May 15, 1997
KOSS CORP (KOSS)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Financial Condition and Liquidity Cash used in operating activities
during the nine months ended March 31, 1997 amounted to $802,572. Working capital was
$20,450,442 at March 31, 1997. The increase in working capital of $4,257,052 from the balance
at June 30, 1996 reflects the net effect of an increase in inventory partially offset by increased
payables. These increases are the result of anticipated higher sales volume in the upcoming quarter.
The cash necessary to fund the Company's operating activities fluctuates from time to time; however,
as a general rule the Company expects to generate adequate amounts of cash to meet future
operating needs. The Company maintains sufficient borrowing capacity to fund any shortfall. Capital
expenditures for new property and equipment (including production tooling) were $672,002 for the
nine months ended March 31, 1997. Depreciation and amortization aggregated $516,998 for the
nine months. For the fiscal year ending June 30, 1997, the Company expects its capital expenditures
to be approximately $1,500,000. The Company expects to generate sufficient operating funds to
fulfill these expenditures. Stockholders' investment increased to $19,276,535 at March 31, 1997,
from $16,546,790 at June 30, 1996. The increase reflects primarily the income for the nine month
period ending March 31, 1997. No cash dividends have been paid since the first quarter of fiscal
1984. The Company has an unsecured working capital credit facility with a bank. This credit facility
provides for borrowings up to a maximum of $8,000,000. Borrowings under this credit facility bear
interest at the bank's prime rate, or LIBOR plus 2.25%. This credit facility includes certain
covenants that require the Company to maintain a minimum tangible net worth and specified current,
interest coverage, and leverage ratios. Utilization of this credit facility as of March 31, 1997 totaled
$2,160,567, consisting of $2,066,000 in borrowings and $94,567 in commitments for foreign letters
of credit. Utilization of this credit facility as of June 30, 1996 was $944,784, consisting of $470,000
in borrowings and $474,784 in foreign letters of credit. The increase as of March 31, 1997 is the
result of an increase in inventory due to anticipated higher sales volume for the upcoming quarter.
The Company can also use up to $1,000,000 of its working capital credit facility to purchase shares
of its own stock. The Company's Canadian subsidiary has a line of credit of $550,000, which is
guaranteed by the Company. Borrowings under this credit facility bear interest at the bank's prime
rate plus 1.5%. The credit facility is subject to the availability of qualifying receivables and
inventories which serve as security for the borrowings. As of March 31, 1997 or June 30, 1996,
there were no borrowings outstanding against this line of credit. The due date for the line is October
31, 1997. 8 of 11 Pursuant to the Company's stock repurchase program, for the nine month period
ended March 31, 1997, the Company purchased 51,629 shares of its common stock at an average
price of $6.83 per share. All 51,629 shares were retired. Since the commencement of the
Company's stock repurchase program, the Company has purchased 343,576 shares of its common
stock for a total of $2,125,014, representing an average price of $6.18 per share. For the nine
month period ended March 31, 1997, the Company's Employee Stock Ownership Plan and Trust
("ESOP") purchased 27,371 shares of the Company's common stock for the ESOP at an average
price of $8.38 per share. For the quarter ended March 31, 1997, the ESOP purchased 10,000
shares of the Company's common stock for the ESOP at an average price of $11.18 per share.
Results of Operations Net sales for the third quarter ended March 31, 1997 were $8,583,303
compared to $8,482,620 for the same period in 1996. Net sales for the nine months ended March
31, 1997 were $31,766,272, up 14% compared with $27,941,603 during the same nine months
one year ago. This increase was primarily a result of strong orders throughout the period. Gross
profit as a percent of net sales was 34% for the quarter ended March 31, 1997 compared with 29%
for the same period in the prior year. For the nine month period ended March 31, 1997, the gross
profit percentage was 34% compared with 30% for the same period in 1996. Shifts in product mix
resulted in the increase in gross profit as compared to last year. Selling, general and administrative
expenses for the quarter ended March 31, 1997 were $2,169,313 or 25%, as against $2,160,599
or 25% for the same period in 1996. For the nine month period ended March 31, 1997, such
expenses were $6,660,273 or 21%, as against $6,529,139 or 23% for the same period in 1996.
The percentage decrease is a direct result of higher sales. For the third quarter ended March 31,
1997, income from operations was $753,381 versus $303,880 for the same period in the prior
year. Income from operations for the nine months ended March 31, 1997 was $4,094,214 as
compared to $1,962,033 for the same period in 1996. The increase is primarily related to higher
sales and to the increase in gross margin resulting from shifts in product mix. Net interest expense
amounted to $77,099 for the quarter as compared to $12,109 for the same period in the prior year.
For the nine month period, interest expense amounted to $254,527 compared with $72,458 for the
same period in the prior year. The increase is a result of the Company borrowing at much higher
levels as compared to the same periods last year. The higher level of borrowing was the result of
increased inventory purchases to support the increase in sales. 9 of 11 The Company recently
agreed to an amendment and assignment of its License Agreement with Trabelco N.V., covering
North America, Central America, and South America, to Jiangsu Electronics Industries Limited, a
subsidiary of Orient Power Holdings Limited. The assignment was effective as of March 31, 1997.
Orient Power has guaranteed Jiangsu's obligations under the License Agreement, as amended.
Orient Power is based in Hong Kong and has an extensive portfolio of audio and video products.
Pursuant to this assignment, Jiangsu has agreed to make royalty payments through December 31,
2000, subject to certain minimum royalty amounts due for the years 1998, 1999, and 2000. This
license arrangement is subject to renewal for additional 3 year periods. Royalty income earned in
connection with this License Agreement for the quarter ended March 31, 1997 was $212,244 as
compared to $43,769 for the same period in 1996. For the nine month period, royalty income was
$908,619 compared to $1,112,498 at March 31, 1996. The Company recognizes royalty income
when earned. The decrease in royalty income for the nine month period is the result of lower sales
volume by Trabelco N.V. in products covered under this License Agreement. The License
Agreement with Trabelco N.V. covering many European countries remains in place. No sales have
been reported under this License Agreement to date; however, certain minimum royalties will be due
for calendar years 1997 and 1998. This License Agreement expires on December 31, 1998.
Trabelco N.V. has the option to renew this License Agreement for additional 3 year periods. |
