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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
KOSS CORPORATION Commission file number 0-3295
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(Exact name of registrant as specified in its charter)
A Delaware Corporation 391168275
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 964-5000
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value (voting)
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(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.
YES X NO
--- ---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of August 1, 2001 was approximately $66,074,852 (based on the
$34.00 per share closing price of the Company's Common Stock as reported on the
NASDAQ Stock Market on August 1, 2001). 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 August 1, 2001 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 August 1, 2001, 1,943,378 shares of voting common stock were outstanding.
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Documents Incorporated by Reference
Part III incorporates by reference information from Koss Corporation's Proxy
Statement for its 2001 Annual Meeting of Stockholders to be filed within 120
days of the end of the fiscal year covered by this Report.
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, 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:
2001 2000 1999
---- ---- ----
Stereophones 94% 91% 97%
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 approximately 18,000 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 in various
countries, and over the years the Company has had numerous trademarks registered
in various countries and numerous patents issued in various countries. Certain
of the Company's 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 52% of sales
occurred in the first six months of the fiscal year and 48% 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 net income. The Company's
current backlog of orders is not material in relation to annual net sales.
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The Company markets its products to approximately 2,000 customers worldwide.
During 2001, the Company's sales to its largest single customer, Tandy
Corporation, were approximately 18% of total net 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 reducing 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 51% of total net sales in 2001.
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 whom 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 $89,000
during fiscal 2001 as compared with $227,000 during fiscal 2000 and $243,000
during fiscal 1999. 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, 2001, the Company employed 111 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 relating to
the conduct of its business in such markets are comparable to the domestic
market. For further information, see Note 9 to the 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
increased the rent from $280,000 per year to a fixed rate of $350,000 per year
for three years and $380,000 for the seven years thereafter. The lease is on
terms no less favorable to the Company than those that could be obtained from an
independent party. 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
in management's opinion.
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, 2001.
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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 951 holders of the Company's
common stock as of August 1, 2001. No dividends have been paid for the years
ended June 30, 2001, 2000, and 1999. The quarterly high and low sale prices of
the Company's common stock for the last two fiscal years are shown below.
Fiscal Year 2001 Fiscal Year 2000
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Quarter High Low High Low
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First $20.375 $15.125 $15.000 $10.625
Second $31.750 $18.875 $15.750 $ 9.125
Third $31.000 $20.250 $16.000 $13.750
Fourth $40.000 $27.563 $18.250 $13.000
The Company paid no cash dividends on its stock for the periods set forth above;
however, on July 25, 2001, the Company issued a press release announcing the
Company's intent to begin paying quarterly dividends beginning with the quarter
ending September 30, 2001. The full text of the Form 8-K and the press release
are incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA.
2001 2000 1999 1998 1997
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Net sales $38,609,335 $35,401,533 $33,776,039 $41,311,207 $40,413,509
Net income $5,687,521 $4,953,461 $4,318,189 $5,477,629 $3,587,688
Earnings per common share:
Basic $2.70 $1.95 $1.41 $1.68 $1.09
Diluted $2.56 $1.90 $1.39 $1.65 $1.07
Total assets $21,496,328 $25,044,307 $25,721,696 $32,028,769 $26,332,923
Long-term debt $0 $0 $0 $2,746,000 $1,221,000
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION AND LIQUIDITY
During 2001, cash provided by operations was $8,923,853. Working capital was
$14,725,834 at June 30, 2001. The decrease in working capital of $5,948,534 from
the balance at June 30, 2000 represents primarily the net effect of a decrease
in cash and inventories and an increase in payables.
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Capital expenditures for new property and equipment including production tooling
were $814,851, $349,620, and $421,251, in 2001, 2000, and 1999, respectively.
Depreciation charges totaled $599,526, $654,916, and $614,184, for the same
fiscal years. Budgeted capital expenditures for fiscal year 2002 are $1,240,000.
The Company expects to generate sufficient funds through operations to fund
these expenditures.
Stockholders' investment decreased to $14,939,429 at June 30, 2001 from
$20,493,633 at June 30, 2000. The decrease reflects primarily the effect of the
purchase and retirement of common stock offset by current year income and the
exercise of stock options during the year. No cash dividends have been paid
since the first quarter of fiscal 1984. On July 25, 2001, the Company announced
a quarterly cash dividend of $0.25 per share for stockholders of record on
September 30, 2001, to be paid October 15, 2001.
The Company amended its existing credit facility in December 1999, extending the
maturity date of the unsecured line of credit to November 1, 2001. This credit
facility provides for borrowings up to a maximum of $10,000,000. The Company can
use this credit facility for working capital purposes or for the purchase of its
own stock pursuant to the Company's stock repurchase program. Borrowings under
this credit facility bear interest at the bank's prime rate, or LIBOR plus
1.75%. This credit facility includes certain financial covenants that require
the Company to maintain a minimum tangible net worth and specified current,
interest coverage, and leverage ratios. There was no utilization of this credit
facility at June 30, 2001, June 30, 2000, and June 30, 1999.
In April of 1995, the Board of Directors approved a stock repurchase program
authorizing the Company to purchase from time to time up to $2,000,000 of its
common stock for its own account. In January of 1996, the Board of Directors
approved an increase in the stock repurchase program from $2,000,000 to
$3,000,000. In July of 1997, the Board of Directors again approved an increase
in the stock repurchase program from $3,000,000 to $5,000,000. In January of
1998, the Board of Directors approved an increase of an additional $2,000,000,
increasing the total stock repurchase program from $5,000,000 to $7,000,000. 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 from $7,000,000 to $10,000,000. In April of 1999, the Board of
Directors again approved an increase in the stock repurchase program from
$10,000,000 to $15,000,000. In October of 1999, the Board of Directors increased
the stock repurchase program by another $5,000,000, up to a maximum of
$20,000,000, and in July of 2000 the Board increased the program by an
additional $5,000,000, for a maximum of $25,000,000. In January of 2001 the
Board of Directors approved an increase in the stock repurchase program from
$25,000,000 to $28,000,000, another increase in April of 2001 of an additional
$3,000,000, and an additional increase of $3,000,000 in July of 2001 for a
maximum of $34,000,000. The Company intends to effectuate all stock purchases
either on the open market or through privately negotiated transactions, and
intends to finance all stock purchases through its own cash flow or by borrowing
for such purchases. For the fiscal year ended June 30, 2001, the Company
purchased 462,241 shares of its common stock at an average gross price of $25.14
per share (and an average net price of $23.36 per share), and retired all such
shares.
From the commencement of the Company's stock repurchase program through June 30,
2001, the Company has purchased and retired a total of 2,277,739 shares for a
total gross purchase price of $33,160,608 (representing an average gross
purchase price of $14.56 per share) and a total net purchase price of
$29,437,035 (representing an average net purchase price of $12.92 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.
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2001 RESULTS COMPARED WITH 2000
Net sales for 2001 were $38,609,335 compared with $35,401,533 in 2000, an
increase of $3,207,802 or 9%. The increase was the result of higher sales volume
of current products as well as the introduction of new products.
Gross profit was $15,572,208 or 40% in 2001 compared with $13,558,016 or 38.3%
in 2000. The improved gross profit is the result of product mix and favorable
raw material prices.
Selling, general and administrative expenses for 2001 were $7,446,119 compared
with $6,947,013 in 2000, an increase of $499,106 or 7%. This increase was a
result of the Company experiencing higher expenses associated with higher sales
for the fiscal year.
Income from operations was $8,126,089 in 2001 compared with $6,611,003 in 2000,
an increase of 22.9%. Interest income was $85,423 in 2001 compared with $102,139
in 2000, a decrease of 16.4%. Interest income fluctuates in relation to cash
balances on hand throughout the year. Interest expense for 2001 was $15,465
compared with $24,244 in 2000.
Royalty income was $1,010,026 in 2001 compared with $1,283,563 in 2000, a
decrease of 21.3%. The decrease in royalty income was a result of a reduction of
territories under certain royalty agreements.
The Company has a License Agreement with Jiangsu Electronics Industries Limited
("Jiangsu"), a subsidiary of Orient Power Holdings Limited, by way of an
assignment of a previously existing License Agreement with Trabelco N.V. Orient
Power is based in Hong Kong and has an extensive portfolio of audio and video
products. This License Agreement covers the United States, Canada, and Mexico,
and has been renewed through December 31, 2002. Pursuant to this License
Agreement, Jiangsu has agreed to meet certain minimum royalty amounts each year.
The products covered by this License Agreement include various consumer
electronics products.
Effective July 1, 1998, the Company entered into a License Agreement and an
Addendum thereto with Logitech Electronics Inc. ("Logitech") of Ontario, Canada
whereby the Company licensed to Logitech the right to sell multimedia/computer
speakers under the Koss brand name. This License Agreement covers North America
and certain countries in South America and Europe, requiring royalty payments by
Logitech through June 30, 2008, subject to certain minimum annual royalty
amounts.
Income taxes are discussed in Note 5 to the consolidated financial statements.
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2000 RESULTS COMPARED WITH 1999
Net sales for 2000 were $35,401,533 compared with $33,776,039 in 1999, an
increase of $1,625,494 or 5%. The increase was the result of higher sales volume
of current products as well as the introduction of new products.
Gross profit was $13,558,016 or 38.3% in 2000 compared with $12,855,894 or 38.1%
in 1999.
Selling, general and administrative expenses for 2000 were $6,947,013 compared
with $7,225,340 in 1999, a decrease of $278,327 or 3.9%. This decrease was a
result of the Company realizing lower bad debt expenses as compared to last
year.
Income from operations was $6,611,003 in 2000 compared with $5,630,554 in 1999,
an increase of 17.4%. Interest income was $102,139 in 2000 compared with $33,373
in 1999, an increase of 206.1%. Interest income fluctuates in relation to cash
balances on hand throughout the year. Interest expense for 2000 was $24,244
compared with $67,932 in 1999. This decrease was due to decreased levels of
borrowings during the fiscal year.
Royalty income was $1,283,563 in 2000 compared with $1,403,194 in 1999, a
decrease of 8.5%. The decrease in royalty income was a result of the expiration
of a licensing agreement with Trabelco N.V. on December 31, 1998.
The Company has a License Agreement with Jiangsu Electronics Industries Limited
("Jiangsu"), a subsidiary of Orient Power Holdings Limited, by way of an
assignment of a previously existing License Agreement with Trabelco N.V. Orient
Power is based in Hong Kong and has an extensive portfolio of audio and video
products. This License Agreement covers North America, Central America, and
South America. Pursuant to this License Agreement, Jiangsu has agreed to make
royalty payments through December 31, 2000, subject to certain minimum royalty
amounts due each year. The products covered by this License Agreement include
various consumer electronics products. This License Agreement is subject to
renewal 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 5 to the consolidated financial statements.
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RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." The statements eliminate the
pooling-of-interests method of accounting for business combinations and require
that goodwill and certain intangible assets not be amortized. Instead, these
assets will be reviewed for impairment annually with any related losses
recognized in earnings when incurred. The statements will be effective for the
Company as of July 1, 2002 for existing goodwill and intangible assets and for
business combinations initiated after June 30, 2001. The adoption of these
statements is not expected to have a material effect on the Company's financial
position or results of operations.
In April 2001, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer
in Connection with the Purchase or Promotion of the Vendor's Products." This
issue requires that consideration from a vendor to a retailer (a) in connection
with the retailer's purchase of the vendor's products or (b) to promote sales of
the vendor's products by the retailer be classified as a reduction of net sales
unless the consideration meets certain criteria. EITF No. 00-25 is effective for
the Company's fiscal quarters beginning on January 1, 2002 and requires
reclassification of prior periods. The Company is currently evaluating the
impact of implementing EITF No. 00-25.
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 accounting principles generally accepted
in the United States of America 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.
Oversight of management's financial reporting and internal accounting control
responsibilities is exercised by the Board of Directors, through an Audit
Committee that is comprised solely of non-employee directors. The Audit
Committee is also 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 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.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of the Company at June 30, 2001 and 2000 and
for each of the three years in the period ended June 30, 2001 and the notes
thereto, and the report of independent accountants thereon are set forth on
pages 13 to 24.
Selected unaudited quarterly financial data is as follows:
Quarter
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2001 First Second Third Fourth
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Net sales $ 9,879,638 $10,348,476 $ 8,195,114 $10,186,107
Gross profit 3,952,247 4,078,142 3,416,187 4,125,632
Net income 1,383,991 1,374,951 1,235,702 1,692,877
Earnings per common share:
Basic (1) $ .62 $ .64 $ .59 $ .86
Diluted (1) .59 .61 .56 .81
Quarter
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2000 First Second Third Fourth
---- ----- ------- ----- ------
Net sales $ 8,505,393 $ 8,700,959 $ 8,449,773 $ 9,745,408
Gross profit 3,479,976 3,296,049 3,540,816 3,241,175
Net income 1,183,617 1,139,209 1,102,648 1,527,987
Earnings per common share:
Basic (1) $ .44 $ .43 $ .45 $ .64
Diluted (1) .43 .42 .44 .62
(1) Due to the use of weighted average shares outstanding each quarter for
computing net income per share, the sum of the quarterly per share amounts
does not equal the per share amount for the year.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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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 2001 Annual Meeting of Stockholders (the
"2001 Proxy Statement"), which 2001 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 2001 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 2001 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 2001 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 24:
Report of Independent Accountants............................................................13
Consolidated Statements of Income for the Years
Ended June 30, 2001, 2000, and 1999.....................................................14
Consolidated Balance Sheets as of June 30, 2001 and 2000.....................................15
Consolidated Statements of Cash Flows
for the Years Ended June 30, 2001, 2000, and 1999.......................................16
Consolidated Statements of Stockholders' Investment
for the Years Ended June 30, 2001, 2000, and 1999.......................................17
Notes to Consolidated Financial Statements...................................................18
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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 Amendment to Loan Agreement dated April 29, 1999.
10.15 Amendment to Loan Agreement dated December 15, 1999.
10.16 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).
10.17 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).
10.18 Third Amendment and Assignment of License Agreement to
Jiangsu Electronics Industries Limited dated March 31,
1997.
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10.19 Fourth Amendment to License Agreement dated as of May 29,
1998.
10.20 Fifth Amendment to License Agreement dated March 30, 2001.
10.21 Sixth Amendment to License Agreement dated August 15,
2001.
10.22 License Agreement dated June 30, 1998 between Koss
Corporation and Logitech Electronics Inc. (including
Addendum to License Agreement dated June 30, 1998).
10.23 Consent of Directors (Supplemental Executive Retirement
Plan for Michael J. Koss dated March 7, 1997).
10.24 Amendment to Lease.
10.25 Partial Assignment, Termination and Modification of Lease.
10.26 Restated Lease.
22 List of Subsidiaries of Koss Corporation.
b. No reports on Form 8-K were filed by the Company during the last quarter
of the period covered by this report; however, the Company filed a report
on Form 8-K on July 27, 2001 announcing the Company's intent to begin
paying quarterly dividends beginning with the quarter ending September
30, 2001.
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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, 2001 and 2000, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
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
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 10, 2001, except for Note 12 for
which the date is July 25, 2001
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CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30, 2001 2000 1999
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Net sales $38,609,335 $35,401,533 $33,776,039
Cost of goods sold 23,037,127 21,843,517 20,920,145
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Gross profit 15,572,208 13,558,016 12,855,894
Selling, general, and
administrative expense 7,446,119 6,947,013 7,225,340
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Income from operations 8,126,089 6,611,003 5,630,554
Other income (expense)
Royalty income 1,010,026 1,283,563 1,403,194
Interest income 85,423 102,139 33,373
Interest expense (15,465) (24,244) (67,932)
-------------------------------------------------------------------------------------------------------------
Income before income taxes 9,206,073 7,972,461 6,999,189
Provision for income taxes (note 5) 3,518,552 3,019,000 2,681,000
-------------------------------------------------------------------------------------------------------------
Net income $ 5,687,521 $ 4,953,461 $ 4,318,189
=============================================================================================================
Earnings per common share:
Basic $2.70 $1.95 $1.41
Diluted $2.56 $1.90 $1.39
=============================================================================================================
Dividends per common share None None None
=============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
14
15
CONSOLIDATED BALANCE SHEETS
As of June 30, 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 181,678 $ 3,164,401
Accounts receivable, less allowances of
$301,252 and $252,194, respectively (note 11) 8,247,045 8,228,185
Inventories 8,496,010 9,414,036
Prepaid expenses 593,961 562,028
Income taxes receivable 480,322 244,755
Deferred income taxes (note 5) 340,973 638,973
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 18,339,989 22,252,378
-----------------------------------------------------------------------------------------------------------------------------
Equipment and Leasehold Improvements, at cost:
Leasehold improvements 1,031,574 852,096
Machinery, equipment, furniture, and fixtures 5,012,089 4,910,652
Tools, dies, molds, and patterns 9,062,776 8,689,732
-----------------------------------------------------------------------------------------------------------------------------
15,106,439 14,452,480
Less--accumulated depreciation 13,415,811 12,888,178
-----------------------------------------------------------------------------------------------------------------------------
1,690,628 1,564,302
Deferred Income Taxes (note 5) 557,135 488,135
Other Assets 908,576 739,492
-----------------------------------------------------------------------------------------------------------------------------
$ 21,496,328 $ 25,044,307
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 2,062,476 $ 570,567
Accrued liabilities (note 6) 1,551,679 1,007,443
-----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,614,155 1,578,010
-----------------------------------------------------------------------------------------------------------------------------
Contingently Redeemable Equity Interest (note 4) 1,490,000 1,490,000
-----------------------------------------------------------------------------------------------------------------------------
Deferred Compensation 1,015,390 1,045,310
-----------------------------------------------------------------------------------------------------------------------------
Other Liabilities 437,354 437,354
-----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (note 10)
-----------------------------------------------------------------------------------------------------------------------------
Stockholders' Investment (note 4):
Common stock, $.01 par value,
authorized 8,500,000 shares;
issued and outstanding 1,943,378
and 2,349,369 shares, respectively 19,434 23,494
Contingently redeemable common stock (1,490,000) (1,490,000)
Undistributed retained earnings 16,409,995 21,960,139
-----------------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 14,939,429 20,493,633
-----------------------------------------------------------------------------------------------------------------------------
$ 21,496,328 $ 25,044,307
=============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
15
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $5,687,521 $4,953,461 $4,318,189
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 600,819 663,422 638,897
Deferred income taxes 229,000 (294,027) 87,000
Deferred compensation 115,080 115,080 115,080
Other (61,001) 71,322 --
Net changes in operating assets and
liabilities (note 7) 2,352,434 2,545,344 4,893,225
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 8,923,853 8,054,602 10,052,391
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of equipment
and leasehold improvements (814,851) (349,620) (421,251)
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments under line of credit agreement -- -- (9,443,000)
Borrowings under line of credit agreement -- -- 6,697,000
Exercise of stock options 535,798 774,262 214,365
Purchase and retirement of treasury stock (11,627,523) (6,486,347) (5,942,779)
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in
financing activities (11,091,725) (5,712,085) (8,474,414)
-----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (2,982,723) 1,992,897 1,156,726
Cash at beginning of year 3,164,401 1,171,504 14,778
-----------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 181,678 $3,164,401 $1,171,504
=============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
16
17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
Accumulated
Common Stock Undistributed Other
------------ Retained Comprehensive
Shares Amount Earnings Loss
------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 3,177,269 $ 31,773 $ 24,120,709 $ (71,322)
Net income -- -- 4,318,189 --
Purchase and retirement of treasury stock (488,650) (4,887) (5,937,892) --
Exercise of stock options 22,500 225 214,140 --
------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 2,711,119 27,111 22,715,146 (71,322)
Net income -- -- 4,953,461 --
Purchase and retirement of treasury stock (435,500) (4,355) (6,481,992) --
Exercise of stock options 73,750 738 773,524 --
Foreign currency translation adjustment -- -- -- 71,322
------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 2,349,369 23,494 21,960,139 --
Net income -- -- 5,687,521 --
Purchase and retirement of treasury stock (462,241) (4,622) (11,622,901) --
Exercise of stock options 56,250 562 385,236 --
------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 1,943,378 $ 19,434 $ 16,409,995 $ --
------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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 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 approximately 18,000 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 14% and 9% of the Company's accounts
receivable at June 30, 2001 and 2000, 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.
REVENUE RECOGNITION--Revenue is recognized by the Company when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred; the seller's price to the buyer is fixed or determinable;
and collectibility is reasonably assured. These criteria are satisfied, and
accordingly, revenue is recognized upon shipment by the Company.
ROYALTY INCOME--The Company recognizes royalty income when earned under terms of
license agreements, which expire in 2002 and 2008. These agreements require
minimum annual royalty payments.
INVENTORIES--Substantially all of the Company's inventories were valued at the
lower of last-in, first-out (LIFO) cost or market. If the first-in, first-out
(FIFO) method of inventory accounting had been used by the Company for
inventories valued at LIFO, inventories would have been $981,018 and $1,076,111
higher than reported at June 30, 2001 and 2000, respectively.
The components of inventories at June 30 are as follows:
2001 2000
-------------------------------------------------------------
Raw materials and
work in process $ 2,516,999 $ 3,903,626
Finished goods 5,979,011 5,510,410
-------------------------------------------------------------
$ 8,496,010 $ 9,414,036
=============================================================
During 2001 and 2000, the Company liquidated certain LIFO layers, the effect of
which did not have a significant impact on operating income.
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 $89,000 in 2001, $227,000 in 2000, and
$243,000 in 1999.
18
19
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
SHIPPING AND HANDLING FEES AND COSTS--During the fourth quarter of fiscal year
2001, the Company adopted the provisions of the Emerging Issues Task Force
("EITF") Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs."
In accordance with the provisions of EITF No. 00-10, certain shipping and
handling fees and costs which the Company had previously recorded on a net basis
as a component of net sales are reflected in cost of goods sold, as appropriate.
ACCOUNTING PRONOUNCEMENTS--In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." The
statements eliminate the pooling-of-interests method of accounting for business
combinations and require that goodwill and certain intangible assets not be
amortized. Instead, these assets will be reviewed for impairment annually with
any related losses recognized in earnings when incurred. The statements will be
effective for the Company as of July 1, 2002 for existing goodwill and
intangible assets and for business combinations initiated after June 30, 2001.
The adoption of these statements is not expected to have a material effect on
the Company's financial position or results of operations.
In April 2001, the EITF reached a consensus on EITF Issue No. 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products." This issue requires that consideration from
a vendor to a retailer (a) in connection with the retailer's purchase of the
vendor's products or (b) to promote sales of the vendor's products by the
retailer be classified as a reduction of net sales unless the consideration
meets certain criteria. EITF No. 00-25 is effective for the Company's fiscal
quarters beginning after December 15, 2001 and requires reclassification of
prior periods. The Company is currently evaluating the impact of implementing
EITF No. 00-25.
RECLASSIFICATIONS--Certain amounts in the prior year financial statements have
been reclassified to conform to current year presentation.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
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, 2001, 2000, and 1999, were
2,104,041, 2,542,768, and 3,072,500, respectively. When dilutive, stock options
are included in earnings per share as share equivalents using the treasury stock
method. Common stock equivalents of 121,200, 59,716, and 39,327 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,
2001, 2000, and 1999, respectively.
3. LONG-TERM DEBT
The Company amended its existing credit facility in December 1999, extending the
maturity date of the unsecured line of credit to November 1, 2001. 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 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. There was no utilization of this credit
facility at June 30, 2001 and 2000.
19
20
4. 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
for the 1990 Plan, which was approved by the stockholders. In 1993, the Board of
Directors authorized the reservation of an additional 300,000 shares for the
1990 Plan, which was approved by the stockholders. In 1997, the Board of
Directors authorized the reservation of an additional 300,000 shares for 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:
Range of Exercise Weighted
Number of Prices per Average
Shares Share Exercise Price
------------------------------------------------------------------------------------------------------------
Shares under option at July 1, 1998 190,000 $5.32-$11.91 $9.02
Granted 110,000 $10.00-$11.83 $11.42
Exercised (22,500) $5.32-$10.83 $8.36
Cancelled (8,750) $5.32-$10.83 $9.86
------------------------------------------------------------------------------------------------------------
Shares under option at June 30, 1999 268,750 $5.32-$11.91 $10.03
Granted 60,000 $13.45-$14.80 $14.24
Exercised (73,750) $5.32-$10.83 $7.85
Cancelled (7,500) $10.00 $10.00
------------------------------------------------------------------------------------------------------------
Shares under option at June 30, 2000 247,500 $5.32-$14.80 $11.70
Granted 80,000 $33.51-$36.86 $35.60
Exercised (56,250) $5.32-$13.45 $9.45
------------------------------------------------------------------------------------------------------------
Shares under option at June 30, 2001 271,250 $10.20-$36.86 $19.22
============================================================================================================
Options exercisable at June 30, 2001 83,750 $10.20-$14.80 $12.00
============================================================================================================
The weighted average fair value at date of grant for options whose exercise
price exceeded the market price of the stock on the grant date during 2001, 2000
and 1999 was $10.61, $6.66 and $4.82, respectively. The weighted average fair
value at date of grant for options whose exercise price was less than the market
price of the stock on the grant date during 2001, 2000 and 1999 was $15.80,
$9.28 and $7.07, respectively. The weighted average remaining contractual life
of these options approximates 5 years.
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" (FAS
123). Under the provisions of FAS 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. FAS 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 FAS 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 2001, 2000, and 1999
consistent with the provisions of FAS 123, the Company's pro forma net income
and earnings per share would have been as presented below:
20
21
2001 2000 1999
----------------------------------------------
Net income - as reported $5,687,521 $4,953,461 $4,318,189
Net income - pro forma 5,238,951 4,602,345 4,073,710
Earnings per common share - as reported
Basic $2.70 $1.95 $1.41
Diluted 2.56 1.90 1.39
Earnings per common share - pro forma
Basic $2.49 $1.81 $1.33
Diluted 2.35 1.77 1.31
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:
2001 2000 1999
----------------------------------------------
Expected stock price volatility 50.41% 56.09% 60.00%
Risk free interest rate 4.97% 6.54% 5.17%
Expected life of options 5.13 years 5.25 years 4.95 years
The Company has an agreement with its Chairman to repurchase common stock from
his estate in the event of his death. The repurchase price is 95% of the fair
market value of the common stock on the date that notice to repurchase is
provided to the Company. The total number of shares to be repurchased shall be
sufficient to provide proceeds which are the lesser of $2,500,000 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.
5. 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 2001, 2000, and 1999 consists of the
following:
Year Ended June 30, 2001 2000 1999
----------------------------------------------------------------------------------------------------
Current:
Federal $2,716,552 $2,788,027 $2,200,000
State 573,000 525,000 394,000
Deferred 229,000 (294,027) 87,000
----------------------------------------------------------------------------------------------------
$3,518,552 $3,019,000 $2,681,000
====================================================================================================
21
22
The 2001, 2000, and 1999 tax provision results in an effective rate different
than the federal statutory rate due to the following:
Year Ended June 30, 2001 2000 1999
----------------------------------------------------------------------------------------------------
Federal income tax at
statutory rate $3,130,000 $2,711,000 $2,380,000
State income taxes, net of
federal tax benefit 378,000 346,000 260,000
Other 10,552 (38,000) 41,000
----------------------------------------------------------------------------------------------------
Total provision for
income taxes $3,518,552 $3,019,000 $2,681,000
====================================================================================================
Temporary differences which give rise to deferred tax assets and liabilities at
June 30 include:
2001 2000
-----------------------------------------------------------------------------------------------------
Deferred Tax Assets
Deferred compensation $385,000 $ 400,000
Accrued expenses and reserves 357,000 612,000
Package design and trademarks 193,000 190,000
Other 9,000 9,000
-----------------------------------------------------------------------------------------------------
944,000 1,211,000
Deferred Tax Liabilities
Royalties receivable/deferred (11,000) (56,000)
Equipment and leasehold improvements (35,000) (28,000)
-----------------------------------------------------------------------------------------------------
Net deferred tax asset $898,000 $1,127,000
=====================================================================================================
The net deferred tax asset at June 30, 2001 is comprised of a current asset of
$340,973 and a long term asset of $557,135. The net deferred tax asset at June
30, 2000 is comprised of a current asset of $638,973 and a long term asset of
$488,135.
6. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of the following:
2001 2000
-----------------------------------------------------------------------------------------------------
Salaries and wages $ 584,435 $ 325,302
Cooperative advertising
and promotion allowances 463,314 305,126
Payroll taxes and
employee benefits 186,738 180,216
Other 317,192 196,799
-----------------------------------------------------------------------------------------------------
$1,551,679 $1,007,443
=====================================================================================================
22
23
7. ADDITIONAL CASH FLOW INFORMATION
The net changes in cash as a result of changes in operating assets and
liabilities consist of the following:
2001 2000 1999
-------------------------------------------------------------------------------------------------
Accounts receivable $ (18,860) $ (820,646) $ 980,300
Inventories 918,026 3,541,082 6,530,940
Prepaid expenses (31,933) (48,128) 34,992
Income taxes (235,567) 21,574 (943,856)
Other assets (170,377) (43,371) (120,750)
Accounts payable 1,491,909 (221,218) (1,165,092)
Accrued liabilities 399,236 116,051 (423,309)
-------------------------------------------------------------------------------------------------
Net change $2,352,434 $2,545,344 $ 4,893,225
=================================================================================================
2001 2000 1999
---- ---- ----
Net cash paid during the year for:
Interest $15,465 $24,244 $93,135
Income taxes $3,675,119 $3,291,453 $3,563,054
8. 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 approximated $94,000 in 2001, $0 in
2000, and $200,000 in 1999.
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 Board of Directors. For calendar years 2001, 2000, and 1999,
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,
2001, 2000, and 1999 were $180,000, $180,000, and $182,155, respectively.
9. 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 Company's export sales amounted to $3,575,021 during 2001, $3,129,872 during
2000, and $2,845,529 during 1999.
Sales to one customer, Tandy Corporation, were approximately 18% of total sales
for the year ended June 30, 2001, and 16% and 17% for the years ended June 30,
2000, and 1999, respectively.
23
24
10. 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 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, approximated $424,000 in 2001, $454,000 in 2000, and
$428,000 in 1999.
11. SUPPLEMENTARY INFORMATION
Changes in the allowance for doubtful accounts for the years ended June 30,
2001, 2000, and 1999 are summarized as follows:
Year Balance at Beginning Charges Against/ Balance at End of
Ending of Period (Credits To) Income Deductions* Period
------ --------- ------------------- ----------- ------
2001 $252,194 $ 52,238 $ 3,180 $301,252
2000 $447,644 ($ 37,178) $158,272 $252,194
1999 $556,290 $254,000 $362,646 $447,644
*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 $207,776 in 2001,
$235,257 in 2000, and $331,890 in 1999. Such costs are expensed as incurred.
12. SUBSEQUENT EVENT
On July 25, 2001, the Company declared a quarterly cash dividend of $0.25 per
share for stockholders of record on September 30, 2001 to be paid October 15,
2001.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of that term in the Private Securities Litigation Reform Act of 1995(the
"Act") (Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Additional written or oral forward-looking
statements may be made by the Company from time to time in filings with the
Securities Exchange Commission, press releases, or otherwise. Statements
contained in this Form 10-K 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-K, the words "anticipates," "believes," or "estimates," "expects," "intends,"
"plans" and variations thereof and similar expressions are intended to identify
forward-looking statements.
24
25
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-K, or in other Company filings, press
releases, or otherwise. In addition to the factors discussed in this Form 10-K,
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.
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: 8/15/01
------------------------------ -------
Michael J. Koss,
Vice Chairman
President
Chief Executive Officer
Chief Operating Officer and
Chief Financial Officer
By: /s/ Sujata Sachdeva Dated: 8/15/01
----------------------------- -------
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: 8/15/01 Dated: 8/15/01
------- -------
/s/ Martin F. Stein /s/ Victor L. Hunter
------------------- --------------------
Martin F. Stein, Director Victor L. Hunter, Director
Dated: 8/16/01 Dated: 8/15/01
------- -------
/s/ John J. Stollenwerk
----------------------- --------------------
John J. Stollenwerk, Director Lawrence S. Mattson, Director
Dated: 8/15/01 Dated:
------- -------
/s/ Thomas L. Doerr
-----------------------
Thomas L. Doerr, Director
Dated: 8/16/01
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
Vice Chairman Thomas L. Doerr
President President
Chief Executive Officer Doerr Corporation
Chief Operating Officer
Chief Financial Officer Victor L. Hunter
President
John C. Koss, Jr. Hunter Business Group, LLC
Vice President-Sales
Michael J. Koss
Sujata Sachdeva Vice Chairman, President,
Vice President-Finance C.E.O., C.O.O., C.F.O.
Koss Corporation
Jill McCurdy
Vice President-Product Development Lawrence S. Mattson
Retired President
Lenore Lillie Oster Company
Vice President-Operations
Martin F. Stein
Cheryl Mike Chairman
Vice President-Human Resources/Customer Relations Eyecare One Inc.
Declan Hanley John J. Stollenwerk
Vice President-International Sales President
Allen-Edmonds Shoe Corporation
ANNUAL MEETING
October 18, 2001
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 Richard W. Silverthorn
should be directed in writing to: General Counsel
Whyte Hirschboeck Dudek S.C.
Firstar Trust Company
Box 2077
Milwaukee, WI 53201
Attn: Philip Meyer
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EXHIBIT INDEX
The Company will furnish a copy of any exhibit described below upon request and
upon reimbursement to the Company of its reasonable expenses of furnishing such
exhibit, which shall be limited to a photocopying charge of $0.25 per page and,
if mailed to the requesting party, the cost of first-class postage.
Designation Incorporation
of Exhibit Exhibit Title by Reference
---------- ------------- ------------
3.1 Certificate of Incorporation of Koss Corporation, as in
effect on September 25, 1996 ............................... (1)
3.2 By-Laws of Koss Corporation, as in effect on
September 25, 1996.......................................... (2)
4.1 Certificate of Incorporation of Koss Corporation, as in
effect on September 25, 1996 ............................... (1)
4.2 By-Laws of Koss Corporation, as in effect on
September 25, 1996 ......................................... (2)
10.1 Officer Loan Policy ........................................ (3)
10.3 Supplemental Medical Care Reimbursement Plan ............... (4)
10.4 Death Benefit Agreement with John C. Koss .................. (5)
10.5 Stock Purchase Agreement with John C. Koss ................. (6)
10.6 Salary Continuation Resolution for John C . Koss ........... (7)
10.7 1983 Incentive Stock Option Plan ........................... (8)
10.8 Assignment of Lease to John C. Koss ........................ (9)
10.9 Addendum to Lease .......................................... (10)
10.10 1990 Flexible Incentive Plan ............................... (11)
10.12 Loan Agreement, effective as of February 17, 1995 .......... (12)
10.13 Amendment to Loan Agreement dated June 15, 1995,
effective as of February 17, 1995 .......................... (13)
10.14 Amendment to Loan Agreement dated April 29, 1999 ........... (14)
10.15 Amendment to Loan Agreement dated December 15,
1999 ....................................................... (15)
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10.16 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) ...................................................... (16)
10.17 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) ...................................................... (17)
10.18 Third Amendment and Assignment of License Agreement
to Jiangsu Electronics Industries Limited dated as of
March 31, 1997 ............................................. (18)
10.19 Fourth Amendment to License Agreement dated as of
May 29, 1998 ............................................... (19)
10.20 Fifth Amendment to License Agreement dated
March 30, 2001 ............................................. (20)
10.21 Sixth Amendment to License Agreement dated
August 15, 2001 ............................................ (21)
10.22 License Agreement dated June 30, 1998 between Koss
Corporation and Logitech Electronics Inc. (including
Addendum to License Agreement dated June 30, 1998) ......... (22)
10.23 Consent of Directors (Supplemental Executive Retirement
Plan for Michael J. Koss dated March 7, 1997) .............. (23)
10.24 Amendment to Lease ......................................... (24)
10.25 Partial Assignment, Termination and Modification of
Lease ...................................................... (25)
10.26 Restated Lease ............................................. (26)
22 List of Subsidiaries of Koss Corporation ................... (27)
(1) Incorporated by reference from Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(2) Incorporated by reference from Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(3) Incorporated by reference from Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
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(4) Incorporated by reference from Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(5) Incorporated by reference from Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(6) Incorporated by reference from Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(7) Incorporated by reference from Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(8) Incorporated by reference from Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(9) Incorporated by reference from Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1988
(Commission File No. 0-3295)
(10) Incorporated by reference from Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1988
(Commission File No. 0-3295)
(11) Incorporated by reference from Exhibit 25 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1990
(Commission File No. 0-3295)
(12) Incorporated by reference from Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1995 (Commission File No. 0-3295)
(13) Incorporated by reference from Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995
(Commission File No. 0-3295)
(14) Incorporated by reference from Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1999
(Commission File No. 0-3295
(15) Incorporated by reference from Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended June 30, 2000
(Commission File No. 0-3295)
(16) Incorporated by reference from Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
(17) Incorporated by reference from Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996
(Commission File No. 0-3295)
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(18) 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)
(19) Incorporated by reference from Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(Commission File No. 0-3295)
(20) Incorporated by reference from the sole Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001 (Commission File No. 0-3295)
(21) Filed herewith
(22) Incorporated by reference from Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(Commission File No. 0-3295)
(23) 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)
(24) Incorporated by reference from Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the year ended June 30, 2000
(Commission File No. 0-3295)
(25) Filed herewith
(26) Filed herewith
(27) Incorporated by reference from Exhibit 22 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1988
(Commission File No. 0-3295)
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