KOSS CORP - Quarter Report: 2004 March (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number 0-3295

KOSS CORPORATION

4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212

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  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES  o          NO  x

At March 31, 2004, there were 3,767,929 shares outstanding of the registrant’s common stock, $0.005 par value per share.

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KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 2004

INDEX

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PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to the condensed consolidated financial statements.

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KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to the condensed consolidated financial statements.

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KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to the condensed consolidated financial statements.

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KOSS CORPORATION AND SUBSIDIARIES
March 31, 2004

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities during the nine months ended March 31, 2004 amounted to $2,550,941. This was primarily a result of net income for the period offset by changes in operating assets and liabilities, primarily related to decreases in accounts receivable and accounts payable.

Capital expenditures for new property and equipment (including production tooling) were $760,657 for the nine months ending March 31, 2004. Budgeted capital expenditures for the fiscal year ending June 30, 2004 are $1,573,000. The Company expects to generate sufficient funds through operations to fund these expenditures.

Stockholders’ investment increased to $16,857,284 at March 31, 2004, from $16,501,202 at June 30, 2003. The increase reflects the effect of the exercise of stock options, purchase and retirement of common stock, offset by net income and dividends paid, and a reclassification of contingency redeemable equity interest.

The Company amended its existing credit facility in October 2003, extending the maturity date of the unsecured line of credit to November 1, 2004. This credit facility provides for borrowings up to a maximum of $10,000,000. The Company can use this credit facility for working capital purposes or for the purchase of its own common stock pursuant to the Company’s common stock repurchase program. Borrowings under this credit facility bear interest at the bank’s prime rate, or LIBOR plus 1.75%. This credit facility includes certain financial covenants that require the Company to maintain a minimum tangible net worth and specified current, interest coverage, and leverage ratios. The maximum leverage of the Company, which consists of the ratio of its total liabilities to its tangible net worth, must not exceed 1.50 to 1.0. The tangible net worth of the Company must not fall below $10.0 million at any time. The fixed charge ratio of the Company, which consists of the ratio of its earnings before interest, income taxes, depreciation, amortization, and other non-cash charges to its total interest expense, must not be less than 2.10 to 1.0. The current ratio of the Company, which is the ration of its current assets to its current liabilities, must exceed 2.50 to 1.0.

The Company has been and is well within these requirements. However, if the Company at some point in the future fails to meet the financial covenants, the lender may accelerate the debt and allow creditors to foreclose on the assets.

The Company uses its credit facility from time to time, although there was no utilization of this credit facility at March 31, 2004 or June 30, 2003.

In April of 1995, the Board of Directors approved a stock repurchase program authorizing the Company to purchase from time to time up to $2,000,000 of its common stock for its own account. Subsequently, the Board of Directors periodically have approved increases in the stock repurchase program. The most recent increase was for an additional $1,000,000 in July 2004, for a maximum of $38,500,000. 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 nine month period ended March 31, 2004, the Company purchased 45,645 shares of its common stock at a net price of $13.74 per share, for a total net purchase price of $627,140. The Company will continue to repurchase its shares from the open market when the Board of Directors determines the shares to be undervalued. The Company may elect to use the purchase of these shares to minimize the dilutive effects to its stockholders when Company stock is used in order to make acquisitions (as in the case of Bi-Audio).

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The Company has no immediate plans to make another acquisition at this time. As of the date hereof, the Company’s Board of Directors has authorized the repurchase by the Company of up to $2,485,546 in Company common stock at the discretion of the Chief Executive Officer of the Company.

From the commencement of the Company’s stock repurchase program through March 31, 2004, the Company has purchased a total of 4,969,825 shares for a total gross purchase price of $40,671,360, (representing an average gross purchase price of $8.19 per share) and a total net purchase price of $36,030,060 (representing an average net purchase price of $7.25 per share). The difference between the total gross purchase price and the total net purchase price is the result of the Company purchasing from certain employees shares of the Company’s stock acquired by such employees pursuant to the Company’s stock option program. In determining the dollar amount available for additional purchases under the stock repurchase program, the Company uses the total net purchase price paid by the Company for all stock purchases, as authorized by the Board of Directors.

The Company also has an Employee Stock Ownership Plan and Trust (“ESOP”) pursuant to which shares of the Company’s stock are purchased by the ESOP for allocation to the accounts of ESOP participants. For the nine months ended March 31, 2004, the ESOP purchased 3,633 shares of the Company’s stock.

Results of Operations

Net sales for the third quarter ended March 31, 2004 rose to $10,547,180 from $8,264,668 for the same period in 2003. Net sales for the nine months ended March 31, 2004 were up 18% at $29,551,443 compared with $25,038,494 during the nine months ended March 31, 2003. The increase is due to sales increases in Europe and to the Company’s largest U.S. accounts.

Gross profit as a percent of net sales was 40% for the quarter ended March 31, 2004, compared to 42% for the same period in the prior year. For the nine month period ended March 31, 2004, the gross profit percentage was 39% compared to 41% for the same period in 2003. The decrease is primarily due to a change in product mix.

Selling, general and administrative expenses for the quarter ended March 31, 2004 were $2,533,181 or 24% of net sales, compared to $2,412,662 or 29% of net sales for the same period in 2003. For the nine month period ended March 31 2004, these expenses were $6,535,030 or 22% of net sales, compared to $6,026,457 or 24% of net sales for the same period in 2003.

For the third quarter ended March 31, 2004, income from operations was $1,714,330 versus $1,102,144 for the same period in the prior year. Income from operations for the nine months ended March 31, 2004 was $4,952,126 as compared to $4,209,966 for the same period in 2003.

Effective July 1, 1998, the Company entered into a License Agreement and an Addendum thereto with Logitech Electronics Inc. of Ontario, Canada, whereby the Company licensed to Logitech the right to sell multimedia/computer speakers under the Koss brand name. This License Agreement covers North America and certain countries in South America and Europe, requiring royalty payments by Logitech through June 30, 2008, subject to certain minimum annual royalty amounts.

The Company has a License Agreement with Jiangsu Electronics Industries Limited, a subsidiary of Orient Power Holdings Limited, by way of an assignment of a previously existing License Agreement with Trabelco N.V. Orient Power is based in Hong Kong and has an extensive portfolio of audio and video products. This License Agreement covers the United States, Canada, and Mexico, and has been renewed through December 31, 2004. Pursuant to this License Agreement, Jiangsu Electronics has agreed to meet certain minimum royalty amounts each year. The products covered by this License Agreement include various consumer electronics products.

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Effective June 30, 2003, the Company entered into a License Agreement with Sonigem Products, Inc. (“Sonigem”) of Ontario, Canada whereby the Company licensed to Sonigem the right to sell video and communications products under the Koss brand name. This License Agreement covers Canada, requiring royalty payments by Sonigem through June 30, 2010, subject to certain minimum annual royalty amounts.

Royalty income for the quarter ended March 31, 2004 was $183,750, compared to $34,015 for the quarter ended March 31, 2003. For the nine month period ended March 31, 2004, royalty income was $761,442 compared to $452,736 for the period ending March 31, 2003. The increase in royalty income was due to increased sales by Jiangsu Electronics.

Interest income for the quarter ended March 31, 2004 was $1,711 as compared to $1,851 for the same quarter in 2003. For the nine month period ended March 31, 2004 interest income was $6,832, compared to $8,632 for the nine month period ended March 31, 2003. The decrease in interest income in 2004 is a result of lower levels of invested excess cash.

Recently Issued Financial Accounting Pronouncements

During April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies financial accounting and reporting for certain derivative instruments. We do not anticipate the adoption of this statement will have a material impact on our consolidated financial statements, as we are not currently a party to derivative financial instruments included in this standard.

During May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Company has recorded a liability for the repurchase obligation relating to mandatorily redeemable stock.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

In management’s opinion, the Company does not engage in any material risk sensitive activities and does not have any market risk sensitive instruments, other than the Company’s commercial credit facility used for working capital purposes and stock repurchases as disclosed on page 8 of this Form 10-Q.

Item 4. Controls and Procedures.

The Company’s management, including the Chief Executive Officer/Chief Financial Officer, evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report and concluded that the Company’s disclosure controls and procedures effectively ensure that the information required to be discussed in the reports the Company files with the SEC, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. During the period covered by this report, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses subsequent to the date of their evaluation.

During the period covered by this report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the “Act”)

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(Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and possible litigation, and assumptions relating to the foregoing. In addition, when used in this Form 10-Q, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and variations thereof and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this Form 10-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, but are not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, the receptivity of consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition, pricing, the number and nature of customers and their product orders, production by third party vendors, foreign manufacturing, sourcing and sales (including foreign government regulation, trade and importation concerns), borrowing costs, changes in tax rates, pending or threatened litigation and investigations, and other risk factors which may be detailed from time to time in the Company’s Securities and Exchange Commission filings.

Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.

PART II
OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

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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 duly authorized.

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EXHIBIT INDEX

The Company will furnish a copy of any exhibit described below upon request and upon reimbursement to the Company of its reasonable expenses of furnishing such exhibit, which shall be limited to a photocopying charge of $0.25 per page and, if mailed to the requesting party, the cost of first-class postage.

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