Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the
fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
KOSS CORPORATION Commission file number 0-3295
- -------------------------------------------------------------------------------
(Exact name of registrant as specified
in its charter)
A Delaware Corporation 391168275
- -------------------------------------------------------------------------------
(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 offices) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value (voting)
--------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 10, 1998 was approximately $12,781,844 (based on the
$10.875 per share closing price of the Company's Common Stock as reported on the
NASDAQ Stock Market on September 10, 1998). In determining who are affiliates of
the Company for purposes of this computation, it is assumed that directors,
officers, and any persons who held on September 10, 1998 more than 5% of the
issued and outstanding common stock of the Company are "affiliates" of the
Company. The characterization of such directors, officers, and other persons as
affiliates is for purposes of this computation only and should not be construed
as a determination or admission for any other purpose that any of such persons
are, in fact, affiliates of the Company.
On September 10, 1998, 3,177,269 shares of voting common stock were outstanding.
2
Documents Incorporated by Reference
Part III incorporates by reference information from Koss Corporation's Proxy
Statement for its 1998 Annual Meeting of Stockholders to be filed within 120
days of the end of the fiscal year covered by this Report. The exhibits hereto
incorporate by reference information from the Company's Annual Report on Form
10-K for the fiscal years ended June 30, 1988, 1990, 1995, and 1996, and the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and
March 31, 1997.
PART I
Item 1. BUSINESS.
As used herein, the term "Company" means Koss Corporation and its consolidated
subsidiaries, unless the context otherwise requires.
The Company operates in the audio/video industry segment of the home
entertainment industry through its design, manufacture and sale of stereo
headphones, audio/video loudspeakers, and related accessory products.
The Company's principal product is the design, manufacture, and sale of
stereophones and related accessories. The percentage of total revenues related
to the product line over the past three years was:
1998 1997 1996
---- ---- ----
Stereophones 87% 83% 80%
The Company's products are sold through audio specialty stores, catalog
showrooms, regional department store chains, military exchanges and national
retailers under the "Koss" name and dual label. The Company has more than 1,600
domestic dealers and its products are carried in more than 17,000 domestic
retail outlets. International markets are served by domestic sales
representatives and a sales office in Switzerland which utilizes independent
distributors in several foreign countries.
Management believes that it has sources of raw materials that are adequate for
its needs.
The Company regularly applies for registration of its trademarks and has
numerous patents. Certain of its trademarks are of material value and importance
to the conduct of its business. Although the Company considers protection of its
proprietary developments important, the Company's business is not, in the
opinion of management, materially dependent upon any single patent.
Although retail sales of consumer electronics are predictably higher during the
holiday season, management of the Company is of the opinion that its business
and industry segment are not seasonal as evidenced by the fact that 54% of sales
occurred in the first six months of the fiscal year and 46% of sales occurred in
the latter six months of the fiscal year.
The Company's working capital needs do not differ substantially from those of
its competitors in the industry and generally reflect the need to carry
significant amounts of inventory to meet delivery requirements of its customers.
The Company provides extended payment terms for product sales to certain
customers. Based on historical trends, management does not expect these
practices to have any material effect on net sales or revenues. The Company's
current backlog of orders is not material in relation to annual net sales.
2
3
The Company markets its products to approximately 2,000 customers worldwide.
During 1998 the Company's sales to its largest single customer, Tandy
Corporation, were 19% of total sales. Management believes that any loss of this
customer's revenues would be partially offset by a corresponding decrease, on a
percentage basis, in expenses thereby dampening the impact on the Company's
operating income. Although perhaps initially material, management believes this
impact would be offset in future years by expanded sales to both existing and
new customers. The five largest customers of the Company accounted for
approximately 39% of total sales in 1998.
Although competition in the stereophone market has increased this past year, the
Company has maintained its competitive position as a leading marketer and
producer of high fidelity stereophones in the United States. In the stereophone
market, the Company competes directly with approximately five major competitors,
several of which are large and diversified and have greater total assets and
resources than the Company.
The amount spent on engineering and research activities relating to the
development of new products or the improvement of existing products was $265,000
during fiscal 1998 as compared with $245,000 during fiscal 1997 and $225,000
during fiscal 1996. These activities were conducted by both Company personnel
and outside consultants. The Company relies upon its unique sound, quality
workmanship, brand identification, engineering skills and customer service to
maintain its competitive position.
As of June 30, 1998, the Company employed 184 people. The Company also utilizes
temporary personnel to meet seasonal production demands.
Foreign Sales.
International markets are serviced through manufacturers representatives or
independent distributors with product produced in the United States. In the
opinion of management, the Company's competitive position and risks attendant to
the conduct of its business in such markets are comparable to the domestic
market. For further information, see Note 10 to consolidated financial
statements accompanying this Form 10-K.
Item 2. PROPERTIES.
The Company leases its main plant and offices in Milwaukee, Wisconsin from its
Chairman, John C. Koss. 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
increases the rent from $280,000 per year (plus Consumer Price Index increase in
1994) 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. The Company is
responsible for all property maintenance, insurance, taxes and other normal
expenses related to ownership.
All facilities are in good repair and, in the opinion of management, are
suitable for the Company's purposes.
Item 3. LEGAL PROCEEDINGS.
Neither Koss nor its subsidiaries are subject to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth quarter of
the fiscal year ended June 30, 1998.
3
4
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION ON COMMON STOCK
The Company's common stock is traded on The Nasdaq Stock Market under the
trading symbol "KOSS". There were approximately 1,087 holders of the Company's
common stock as of September 10, 1998. No dividends have been paid for the years
ended June 30, 1998, 1997, and 1996. The quarterly high and low sale prices of
the Company's common stock for the last two fiscal years are shown below.
Fiscal Year 1998 Fiscal Year 1997
---------------- ----------------
Quarter High Low High Low
- ------- ---- --- ---- ---
First $14-0/0 $8-1/4 $7-3/8 $5-3/4
Second $15-1/8 $11-1/4 $7-0/0 $5-3/4
Third $12-1/2 $10-0/0 $13-0/0 $6-1/4
Fourth $11-1/4 $9-1/2 $11-1/4 $8-3/4
Item 6. SELECTED FINANCIAL DATA.
1998 1997 1996 1995 1994
- ---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Net sales $40,638,747 $39,554,720 $36,422,377 $33,432,344 $35,561,322
Net income $5,477,629 $3,587,688 $2,360,963 $2,087,994 $2,800,855
Earnings per common share:
Basic $1.68 $1.09 $0.69 $0.63 $0.88
Diluted $1.65 $1.07 $0.67 $0.58 $0.75
Total assets $32,028,769 $26,332,923 $22,005,257 $20,972,923 $19,220,406
Long-term debt $2,746,000 $1,221,000 $470,000 $570,000 $2,068,741
4
5
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL CONDITION AND LIQUIDITY
During 1998, cash provided by operations was $1,839,750. Working capital was
$25,044,408 at June 30, 1998. The increase of $4,255,260 from the balance at
June 30, 1997 represents primarily the net effect of an increase in inventory of
$4,938,405. The increase in inventory is the result of anticipated higher sales
volume in the upcoming year.
Capital expenditures for new property and equipment including production tooling
were $221,560, $782,287, and $690,932 in 1998, 1997, and 1996, respectively.
Depreciation charges aggregated $636,558, $649,099, and $629,985 for the same
fiscal years. Budgeted capital expenditures for fiscal year 1999 are $1,100,000.
The Company expects to generate sufficient funds through operations to fulfill
these expenditures.
Stockholders' investment increased to $22,591,160 at June 30, 1998 from
$20,274,494 at June 30, 1997. The increase reflects primarily the effect of net
income, the purchase and retirement of common stock, and the exercise of stock
options for the year. No cash dividends have been paid since the first quarter
of fiscal 1984.
The Company has an unsecured working capital line of credit facility with a bank
which expires November 1, 1999. 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. Borrowings
under this credit facility as of June 30, 1998 totaled $2,746,000.
There are no commitments for foreign letters of credit at June 30, 1998.
In April, 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, 1996 the Board of Directors
approved an increase in the total amount of potential stock purchases for the
Company's own account from $2,000,000 to $3,000,000. In July of 1997, the Board
of Directors again approved an increase in the total amount of potential stock
purchases for the Company's own account from $3,000,000 to $5,000,000. In August
of 1998, the Board of Directors approved an increase of $3,000,000 in the
Company's stock repurchase program, thereby increasing the total amount of stock
repurchases for the Company's own account from $5,000,000 to $8,000,000. 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. For the
fiscal year ended June 30, 1998, the Company purchased 547,772 shares of its
common stock at an average gross price of $12.75 per share (and an average net
price of $7.96 per share), and retired all such shares.
From the commencement of the Company's stock repurchase program through June 30,
1998, the Company has purchased and retired a total of 891,348 shares for a
total gross purchase price of $9,108,577 (representing an average gross purchase
price of $10.22 per share) and a total net purchase price of $6,485,677
(representing an average net purchase price of $7.28 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.
5
6
1998 RESULTS COMPARED WITH 1997
Net sales for 1998 were $40,638,747 compared with $39,554,720 in 1997, an
increase of $1,084,027 or 3%. The increase was the result of higher sales of
current products as well as the introduction of new products.
The Company anticipates a decline in net sales for fiscal 1999 as a result of
the Company's previously announced decision to exit the computer speaker
business, which accounted for $5,831,234 of gross sales for the fiscal year
ending June 30, 1998.
Gross profit was $15,794,779 or 38.9% in 1998 compared with $13,632,099 or 34.5%
in 1997. Shifts in product mix resulted in the increase in gross profit as
compared to last year.
Selling, general and administrative expenses for 1998 were $7,822,338 compared
with $8,594,260 in 1997, a decrease of $771,922 or 9%. This decrease is a result
of the closing of Koss Limited in Canada.
Income from operations was $7,972,441 in 1998 compared with $5,037,839 in 1997,
an increase of 58%. Net interest expense for 1998 was $253,171 compared with
$200,401 in 1997. The increase is due to increased levels of borrowings during
the fiscal year.
The Company had a License Agreement with Trabelco N.V., a Netherlands, Antilles
company and a subsidiary of Hagemeyer, N.V., a diverse international trading
company based in the Netherlands. This License Agreement covered North America,
Central America, and South America. Effective March 31, 1997, the Company
assigned this License Agreement to Jiangsu Electronics Industries Limited
("Jiangsu"), a subsidiary of Orient Power Holdings Limited. 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. In May of 1998, the Company and Jiangsu entered into an
amendment to this License Agreement expanding the products covered by this
License Agreement to include mobile electronics and increasing the minimum
royalties due for the years 1998, 1999, and 2000. This License Agreement is
subject to renewal for additional 3 year periods. Royalty income earned in
connection with this License Agreement for the year ended June 30, 1998 was
$1,206,359 as compared to $1,131,250 for the same period in 1997. The Company
recognizes royalty income when earned. The increase in royalty income for the
twelve-month period is the result of higher sales volume 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 are due for calendar year 1998. This
License Agreement expires on December 31, 1998; however, Trabelco N.V. has the
option to renew this License Agreement for additional 3 year periods.
Effective July 1, 1998, the Company entered into a License Agreement and an
Addendum thereto with Logitech Electronics Inc. ("Logitech") of Ontario, Canada
whereby the Company licensed to Logitech the right to sell multimedia/computer
speakers under the Koss brand name. This License Agreement covers North America
and certain countries in South America and Europe. This License Agreement
extends for 5 years and includes a 5 year renewal option at the Company's
discretion. This License Agreement requires royalty payments by Logitech through
June 30, 2003, subject to certain minimum royalty amounts due each year.
Income taxes are discussed in Note 6 to the financial statements.
6
7
1997 RESULTS COMPARED WITH 1996
Net sales for 1997 were $39,554,720 compared with $36,422,377 in 1996, an
increase of $3,132,343 or 9%. The increase was the result of higher sales of
current product as well as the introduction of new products.
Gross profit was $13,632,099 or 34.5% in 1997 compared with $11,180,754 or 30.7%
in 1996. Shifts in product mix resulted in the increase in gross profit as
compared to last year.
Selling, general and administrative expenses for 1997 were $8,594,260 compared
with $8,528,098 in 1996, an increase of $66,162 or less than 1%.
Income from operations was $5,037,839 in 1997 compared with $2,652,656 in 1996,
an increase of 90%. Net interest expense for 1997 was $200,401 compared with
$40,195 in 1996. The increase is due to increased levels of borrowings during
the fiscal year.
The Company had a License Agreement with Trabelco N.V., a Netherlands, Antilles
company and a subsidiary of Hagemeyer, N.V., a diverse international trading
company based in the Netherlands. This License Agreement covered North America,
Central America, and South America. Effective March 31, 1997, the Company
assigned this License Agreement to Jiangsu Electronics Industries Limited
("Jiangsu"), a subsidiary of Orient Power Holdings Limited. 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. In May of 1998, the Company and Jiangsu entered into an
amendment to this License Agreement expanding the products covered by this
License Agreement to include mobile electronics and increasing the minimum
royalties due for the years 1998, 1999, and 2000. This License Agreement is
subject to renewal for additional 3 year periods. Royalty income earned in
connection with this License Agreement for the year ended June 30, 1997 was
$1,131,250 as compared to $1,303,502 for the same period in 1996. The Company
recognizes royalty income when earned. The decrease in royalty income for the
twelve-month period is the result of lower sales volume 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 are due for calendar years 1997 and
1998. This License Agreement expires on December 31, 1998; however, Trabelco
N.V. has the option to renew this License Agreement for additional 3 year
periods.
Income taxes are discussed in Note 6 to the financial statements.
7
8
MANAGEMENT'S REPORT
The consolidated financial statements and related financial information included
in this report are the responsibility of management as to preparation,
presentation and reliability. Management believes that the financial statements
have been prepared in conformity with generally accepted accounting principles
appropriate under the circumstances and necessarily include amounts that are
based on best estimates and judgments.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that the books and records
reflect the authorized transactions of the Company.
The Board of Directors, acting through the Audit Committee, is responsible for
the selection and appointment of the independent auditors and reviews the scope
of their audit and their findings. The independent auditors have direct access
to the Audit Committee, with or without the presence of management
representatives, to discuss the scope and the results of their audit work. The
Audit Committee is comprised solely of non-employee directors.
The independent auditors provide an objective assessment of the degree to which
management meets its responsibility for fairness of financial reporting. They
evaluate the system of internal accounting controls in connection with their
audit and perform such tests and procedures as they deem necessary to reach and
express an opinion on the fairness of the financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
(SFAS 131) which establishes standards for reporting information about operating
segments in annual financial statements and interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997 and requires presentation of prior period
financial statements for comparability purposes. The Company is currently
evaluating its required disclosures under SFAS 131 and expects to adopt this
standard during the year ended June 30, 1999.
YEAR 2000
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using 2 digits to define the applicable year (as
opposed to 4 digits). Any of the Company's programs that have time sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or systems failure. Based on a
review of the Company's software by the Chief Information Officer and outside
consultants, the anticipated costs of addressing potential problems are not
expected to have an adverse impact on the Company's financial position, results
of operations or cash flows in future periods. The Company expects its computer
systems will be year 2000 compliant by January 31, 1999.
A year 2000 compliance letter and survey form has been sent to all our customers
doing over $10,000 annually in sales. Responses will be analyzed to see if there
are any adverse conditions that the Company may have overlooked in its year 2000
plan. The same procedure is being followed with our suppliers and vendors. The
Company's current inventory levels and forecasting technique will insure product
is available to support customer requirements. In the event there are any
adverse conditions, the Company will devote necessary resources to resolve all
significant year 2000 issues in a timely manner.
8
9
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of the Company at June 30, 1998 and 1997 and
for each of the three years in the period ended June 30, 1998 and the notes
thereto, and the report of independent accountants thereon are set forth on
pages 13 to 25.
Selected unaudited quarterly financial data is as follows:
Quarter
-------
1998 First Second Third Fourth
- ---- ----- ------- ----- ------
Net sales $11,755,125 $10,378,151 $8,089,590 $10,415,881
Gross profit 4,424,457 3,310,141 2,517,692 5,542,489
Net income 1,401,423 1,084,436 661,608 2,330,162
Earnings per common share:
Basic .42 .33 .21 .73
Diluted .41 .32 .20 .73
Quarter
-------
1997 First Second Third Fourth
- ---- ----- ------- ----- ------
Net sales $9,862,803 $13,320,166 $8,583,303 $7,788,448
Gross profit 3,287,678 4,544,115 2,922,694 2,877,612
Net income 838,990 1,482,478 531,552 734,668
Earnings per common share:
Basic .25 .45 .16 .22
Diluted .25 .45 .15 .21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
9
10
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the directors of Koss Corporation is incorporated herein
by reference from the "ELECTION OF DIRECTORS -- Information As To Nominees" and
the "ELECTION OF DIRECTORS -- Executive Officers" contained in the Koss
Corporation Proxy Statement for its 1998 Annual Meeting of Stockholders (the
"1998 Proxy Statement"), which 1998 Proxy Statement is to be filed within 120
days of the end of the fiscal year covered by this Report pursuant to General
Instruction G(3) of Form 10-K.
Item 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is incorporated herein by
reference from the "ELECTION OF DIRECTORS -- Executive Compensation And Related
Matters" section of the 1998 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to the security ownership of certain beneficial owners and
management is incorporated herein by reference from the "ELECTION OF DIRECTORS
- -- Beneficial Ownership Of Company Securities" section of the 1998 Proxy
Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to related transactions is incorporated herein by reference
from the "ELECTION OF DIRECTORS -- Executive Compensation And Related Matters"
and "ELECTION OF DIRECTORS -- Related Transactions" sections of the 1998 Proxy
Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. The following documents are filed as part of this report:
1. Financial Statements
The following consolidated financial statements of Koss Corporation are set forth on pages 13 to
25:
Report of Independent Accountants............................................................. 13
Consolidated Statements of Income for the Years
Ended June 30, 1998, 1997, and 1996.......................................................... 14
Consolidated Balance Sheets as of June 30, 1998 and 1997...................................... 15
Consolidated Statements of Cash Flows
for the Years Ended June 30, 1998, 1997, and 1996............................................ 16
Consolidated Statements of Stockholders' Investment
for the Years Ended June 30, 1998, 1997, and 1996............................................ 17
Notes to Consolidated Financial Statements.................................................... 18
10
11
2. Financial Statement Schedules
All schedules have been omitted because the information is not
applicable or is not material or because the information
required is included in the financial statements or the notes
thereto.
3. Exhibits Filed
3.1 Certificate of Incorporation of Koss Corporation.
3.2 By-Laws of Koss Corporation.
4.1 Certificate of Incorporation of Koss Corporation.
4.2 By-Laws of Koss Corporation.
10.1 Officer Loan Policy.
10.3 Supplemental Medical Care Reimbursement Plan.
10.4 Death Benefit Agreement with John C. Koss.
10.5 Stock Repurchase Agreement with John C. Koss.
10.6 Salary Continuation Resolution for John C. Koss.
10.7 1983 Incentive Stock Option Plan.
10.8 Assignment of Lease to John C. Koss.
10.9 Addendum to Lease.
10.10 1990 Flexible Incentive Plan.
10.12 Loan Agreement, effective as of February 17, 1995.
10.13 Amendment to Loan Agreement dated June 15, 1995,
effective as of February 17, 1995.
10.14 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).
10.15 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).
10.16 Third Amendment and Assignment of License Agreement
to Jiangsu Electronics Industries Limited dated March
31, 1997.
11
12
10.17 Fourth Amendment to License Agreement dated as of May
29, 1998.
10.18 License Agreement dated June 30, 1998 between Koss
Corporation and Logitech Electronics Inc. (including
Addendum to License Agreement dated June 30, 1998).
10.19 Consent of Directors (Supplemental Executive
Retirement Plan for Michael J. Koss dated March 7,
1997).
22 List of Subsidiaries of Koss Corporation.
27 Financial Data Schedule.
b. One report on Form 8-K was filed by the Company during the last quarter
of the period covered by this report. This Form 8-K referenced a Press
Release issued by the Company announcing a decline in forecasted sales
revenue of approximately $4,000,000, or 10%, for the fiscal year ending
June 30, 1999, relating to an anticipated reduction in sales of the
Company's computer loudspeaker and associated peripheral business.
12
13
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KOSS CORPORATION
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 10 present fairly, in all material
respects, the financial position of Koss Corporation and its subsidiaries at
June 30, 1998 and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
- --------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 15, 1998
13
14
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Net sales $40,638,747 $39,554,720 $36,422,377
Cost of goods sold 24,843,968 25,922,621 25,241,623
- ----------------------------------------------------------------------------------------------------------
Gross profit 15,794,779 13,632,099 11,180,754
Selling, general and
administrative expense 7,822,338 8,594,260 8,528,098
- ---------------------------------------------------------------------------------------------------------
Income from operations 7,972,441 5,037,839 2,652,656
Other income (expense)
Royalty income 1,206,359 1,131,250 1,303,502
Interest expense (net) (253,171) (200,401) (40,195)
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 8,925,629 5,968,688 3,915,963
Provision for income taxes (note 6) 3,448,000 2,381,000 1,555,000
- ---------------------------------------------------------------------------------------------------------
Net income $5,477,629 $ 3,587,688 $ 2,360,963
=========================================================================================================
Earnings per common share:
Basic $1.68 $1.09 $0.69
Diluted $1.65 $1.07 $0.67
- ---------------------------------------------------------------------------------------------------------
Dividends per common share None None None
=========================================================================================================
See accompanying notes.
14
15
CONSOLIDATED BALANCE SHEETS
As of June 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 14,778 $ 32,551
Accounts receivable, less allowances of
$556,290 and $928,605, respectively (note 12) 8,387,839 6,992,513
Inventories 19,486,058 14,547,653
Prepaid expenses 548,892 603,997
Income taxes receivable -- 65,493
Deferred income taxes (note 6) 555,946 756,946
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 28,993,513 22,999,153
- ---------------------------------------------------------------------------------------------------------------------------
Equipment and Leasehold Improvements, at cost:
Leasehold improvements 742,289 735,930
Machinery, equipment, furniture and fixtures 4,587,729 4,548,096
Tools, dies, molds and patterns 8,351,591 8,176,023
- ---------------------------------------------------------------------------------------------------------------------------
13,681,609 13,460,049
Less--accumulated depreciation 11,619,078 10,982,520
- ---------------------------------------------------------------------------------------------------------------------------
2,062,531 2,477,529
Deferred Income Taxes (note 6) 364,135 258,135
Intangible and Other Assets 608,590 598,106
- ---------------------------------------------------------------------------------------------------------------------------
$32,028,769 $26,332,923
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,956,877 $ 741,646
Accrued liabilities (note 7) 1,314,701 994,877
Deferred revenue -- 473,482
Income taxes payable 677,527 --
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,949,105 2,210,005
- ---------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (note 4) 2,746,000 1,221,000
- ---------------------------------------------------------------------------------------------------------------------------
Deferred Compensation and Other Liabilities (note 11) 1,252,504 1,137,424
- ---------------------------------------------------------------------------------------------------------------------------
Contingently Redeemable Equity Interest (note 5) 1,490,000 1,490,000
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' Investment (note 5):
Common stock, $.01 par value,
authorized 8,500,000 shares;
issued and outstanding 3,177,269
and 3,323,791 shares, respectively 31,773 33,238
Paid in capital -- 2,328,677
Contingently redeemable common stock (1,490,000) (1,490,000)
Accumulated other comprehensive income (71,322) (71,322)
Undistributed retained earnings 24,120,709 19,473,901
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 22,591,160 20,274,494
- ---------------------------------------------------------------------------------------------------------------------------
$32,028,769 $26,332,923
===========================================================================================================================
See accompanying notes.
15
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 5,477,629 $ 3,587,688 $ 2,360,963
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 676,673 712,215 777,238
Deferred income taxes 95,000 (74,532) (568,465)
Deferred compensation 115,080 115,080 115,080
Net changes in operating assets and
liabilities (note 8) (4,524,632) (4,407,722) (802,625)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 1,839,750 (67,271) 1,882,191
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (221,560) (782,287) (690,932)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreement (24,385,400) (21,029,000) (13,891,000)
Borrowings under line of credit agreement 25,910,400 21,780,000 13,791,000
Exercise of stock options 3,822,600 456,799 433,835
Purchase and retirement of common stock (6,983,563) (352,691) (1,547,320)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (1,635,963) 855,108 (1,213,485)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (17,773) 5,550 (22,226)
Cash at beginning of year 32,551 27,001 49,227
- --------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 14,778 $ 32,551 $ 27,001
==========================================================================================================================
See accompanying notes.
16
17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
Accumulated
Other
Common Paid In Retained Comprehensive
Stock Capital Earnings Income
- -------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $ 34,861 $ 3,336,431 $13,525,250 $ (65,116)
Net income -- -- 2,360,963 --
Foreign currency translation adjustment -- -- -- (42,114)
Purchase and retirement of treasury stock (2,519) (1,544,801) -- --
Exercise of stock options 837 432,998 -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 33,179 2,224,628 15,886,213 (107,230)
Net income -- -- 3,587,688 --
Foreign currency translation adjustment -- -- -- 35,908
Purchase and retirement of treasury stock (516) (352,175) -- --
Exercise of stock options 575 456,224 -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 33,238 2,328,677 19,473,901 (71,322)
Net income -- -- 5,477,629 --
Purchase and retirement of treasury stock (5,478) (6,147,264) (830,821) --
Exercise of stock options 4,013 3,818,587 -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $ 31,773 $ -- $24,120,709 $ (71,322)
- ------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
17
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
CONCENTRATION OF CREDIT RISK--The Company operates in the audio/video industry
segment of the home entertainment industry through its design, manufacture and
sale of stereo headphones, audio/video loudspeakers and related accessory
products. The Company's products are sold through audio specialty stores,
catalog showrooms, regional department store chains, military exchanges and
national retailers under the "Koss" name and dual label. The Company has more
than 1,600 domestic dealers and its products are carried in more than 17,000
domestic retail outlets. International markets are served by domestic sales
representatives and a sales office in Switzerland, which utilizes independent
distributors in several foreign countries. The Company grants credit to its
domestic and Canadian customers. Collection is dependent on the retailing
industry economy. International customers outside of Canada are sold on a cash
against documents or letter of credit basis. Approximately 16% and 13% of the
Company's accounts receivable at June 30, 1998 and 1997, respectively, were
foreign receivables.
BASIS OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly-owned. All
significant intercompany accounts and transactions have been eliminated.
ROYALTY INCOME--The Company recognizes royalty income when earned under terms of
license agreements, which expire in 1998 and 2000. These agreements contain
three year renewal options and require minimum calendar year royalty payments.
INVENTORIES--At June 30, 1998 and 1997, approximately 83% and 98%, respectively,
of the Company's inventories were valued at the lower of last-in, first-out
(LIFO) cost or market. All other inventories are valued at the lower of
first-in, first-out (FIFO) cost, or market. If the FIFO method of inventory
accounting had been used by the Company for inventories valued at LIFO,
inventories would have been $461,143 and $457,484 higher than reported at June
30, 1998 and 1997, respectively.
The components of inventories at June 30, is as follows:
1998 1997
----------------------------------------------------------
Raw materials and
Work in process $ 6,547,983 $ 7,242,161
Finished goods 12,938,075 7,305,492
----------------------------------------------------------
$19,486,058 $14,547,653
==========================================================
PROPERTY AND EQUIPMENT--Depreciation is provided on a straight-line basis over
the estimated useful life of the asset as follows:
Leasehold Improvements 10-15 years
Machinery, Equipment,
Furniture and Fixtures 3-10 years
Tools, Dies, Molds
and Patterns 4-5 years
RESEARCH AND DEVELOPMENT--Research and development expenditures charged to
operations amounted to approximately $265,000 in 1998, $245,000 in 1997, and
$225,000 in 1996.
EARNINGS PER SHARE--Basic earnings per share are computed based on the weighted
average number of common shares outstanding. When dilutive, stock options are
included as share equivalents using the treasury stock method.
18
19
FAIR VALUE OF FINANCIAL INSTRUMENTS--Cash, accounts receivable, accounts payable
and accrued liabilities recorded in the consolidated balance sheets approximate
fair value based on the short maturity of these instruments. Amounts recorded
for long-term debt, deferred compensation and other liabilities are estimated to
approximate fair value based on market conditions and interest rates available
to the Company for similar financial instruments.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share," (SFAS
128). This Statement establishes new standards for computing and presenting
earnings per share. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997 and requires restatement of all
prior-period earnings per share data. The Company's adoption of the provisions
of SFAS 128 resulted in the dual presentation of basic and diluted per share
amounts on the Company's income statement.
Basic earnings per share are computed based on the weighted average number of
common shares outstanding. The weighted average number of common shares
outstanding for the fiscal years ended June 30, 1998, 1997, and 1996 were
3,263,842, 3,304,194, and 3,443,247, respectively. When dilutive, stock options
are included in earnings per share as share equivalents using the treasury stock
method. Common stock equivalents of 64,889, 58,648, and 60,201 related to stock
option grants were included in the computation of the average number of shares
outstanding for diluted earnings per share for the fiscal years ended June 30,
1998, 1997, and 1996, respectively.
3. COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting of Comprehensive Income," (SFAS 130). This Statement requires
that certain items recognized under generally accepted accounting principles as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence of other financial statements.
Total comprehensive income totaled $5,477,629 and $3,623,596 for the fiscal
years ended June 30, 1998 and 1997, respectively. Total comprehensive income for
the year ended June 30, 1998 and 1997, is comprised of net income of $5,477,629
and $3,587,688, respectively, and other comprehensive income of $-0- and
$35,908, respectively. Other comprehensive income is comprised solely of foreign
currency transaction adjustments and are included in the Consolidated Statement
of Stockholder's Investment.
4. LONG TERM DEBT
The Company has an unsecured working capital line of credit facility with a
bank, which expires through November 1, 1999. 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. Borrowings under this credit facility as of June 30, 1998
totaled $2,746,000. There are no commitments for foreign letters of credit at
June 30, 1998. Utilization of this credit facility as of June 30, 1997 was
$1,274,386, consisting of $1,221,000 in borrowings and $53,386 in foreign
letters of credit.
19
20
5. STOCK OPTIONS AND STOCK PURCHASE AGREEMENTS
In 1990, pursuant to the recommendation of the Board of Directors, the
stockholders ratified the creation of the Company's 1990 Flexible Incentive Plan
(the "1990 Plan"). The 1990 Plan is administered by a committee of the Board of
Directors and provides for the granting of various stock-based awards including
stock options to eligible participants, primarily officers and certain key
employees. A total of 225,000 shares of common stock were available in the first
year of the Plan's existence. Each year thereafter additional shares equal to
.25% of the shares outstanding as of the first day of the applicable fiscal year
were reserved for issuance pursuant to the 1990 Plan. On July 22, 1992, the
Board of Directors authorized the reservation of an additional 250,000 shares to
the 1990 Plan, which was approved by the stockholders. In 1993, the Board of
Directors authorized the reservation of an additional 300,000 shares to the 1990
Plan, which was approved by the stockholders. In 1997, the Board of Directors
authorized the reservation of an additional 300,000 shares to the 1990 Plan,
which was approved by the stockholders.
The following table identifies options granted, exercised, cancelled or
available for exercise pursuant to the above mentioned Plan:
Number of Price per
Shares Share
-------------------------------------------------------------------------------------
Shares under option at June 30, 1995 536,250 $1.75-$10.55
Granted 72,500 $5.32-$5.85
Exercised (56,250) $1.75-$2.75
-------------------------------------------------------------------------------------
Shares under option at June 30, 1996 552,500 $1.75-$10.55
Granted 52,500 $10.20-$11.22
Exercised (57,500) $2.50-$7.50
Cancelled (11,250) $5.32-$7.35
-------------------------------------------------------------------------------------
Shares under option at June 30, 1997 536,250 $2.50-$11.22
Granted 55,000 $10.83-$11.91
Exercised (401,250) $2.50-$10.55
-------------------------------------------------------------------------------------
Shares under option at June 30, 1998 190,000 $5.32-$11.91
=====================================================================================
Options exercisable at June 30, 1998 52,500 $5.32-$10.20
=====================================================================================
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.
The Company currently accounts for its stock-based compensation plans using the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). In 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Under the provisions of SFAS 123, companies can elect to account for
stock-based compensation plans using a fair-value-based method or continue
measuring compensation expense for those plans using the intrinsic value method
prescribed in APB 25. SFAS 123 requires that companies electing to continue
using the intrinsic value method must make pro forma disclosures of net income
and earnings per share as if the fair-value-based method of accounting had been
applied. The Company has adopted the disclosure-only provisions of SFAS 123;
accordingly, no compensation cost has been recognized for options granted under
the stock-based compensation plan. Had compensation cost been determined based
on the fair value at the grant date for awards in 1998, 1997, and 1996
consistent with the provisions of SFAS 123, the Company's pro forma net income
and earnings per share would have been as presented below:
20
21
1998 1997 1996
------------- ----------- ------------
Net income - as reported $5,477,629 $3,587,688 $2,360,963
Net income - pro forma 5,318,518 3,511,965 2,349,608
Earnings per common share - as reported
Basic 1.68 1.09 .69
Diluted 1.65 1.07 .67
Earnings per common share - pro forma
Basic 1.63 1.06 .68
Diluted 1.60 1.04 .67
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1998 1997 1996
----------- ---------- ----------
Expected stock price volatility 69.17% 70.94% 70.53%
Risk free interest rate 5.72% 6.84% 6.45%
Expected life of options 5.91 years 6 years 5.6 years
The weighted average exercise prices per share for options outstanding and
exercisable at June 30, 1998 are $9.02 and $7.92, respectively. The weighted
average exercise prices per share for options outstanding and exercisable at
June 30, 1997 are $7.56 and $7.67, respectively. The weighted average exercise
prices per share for options outstanding and exercisable at June 30, 1996 are
$7.15 and $7.80, respectively. The weighted average fair value of options
granted during 1998, 1997, and 1996 are $6.95, $7.02, and $3.37 per share,
respectively.
21
22
6. INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires use of the liability method of
accounting for income taxes. The liability method measures the expected tax
impact of future taxable income and deductions implicit in the consolidated
balance sheet.
The provision for income taxes in 1998, 1997, and 1996 consists of the
following:
Year Ended June 30, 1998 1997 1996
-------------------------------------------------------------------------------------------------
Current:
U.S. federal $2,839,000 $2,061,000 $1,536,000
State 514,000 394,000 296,000
Foreign -- -- (44,000)
Deferred 95,000 (74,000) (233,000)
-------------------------------------------------------------------------------------------------
$3,448,000 $2,381,000 $1,555,000
=================================================================================================
The 1998, 1997, and 1996 tax provision results in an effective rate different
than the federal statutory rate due to the following:
Year Ended June 30, 1998 1997 1996
-------------------------------------------------------------------------------------------------
Federal income tax at
statutory rate $3,035,000 $2,029,000 $1,331,000
State income taxes, net of
federal tax benefit 339,000 260,000 195,000
Other 74,000 92,000 29,000
-------------------------------------------------------------------------------------------------
Total provision for
income taxes $3,448,000 $2,381,000 $1,555,000
=================================================================================================
Income before taxes for United States operations was $8,925,629 in 1998,
$6,803,219 in 1997, and $4,013,970 in 1996. Losses before taxes for foreign
operations were $0, $834,531, and $97,322 for the respective years.
22
23
Temporary differences which give rise to deferred tax assets and liabilities at
June 30 include:
1998 1997
-------------------------------------------------------------------------------------------------
Deferred Tax Assets
Deferred compensation $307,000 $ 265,000
Accrued expenses and reserves 579,000 530,000
Royalties receivable/deferred -- 179,000
Package design and trademarks 150,000 125,000
Other 9,000 39,000
--------------------------------------------------------------------------------------------------
1,045,000 1,138,000
Deferred Tax Liabilities
Royalties receivable/deferred (32,000) --
Equipment and leasehold improvements (93,000) (123,000)
--------------------------------------------------------------------------------------------------
Net deferred tax asset $920,000 $1,015,000
==================================================================================================
The net deferred tax asset at June 30, 1998 is comprised of a current asset of
$555,946 and a long term asset of $364,135. The net deferred tax asset at June
30, 1997 is comprised of a current asset of $756,946 and a long term asset of
$258,135.
7. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of the following:
1998 1997
--------------------------------------------------------------------------------------------------
Salaries and wages $608,288 $340,498
Cooperative advertising
and promotion allowances 282,761 240,612
Payroll taxes and
employee benefits 161,075 162,626
Other 262,577 251,141
--------------------------------------------------------------------------------------------------
$1,314,701 $994,877
==================================================================================================
8. ADDITIONAL CASH FLOW INFORMATION
The net operating changes in cash as a result of changes in operating assets and
liabilities consist of the following:
1998 1997 1996
---------------------------------------------------------------------------------------------------
Accounts receivable $(1,395,326) $ 1,972,700 $ (1,722,351)
Inventories (4,938,405) (5,734,529) 576,585
Prepaid expenses 55,105 (221,860) 294,737
Net income taxes 743,020 (427,348) 738,002
Other assets (50,599) (92,422) (146,495)
Accounts payable 1,215,231 (586,269) (398,796)
Deferred revenue (473,482) 473,482 --
Accrued liabilities 319,824 208,524 (144,307)
---------------------------------------------------------------------------------------------------
Net change $(4,524,632) $ (4,407,722) $ (802,625)
===================================================================================================
23
24
1998 1997 1996
---- ---- ----
Net cash paid during the year for:
Interest $ 241,687 $ 297,398 $ 161,256
Income taxes $1,771,313 $2,849,333 $1,413,283
9. EMPLOYEE BENEFIT PLANS
Substantially all domestic employees are participants in the Company's Employee
Stock Ownership Plan and Trust under which an annual contribution in either cash
or common stock may be made at the discretion of the Board of Directors. The
expense recorded for such contributions amounted to $216,000 in 1998, $200,000
in 1997, and $344,000 in 1996.
The Company maintains a retirement savings plan under Section 401(k) of the
Internal Revenue Code. This plan covers all employees of the Company who have
completed six months of service. Matching contributions can be made at the
discretion of the Company's Board of Directors. For calendar years 1998, 1997,
and 1996, the matching contribution was 100% of employee contributions to the
plan, not to exceed 10% of the employee's annual compensation. Vesting of
Company contributions occurs immediately. Contributions for the years ended June
30, 1998, 1997, and 1996 were $170,600, $144,000, and $264,631, respectively.
10. INDUSTRY SEGMENT INFORMATION, FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
The Company has one line of business--the design, manufacture and sale of
stereophones and related accessories. The table below summarizes certain
information regarding the Company's United States and Canadian operations for
the years ended June 30, 1998, 1997, and 1996.
000's Omitted United
States Canada Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------
1998:
- -----------------------------------------------------------------------------------------------------
Net sales $ 40,638 $ -- $ -- $ 40,638
Intercompany transfers 300 -- (300) --
- -----------------------------------------------------------------------------------------------------
Total $ 40,938 $ -- $ (300) $ 40,638
- -----------------------------------------------------------------------------------------------------
Income from operations $ 7,964 $ -- $ 8 $ 7,972
- -----------------------------------------------------------------------------------------------------
Assets $ 32,029 $ -- $ -- $ 32,029
=====================================================================================================
1997:
- -----------------------------------------------------------------------------------------------------
Net sales $ 39,128 $ 427 $ -- $ 39,555
Intercompany transfers 1,111 -- (1,111) --
- -----------------------------------------------------------------------------------------------------
Total $ 40,239 $ 427 $ (1,111) $ 39,555
- -----------------------------------------------------------------------------------------------------
Income from operations $ 5,840 $ (742) $ (60) $ 5,038
- -----------------------------------------------------------------------------------------------------
Assets $ 26,333 $ -- $ -- $ 26,333
=====================================================================================================
1996:
- -----------------------------------------------------------------------------------------------------
Net sales $ 33,319 $ 3,103 $ -- $ 36,422
Intercompany transfers 2,829 -- (2,829) --
- -----------------------------------------------------------------------------------------------------
Total $ 36,148 $ 3,103 $ (2,829) $ 36,422
- -----------------------------------------------------------------------------------------------------
Income from operations $ 2,716 $ (70) $ 7 $ 2,653
- -----------------------------------------------------------------------------------------------------
Assets $ 20,313 $ 1,730 $ (38) $ 22,005
=====================================================================================================
24
25
The Company's export sales to customers in foreign countries amounted to
$5,245,982 during 1998, $4,955,824 during 1997, and $6,481,135 during 1996.
Sales to one customer, Tandy Corporation, were approximately 19% of total sales
for the year ended June 30, 1998, and 17% and 16% for the years ended June 30,
1997, and 1996, respectively.
11. COMMITMENTS AND CONTINGENCIES
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 increases the
rent from $280,000 per year (plus Consumer Price Index increase in 1994) 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. The Company is responsible for
all property maintenance, insurance, taxes and other normal expenses related to
ownership. Rent expense, which includes this lease, was $394,000 in 1998,
$432,000 in 1997, and $450,000 in 1996.
In 1980, the Company entered into an agreement with John C. Koss that if he dies
prior to attaining 70 years of age, the Company will pay to his spouse or other
designated beneficiary the sum of $50,000 every six months until the total
benefits paid equal $700,000. The agreement is null and void if he reaches age
70.
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 he
becomes disabled or not. 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 June 30, 1998 and 1997,
respectively, the related liabilities in the amounts of $766,380 and $651,300
have been included in deferred compensation and other liabilities in the
accompanying balance sheets.
12. SUPPLEMENTARY INFORMATION
Changes in the allowance for doubtful accounts for the years ended June 30,
1998, 1997, and 1996 are summarized as follows:
Year Balance at Beginning Charges Against Balance at End of
---- -------------------- --------------- -----------------
Ending of Period Income Deductions* Period
------ --------- ------ ----------- ------
1998 $928,605 $310,000 $682,315 $556,290
1997 $685,107 $434,000 $190,502 $928,605
1996 $289,217 $490,097 $ 94,207 $685,107
*Represents charges against the allowance, net of recoveries.
The amounts included for advertising in selling, general and administrative
expenses in the accompanying statements of income were $397,033 in 1998,
$428,428 in 1997, and $486,723 in 1996.
25
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KOSS CORPORATION
By: /s/ Michael J. Koss Dated: 9/21/98
-------------------- -------
Michael J. Koss, President,
Chief Executive Officer
Chief Operating Officer and
Chief Financial Officer
By: /s/ Sujata Sachdeva Dated: 9/21/98
--------------------- -------
Sujata Sachdeva,
Vice President - Finance
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ John C. Koss /s/ Michael J. Koss
- ----------------- ---------------------------
John C. Koss, Director Michael J. Koss, Director
Dated: 9/21/98 Dated: 9/21/98
/s/ Martin F. Stein /s/ Victor L. Hunter
- --------------------- ---------------------------
Martin F. Stein, Director Victor L. Hunter, Director
Dated: 9/21/98 Dated: 9/21/98
/s/ John J. Stollenwerk
- ------------------------ ---------------------------
John J. Stollenwerk, Director Lawrence S. Mattson, Director
Dated: 9/21/98 Dated:
--------
/s/ Thomas L. Doerr
- --------------------
Thomas L. Doerr, Director
Dated: 9/21/98
The signatures of the above directors constitute a majority of the Board of
Directors of Koss Corporation.
26
27
OFFICERS AND DIRECTORS
SENIOR MANAGEMENT
John C. Koss John C. Koss
Chairman of the Board Chairman of the Board
Koss Corporation
Michael J. Koss
President Thomas L. Doerr
Chief Executive Officer President
Chief Operating Officer Doerr Corporation
Chief Financial Officer
Victor L. Hunter
John C. Koss, Jr. President
Vice President-Sales Hunter Business Direct
Daniel Esposito Michael J. Koss
Vice President-Corporate Systems President, C.E.O.,
C.O.O., C.F.O.
Sujata Sachdeva
Vice President-Finance Lawrence S. Mattson
Retired President
Jill McCurdy Oster Company
Vice President-Product Development
Martin F. Stein
Lenore Lillie Chairman
Vice President-Operations Eyecare One Inc.
Richard W. Silverthorn John J. Stollenwerk
Secretary President
General Counsel Allen-Edmonds Shoe Corporation
Declan Hanley
Vice President-International Sales
ANNUAL MEETING
October 22, 1998
Performance Center
Koss Corporation
4129 N. Port Washington Avenue INDEPENDENT ACCOUNTANTS
Milwaukee, WI 53212
PricewaterhouseCoopers LLP
TRANSFER AGENT Milwaukee, Wisconsin
Questions regarding change of address, LEGAL COUNSEL
stock transfer, lost certificate, or
information on a particular account Whyte Hirschboeck Dudek S.C.
should be directed in writing to:
Firstar Trust Company
Box 2077
Milwaukee, WI 53201
Attn: Nikhat Quryski
27
28
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 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)... (14)
28
29
10.15 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) ........................................................................ (15)
10.16 Third Amendment and Assignment of License Agreement to Jiangsu
Electronics Industries Limited dated as of March 31, 1997 .................... (16)
10.17 Fourth Amendment to License Agreement dated as of May 29, 1998
filed herewith................................................................ filed herewith
10.18 License Agreement dated June 30, 1998 between Koss Corporation
and Logitech Electronics Inc. (including Addendum to License
Agreement dated June 30, 1998)................................................ filed herewith
10.19 Consent of Directors (Supplemental Executive Retirement Plan
for Michael J. Koss dated March 7, 1997)...................................... (17)
22 List of Subsidiaries of Koss Corporation ..................................... (18)
27 Financial Data Schedule....................................................... filed herewith
(1) Incorporated by reference from Exhibit 3.1 to the
Company's 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 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
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
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
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
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
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
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)
29
30
(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)
(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
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(15) Incorporated by reference from Exhibit 10.15 to the Company's
Form 10-K for the year ended June 30, 1996 (Commission File
No. 0-3295)
(16) 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)
(17) 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)
(18) 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)
30
31
Annual Report 1998
Dear Stockholders,
We are pleased to report a third year of consecutive record sales for fiscal
year 1998.
Sales for the fiscal year ending June 30, 1998 were $40,638,747 compared
with $39,554,720 in fiscal year 1997. Net income for the year was $5,477,629
compared with $3,587,688 for the same period in 1997, an increase of 53%.
Diluted earnings per share for the year were $1.65 compared with $1.07 for the
same period a year ago, an increase of 54%.
Contributing to the success of this record year was an exceptionally strong
fourth quarter. The capability of meeting customer demand came on the heels of
the Company's decision to smooth production through a multi million dollar
commitment to raising our finished goods inventory. Increasing finished goods
inventory has helped reduce our seasonal labor demand and variances in cost and
quality. We have also instituted an aggressive program to outsource all
non-critical sub-assembly operations to lower our cost of sales and increase our
gross margin contribution.
In the fourth quarter, the Company also finalized an agreement with Jiangsu
Electronics Industries Limited of Hong Kong to expand the license of the Koss
name to include mobile electronics for the car stereo market. A second agreement
was also reached with Logitech Electronics, Inc. of Ontario, Canada for Koss
branded multimedia/computer speakers. These two agreements are expected to
contribute increases in royalty minimums of 27% and 55% over the course of the
next two fiscal years.
The stock market has not reflected a multiple of earnings that is consistent
with historical norms for the Company. We have therefore continued to
re-purchase shares of the Company's stock from the open market or in privately
negotiated transactions. We believe that fundamental changes in the nature of
the stock market itself, coupled with general market concerns, have temporarily
orphaned many small cap stocks. In fact, we plan to re-purchase approximately
$3.5 million dollars in stock during the coming fiscal year to take advantage of
the market's lower than average EPS multiple on Koss stock.
1998 marks the 40th Anniversary of the SP/3 Stereophone. The Company is
focusing on the base stereophone business as it looks to new and expanded
applications in the computer and telephony segments of the marketplace. This
strategic focus has allowed the company to continue its earnings growth
reflecting solid ROE and ROI performance. Management remains committed to the
long range, profitable return on it's prudentially deployed capital in support
of the stereo headphone industry we created 40 years ago.
We would like to take this opportunity to thank our customers, suppliers,
stockholders, as well as the entire Koss team for their efforts during this
record setting year. We look to each of you for continued support and dedication
in the year ahead.
Sincerely,
John C. Koss Michael J. Koss
Chairman President and CEO
32
CONSOLIDATED STATEMENTS OF INCOME KOSS CORPORATION
Year Ended June 30, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Net sales $40,638,747 $39,554,720 $36,422,377
Cost of goods sold 24,843,968 25,922,621 25,241,623
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 15,794,779 13,632,099 11,180,754
Selling, general and
administrative expense 7,822,338 8,594,260 8,528,098
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 7,972,441 5,037,839 2,652,656
Other income (expense)
Royalty income 1,206,359 1,131,250 1,303,502
Interest expense, net (253,171) (200,401) (40,195)
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,925,629 5,968,688 3,915,963
Provision for income taxes 3,448,000 2,381,000 1,555,000
- ----------------------------------------------------------------------------------------------------------------------
Net income $5,477,629 $ 3,587,688 $2,360,963
======================================================================================================================
Earnings per common share:
Basic $1.68 $1.09 $ .69
Diluted $1.65 $1.07 $ .67
======================================================================================================================
Dividends per common share None None None
======================================================================================================================
33
CONSOLIDATED BALANCE SHEETS KOSS CORPORATION
As of June 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 14,778 $ 32,551
Accounts receivable, less allowances of
$556,290 and $928,605, respectively 8,387,839 6,992,513
Inventories 19,486,058 14,547,653
Prepaid expenses 548,892 603,997
Income taxes receivable -- 65,493
Deferred income taxes 555,946 756,946
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 28,993,513 22,999,153
- -------------------------------------------------------------------------------------------------------------------------
Equipment and Leasehold improvements, at cost:
Leasehold improvements 742,289 735,930
Machinery, equipment, furniture and fixtures 4,587,729 4,548,096
Tools, dies, molds and patterns 8,351,591 8,176,023
- -------------------------------------------------------------------------------------------------------------------------
13,681,609 13,460,049
Less--accumulated depreciation 11,619,078 10,982,520
- -------------------------------------------------------------------------------------------------------------------------
2,062,531 2,477,529
Deferred Income Taxes 364,135 258,135
Intangible and Other Assets 608,590 598,106
- -------------------------------------------------------------------------------------------------------------------------
$32,028,769 $ 26,332,923
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,956,877 $ 741,646
Accrued liabilities 1,314,701 994,877
Deferred revenue -- 473,482
Income taxes payable 677,527 --
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,949,105 2,210,005
- -------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 2,746,000 1,221,000
Deferred Compensation and Other Liabilities 1,252,504 1,137,424
Contingently Redeemable Equity Interest 1,490,000 1,490,000
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Investment:
Common stock, $.01 par value,
authorized 8,500,000 shares;
issued and outstanding 3,177,269
and 3,323,791 shares, respectively 31,773 33,238
Paid in capital -- 2,328,677
Contingently redeemable common stock (1,490,000) (1,490,000)
Cumulative translation adjustment (71,322) (71,322)
Retained earnings 24,120,709 19,473,901
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 22,591,160 20,274,494
- -------------------------------------------------------------------------------------------------------------------------
$32,028,769 $ 26,332,923
=========================================================================================================================
34
STOCKHOLDERS' INFORMATION KOSS CORPORATION
Koss Corporation's 1998 Annual Report is presented in a simple, readable
and functional style. This Annual Report contains condensed financial statements
only. The detailed financial statements including footnotes are included in the
Form 10-K which has been provided to all stockholders along with the 1998 Annual
Report. The Company believes this manner of presentation provides a concise
summary for those who want to be kept informed while at the same time allowing
those who feel it necessary the opportunity to investigate further.
Koss Corporation common stock is traded on the Over the Counter market
and quotations are available through the National Market System. The trading
symbol is KOSS.
For additional Annual Reports, Form 10-K's or Proxy materials write to:
Investment Relations
Koss Corporation
4129 N. Port Washington Ave.
Milwaukee, WI 53212
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Koss Corporation
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Koss Corporation and its
subsidiaries as of June 30, 1998 and 1997, and the related consolidated
statements of income, of stockholders' investment and of cash flows for each of
the three years in the period ended June 30, 1998 (not presented herein); and in
our report dated July 15, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheets as of June 30, 1998 and
1997, and the related condensed consolidated statements of income for each of
the three years in the period ended June 30, 1998, when read in conjunction with
the consolidated financial statements from which it has been derived, is fairly
stated in all material respects in relation thereto.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 15, 1998
35
MANAGEMENT INFORMATION KOSS CORPORATION
OFFICERS AND DIRECTORS
SENIOR MANAGEMENT
John C. Koss John C. Koss
Chairman of the Board Chairman of the Board
Michael J. Koss
President Thomas L. Doerr
Chief Executive Officer President
Chief Operating Officer Doerr Corporation
Chief Financial Officer
Victor L. Hunter
John C. Koss, Jr. President
Vice President-Sales Hunter Business Direct
Daniel Esposito Michael J. Koss
Vice President-Corporate Systems President, C.E.O.,
C.O.O., C.F.O.
Sujata Sachdeva
Vice President-Finance Lawrence S. Mattson
Retired President
Jill McCurdy Oster Company
Vice President-Product Development
Martin F. Stein
Lenore Lillie Chairman
Vice President-Operations Eyecare One Inc.
Richard W. Silverthorn John J. Stollenwerk
Secretary President
General Counsel Allen-Edmonds Shoe Corporation
Declan Hanley
Vice President-International Sales ANNUAL MEETING
October 22, 1998
INDEPENDENT ACCOUNTANTS Performance Center
Koss Corporation
PricewaterhouseCoopers LLP 4129 N. Port Washington Avenue
Milwaukee, Wisconsin Milwaukee, WI 53212
TRANSFER AGENT
LEGAL COUNSEL
Questions regarding change
Whyte Hirschboeck Dudek S.C. of address, stock transfer,
lost certificate, or
information on a particular
account should be directed in
writing to: Firstar Trust Company
Box 2077
Milwaukee, WI 53201
Attn: Mr. Eugene R. Lee