------------- ------------------- -------------------
Net income $ 1,242,839 $ 1,235,702 $ 3,427,913 $ 3,994,645
=============================================== =================== ================= =================== ===================
Earnings per common share:
Basic $0.34 $0.30 $0.92 $0.93
Diluted $0.32 $0.28 $0.87 $0.88
=============================================== =================== ================= =================== ===================
Dividends per common share $0.12 None $0.365 None
=============================================== =================== ================= =================== ===================
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31 2002 2001
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 3,427,913 $ 3,994,644
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 464,354 468,337
Deferred compensation -- 86,310
Net changes in operating assets and
liabilities (411,988) 1,788,635
- ------------------------------------------------------------------ ------------------ -----------------
Net cash provided by operating
activities 3,480,279 6,337,926
- ------------------------------------------------------------------ ------------------ -----------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (520,897) (518,245)
- ------------------------------------------------------------------ ------------------ -----------------
Net cash used in
investing activities (520,897) (518,245)
- ------------------------------------------------------------------ ------------------ -----------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreements (4,082,000) --
Borrowings under line of credit agreements 6,535,500 --
Dividends paid (900,657) --
Purchase of common stock for treasury (3,850,112) --
Purchase and retirement of common stock (844,325) (8,512,653)
Exercise of stock options 112,200 173,188
- ------------------------------------------------------------------ ------------------ -----------------
Net cash used in financing
Activities (3,029,394) (8,339,465)
- ------------------------------------------------------------------ ------------------ -----------------
Net decrease in cash (70,012) (2,519,784)
Cash at beginning of period 181,678 3,164,401
- ------------------------------------------------------------------ ------------------ -----------------
Cash at end of period $ 111,666 $ 644,617
================================================================== ================== =================
The Company paid $437,766 in dividends to stockholders in April 2002 which is
not included in cash flows from financing activities for the quarter ended March
31, 2002.
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
March 31, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements presented herein are based on interim amounts.
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, 2002 and
for all periods presented have been made. The income from operations
for the quarter ended March 31, 2002 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, 2001, Annual Report
on Form 10-K.
2. EARNINGS PER COMMON SHARE AND STOCK SPLIT
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, 2002 and
2001 were 3,648,054 and 3,674,695, respectively. For the nine months
ended March 31, 2002 and 2001, weighted average number of common shares
outstanding were 3,717,840 and 4,300,911, respectively. When dilutive,
stock options are included as share equivalents using the treasury
stock method. Common stock equivalents of 214,396 and 260,796 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, 2002 and 2001, respectively. Common stock
equivalents of 228,595 and 232,620 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, 2002
and 2001, respectively.
On October 2, 2001, the Company declared a 2 for 1 stock split of the
Company's common stock for stockholders of record on October 22, 2001,
with the effective date being November 5, 2001. Earnings per common
share amounts disclosed have been restated to give effect to the common
stock split.
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3. INVENTORIES
The classification of inventories is as follows:
<Caption>
March 31, 2002 June 30, 2001
---------------------------------- -------------------------- -------------------
Raw materials and
work in process $2,169,969 $3,064,147
Finished goods 6,485,569 6,412,881
---------------------------------- -------------------------- -------------------
8,655,538 9,477,028
LIFO Reserve (981,018) (981,018)
---------------------------------- -------------------------- -------------------
$7,674,520 $8,496,010
================================== ========================== ===================
4. STOCK PURCHASE AGREEMENT
The Company has an agreement with its Chairman to repurchase stock from
his estate in the event of his death. The repurchase price is 95% of
the fair market value of the common stock on the date that notice to
repurchase is provided to the Company. The total number of shares to be
repurchased shall be sufficient to provide proceeds which are the
lesser of $2,500,000 or the amount of estate taxes and administrative
expenses incurred by his estate. The Company is obligated to pay in
cash 25% of the total amount due and to execute a promissory note at
the prime rate of interest for the balance. The Company maintains a
$1,150,000 life insurance policy to fund a substantial portion of this
obligation. At March 31, 2002 and June 30, 2001, $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. RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
6. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." The
statements eliminate the pooling-of-interests method of accounting for
business combinations and require that goodwill and certain intangible
assets not be amortized. Instead, these assets will be reviewed for
impairment annually with any related losses recognized in earnings when
incurred. The statements will be effective for the Company as of July
1, 2002 for existing goodwill and intangible assets and for business
combinations initiated after June 30, 2001. As of March 31, 2002, the
Company does not have any goodwill or intangible assets.
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In July 2001, the FASB also issued FAS No. 143, "Accounting for Asset
Retirement Obligations" and in August 2001, issued No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." FAS No. 143
establishes accounting standards for the recognition and measurement of
an asset retirement obligation. FAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets, superseding FAS No. 121. The statements are effective for the
Company July 1, 2002. The Company is currently analyzing the impact
these statements will have; however, the impact is not expected to be
material on the Company's financial position or results of operations.
In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
"Accounting for Consideration from a Vendor to a Retailer in Connection
with the Purchase or Promotion of the Vendor's Products." This issue
requires that consideration from a vendor to a retailer (a) in
connection with the retailer's purchase of the vendor's products or (b)
to promote sales of the vendor's products by the retailer be classified
as a reduction of net sales unless the consideration meets certain
criteria. In November 2001, the EITF reached a consensus on EITF No.
01-9, "Accounting for Consideration Given by a Vendor to a Customer or
a Reseller of the Vendor's Products." This EITF codifies and reconciles
certain issues, including those discussed in EITF No. 00-25. The
Company implemented these consensuses for the quarter ended March 31,
2002. The implementation of these consensuses did not have a material
impact on the Company's financial position or results of operations.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q -- March 31, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Cash provided by operating activities during the nine months ended March 31,
2002 amounted to $3,480,279. This was primarily a result of net income for the
period plus depreciation offset by changes in operating assets and liabilities,
primarily related to decreases in accounts receivable, inventories, and income
taxes receivable offset by decreases in accounts payable and accrued
liabilities.
Capital expenditures for new property and equipment (including production
tooling) were $520,897 for the nine months. Budgeted capital expenditures for
fiscal year 2002 are $1,239,865. The Company expects to generate sufficient
funds through operations to fund these expenditures.
Cash used in financing activities for the nine month period ended March 31, 2002
of $3,029,394 relates primarily to activity under the Company's unsecured line
of credit. The Company borrowed $6,535,500 under the line of credit and repaid
$4,082,000 under the line during the nine month period. Financing cash flows
were also impacted by the payment of dividends of $900,657 and purchases of
common stock totaling $4,694,437.
Stockholders' investment decreased to $12,446,682 at March 31, 2002, from
$14,939,429 at June 30, 2001. The decrease reflects the effects of purchases of
common stock, and dividends, offset by net income and the exercise of stock
options.
The Company amended its existing credit facility in October 2001, extending the
maturity date of the unsecured line of credit to November 1, 2002. 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. The amount outstanding under this credit
facility at March 31, 2002 was $2,453,500. There was no utilization of this
credit facility at June 30, 2001.
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,
and in August of 1998, another $3,000,000, thereby increasing the total amount
of stock repurchases to $10,000,000. In April of 1999, the Board of Directors
approved a $5,000,000 increase in the stock repurchase program from $10,000,000
to $15,000,000, and in October of 1999 another $5,000,000, up to a maximum of
$20,000,000. In July of 2000 the Board increased the program by an additional
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$5,000,000, for a maximum of $25,000,000. In January of 2001, the Board of
Directors approved an increase in the stock repurchase program from $25,000,000
to $28,000,000, another increase in April of 2001 of an additional $3,000,000,
and an additional increase of $3,000,000 in July of 2001, for a maximum of
$34,000,000. 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.
From the commencement of the Company's stock repurchase program through March
31, 2002, the Company has purchased a total of 2,422,590 shares for a total
gross purchase price of $37,855,045 (representing an average gross purchase
price of $15.63 per share) and a total net purchase price of $33,987,852
(representing an average net purchase price of $14.03 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 Company's
stock acquired by such employees pursuant to the Company's 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.
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. The ESOP purchased 5,000 shares of the
Company's stock for $74,000 (representing a purchase price of $14.80 per share)
in the second quarter of this fiscal year.
Results of Operations
Net sales for the third quarter ended March 31, 2002 rose to $8,203,325 from
$8,195,114 for the same period in 2001. The increase in sales was due to
improved sales volumes to major domestic and European retailers. Net sales for
the nine months ended March 31, 2002 were $26,906,133 down 5% compared with
$28,423,228 during the same nine months one year ago. This decline was due to
soft retail business through the second quarter offset by stronger retail sales
in the third quarter.
Gross profit as a percent of net sales remained consistent at 42% for the
quarter ended March 31, 2002 compared to 42% for the same period in the prior
year. For the nine month period ended March 31, 2002, the gross profit
percentage was 40% compared to 40% for the same period in 2001.
Selling, general and administrative expenses for the quarter ended March 31,
2002 were $1,641,877 or 20% of net sales, compared to $1,553,013 or 19% of net
sales for the same period in 2001. For the nine month period ended March 31,
2002, these expenses were $5,805,775 or 22% of net sales, compared to $5,841,620
or 21% of net sales, for the same period in 2001. Selling, general and
administrative expenses for the nine months ended March 31, 2002 were impacted
by additional reserves for bad debts of $500,000 for outstanding KMART
receivables recorded in the second quarter.
For the third quarter ended March 31, 2002, income from operations was
$1,801,749 versus $1,863,174 for the same period in the prior year. Income from
operations for the nine months ended March 31, 2002 was $4,989,589 as compared
to $5,604,957 for the same period in 2001.
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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 Company has a License Agreement with Jiangsu Electronics Industries Limited
("Jiangsu"), a subsidiary of Orient Power Holdings Limited, by way of an
assignment of a previously existing License Agreement with Trabelco N.V. Orient
Power is based in Hong Kong and has an extensive portfolio of audio and video
products. This License Agreement covers the United States, Canada, and Mexico,
and has been renewed through December 31, 2002. Pursuant to this License
Agreement, Jiangsu has agreed to meet certain minimum royalty amounts each year.
The products covered by this License Agreement include various consumer
electronics products.
Royalty income for the quarter ended March 31, 2002 was $137,258, up 18%
compared to $116,277 for the quarter ended March 31, 2001. The increase in
royalty income reflects the improvement in the retail market during the
Company's third quarter. For the nine months ended March 31, 2002, royalty
income fell 28% from $789,969 to $570,805. The decline was due to depressed
market conditions in the first six months of the current fiscal year.
Interest income for the quarter was $751 as compared to $21,965 for the same
quarter in 2001. Interest income for the nine month period was $23,021 as
compared to $80,847 for the same period in 2001. The significant decrease in
interest income in 2002 is a result of lower levels of invested excess cash.
Interest expense amounted to $31,549 for the quarter as compared to $3,282 for
the same period in the prior year. For the nine month period, the interest
expense amounted to $91,767 compared with $14,479 for the same period in the
prior year. The increase in interest expense in the quarter and for the nine
month period ended March 31, 2002 is due to the Company's increased level of
borrowings under its unsecured line of credit.
On October 2, 2001, the Company declared a 2 for 1 stock split of the Company's
common stock for stockholders of record on October 22, 2001, with the effective
date being November 5, 2001. All earnings per common share amounts herein have
been restated to give effect to the common stock split.
On March 21, 2002, the Company declared a quarterly cash dividend of $0.12 per
share (reflecting the effect of the 2 for 1 stock split) payable on April 15,
2002 to stockholders of record on March 31, 2002, which is recorded as dividends
payable.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." The statements eliminate the
pooling-of-interests method of accounting for business combinations and require
that goodwill and certain intangible assets not be amortized. Instead, these
assets will be reviewed for impairment annually with any related losses
recognized in earnings when incurred. The statements will be effective for the
Company
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as of July 1, 2002 for existing goodwill and intangible assets and for business
combinations initiated after June 30, 2001. As of March 31, 2002, the Company
does not have any goodwill or other intangible assets.
In July 2001, the FASB also issued FAS No. 143, "Accounting for Asset Retirement
Obligations" and in August 2001, issued No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." FAS No. 143 establishes accounting standards
for the recognition and measurement of an asset retirement obligation. FAS No.
144 addresses financial accounting and reporting for the impairment or disposal
of long-lived assets, superseding FAS No. 121. The statements are effective for
the Company July 1, 2002. The Company is currently analyzing the impact these
statements will have; however, the impact is not expected to be material on the
Company's financial position or results of operations.
In April 2001, the EITF reached a consensus on EITF Issue No. 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products." This issue requires that consideration from
a vendor to a retailer (a) in connection with the retailer's purchase of the
vendor's products or (b) to promote sales of the vendor's products by the
retailer be classified as a reduction of net sales unless the consideration
meets certain criteria. In November 2001, the EITF reached a consensus on EITF
No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products." This EITF codifies and reconciles certain
issues, including those discussed in EITF No. 00-25. The Company implemented
these consensuses for the quarter ended March 31, 2002. The implementation of
these consensuses did not have a material impact on the Company's financial
position or results of operations.
DISCLOSURES CONCERNING LIQUIDITY AND CAPITAL RESOURCES, INCLUDING
"OFF-BALANCE SHEET" ARRANGEMENTS
On January 22, 2002 the SEC issued FR-61, "Commission Statement about
Management's Discussion and Analysis of Financial Condition and Results of
Operations." The SEC has indicated that, while it intends to consider rulemaking
regarding these topics and other topics covered by the MD&A requirements, the
purpose of its statement is to suggest steps that issuers should consider in
meeting their current disclosure obligations with respect to the topics
addressed.
The Company is currently evaluating FR-61 and the effects it may have, if any,
on this, and future, filings. The Company has responded to each of the areas
addressed by FR-61. Any statements in this section, which discuss or are related
to future dates or periods, are "forward-looking statements."
FR-61 requires management to identify any known demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in the
Company's liquidity increasing or decreasing in any material way. FR-61 also
requires management to identify any known material trends, favorable or
unfavorable, in the Company's capital resources including any expected material
changes in the mix and relative cost of such resources.
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The Company's primary source of liquidity over the past nine months has been
operating cash flows. The Company's future cash flows from operations are
dependent upon, but not limited to:
- the ability of the Company to attract new and retain existing
customers,
- the volume of sales for these customers,
- the loss of business of one or more primary customer,
- changes in sales mix,
- the volume of royalty income,
- changes in general economic conditions,
- management's effectiveness in managing the manufacturing process, and
- the ability to collect in full and in a timely manner, amounts due
the Company.
The Company is dependent upon its ability to retain existing and obtain new
customers as well as develop new product lines for these customers. The
Company's failure to retain existing customers, obtain new customers or develop
new product lines could significantly affect future profitability of the
Company. 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 Company's sales volume and profitability.
Due to the range of products that the Company sells, the product sales mix can
produce a range of profit margins. Some businesses in which the Company operates
produce lower profit margins than others.
Deteriorating or weak economic conditions, including retail slowdowns at both
the domestic or European level, could affect future sales and profitability of
the Company. 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 it may be impacted by these circumstances.
Management's effectiveness in managing its manufacturing processes will have a
direct impact on its future profitability. The Company regularly makes decisions
that affect production schedules, shipping schedules, employee levels, and
inventory levels. The Company's ineffectiveness in managing these areas could
have an effect on future profitability.
The Company has had significant accounts receivable or other amounts due from
its customers or other parties. From time to time, certain of these accounts
receivable or other amounts due have become unusually large and/or overdue, and
on occasion the Company has taken significant write-offs relating to accounts
receivable. The failure of the Company's customers to pay in full amounts due to
the Company could affect future profitability.
The Company maintains an unsecured line of credit with a bank that provides for
a maximum credit commitment of $10.0 million. The Company currently has
$2,453,500 outstanding on the line of credit. Borrowings on the line of credit
bear interest at the bank's prime rate, or LIBOR plus 1.75%.
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General Factors
Because of the nature of the Company's product, the Company's largest customers
have historically tended to be large domestic retailers. The Company is
dependent upon its ability to retain existing customers and obtain new customers
as well as develop new product lines for these customers. The Company's failure
to retain existing customers, obtain new customers or develop new product lines
could significantly affect future sales and profitability of the Company. The
Company had no customers during the first nine months of fiscal 2002 or 2001
that accounted for more than 10% of net sales. As with many of the Company's
customers, the timing and volume of activities can vary significantly from
period to period. The loss of business or one or more principal customers or a
change in the sales volume from a particular customer could have a material
adverse effect on the Company's sales volume and profitability.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
FR-61 encourages companies to identify obligations and commitments to make
future payments under contracts, such as debt and lease agreements, and under
contingent commitments, such as debt guarantees. It is also suggested that the
disclosure reference the various parts of a registrants filings, which discuss
these commitments. The SEC believes that investors would find it beneficial if
aggregated information about contractual obligations and commercial commitments
were provided in a single location so that a total picture of such obligations
would be readily available. In FR-61, the SEC has suggested that one additional
aid to presenting the total picture of a registrant's liquidity and capital
resources and the integral role of on and off balance sheet arrangements may be
schedules of contractual obligations and commercial commitments as of the latest
balance sheet date.
The Company has disclosed information pertaining to these events in its 2001
Report on Form 10-K, footnotes 3 and 10. In addition, the Company has prepared
the following schedule suggested by the SEC in FR-61 for the period ending March
31, 2002. The Company had no commercial commitments to report as of the latest
balance sheet date.
--------------------------- --------------------------------------------------------------------
Payments Due By Period
=========================== ====================================================================
Contractual Less than After
Obligations Total 1 year 1-3 years 4-5 years 5 years
=========================== ============== ============ =============== ============ ===========
Long-Term Debt $2,453,500 $0 $2,453,500 $0 $0
=========================== ============== ============ =============== ============ ===========
Capital Lease
Obligations $0 $0 $0 $0 $0
=========================== ============== ============ =============== ============ ===========
Operating Leases $475,000 $95,000 $380,000 $0 $0
=========================== ============== ============ =============== ============ ===========
Unconditional
Purchase
Obligations $0 $0 $0 $0 $0
=========================== ============== ============ =============== ============ ===========
Other Long-Term
Obligations $0 $0 $0 $0 $0
=========================== ============== ============ =============== ============ ===========
Total Contractual
Cash Obligations $2,928,500 $95,000 $2,833,500 $0 $0
=========================== ============== ============ =============== ============ ===========
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DISCLOSURES 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.
DISCLOSURES ABOUT EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
As reported in the Company's June 30, 2001 Form 10-K, the Company has an
agreement with its Chairman to repurchase common 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 $2.5 million 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.
In 1991, the Board of Directors agreed to continue the Chairman's 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 disables or not. The Chairman has turned 70. The Company has a deferred
compensation liability of $1,015,390 recorded as of March 31, 2002 for this
arrangement.
The Company leases its main plant and offices in Milwaukee, Wisconsin from its
Chairman. On June 25, 1993, the lease was renewed for a period of ten years, and
is being accounted for as an operating lease. The lease extension increased the
rent from $280,000 per year to a fixed rate of $350,000 per year for three years
and $380,000 for the seven years thereafter. The lease is on terms no less
favorable to the Company than those that could be obtained from an independent
party. It is the Company's policy, that all material transactions between the
Company, its officers, directors or principal shareholders, or affiliates of any
of them, shall be on terms no less favorable to the Company than those which
could have been obtained if the transaction had been with unaffiliated third
parties on an arm's length basis, and such transactions will be approved by a
majority of the members of the Audit Committee of the Board of Directors, or a
majority of the directors who are independent and not financially interested in
the transactions.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
On December 12, 2001, the SEC issued FR-60 "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies." FR-60 is an intermediate step to
alert companies to prepare adequate disclosure that will facilitate an
understanding of the company's financial status, and the possibility, likelihood
and implications of changes in its financial and operating status. It encourages
companies to aid awareness in their "critical accounting policies, the judgments
and uncertainties affecting the application of those policies, and the
likelihood that materially different amounts would be reported under different
conditions or using different assumptions."
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The Company's accounting policies are disclosed in its 2001 Report on Form 10-K.
There have been no material changes to these policies during the first nine
months of fiscal 2002. The more critical of these 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; the
seller's price to the buyer is fixed or determinable; and collectibility is
reasonably assured. These criteria are generally satisfied and the Company
recognizes revenue upon shipment. The Company's revenue recognition policies are
in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." 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 in
the past. Any significant increase in product quality failure rates and the
resulting credit returns could have a material adverse impact on the Company's
operating results for the period or periods in which such returns materialize.
The Company provides for certain sales incentives which include sales rebates
and co-op advertising incentives. 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 do not properly reflect future returns, revenues could be
overstated.
Products sold are covered by a lifetime warranty. The Company accrues a warranty
reserve for estimated costs to provide warranty services. The Company's 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 Company's 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 Company's License Agreements. These agreements require
minimum annual royalty payments. The Company currently has two royalty
agreements which expire in 2002 and 2008, respectively. The inability of the
Company to negotiate favorable royalty arrangements and renew current agreements
could have a material adverse impact on the Company's 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.
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Accounts Receivable
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customer's current credit
worthiness, as determined by the review of the customer's current credit
information. The Company continuously monitors collections and payments from
customers and maintains a provision for estimated credit losses based upon the
Company's 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 Company's
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. The same
technique used to compute this allowance at June 30, 2001 has been used
throughout the first nine months of fiscal 2002. 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.
Inventory
The Company values inventory 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. As discussed under "General
Factors" 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 inventory. 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q 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-Q
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-Q, the words
"anticipates," "believes," or "estimates," "expects," "intends," "plans" and
variations thereof and similar expressions are intended to identify
forward-looking statements.
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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-Q, or in other Company filings, press
releases, or otherwise. In addition to the factors discussed in this Form 10-Q,
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 other risk factors which may be
detailed from time to time in the Company's 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.
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PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits Filed
See Exhibit Index attached hereto.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
quarter ended March 31, 2002.
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: 4/15/02 /s/ Michael J. Koss
------- ---------------------------
Michael J. Koss
Vice Chairman, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 4/15/02 /s/ Sue Sachdeva
------- ---------------------------
Sue Sachdeva
Vice President--Finance
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EXHIBIT INDEX
The Company will furnish a copy of any exhibit described below upon request and
upon reimbursement to the Company of its reasonable expenses of furnishing such
exhibit, which shall be limited to a photocopying charge of $0.25 per page and,
if mailed to the requesting party, the cost of first-class postage.
Designation Incorporation
of Exhibit Exhibit Title by Reference
- ---------- ------------- ------------
3.1 Certificate of Incorporation of Koss Corporation, as in
effect on September 25, 1996 .............................. (1)
3.2 By-Laws of Koss Corporation, as in effect on
September 25, 1996 ......................................... (2)
4.1 Certificate of Incorporation of Koss Corporation, as in
effect on September 25, 1996.. ............................. (1)
4.2 By-Laws of Koss Corporation, as in effect on
September 25, 1996 ........................................ (2)
10.1 Officer Loan Policy ....................................... (3)
10.3 Supplemental Medical Care Reimbursement Plan................ (4)
10.4 Death Benefit Agreement with John C. Koss ................. (5)
10.5 Stock Purchase Agreement with John C. Koss ................ (6)
10.6 Salary Continuation Resolution for John C . Koss .......... (7)
10.7 1983 Incentive Stock Option Plan ......................... (8)
10.8 Assignment of Lease to John C. Koss ...................... (9)
10.9 Addendum to Lease ........................................ (10)
10.10 1990 Flexible Incentive Plan ............................. (11)
10.12 Loan Agreement, effective as of February 17, 1995 (12)
10.13 Amendment to Loan Agreement dated June 15, 1995,
effective as of February 17, 1995 ........................ (13)
10.14 Amendment to Loan Agreement dated April 29, 1999 (14)
10.15 Amendment to Loan Agreement dated December 15, 1999......... (15)
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10.16 Amendment to Loan Agreement dated October 10, 2001....................... (16)
10.17 License Agreement dated November 15, 1991 between
Koss Corporation and Trabelco N.V. (a subsidiary
of Hagemeyer N.V.) for North America, Central
America and South America (including Amendment
to License Agreement dated November 15, 1991;
Renewal Letter dated November 18, 1994; and Second
Amendment to License Agreement dated September 29, 1995)................. (17)
10.18 License Agreement dated September 29, 1995 between
Koss Corporation and Trabelco N.V. (a subsidiary
of Hagemeyer N.V.) for Europe (including First
Amendment to License Agreement dated December 26,
1995) ................................................................. (18)
10.19 Third Amendment and Assignment of License Agreement to Jiangsu
Electronics Industries Limited dated as of March 31,
1997..................................................................... (19)
10.20 Fourth Amendment to License Agreement between Koss Corporation and
Jiangsu Electronics Industries Limited dated as of May 29,
1998..................................................................... (20)
10.21 Fifth Amendment to License Agreement between Koss Corporation and
Jiangsu Electronics Industries Limited dated March 30,
2001..................................................................... (21)
10.22 Sixth Amendment to License Agreement between Koss Corporation and
Jiangsu Electronics Industries Limited dated August 15,
2001..................................................................... (22)
10.23 Seventh Amendment to License Agreement between Koss Corporation and
Jiangsu Electronics Industries Limited dated December 28,
2001..................................................................... (23)
10.24 License Agreement dated June 30, 1998 between Koss Corporation and
Logitech Electronics Inc. (including Addendum to License Agreement
dated June 30, 1998)..................................................... (24)
10.25 Amendment and Extension Agreement between Koss Corporation and
Logitech Electronics Inc. dated May 1, 2001
......................................................................... (25)
10.26 Consent of Directors (Supplemental Executive
Retirement Plan for Michael J. Koss dated
March 7, 1997) ......................................................... (26)
10.27 Amendment to Lease....................................................... (27)
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10.28 Partial Assignment, Termination and Modification of
Lease .................................................................. (28)
10.29 Restated Lease .......................................................... (29)
22 List of Subsidiaries of Koss Corporation .............................. (30)
(1) Incorporated by reference from Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(2) Incorporated by reference from Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(3) Incorporated by reference from Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(4) Incorporated by reference from Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(5) Incorporated by reference from Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(6) Incorporated by reference from Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(7) Incorporated by reference from Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(8) Incorporated by reference from Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(9) Incorporated by reference from Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1988
(Commission File No. 0-3295)
(10) Incorporated by reference from Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1988
(Commission File No. 0-3295)
(11) Incorporated by reference from Exhibit 25 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1990
(Commission File No. 0-3295)
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(12) Incorporated by reference from Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1995 (Commission File No. 0-3295)
(13) Incorporated by reference from Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995
(Commission File No. 0-3295)
(14) Incorporated by reference from Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1999
(Commission File No. 0-3295)
(15) Incorporated by reference from Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended June 30, 2000
(Commission File No. 0-3295)
(16) Incorporated by reference from Exhibit 10.16 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 2001 (Commission File No. 0-3295)
(17) Incorporated by reference from Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(18) Incorporated by reference from Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(19) Incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 (Commission File No. 0-3295)
(20) Incorporated by reference from Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(Commission File No. 0-3295)
(21) Incorporated by reference from the sole Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001 (Commission File No. 0-3295)
(22) Incorporated by reference from Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the year ended June 30, 2001
(Commission File No. 0-3295)
(23) Incorporated by reference from Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 2001 (Commission File No. 0-3295)
(24) Incorporated by reference from Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(Commission File No. 0-3295)
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(25) Filed herewith
(26) Incorporated by reference from Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 (Commission File No. 0-3295)
(27) Incorporated by reference from Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the year ended June 30, 2000
(Commission File No. 0-3295)
(28) Incorporated by reference from Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the year ended June 30, 2001
(Commission File No. 0-3295)
(29) Incorporated by reference from Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the year ended June 30, 2001
(Commission File No. 0-3295)
(30) Incorporated by reference from Exhibit 22 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1988
(Commission File No. 0-3295)
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