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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
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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,
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Milwaukee, Wisconsin 53212
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
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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
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At March 31, 1997, there were 3,316,291 shares outstanding of the Registrant's
common stock, $0.01 par value per share.
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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 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
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1997 June 30, 1996
(Unaudited) (*)
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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
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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
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$26,284,210 $22,005,257
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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
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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
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$26,284,210 $22,005,257
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* The balance sheet at June 30, 1996, has been prepared from the audited
financial statements at that date.
See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Nine Months
Period Ended March 31 1997 1996 1997 1996
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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
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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
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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)
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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
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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
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Dividends per common share None None None None
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See accompanying notes.
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KOSS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31 1997 1996
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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)
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Net cash used in operating activities: (802,572) (287,892)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (672,002) (242,043)
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Net cash used in
investing activities (672,002) (242,043)
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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
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Net cash provided
by financing activities 1,579,683 502,500
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Net increase (decrease) in cash 105,109 (27,435)
Cash at beginning of year 27,001 49,227
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Cash at end of period $ 132,110 $ 21,792
===============================================================================
See accompanying notes.
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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:
March 31, 1997 June 30, 1996
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Raw materials and
work in process $ 6,847,695 $4,751,156
Finished goods 7,767,099 4,663,842
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14,614,794 9,414,998
LIFO Reserve (637,782) (637,782)
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$13,977,012 $8,777,216
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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.
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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.
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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.
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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.
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto authorized.
KOSS CORPORATION
Dated: 5/14/97 /s/ Michael J. Koss
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Michael J. Koss, President,
Chief Executive Officer,
Chief Financial Officer
Dated: 5/14/97 /s/ Sue Sachdeva
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Sue Sachdeva
Vice President -- Finance
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