**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**x****      ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended June 30, 2009**

 

**OR**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**COMMISSION FILE NUMBER 0-3295**

 

**KOSS CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **391168275**                         |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |
|                                                            |       |                                  |
| **4129 North Port Washington Avenue, Milwaukee, Wisconsin**     | ** ** | **53212**                             |
| (Address  of principal executive offices                        |       | (Zip  Code)                           |

 

Registrant’stelephone number, including area code: **(414)964-5000**

 

Securities registeredpursuant to Section 12(b) of the Act:

 
| **Title of Each Class**        | ** ** | **Name of Each Exchange on Which Registered** |
|--------------------------------|------------|-----------------------------------------------|
| Common  Stock $0.005 par value |       | The  Nasdaq Stock Market LLC                  |

 

**NONE**

(Title of class)

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.  Yes o No x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Act.  Yes o No x

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act.  

 
| Large  accelerated filer o                     | Accelerated  filer o         |
|------------------------------------------------|------------------------------|
|                                           |                         |
| Non-accelerated  filer o                       | Smaller  reporting company x |
| (Do  not check if a smaller reporting company) |                         |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o No x

 

The aggregate market valueof the common voting stock held by nonaffiliates of the registrant as of December 31,2008 was approximately $9,733,454****(basedon the $9.30 per share closing price of the Company’s common stock as reportedon the NASDAQ Stock Market on December 31, 2008).  In determining who are affiliates of theCompany for purposes of this computation, it is assumed that directors,officers, and any persons who held on December 31, 2008 more than 5% ofthe issued and outstanding common stock of the Company are “affiliates” of theCompany.  The characterization of suchdirectors, officers, and other persons as affiliates is for purposes of thiscomputation only and should not be construed as a determination or admissionfor any other purpose that any of such persons are, in fact, affiliates of theCompany.

 

On August 1, 2009,3,691,353 shares of voting common stock were outstanding.

 

DocumentsIncorporated by Reference

 

Part III of this Form 10-Kincorporates by reference information from Koss Corporation’s Proxy Statementfor its 2009 Annual Meeting of Stockholders filed with the Commission underRegulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.

 

 

 

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**PART I**

 

**ITEM 1.          BUSINESS.**

 

**GENERAL**

 

As used herein, the term “Company”means Koss Corporation and its consolidated subsidiaries, unless the contextotherwise requires.  The Company wasincorporated in Delaware in 1971.

 

The Company operates in theaudio/video industry segment of the home entertainment industry through itsdesign, manufacture and sale of stereo headphones and related accessoryproducts.  The Company reports itsfinances as a single reporting segment, as the Company’s principal businessline is the design, manufacture, and sale of stereo headphones and relatedaccessories.  The percentage of totalrevenues related to this central business line over the past three fiscal****years was 100% for each year.

 

The Company’s products aresold through audio specialty stores, the Internet, direct mail catalogs,regional department store chains, discount department stores, militaryexchanges, prisons, and national retailers under the “Koss” name and duallabel.  The Company also sells productsto distributors for resale to school systems, and directly to othermanufactures for inclusion with their own products.  The Company has more than 312 domesticdealers and its products are carried in approximately 20,194 domestic retailoutlets.  International markets areserved by domestic sales representatives and a sales office in Switzerlandwhich utilizes independent distributors in several foreign countries.  The Company has two subsidiaries:  Bi-Audio and Koss Classics.

 

Ninety-nine percent of theCompany’s products are stereo headphones for listening to music.  The products are not significantlydifferentiated by channel or application with the exception of products sold toschool systems, which sometimes include a microphone.  Sales in this application represent between1% and 2% of the Company’s revenue. There are no other product line differentiations other than the qualityof the sound produced by the stereo headphone itself, which is highlysubjective.  The business could also beclassified by distribution channel. Consumers purchase more than 98% of the Koss stereophone range ofproducts through some form of retail channel or reseller.

 

Management believes that ithas sources of raw materials that are adequate for its needs.

 

No employment orcompensation agreement exists between the Company and its dealers.  The Company has several independentmanufacturer’s representatives for distribution.  The Company typically signs one yearcontracts with these manufacturer’s representatives.  These agreements are seldom renewed in writing.  The sales from these agreements accounted forapproximately 1% of the Company’s total revenue in 2009.  Specifically, the Company has a manufacturer’srepresentative agreement with a firm in Detroit to work exclusively in theautomotive arena.  The automotiverepresentative is paid 2% for all business in this area. The Company’sremaining agreements with distributors, past or present, pertain todistribution arrangements in foreign countries. The arrangements with foreign distributors do not contemplate that theCompany pays any compensation other than any profit the distributors make upontheir sale of the Company’s products. The Company has the right to terminate these agreements with foreigndistributors without cause.

 

**INTELLECTUALPROPERTY**

 

John C. Koss has beenrecognized for creating the stereophone industry with the first SP3 stereophonein 1958.  The Company regularly appliesfor registration of its trademarks in many countries around the world in whichit does business, and over the years the Company has had numerous trademarksregistered and patents issued in countries in North America, South America,Asia, Europe, Africa, and Australia.  TheCompany currently has 364 trademarks registered in 86 countries around theworld and patents in 24 countries.  TheCompany has trademarks to protect the brand name, Koss, and its logo on itsproducts.  These trademarks aremaintained throughout the countries in which the Company sells itsproducts.  The Company also holds manydesign patents that protect the unique visual appearance of some of itsproducts.  These trademarks and patentsare important to differentiate the 

 

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Company from itscompetitors.  Certain of the Company’strademarks are of material value and importance to the conduct of itsbusiness.  The Company considersprotection of its proprietary developments important; however, the Company’sbusiness is not, in the opinion of management, materially dependent upon anysingle trademark or patent.  During thefiscal year ended June 30, 2009, the Company took steps to update andmonitor its patents and trademarks to protect its intellectual property aroundthe world.

 

See Part II, Item 7 — “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”herein for information relating to the Company’s license agreements.

 

**SEASONALITY**

 

Although retail sales ofconsumer electronics have typically been higher during the holiday season,stereophones have also seen increased interest as gift items over theyears.  Management of the Companybelieves that its business and industry segment are no longer seasonal asevidenced by the fact that 56% of sales occurred in the first six months of thefiscal year ended June 30, 2009, and 44% of sales occurred in the lattersix months of the fiscal year. Management believes that the reason for this level performance of salesto retailers is related to the fact that stereo headphones have becomereplacement items for portable electronic products.  Therefore upgrades and replacements appear tohave as much interest over the course of the year as gifts of stereophonesduring the holiday season.

 

**WORKINGCAPITAL AND BACKLOG**

 

The Company’s workingcapital needs do not differ substantially from those of its competitors in theindustry and generally reflect the need to carry significant amounts ofinventory to meet delivery requirements of its customers.  From time to time, although rarely, theCompany may extend payment terms to its dealers for a special promotion.  For instance, the Company has in the pastoffered a 90-120 day payment period for certain customers, such as computerretailers and office supply stores.  Basedon historical trends, management does not expect these practices to have anymaterial effect on net sales or net income. The Company’s backlog of orders as of June 30, 2009 is not deemedmaterial in relation to net sales during fiscal 2009.

 

**CUSTOMERS**

 

The Company markets a lineof products used by consumers to listen to music, DVD’s in vehicles, soundbytes on computer systems, and other audio related media.  The Company distributes these productsthrough retail channels in the U.S. and independent distributors throughout therest of the world.  The Company marketsits products to approximately 20,000 retailers and distributors worldwide.  During 2009, the Company’s sales to itslargest single customer, Wal-Mart Stores, Inc., were approximately 21% oftotal gross sales.  The Company isdependent upon its ability to retain a base of retailers and distributors tosell the Company’s line of products. Loss of retailers and distributors means loss of product placement.  The Company has broad distribution acrossmany channels including specialty stores, mass merchants, electronics stores,and computer retailers.  Managementbelieves that any loss of revenues would be partially offset by a correspondingdecrease, on a percentage basis, in expenses, thereby partially reducing theimpact on the Company’s operating income. The five largest customers of the Company (including Wal-Mart) accountedfor approximately 51% and 46% of total sales in 2009 and 2008, respectively.

 

**COMPETITION**

 

The Company focuses on theheadphone industry.  In the stereophonemarket, the Company competes directly with approximately five majorcompetitors, several of which are large and diversified and have greater totalassets and resources than the Company. The Company’s single product focus is unique in the marketplace.  The extent to which retailers view the Companyas an innovative vendor of high quality headphone products, and a provider ofexcellent after sales customer service, is the extent to which the Companymaintains a competitive advantage.  TheCompany relies upon its unique sound, quality workmanship, brandidentification, engineering skills, and customer service to maintain itscompetitive position.

 

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**RESEARCHAND DEVELOPMENT**

 

The amount spent onengineering and research activities relating to the development of new productsor the improvement of existing products was approximately $1,948,000 duringfiscal year 2009 as compared with $981,000 during fiscal year 2008. Theseactivities were conducted by both Company personnel and outside consultants.

 

**ENVIRONMENTALMATTERS**

 

The Company believes that ithas materially complied with all currently existing federal, state and localstatutes and regulations regarding environmental standards and occupationalsafety and health matters to which it is subject.  During fiscal years 2009 and 2008, theamounts incurred in complying with federal, state and local statutes andregulations pertaining to environmental standards and occupational safety andhealth laws and regulations did not materially affect the Company’s earnings orfinancial condition.

 

**EMPLOYEES**

 

As of June 30, 2009,the Company employed 73 people.  TheCompany also utilizes temporary personnel to meet seasonal production demands.

 

**FOREIGNSALES**

 

International markets areserviced through manufacturer’s representatives or independent distributorswith products produced in the United States and overseas.  Our products are sold in countries in thefollowing regions: Western and Eastern Europe, Scandinavia, The Middle East,Africa, Asia, South America, Latin America, the Caribbean, and Mexico.  The Company sells products in the Canadianmarket directly to retailers, and also through a distributor who servicessmaller specialty accounts.

 

In the opinion ofmanagement, the Company’s competitive position and risks relating to theconduct of its business in such markets are comparable to the domesticmarket.  In addition, the governments offoreign nations may elect to erect trade barriers on imports.  The creation of additional such barrierswould reduce the Company’s revenue and profit. In addition, any fluctuations in currency exchange rates could affectthe pricing of the Company’s products and divert customers who might choose topurchase lower-priced, less profitable products, and could affect overalldemand for the Company’s products.  Forfurther information, see Part II, Item 7 and Note 11 to the consolidatedfinancial statements accompanying this Form 10-K.

 

The Company maintains asmall sales office in Switzerland to service the international export marketplace.  The Company is aware of no material risks inmaintaining this operation.  Loss of thisoffice would result in a transfer of sales and marketing responsibility.  The Company sells its products to independentdistributors in countries and regions outside the United States, includingEurope, the Middle East, Africa, Asia, South America, Latin America, theCaribbean, and Mexico.  The Company sellsproducts in the Canadian market directly to retailers, and also through adistributor who services smaller specialty accounts.  During the last two fiscal years, net salesof all Koss products, were distributed as follows:

 
| ** **             | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|
| From U.S.              |       | $          | 20,351,892 |       | $          | 27,800,730 |   |
| From foreign countries |       | 17,832,258 |       | 19,142,563 |       |
| Total Sales            |       | $          | 38,184,150 |       | $          | 46,943,293 |   |

 

In addition to manufacturingfacilities in the United States, the Company uses contract manufacturingfacilities in the Peoples Republic of China, Taiwan, and South Korea.  These independent supplier entities are distantfrom the Company, which means that we are at risk of business interruptions dueto natural disasters, war, disease, and government intervention through tariffsor trade restrictions that are of less concern domestically.  The Company 

 

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maintains finished goodsinventory in its U.S. facility to mitigate this risk.  Finished goods inventory is stocked at anaverage of approximately 90 days demand per item.  Recovery of a single facility through areplacement of supplier in the event of a disaster or suspension of supplycould take 120 days.  The Companybelieves that it could restore production of its top eighteen selling models(which represent 75% of the Company’s sales revenue) within one year.  The Company is also at risk if trade restrictionsare introduced on its products based upon country of origin.  In addition, most increases in tariffs andfreight charges would not be acceptable to pass along to the Company’scustomers and would directly impact the Company’s profits.  Finally, an additional area of concern forthe Company is with the continuing “War on Terror” and the most recentdevelopments in North Korea, Iran, and Lebanon. Three of our largest distributors outside the U.S. have alreadyexperienced a general tightening of the availability of credit in recentmonths, which we believe to be partly a result of certain of these externalconcerns.

 

**AVAILABLEINFORMATION**

 

Our internet website ishttp://www.koss.com.  The Company makesavailable free of charge through its internet website the Company’s annualreport on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, Proxy Statements and all amendments to those reports as soonas reasonably practicable after they are electronically filed with (orfurnished to) the Securities and Exchange Commission (SEC).  These reports and other information regardingthe Company are also available on the SEC’s internet website athttp://www.sec.gov.

 

**ITEM 1A.       RISK FACTORS.**

 

Investing in our commonstock involves a high degree of risk. Any of the following risks could have amaterial adverse effect on our financial condition, liquidity, and results ofoperations or prospects, financial or otherwise.

 

**REDUCTIONIN PRESENT LEVELS OF CASH FLOW COULD ADVERSELY AFFECT THE COMPANY’S BUSINESS**

 

The Company’s primary sourceof liquidity over the past 12 months has been operating cash flows.  The Company’s future cash flows fromoperations (on both a short term and long term basis) are dependent upon, butnot limited to:

 

·                       the Company’s ability toattract new customers that will sell the Company’s products and pay for them;

·                       the Company’s ability toretain the Company’s existing customers at the level of sales previouslyproduced;

·                       the volume of sales forthese customers;

·                       the loss of business of oneor more primary customers;

·                       changes in types of productsthat the customers purchase in their sales mix;

·                       the volume of royalty incomepaid to the Company by its licensees based upon the terms of each royaltyagreement, including the inability to negotiate favorable royalty arrangementsand renew current arrangements with certain existing favorable terms;

·                       poor or deterioratingeconomic conditions which would directly impact the ability of the Company’scustomers to remain in business and pay for their products on a timely basis;

·                       management’s ability to holdthe line on any requests for increases in material or labor cost increases; and

·                       the ability to collect infull and in a timely manner, amounts due to the Company.

 

In addition, as noted above,the Company’s cash flow is also dependent, to some extent, upon the ability tomaintain operating margins.  Thecontinuing general downturn in economic conditions or other events that causedthe Company’s customers to turn to lower-priced, lower-margin products, theCompany’s cash flow and profitability could be materially and adverselyaffected.

 

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**FAILURE TOATTRACT AND RETAIN CUSTOMERS TO SELL THE COMPANY’S PRODUCTS COULD ADVERSELYAFFECT SALES VOLUME AND FUTURE PROFITABILITY**

 

The Company markets a lineof products used by consumers to listen to music.  The Company distributes these productsthrough retail channels in the U.S. and independent distributors throughout therest of the world.  The Company isdependent upon the Company’s ability to retain an existing base of customers tosell the Company’s line of products. Loss of customers means loss of product placement.  The Company has broad distribution acrossmany channels including specialty stores, mass merchants, electronics storesand computer retailers.  Sincedistribution is broadly based, any loss of a customer directly translates intoa reduction in sales volume which can only be replaced by replacing a similarnumber of representative retail outlets. The inability of the Company’s sales and marketing staff to obtain newdistribution outlets translates into a lack of future growth and possibly asetback in sales volumes when loss of current customers occur.  For example, the loss of a customerrepresenting 10% of the Company’s business would translate into a reduction inrevenues of up to 10% based upon the point through the fiscal year that thecustomer was lost.  Attracting a newcustomer during the course of a fiscal year could have a positive impact orsimply replace an account which has been lost. In addition, a customer can decide to make a change in the models thatit decides to offer for sale.  Such changescan take place arbitrarily throughout the course of a year which can causereductions in sales revenues in proportion to the number of retail outlets thatthe store represents in the market.  TheCompany may not be able to maintain customers or model selections and thereforeexperience a reduction in its sales revenue until a model is restored to themix or a customer is replaced by a new customer.  A reduction in sales volume would cause areduction in profitability.  The Company’sfailure to retain existing customers, obtain new customers or develop newproduct lines that customers would choose to offer to consumers couldsignificantly affect the Company’s future profitability.  The loss of business of one or more principalcustomers or a change in the sales volume from a particular customer could havea material adverse effect on the Company’s sales volume and profitability.

 

**SHIFT INCUSTOMER SPECIFICATIONS TO LOWER PRICED ITEMS CAN REDUCE PROFIT MARGINSNEGATIVELY IMPACTING PROFITABILITY**

 

The Company sells a line ofproducts with a suggested retail price ranging from less than $10 up to$1,000.  The gross margin for each ofthese models is unique in terms of percentages. The price range of the products also produces a different level ofactual dollar contribution per unit.  Forexample a product with a gross margin contribution of 50% might yield a $5.00contribution for one item, while another item may feature a 30% gross marginwhich could yield $50.00.  The Companyfinds the low priced portion of the market most competitive and therefore mostsubject to pressure on gross margin percentages, which tends to lower profitcontributions.  Retail preference forlower priced items can reduce profit margins and contributions.  The risk is that a shift in retail customerspecifications toward lower priced items can lead to lower gross margins andlower profit contributions per unit of sale. Due to the range of products that the Company sells, the product salesmix can produce a variation in terms of a range of profit margins.  Some customers sell a limited range ofproducts that yield lower profit margins than others.  Most notably, the budget priced headphonesegment of the market below $10.00 retail which is distributed through computerstores, office supply stores, and mass market retailers tend to yield thelowest gross margins.  An increase inbusiness with these types of accounts, if coupled with a simultaneous reductionin sales to customers with higher gross margins would reduce profit margins andprofitability.

 

**POORECONOMIC CONDITIONS CAN RESTRICT OR LIMIT PRODUCT PLACEMENT, SALES ANDREPLENISHMENT WHICH COULD DECREASE PROFITS**

 

Deteriorating or weakeconomic conditions, or a forecast for the same, can trigger changes ininventory stocking at retail.  This mayin turn lead to a reduction in model offerings and to out of stock situations.  If a retail customer of the Company does nothave adequate stocks of the Company’s products to offer for sale in a retailstore, consumers may choose another competitive model instead.  Customers operating retail stores anticipatefuture sales demands and inventory products accordingly.  Whenever a general economic slowdown occurs,at both the domestic or foreign level, sales volume levels and re-orderschange.  These changes directly impactthe Company’s sales and profitability. The Company is not in a position to determine how it will be affected bythese circumstances, how extensive the effects may be, or for how long theCompany may be impacted by these 

 

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circumstances.  The Company’s customers respond to changes ineconomic conditions and any adverse changes in economic conditions cantherefore restrict product placement, availability, sales, replenishment andultimately profitability.  Theseconditions exist domestically and internationally.

 

**MANAGEMENTIS SUBJECT TO DECISIONS MADE OUTSIDE ITS CONTROL WHICH COULD DIRECTLY AFFECTFUTURE PROFITABILITY**

 

Retail customers determinewhich products they will stock for resale. The Company competes with other manufacturers to secure shelf space in retailstores for the Company’s products. During the course of a year, changes in the customers’ managementpersonnel can ultimately lead to changes in the stock assortment offered toconsumers.  These changes are oftenarbitrary.  In addition to changes inpersonnel within the Company’s customers, it is also possible that a strategicdecision can be made by a retail customer to consolidate vendors, or todiscontinue certain product categories altogether.  In these instances, the Company’s managementteam may not able to convince customers to reverse such decisions.  The Company’s management team is also engagedin the effective procurement, assembly, and manufacture of products.  The ability to negotiate with suppliers,maintain productivity, and hold the line on cost increases can be subjected topressures outside the control of management. For example, increases in fuel costs can increase rates of freight.  Increases of this nature can seldom beavoided and the Company may not be able to pass such increases along to itscustomers.  Management’s effectivecontrol of the manufacturing processes will have a direct impact on the Company’sfuture profitability.  The Companyregularly makes decisions that affect production schedules, shipping schedules,employee levels, and inventory levels. The Company’s ability to make effective decisions in managing theseareas has a direct effect on future profitability.

 

**ACCOUNTSRECEIVABLE AMOUNTS DUE FROM OUR CUSTOMERS CAN BE LOST AS A RESULT OF CUSTOMERBANKRUPTCY, OPERATIONAL DIFFICULTY, OR FAILURE TO PAY, NEGATIVELY IMPACTINGFUTURE PROFITABILITY**

 

The Company has significantaccounts receivable or other amounts due from the Company’s customers.  The accounts receivable balance at the end ofthe last four quarters averaged approximately $8,967,067.  Terms of payment for customers generallyrange from cash in advance to net 90 day credit terms.  These credit arrangements are negotiated atunspecified and irregular intervals.  Thelargest customers generate the largest receivable balances.  If a customer develops operational difficultyit is not uncommon to temporarily suspend payment to vendors.  The Company is subject to this risk in theretail marketplace.  From time to time acustomer may develop severe operating losses which can lead to abankruptcy.  In these cases, the Companymay lose most of the outstanding balance due. Occasionally, the Company has been current with a customer at the timesuch an event occurs.  The more materialrisk is that of losing the revenue of the customer which might be more onerousthan losing the current outstanding accounts receivable.  In addition, many companies that will insureaccounts receivables will not do so for the Company’s largest mass marketcustomers.  An example of such a loss wasKMART Corporation.  The Company recordeda loss of approximately $500,000 of which $44,000 was repaid in 2007, $37,000in 2005 and $312,000 in 2004, when KMART filed for re-organization.  KMART was current with the Company at thetime that KMART filed Chapter 11 bankruptcy in January of 2002.  The Company continued to supply KMART duringits post petition re-organization and continues to supply the customerprofitably today.  The risk is that theCompany derives most of the Company’s sales revenue and profits from sellingproducts to retailers for resale to consumers. The failure of the Company’s customers to pay in full amounts due to theCompany could negatively affect future profitability.

 

**COMPANYPROFITS CAN SUFFER FROM INTERRUPTIONS IN SUPPLY CHAIN**

 

The Company uses contractmanufacturing facilities in Mainland China, Taiwan, and South Korea.  These independent supplier entities aredistant from the Company which means that the Company is at risk of businessinterruptions due to natural disaster, war, disease, and governmentintervention through tariffs or trade restrictions that are of less concerndomestically.  An additional area ofconcern for the Company is with the continuing “War on Terror” and the mostrecent developments in North Korea, Iran, and Lebanon.  Three of our largest distributors outside theU.S. have already experienced a general tightening of the availability ofcredit in recent months, which 

 

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we believe to be partly aresult of certain of these external concerns. Therefore, if there are any interruptions in the supply chain for any ofthese reasons, this could directly impact the Company’s profits in a negativeway.  The Company is also at risk iftrade restrictions are imposed on the Company’s products based upon country oforigin.  In addition, any increase intariffs and freight charges may not be acceptable to pass along to the Company’scustomers and could directly impact the Company’s profits.

 

**FLUCTUATIONSIN CURRENCY EXCHANGE RATES COULD AFFECT PRICING OF PRODUCTS AND CAUSE CUSTOMERSTO PURCHASE LOWER-PRICED, LESS PROFITABLE PRODUCTS AND COULD AFFECT OVERALLDEMAND FOR THE COMPANY’S PRODUCTS**

 

The Company receives amaterial portion of its revenue and profits from business in Canada andEurope.  To the extent that value of theU.S. dollar increases relative to currencies in those jurisdictions, itincreases the cost of the Company’s products in those jurisdictions, whichcould create negative pressure on the overall demand for the Company’sproducts.  The Company gets paid from itsinternational customers in U.S. dollars. To the extent that increased prices arising from currency fluctuationsdecrease the overall demand for the Company’s products and the Company’s salesor motivate customers to purchase lower-priced, lower profit products, theCompany’s revenues, profits, and cash flows could be adversely affected.

 

**COMPANYPROFITS CAN SUFFER FROM INCREASING MANUFACTURING COSTS IN CHINA AS A RESULT OFINCREASED WAGES AND WAGE TAXES**

 

The Company uses contractmanufacturing facilities in Mainland China. An increase in the cost of labor or taxes on wages in China may lead toan increase in the cost of goods manufactured in China.  The cost of labor and wage taxes haveincreased in China which means that the Company is at risk of highermanufacturing costs associated with goods manufactured in China.  Additionally, in response to inflationaryconcerns, wages in certain provinces in China have recently increased and maycontinue to do so in the future. Significant increases in wages or wage taxes paid by contractmanufacturing facilities may increase the cost of goods manufactured in Chinawhich could have a material adverse effect on the Company’s profit margins andprofitability.

 

**THE COMPANYUSES THIRD PARTY CARRIERS TO SHIP OUR PRODUCTS WHICH MAY PASS ON INCREASESIN TRANSPORTAION-RELATED FUEL COST TO THE COMPANY WHICH CAN REDUCE PROFITMARGINS NEGATIVELY IMPACTING PROFITABILITY**

 

The Company uses numerousthird party carriers to ship product, both domestically andinternationally.  If the price of fuelcontinues to increase and the carriers choose to pass on these increase to theCompany, our freight costs may increase. As a result, the Company’s freight cost is impacted by changes in fuelprices.  Fuel prices affect freight coststo both our customer’s location and our distribution center.  Increase in fuel prices and surcharges andother factors have increased and may continue to increase freight costs in thefuture.  This inflationary pressure ofhigher fuel costs and continued increase in transportation-related fuel costscould have a material adverse effect on the Company’s profit margins andprofitability.

 

**CONSISTENCYOF THE COMPANY’S BUSINESS WITH SEVERAL U.S. RETAILERS**

 

The Company is particularlyconcerned about the consistency of business with several U.S. retailers for thecoming year.  The recent tightening ofcredit availability worldwide caused all retailers to sharply curtail inventoryincreases in advance of this year’s holiday season.  The Company has already seen someconsolidation in product lines, and item elimination, or reductions at severalbig box retailers this past spring.  TheCompany also recognizes the struggle that many of the Company’s automobile customershave been reporting in the news, and the potential impact that a reduction inautomobile unit sales might have upon our rear seat entertainment products’ forthe automotive market in the coming fiscal year.

 

**ITEM 1B.       UNRESOLVED STAFF COMMENTS.**

 

None.

 

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**ITEM 2.          PROPERTIES.**

 

The Company leases its mainplant and offices in Milwaukee, Wisconsin from its Chairman, John C. Koss.  On August 15, 2007, the lease wasrenewed for a period of five years, and is being accounted for as an operatinglease.  The lease extension maintainedthe rent at a fixed rate of $380,000 per year. At anytime during this period the Company has the option to renew thelease for an additional five years for the period commencing July 1, 2013and ending June 30, 2018 under the same terms and conditions.  The lease is on terms no less favorable tothe Company than those that could be obtained from an independent party.  The Company is responsible for all propertymaintenance, insurance, taxes, and other normal expenses related toownership.  All facilities are in goodrepair and, in the opinion of management, are suitable and adequate for theCompany’s business purposes.

 

**ITEM 3.          LEGAL PROCEEDINGS.**

 

From time to time theCompany is involved in routine litigation; however, neither the Company nor itsSubsidiaries are currently subject to any material legal proceedings inmanagement’s opinion.

 

**ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

 

No matters were submitted toa vote of stockholders during the fourth quarter of the fiscal year ended June 30,2009.

 

**PART II**

 

**ITEM 5.          MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.**

 

**MARKETINFORMATION ON COMMON STOCK**

 

The Company’s common stockis traded on The Nasdaq Stock Market under the trading symbol KOSS.  There were approximately 550 record holdersof the Company’s common stock as of August 1, 2009.  This number does not include individualparticipants in security position listings. The quarterly high and low sale prices of the Company’s common stock forthe last two fiscal years as well as dividends declared are shown below.

 
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|--------------------|------------|
| **Quarter Ended**  | ** ** | **High**   | ** ** | **Low**    | ** ** | **Dividend**       | ** ** |
| September 30, 2007 |       | $          | 22.18      |       | $          | 18.58              |       | $ | 0.13 |   |
| December 31, 2007  |       | $          | 20.39      |       | $          | 17.50              |       | $ | 1.13 |   |
| March 31, 2008     |       | $          | 19.88      |       | $          | 16.69              |       | $ | 0.13 |   |
| June 30, 2008      |       | $          | 17.94      |       | $          | 15.51              |       | $ | 0.13 |   |
| September 30, 2008 |       | $          | 18.48      |       | $          | 13.52              |       | $ | 0.13 |   |
| December 31, 2008  |       | $          | 16.00      |       | $          | 9.30               |       | $ | 0.13 |   |
| March 31, 2009     |       | $          | 12.60      |       | $          | 9.35               |       | $ | 0.13 |   |
| June 30, 2009      |       | $          | 15.78      |       | $          | 11.90              |       | $ | 0.13 |   |

 

The Company’s stockholdersare entitled to receive dividends as may be declared by the Board of Directorsand paid out of funds legally available therefore.  The Company began paying dividends for thequarter ended September 30, 2002 and has paid a dividend for each quartersince, including the last fiscal quarter ended June 30, 2009.  On June 17, 2009, the Company announcedits quarterly dividend of $0.13 per share for stockholders of record on June 30,2009.  The dividend was distributed on oraround July 15, 2009.  Although theCompany anticipates it will continue to pay a quarterly dividend, the decisionto pay dividends and the amount of such dividends are within the solediscretion of the Board of Directors, who meet quarterly.  The decision to pay dividends will depend onthe Company’s operating results, financial condition, tax considerations,alternative uses for such funds, and other factors the Board of Directors deemrelevant, and there can be no assurance that dividends will be paid in thefuture.

 

9

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**COMPANYREPURCHASES OF EQUITY SECURITIES**

 
| **Period (2009)**     | ** ** | **Total  Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Approximate Dollar  Value of  Shares Available under  Repurchase Plan** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| April 1-April 30 |       | 0                                            |       | $                                            |  0.00 |                                                                                                                   | 0          |                                                                                               | $          |  2,125,887 |   |
| May 1-May 31     |       | 0                                            |       | $                                            |  0.00 |                                                                                                                   | 0          |                                                                                               | $          |  2,125,887 |   |
| June 1-June 30   |       | 0                                            |       | $                                            |  0.00 |                                                                                                                   | 0          |                                                                                               | $          |  2,125,887 |   |

 

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(1)  In April of1995, the Board of Directors approved a stock repurchase program authorizingthe Company to purchase from time to time up to $2,000,000 of its common stockfor its own account.  Subsequently, theBoard of Directors periodically has approved increases in the stock repurchaseprogram.  As of June 30, 2009, themost recently approved increase was for additional purchases of $2,000,000,which occurred in October of 2006, for an aggregate maximum of$45,500,000, of which $43,374,113 had been expended through June 30, 2009.

 

**ITEM 6.          SELECTED FINANCIAL DATA.**

 
| ** **                       | ** ** | **June 30, 2009** | ** **       | **June 30, 2008** | ** ** |
|----------------------------------|------------|-----------------------------|------------------|-----------------------------|------------|
| Net sales                        |       | $                           |  38,184,150 |                        | $          |  46,943,293 |   |
| Net income                       |       | $                           |  1,976,668  |                        | $          |  4,494,289 |   |
| Basic earnings per common share: |       |                        |             |                        |       |
| Basic:                           |       | $                           |  0.54       |                        | $          |  1.22 |   |
| Diluted:                         |       | $                           |  0.54       |                        | $          |  1.22 |   |
| Total assets                     |       | $                           |  28,470,352 |                        | $          |  29,977,077 |   |
|                             |       |                        |             |                        |       |
| Cash dividends per common share  |       | $                           |  0.52       |                        | $          |  1.52 |   |

 

See Part II, Item 7 - “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” andConsolidated Financial Statements and Notes to the Consolidated FinancialStatements for more information relating to Selected Financial Data.

 

**ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

During fiscal year 2009,cash provided by operations was $2,378,626, and during fiscal year 2008, cashprovided by operations was $5,337,129. Working capital was $17,387,842 at June 30, 2009 and $18,547,574 atJune 30, 2008.  The net decrease inworking capital of $1,159,732 from June 30, 2008 represents primarily thenet change in cash, accounts receivable, accounts payable and accruedliabilities.

 

Capital expenditures for newproperty and equipment (including production tooling) were $2,147,866 and$1,179,344, in fiscal years 2009 and 2008, respectively. Depreciation chargestotaled $817,957 and $961,605, for the same fiscal years.  Budgeted capital expenditures for fiscal year2010 are approximately $2,000,000.  TheCompany expects to generate sufficient funds through operations to fund theseexpenditures.

 

Stockholders’ investmentincreased to $23,630,392 at June 30, 2009 from $23,217,435 at June 30,2008.  The increase reflects the neteffect of net income, dividends declared, purchase of common stock, exercise ofstock options and compensation expense recorded for vested stock optionsgranted under SFAS No. 123(R).  On June 16,2009, the Company declared a quarterly cash dividend of $0.13 per share, for anaggregate of $479,876 payable on July 15, 2009 to stockholders of recordon June 30, 2009, which is recorded as dividends payable.

 

10

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On February 16, 2009, the Company entered into anew credit facility for an unsecured line of credit for up to a maximum of$10,000,000 up to and including January 29, 2010.  This credit facility replaces the Company’sprevious credit facility, which has been terminated and contained substantiallythe same terms as the Company’s new credit facility.  The Company’s creditfacility matures on January 29, 2010. This unsecured credit facility provides for borrowings up to a maximumof $10,000,000.  The Company can use thiscredit facility for working capital, to refinance existing indebtedness, forstock repurchase and for general corporate purposes. Borrowings under thiscredit facility bear interest at either the bank’s most recently publiclyannounced prime rate or at a LIBOR-based rate determined in accordance with theloan agreement.  This credit facilityincludes certain financial covenants that require the Company to maintain aminimum tangible net worth, liabilities to tangible net worth ratios andinterest coverage ratios. The tangible net worth of the Company must not fallbelow $10.0 million at any time. The maximum leverage of the Company, whichconsists of the ratio of its consolidated liabilities to its consolidatedtangible net worth, must not exceed 1.50 to 1.0.  The interest coverage of the Company, whichconsists of the ratio of its earnings before interest, income taxes,depreciation, amortization, and other non-cash charges to its consolidatedinterest charges, must not be less than 2.00 to 1.0.  The Company has been and is well within theserequirements.  The Company uses itscredit facility from time to time, although there was no utilization of thiscredit facility at June 30, 2009 or June 30, 2008.

 

In April of 1995, theBoard of Directors approved a stock repurchase program authorizing the Companyto purchase from time to time up to $2,000,000 of its common stock for its ownaccount.  Subsequently, the Board ofDirectors periodically has approved increases of between $1,000,000 to$2,000,000 in the stock repurchase program. As of June 30, 2009, the most recently approved increase was foradditional purchases of $2,000,000, which occurred in October of 2006, foran aggregate maximum of $45,500,000, of which $43,374,113 had been expendedthrough June 30, 2009.  The Companyintends to effect all stock purchases either on the open market or throughprivately negotiated transactions, and intends to finance all stock purchasesthrough its own cash flow or by borrowing for such purchases.  The Company will continue to repurchase itsshares from the market when the board determines the shares to beundervalued.  The Company may elect touse the purchase of these shares to minimize the dilutive effects to itsstockholders when the Company’s stock is used in acquisitions asconsideration.  The Company has noimmediate plans to make an acquisition at this time.

 

For fiscal year 2009, theCompany purchased 3,998 shares of its common stock at an average net price of$10.91 per share, for a total purchase price of $43,620.  As of June 30, 2009 the Company’s Boardof Directors has authorized the repurchase by the Company of up to $2,000,000in Company common stock at the discretion of the Chief Executive Officer of theCompany.

 

From the commencement of theCompany’s stock repurchase program through June 30, 2009, the Company haspurchased a total of 5,474,102 shares for a total gross purchase price of$52,768,873 (representing an average gross purchase price of $9.64 per share)and a total net purchase price of $41,945,130 (representing an average netpurchase price of $7.66 per share).  Thedifference between the total gross purchase price and the total net purchaseprice is the result of the Company purchasing from certain employees shares ofthe Company’s stock acquired by such employees pursuant to the Company’s stockoption program.  In determining thedollar amount available for additional purchases under the stock repurchaseprogram, the Company uses the total net purchase price paid by the Company forall stock purchases, as authorized by the Board of Directors.

 

**2009 RESULTS OF OPERATIONS COMPARED WITH 2008**

 

Net sales for 2009 were$38,184,150 compared with $46,943,293 in 2008, a decrease of $8,759,143 or19%.  The sales decrease for the fiscalyear is primarily due to soft retail sales in the United States and Europe.Gross profit, as a percentage of net sales, was $13,267,137 or 35% in 2009compared with $17,791,502 or 38% in 2008, this decrease is primarily due to softerretail sales worldwide and a less profitable product mix.

 

Selling, general, andadministrative expenses for 2009 were $10,653,243 compared with $10,792,064 in2008.  The Company has continued spendingmoney on research and development of new products.  The company spent approximately $1,948,000 onresearch and development during fiscal year 2009, as compared with $981,000during fiscal year 2008.

 

11

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Income from operations was$2,613,894 in 2009 compared with $6,999,438 in 2008, a decrease of $4,385,544or 63%.  This decrease was primarily dueto spending on new product development, soft retail sales worldwide and a lessprofitable product mix. Interest income was $15,503 in 2009 compared with$119,464 in 2008, which was a decrease of 87%.

 

Royalty income was $258,333in 2009 compared with $291,667 in 2008, a decrease of 11%. The decrease inroyalty income for the twelve month period was primarily a result of lowersales by the Company’s primary licensee.

 

The provision for incometaxes was $911,062 and $2,916,280 in 2009 and 2008, respectively. The decreaseis the provision for income taxes is attributable primarily to the decrease inincome before income tax provision in 2009 compared to 2008. The Company’seffective tax rate was 32% in 2009 and 39% in 2008.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

The Company has no “offbalance sheet arrangements except for operating leases disclosed in Part I,Item 2. Properties.

 
| *** ***           | *** *** | **Payments Due By Period** | ** ** |
|------------------------|--------------|----------------------------|------------|
| ** **             | ** **   | ** **                 | ** ** | **Less  Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More  Than** | ** ** |
|                   | ** **   | **Total**                  | ** ** | **1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **5 Years** | ** ** |
| Contractual Obligation | ** **   | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating Leases       |         | $                          | 1,520      |   | $ | 380 |   | $ | 760 |   | $ | 380 |   | $ | 0 |   |
| Total                  |         | $                          | 1,520      |   | $ | 380 |   | $ | 760 |   | $ | 380 |   | $ | 0 |   |

 

**DISCLOSUREABOUT CERTAIN TRADING ACTIVITIES THAT INCLUDE NON-EXCHANGE TRADED CONTRACTSACCOUNTED FOR AT FAIR VALUE**

 

The Company does not haveany trading activities that include non-exchange traded contracts accounted forat fair value.

 

**DISCLOSUREABOUT EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES**

 

The Company has an agreementwith its Chairman, John C. Koss, in the event of his death, at the requestof the executor of his estate, to repurchase his Company common stock from hisestate.  The repurchase price is 95% ofthe fair market value of the common stock on the date that notice to repurchaseis provided to the Company.  The totalnumber of shares to be repurchased will be sufficient to provide proceeds whichare the lesser of $2,500,000 or the amount of estate taxes and administrativeexpenses incurred by the Chairman’s estate. The Company may elect to pay the purchase price in cash or may elect topay cash equal to 25% of the total amount due and to execute a promissory notefor the balance, payable over four years, at the prime rate of interest.  The Company maintains a $1,150,000 lifeinsurance policy to fund a substantial portion of this obligation.

 

In 1991, the Board ofDirectors agreed to continue the Chairman’s current base salary in the event hebecomes disabled prior to age 70.  Afterage 70, he shall receive his current base salary for the remainder of his life,whether he becomes disabled or not.  TheChairman has turned 70.  These paymentsbegin upon the Chairman’s retirement, and since the Chairman has not retired,he is not currently receiving any of these payments under thisarrangement.  The Company had a deferredcompensation liability of $400,000 recorded as of June 30, 2009 and June 30,2008 for this arrangement.

 

The Company leases its mainplant and offices in Milwaukee, Wisconsin from its Chairman.  On August 15, 2007, the lease wasrenewed for a period of five years, and is being accounted for as an operatinglease.  The lease extension maintainedthe rent at a fixed rate of $380,000 per year. At anytime during this period the Company has the option to renew thelease for an additional five years for the period commencing July 1, 2013and ending June 30, 2018 under the same terms and conditions.  In the opinion of the independent directorsof the Board, the lease is on terms no less favorable to the Company than thosethat could be obtained from an independent party.  The Company is responsible for all propertymaintenance, insurance, taxes, and other normal expenses related to ownershipof the property.

 

12

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**DISCLOSUREABOUT CRITICAL ACCOUNTING POLICIES**

 

The Company’s more criticalaccounting policies include revenue recognition, royalty income, and the use ofestimates (which inherently involve judgment and uncertainties) in valuinginventory and accounts receivable.

 

Revenue Recognition

 

The Company recognizesrevenue when all of the following criteria are met:  persuasive evidence of an arrangement exists;delivery has occurred (either FOB shipping point or delivery taken at the Company’sdock); the seller’s price to the buyer is fixed and determinable (pricing isfinalized through the purchase order); and collectibility is reasonablyassured.  These criteria are generallysatisfied and the Company recognizes revenue upon shipment.  The Company also offers certain of itscustomers the right to return products that do not meet the standards agreedwith the customer.  The Companycontinuously monitors such product returns and while such returns havehistorically been minimal, the Company cannot guarantee that they will continueto experience the same return rates that they have experienced in thepast.  Any significant increase inproduct quality failure rates and the resulting credit returns could have amaterial adverse impact on the Company’s operating results for the period orperiods in which such returns materialize.

 

The Company provides forcertain sales incentives, which include sales rebates.  The Company records a provision for estimatedincentives based upon the incentives offered to customers on product relatedsales in the same period as the related revenues are recorded.  The Company also records a provision forestimated sales returns and allowances on product related sales in the sameperiod as the related revenues are recorded. These estimates are based on historical sales returns, analysis ofcredit memo data and other known factors. If the historical data the Company uses to calculate these estimatesdoes not properly reflect future returns, adjustments may be required in futureperiods. Products sold are covered by a lifetime warranty.  The Company accrues a warranty reserve forestimated costs to provide warranty services. The Company’s estimate of costs to service its warranty obligations isbased on historical experience and expectation of future conditions.  To the extent the Company experiencesincreased warranty claim activity or increased costs associated with servicingthose claims, its warranty accrual will increase accordingly and result indecreased gross profit.

 

Royalty Income

 

TheCompany’s net income is affected by the levels of royalty income generated inany given period.  Royalty income isrecognized when earned under the terms of the Company’s license agreements. Ingeneral, these agreements have required minimum quarterly royaltypayments.  Royalty income owed to theCompany is calculated by the licensee and then verified by the Company.  Royalty payments are calculated based uponpredetermined percentages of net sales of the licensed products or based uponminimum quarterly royalty payments. Royalty income is booked monthly, on an accrual basis, and the amountthat the Company accrues is the monthly equivalent of the minimum royaltypayment.  When the royalty payments arereceived each quarter, the Company then reduces the accounts receivableaccordingly.  The Company had one royaltyagreement that terminated in the fourth quarter of fiscal year 2009.  As of June 30, 2009, the Company has nolicense agreements in effect.

 

Accounts Receivable

 

The Company performs ongoingcredit evaluations of its customers and adjusts credit limits based uponpayment history and the customer’s current credit worthiness, as determined bythe review of the customer’s current credit information.  The Company continuously monitors collectionsand payments from customers and maintains a provision for estimated creditlosses based upon the Company’s historical experience and any specific customercollection issues that have been identified. The Company values accounts receivable net of an allowance foruncollectible accounts.  The allowance iscalculated based upon the Company’s evaluation of specific customer accountswhere the Company has information that the customer may have an inability tomeet its financial obligations (bankruptcy, etc.).  In these cases, the Company uses itsjudgment, based on the best available facts and circumstances, and records aspecific reserve for that customer against amounts due to reduce the receivableto the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additionalinformation is received that impacts the amount reserved.  However, the ultimate collectibility of areceivable is dependent upon the financial condition of an individual customer,which could change rapidly and without warning.

 

13

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Inventories

 

The Company values itsinventories at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method.  As of June 30, 2009, approximately 99%of the Company’s inventory was valued using LIFO.  Valuing inventories at the lower of cost ormarket requires the use of estimates and judgment.  Our customers may cancel their orders orchange purchase volumes.  Any of these,or certain additional actions, could create excess inventory levels, whichwould impact the valuation of our inventories. The Company continues to use the same techniques to value inventory ashave been used in the past.  Any actionstaken by our customers that could impact the value of our inventory areconsidered when determining the lower of cost or market valuations.  The Company regularly reviews inventoryquantities on hand and records a provision for excess and obsolete inventorybased primarily on our estimated forecast of product demand and productionrequirements for the next twelve months. If the Company is not able to achieve its expectations of the netrealizable value of the inventory at its current value, the Company would haveto adjust its reserves accordingly.

 

**RECENTLYISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS**

 

EffectiveJuly 1, 2008, the Company implemented SFAS No. 157, “Fair ValueMeasurements” (“SFAS 157”) related to its financial assets andliabilities, which defines fair value, establishes a framework for itsmeasurement, and expands disclosures about fair value measurements. Theadoption of SFAS 157 did not have an impact on the measurement of theCompany’s financial assets and liabilities, nor did it result in additional disclosures.

 

InFebruary 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP157-2”), which delayed the effective date by which companies must adopt certainprovisions of Statement of Financial Accounting Standards No. 157, FairValue Measurements (“SFAS 157”). FSP 157-2 defers the effective date ofSFAS 157 for all nonfinancial assets and nonfinancial liabilities, exceptfor items that are recognized or disclosed at fair value in the financialstatements on a recurring basis, to fiscal years beginning after November 15,2008, and interim periods within those fiscal years. The adoption of thisstandard is not anticipated to have a material impact on our financialposition, results of operations, or cash flows.

 

In May 2009, the FASBissued Statement 165, Subsequent Events, to incorporate the accounting anddisclosure requirements for subsequent events into U.S. generally acceptedaccounting principles. Statement 165 introduces new terminology, defines a datethrough which management must evaluate subsequent events, and lists thecircumstances under which an entity must recognize and disclose events ortransactions occurring after the balance sheet date. We adopted Statement 165as of June 30, 2009. We evaluated our June 30, 2009 financialstatements for subsequent events through August 4, 2009, the date thefinancial statements were available to be issued. We are not aware of anysubsequent events which would require recognition or disclosure in thefinancial statements.

 

In June 2009, FASB issued,“Accounting Standards Update No. 2009-1, Topic 105 —Generally AcceptedAccounting Principles amendments based on the Statement of Financial Standards No. 168— the FASB Accounting Standard Codifications and the Hierarchy of GenerallyAccepted Accounting Principles and Statement of Financial Accounting Standard No. 168,the FASB Accounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles, a replacement of FASB Statement No. 62.”The Accounting Standards Update and SFAS No. 168 make the FASBCodification the authoritative source of GAAP. The FASB Codification iseffective for interim and annual reporting periods ending after September 15,2009. We will update GAAP referencing for our September 30, 2009 Form 10-Q.  The FASB Codification is not expected to havea material impact on our financial reporting.

 

**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

 

**MANAGEMENT’SREPORT**

 

The consolidated financialstatements and related financial information included in this report are the responsibilityof management as to preparation, presentation and reliability.  Management believes that the financialstatements have been prepared in conformity with accounting principlesgenerally accepted in the United States of America appropriate under thecircumstances and necessarily include amounts that are based on best 

 

14

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estimates andjudgments.  The Company maintains asystem of internal control to provide reasonable assurance that assets are safeguardedand that the books and records reflect the authorized transactions of theCompany.  Oversight of management’sfinancial reporting and internal accounting control responsibilities isexercised by the Board of Directors, through an Audit Committee that iscomprised solely of independent directors. The Audit Committee is also responsible for the selection andappointment of the independent auditors and reviews the scope of their auditand their findings.  The independentauditors have direct access to the Audit Committee, without the presence ofmanagement representatives, to discuss the scope and the results of their auditwork.

 

Consolidated financialstatements of the Company at June 30, 2009 and 2008 and for each of thetwo years in the period ended June 30, 2009 and the notes thereto, and thereport of independent auditors thereon are set forth on pages 20 to 33.

 

Selected unaudited quarterlyfinancial data is as follows:

 
| ** **                         | ** ** | **Quarter** | ** ** |
|------------------------------------|------------|-------------|------------|
| **2009**                           | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Net sales                          |       | $           | 11,486,034 |   | $ | 10,287,595 |   | $ | 8,145,930 |   | $ | 8,264,591 |   |
| Gross profit                       |       | 4,400,460   |       | 3,482,884 |   | 2,613,992 |   | 2,769,801 |   |
| Net income                         |       | 913,764     |       | 322,454 |   | 137,767 |   | 602,683 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Basic earnings per common share:   |       | $           | 0.25       |   | $ | 0.09 |   | $ | 0.04 |   | $ | 0.16 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Diluted earnings per common share: |       | $           | 0.25       |   | $ | 0.09 |   | $ | 0.04 |   | $ | 0.16 |   |

 
| ** **                         | ** ** | **Quarter** | ** ** |
|------------------------------------|------------|-------------|------------|
| **2008**                           | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Net sales                          |       | $           | 12,637,606 |   | $ | 12,099,397 |   | $ | 10,003,648 |   | $ | 12,202,642 |   |
| Gross profit                       |       | 4,791,980   |       | 4,324,375 |   | 3,565,124 |   | 5,110,023 |   |
| Net income                         |       | 1,335,674   |       | 1,246,552 |   | 647,997 |   | 1,264,066 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Basic earnings per common share:   |       | $           | 0.36       |   | $ | 0.34 |   | $ | 0.18 |   | $ | 0.34 |   |
|                               |       |        |       |   |   |   |   |   |   |
| Diluted earnings per common share: |       | $           | 0.36       |   | $ | 0.34 |   | $ | 0.18 |   | $ | 0.34 |   |

 

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(1)          Due to the useof weighted-average shares outstanding each quarter for computing earnings pershare, the sum of the quarterly per share amounts may not equal the per shareamount for the year.

 

**ITEM 9.CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

 

None.

 

**ITEM 9A(T).Controls and Procedures.**

 

*DisclosureControls and Procedures*.  TheCompany maintains a system of disclosure controls and procedures that aredesigned to provide reasonable assurance that information, which is required tobe timely disclosed, is accumulated and communicated to management in a timelyfashion.  A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met.  The Company, under the supervision and withthe participation of the Company’s management, including the Company’s ChiefExecutive Officer/Chief Financial Officer, after evaluating the effectivenessof the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct)) as of the end of the period covered by this report, has concluded thatthe Company’s disclosure controls and procedures are effective to providereasonable assurance 

 

15

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that information required tobe disclosed by the Company in the reports that it files or submits under theExchange Act is accumulated and communicated to the Company’s management,including the Company’s Chief Executive Officer/Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure and areeffective to provide reasonable assurance that such information is recorded,processed, summarized, and reported within the time periods specified in the SEC’srules and forms.

 

*Management’sAnnual Report on Internal Controls over Financial Reporting.*.  The Company’s management, including its ChiefExecutive Officer/Chief Financial Officer, is responsible for establishing andmaintaining adequate internal control of financial reporting (as defined inExchange Act Rules 13a-15(f) and 15d-15(f)) and designing suchinternal control to provide reasonable assurances regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.

 

Management conducted itsevaluation of the effectiveness of its internal control over financialreporting based on the framework in “Internal Control-Integrated Framework”issued by the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”) as of June 2009.  Based on thisassessment, the Company’s management, including its Chief ExecutiveOfficer/Chief Financial Officer, believes that as of June 30, 2009, the Company’sinternal control over financial reporting was effective based on the criteriaset forth by COSO in “Internal Control-Integrated Framework.”  However, because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within theCompany have been detected.

 

This annual report does notinclude an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this Form 10-K.

 

*Changes inInternal Control Over Financial Reporting. *There were no changes in the Company’s internal control over financialreporting that occurred during the Company’s most recent fiscal quarter thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

ITEM9B. OTHER INFORMATION.

 

None.

 

**PART III**

 

**ITEM 10.DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT, AND CORPORTATE GOVERNANCE.**

 

Information relating to thedirectors of Koss Corporation is incorporated herein by reference from the “ELECTIONOF DIRECTORS” sections on “Information As To Nominees,” “Board Committees,” “Independenceof the Board,” “Code of Ethics,” “Executive Officers,” and “BeneficialOwnership of Company Securities” contained in the Koss Corporation ProxyStatement for its 2009 Annual Meeting of Stockholders (the “2009 ProxyStatement”), which 2009 Proxy Statement will be filed within 120 days of theend of the fiscal year covered by this Report pursuant to General Instruction G(3) ofForm 10-K.

 

**ITEM 11.EXECUTIVE COMPENSATION.**

 

Information relating toexecutive compensation is incorporated herein by reference from the “ELECTIONOF DIRECTORS” section of the 2009 Proxy Statement.

 

16

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**ITEM12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

 

Information relating to thesecurity ownership of certain beneficial owners and management is incorporatedherein by reference from the “ELECTION OF DIRECTORS — Beneficial Ownership ofCompany Securities” section of the 2009 Proxy Statement.

 

**Equity Compensation Plan Information. **The table set forth belowprovides certain information with respect to the Company’s equity compensationplans as of the end of the most recently completed fiscal year ended June 30,2009, under which equity securities of the Company are authorized for issuance.

 

**Equity Compensation PlanInformation Table**

 
| **Plan category**                                          | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(a)**                                                                                                                                          | ** ** | **(b)**                                                                                                 | ** ** | **(c)**                                                                                                                                                                                                          | ** ** |
| **Equity compensation plans approved by security  holders**     |       | 431,654                                                                                                                                          |       | $                                                                                                       | 20.70      |                                                                                                                                                                                                             | 1,037,713  |   |
| **Equity compensation plans not approved by  security holders** |       | Not applicable                                                                                                                                   |       | Not applicable                                                                                          |       | Not applicable                                                                                                                                                                                                   |       |
| **Total**                                                       |       | 431,654                                                                                                                                          |       | $                                                                                                       | 20.70      |                                                                                                                                                                                                             | 1,037,713  |   |

 

**ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.**

 

Information relating torelated transactions is incorporated herein by reference from the “ELECTION OFDIRECTORS” sections of the 2009 Proxy Statements on “Independence of the Board”and “Related Transactions.”

 

**ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES.**

 

Information relating to theprincipal accountant fees and services is incorporated herein by reference fromthe “RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS” section of the2009 Proxy Statement.

 

17

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**PART IV**

 

**ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.**

 

The following documents arefiled as part of this report:

 

1.                                       FinancialStatements

 

Thefollowing consolidated financial statements of Koss Corporation are set forthon pages 20 to 25:

 
| Report  of Independent Registered Public Accounting Firm                                                  | 20 |
|-----------------------------------------------------------------------------------------------------------|----|
| Consolidated Statements of Income for the Years Ended  June 30, 2009 and 2008                        | 21 |
| Consolidated  Balance Sheets as of June 30, 2009 and 2008                                            | 22 |
| Consolidated Statements of Cash Flows for the Years  Ended June 30, 2009 and 2008                    | 23 |
| Consolidated Statements of Stockholders’ Investment  for the Years Ended June 30, 2009 and 2008 | 24 |
| Notes to Consolidated Financial Statements                                                                | 25 |

 

18

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2.                                       FinancialStatement Schedules

 

All schedules have beenomitted because the information is not applicable, is not material or becausethe information required is included in the financial statements or the notesthereto.

 

3.                                       Exhibits Filed

 

SeeExhibit Index attached hereto.

 

19

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors andStockholders

Koss Corporation

 

We have audited theaccompanying consolidated balance sheets of Koss Corporation (a DelawareCorporation) and subsidiaries as of June 30, 2009 and 2008, and therelated consolidated statements of income, stockholders’ investment, and cashflows for each of the two years in the period ended June 30, 2009.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Koss Corporation and subsidiariesas of June 30, 2009 and 2008, and the results of their operations andtheir cash flows for each of the two years in the period ended June 30,2009 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

GRANT THORNTON LLP

Milwaukee, Wisconsin

August 24, 2009

 

20

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KOSS CORPORATION

CONSOLIDATED STATEMENTS OFINCOME

 
| **Year Ended June 30,**       | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| Net sales                                    |       | $          | 38,184,150 |       | $          | 46,943,293 |   |
| Cost of goods sold                           |       | 24,917,013 |       | 29,151,791 |       |
| Gross profit                                 |       | 13,267,137 |       | 17,791,502 |       |
| Selling, general, and administrative expense |       | 10,653,243 |       | 10,792,064 |       |
| Income from operations                       |       | 2,613,894  |       | 6,999,438  |       |
| Other income (expense):                      |       |       |       |       |       |
| Royalty income                               |       | 258,333    |       | 291,667    |       |
| Interest income                              |       | 15,503     |       | 119,464    |       |
| Interest expense                             |       | —     |       | —     |       |
| Income before income tax provision           |       | 2,887,730  |       | 7,410,569  |       |
| Provision for income taxes                   |       | 911,062    |       | 2,916,280  |       |
| Net income                                   |       | $          | 1,976,668  |       | $          | 4,494,289 |   |
| Earnings per common share:                   |       |       |       |       |       |
| Basic                                        |       | $          | 0.54       |       | $          | 1.22 |   |
| Diluted                                      |       | $          | 0.54       |       | $          | 1.22 |   |
|                                         |       |       |       |       |       |
| Dividends per common share                   |       | $          | 0.52       |       | $          | 1.52 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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KOSS CORPORATION

CONSOLIDATED BALANCE SHEETS

 
| **As of June 30,**                                                                                                  | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ASSETS                                                                                                                             |       |       |       |       |       |
| Current Assets:                                                                                                                    |       |       |       |       |       |
| Cash                                                                                                                               |       | $          | 1,664,407  |       | $          | 3,322,873 |   |
| Accounts receivable, less allowances of $977,711  and $900,704, respectively                                                       |       | 8,679,606  |       | 10,148,646 |       |
| Inventories                                                                                                                        |       | 9,763,158  |       | 9,374,344  |       |
| Prepaid expenses                                                                                                                   |       | 179,549    |       | 504,806    |       |
| Deferred income taxes                                                                                                              |       | 720,121    |       | 783,995    |       |
| Total current assets                                                                                                               |       | 21,006,841 |       | 24,134,664 |       |
| Equipment and Leasehold Improvements, at cost:                                                                                     |       |       |       |       |       |
| Leasehold improvements                                                                                                             |       | 1,783,946  |       | 1,766,842  |       |
| Machinery, equipment, furniture, and fixtures                                                                                      |       | 2,650,158  |       | 2,488,657  |       |
| Tools, dies, molds, and patterns                                                                                                   |       | 11,371,402 |       | 9,605,720  |       |
|                                                                                                                               |       | 15,805,506 |       | 13,861,219 |       |
| Less—accumulated depreciation                                                                                                 |       | 11,729,308 |       | 11,114,852 |       |
|                                                                                                                               |       | 4,076,198  |       | 2,746,367  |       |
| Deferred Income Taxes                                                                                                              |       | 1,237,727  |       | 1,066,853  |       |
| Other Assets                                                                                                                       |       | 2,149,586  |       | 2,029,123  |       |
|                                                                                                                               |       | $          | 28,470,352 |       | $          | 29,977,007 |   |
|                                                                                                                               |       |       |       |       |       |
| LIABILITIES AND STOCKHOLDERS’ INVESTMENT                                                                                      |       |       |       |       |       |
| Current Liabilities:                                                                                                               |       |       |       |       |       |
| Accounts payable                                                                                                                   |       | $          | 1,810,466  |       | $          | 2,950,721 |   |
| Accrued liabilities                                                                                                                |       | 1,153,089  |       | 1,808,467  |       |
| Dividends payable                                                                                                                  |       | 479,876    |       | 480,395    |       |
| Income taxes payable                                                                                                               |       | 175,568    |       | 347,507    |       |
| Total current liabilities                                                                                                          |       | 3,618,999  |       | 5,587,090  |       |
| Deferred Compensation                                                                                                              |       | 1,095,961  |       | 1,047,482  |       |
| Derivative Liability                                                                                                               |       | 125,000    |       | 125,000    |       |
| Stockholders’ Investment:                                                                                                     |       |       |       |       |       |
| Common stock, $0.005 par value, authorized  8,500,000 shares; issued and outstanding 3,691,353 and 3,695,351 shares,  respectively |       | 2,049,384  |       | 1,649,408  |       |
| Retained earnings                                                                                                                  |       | 21,581,008 |       | 21,568,027 |       |
| Total Stockholders’ Investment                                                                                                |       | 23,630,392 |       | 23,217,435 |       |
|                                                                                                                               |       | $          | 28,470,352 |       | $          | 29,977,007 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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KOSS CORPORATION

CONSOLIDATED STATEMENTS OFCASH FLOWS

 
| **Year Ended June 30,**                                             | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                               |       |       |       |       |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |       |       |       |       |
| Net income                                                                         |       | $          | 1,976,668  |       | $          | 4,494,289 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |       |       |       |       |
| Change in allowance for doubtful accounts                                          |       | 77,007     |       | (58,164    | )          |
| (Gain) loss on disposal                                                            |       | —     |       | (149,775   | )          |
| Depreciation and amortization                                                      |       | 817,957    |       | 961,605    |       |
| Stock compensation expense                                                         |       | 399,996    |       | 545,052    |       |
| Deferred income taxes                                                              |       | (107,000   | )          | (302,121   | )          |
| Cash surrender value                                                               |       | (195,463   | )          | (193,533   | )          |
| Deferred compensation                                                              |       | 48,479     |       | 58,329     |       |
| Net changes in operating assets and liabilities  (see note 8)                      |       | (639,018   | )          | (18,553    | )          |
| Net cash provided by operating activities                                          |       | 2,378,626  |       | 5,337,129  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |       |       |       |       |
| Sale of investments                                                                |       | 75,000     |       | 25,000     |       |
| Proceeds from sale of certain Bi-Audio assets                                      |       | —     |       | 700,000    |       |
| Acquisition of equipment and leasehold  improvements                               |       | (2,147,866 | )          | (1,179,344 | )          |
| Net cash used in investing activities                                              |       | (2,072,866 | )          | (454,344   | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |       |       |       |       |
| Tax benefit of non-qualified stock options                                         |       | —     |       | (286,200   | )          |
| Dividends paid to stockholders                                                     |       | (1,920,586 | )          | (5,591,850 | )          |
| Purchase of common stock                                                           |       | (43,640    | )          | (1,283,413 | )          |
| Exercise of stock options                                                          |       | —     |       | 1,413,869  |       |
| Net cash used in financing activities                                              |       | (1,964,226 | )          | (5,747,594 | )          |
| Net decrease in cash                                                               |       | (1,658,466 | )          | (864,809   | )          |
| Cash at beginning of period                                                        |       | 3,322,873  |       | 4,187,682  |       |
| Cash at end of period                                                              |       | $          | 1,664,407  |       | $          | 3,322,873 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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KOSS CORPORATION

CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ INVESTMENT

 
| ** **                                 | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | ** **   | ** ** |
|--------------------------------------------|------------|-----------------------|------------|--------------|------------|--------------|------------|
| ** **                                 | ** ** | **Shares**            | ** ** | **Amount**   | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| Balance,  June 30, 2007               |       | 3,665,069             |       | 1,104,200    |       | 22,825,424   |       | $ | 23,929,624 |   |
| Net  income                                |       | —                |       | —       |       | 4,494,289    |       | 4,494,289 |   |
| Dividends  declared                        |       | —                |       | —       |       | (5,595,786   | )          | (5,595,786 | ) |
| Stock  compensation expense                |       | —                |       | 545,052      |       | —       |       | 545,052 |   |
| Tax  impact of stock options               |       | —                |       | —       |       | (286,356     | )          | (286,356 | ) |
| Exercise  of stock options                 |       | 94,008                |       | 470          |       | 1,413,869    |       | 1,414,339 |   |
| Purchase  and retirement of treasury stock |       | (63,726               | )          | (314         | )          | (1,283,413   | )          | (1,283,727 | ) |
| Balance,  June 30, 2008               |       | 3,695,351             |       | 1,649,408    |       | 21,568,027   |       | 23,217,435 |   |
| Net  income                                |       | —                |       | —       |       | 1,976,668    |       | 1,976,668 |   |
| Dividends  declared                        |       | —                |       | —       |       | (1,920,067   | )          | (1,920,067 | ) |
| Stock  compensation expense                |       | —                |       | 399,996      |       | —       |       | 399,996 |   |
| Tax  impact of stock options               |       | —                |       | —       |       | —       |       | — |   |
| Exercise  of stock options                 |       | —                |       | —       |       | —       |       | — |   |
| Purchase  and retirement of treasury stock |       | (3,998                | )          | (20          | )          | (43,620      | )          | (43,640 | ) |
| Balance,  June 30, 2009               |       | 3,691,353             |       | $            | 2,049,384  |         | $          | 21,581,008 |   | $ | 23,630,392 |   |
|                                            |            |                       |            |              |            |              |            |  |  |  |  |  |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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KOSS CORPORATION

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

1.                                       ACCOUNTINGPOLICIES

 

NATURE OF BUSINESS—KossCorporation, a Delaware corporation (the “Company”) reports its finances as asingle reporting segment, as the Company’s principal business line is thedesign, manufacture, and sale of stereo headphones and relatedaccessories.  The percentage of totalrevenues related to this central business line over the past three fiscal****years was 100% for each year.  The Company leases its main plant and officesin Milwaukee, Wisconsin.  In addition,the Company has more than 300 domestic dealers and its products are carried byapproximately 20,000 retailers and distributors worldwide.  International markets are served by domesticsales representatives and a sales office in Switzerland which utilizesindependent distributors in several foreign countries.  The Company has two subsidiaries:  Bi-Audio and Koss Classics.

 

CONCENTRATION OF CREDITRISK—The Company operates in the audio/video industry segment of the homeentertainment industry through its design, manufacture, and sale of stereoheadphones and related accessory products. The Company’s products are sold through audio specialty stores, theInternet, direct mail catalogs, regional department store chains, militaryexchanges, and national retailers under the “Koss” name and dual label.  The Company grants credit to its domestic andinternational customers based on the extension of credit from 30 to 90 days,depending on the customer.  Collection isdependent on the retailing industry economy. International customers outside of Canada are sold on a cash againstdocuments or letter of credit basis. Approximately 30% and 31% of the Company’s accounts receivable at June 30,2009 and 2008, respectively, were foreign receivables.

 

BASIS OF CONSOLIDATION—Theconsolidated financial statements include the accounts of the Company and itssubsidiaries, Bi-Audio and Koss Classics, both of which are wholly-ownedsubsidiaries.  All significant intercompanyaccounts and transactions have been eliminated.

 

REVENUE RECOGNITION—Revenueis recognized by the Company when all of the following criteria are met:  persuasive evidence of an arrangement exists;delivery has occurred (either FOB shipping point or delivery taken at theCompany’s dock); the seller’s price to the buyer is fixed and determinable(pricing is finalized through the purchase order); and collectibility isreasonably assured.  These criteria aregenerally satisfied upon shipment of the Company’s products.  The Company may periodically offer slottingfees, cooperative advertising programs and sales discounts and the estimatedcosts for these items are accrued for at the time revenue is recognized.  These amounts are recorded as a reduction tosales.

 

ROYALTY INCOME—The Companyrecognizes royalty income when earned under the terms of its licenseagreements, which generally require minimum quarterly royalty payments.  Royalty income owed to the Company iscalculated by the licensee and then verified by the Company.  Royalty payments are calculated based uponpredetermined percentages of net sales of the licensed products or based uponminimum quarterly royalty payments, as set forth in the Company’s licenseagreements.  Royalty income is bookedmonthly, on an accrual basis, and the amount that the Company accrues is themonthly equivalent of the minimum royalty payment.  When the royalty payments are received eachquarter, the Company then reduces the accounts receivable accordingly.  In fiscal year 2009, the Company had onelicense agreement that terminated in the fourth quarter.  As of June 30, 2009, the Company has nolicense agreements in effect.

 

CASH AND CASH EQUIVALENTS—The Companyconsiders all unrestricted highly liquid investments immediately available tobe cash equivalents. Cash equivalents primarily consist of time deposits withbanks and brokerage money market accounts.

 

CONCENTRATION OF CREDIT RISKS AND OTHER RISKS ANDUNCERTAINTIES—Financial instruments that could potentially subjectthe Company to concentrations of credit risk consist principally of cash andcash equivalents. At June 30, 2009 and 2008, the Company had $1,241,758and $2,947,614 on deposit at a financial institution in excess of amountsinsured by the Federal Deposit Insurance Corporation. The Company performsperiodic evaluation of his institution for relative credit standing. TheCompany has not experienced any 

 

25

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lossesin such accounts and management believes it is not exposed to any significantrisk of loss on these balances.

 

RECEIVABLES—Receivablesconsist of trade receivables due from customers.  The Company evaluates collectibility ofreceivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past duereceivable balances based on a review of the past due item, general economicconditions and the industry as a whole. Changes in the allowance for doubtful accounts are as follows:

 
| **Year Ended  June 30,** | ** ** | **Balance,  Beginning********of Year** | ** ** | **Provision Charged  to Expense** | ** ** | **Accounts  Written off*** | ** ** | **Balance at  End Year** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| 2009                               |       | $                                           | 900,704    |                                   | $          | (116,637                        | )          | $                                  | 39,630     |   | $ | 977,711 |   |
| 2008                               |       | 958,868                                     |       | —                                 |       | 58,164                          |       | 900,704                            |       |
|                                    |            |                                             |            |                                        |            |                                 |            |                                    |            |  |  |  |  |

 

----

*Represents charges againstthe allowance, net of recoveries.

 

INVENTORIES—As of June 30,2009, approximately 99% of the Company’s inventory was valued at the lower oflast-in, first-out (LIFO) cost or market. If the first-in, first-out (FIFO) method of inventory accounting hadbeen used by the Company for inventories valued at LIFO, inventories would havebeen $785,378 and $1,218,866 higher than reported at June 30, 2009 and2008, respectively.  The Company did notmaintain any work-in-process inventories at June 30, 2009 and June 30,2008.

 

The components ofinventories at June 30 are as follows:

 
| ** **     | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|----------------|------------|-----------|------------|-----------|------------|
| Raw materials  |       | $         | 3,592,418  |      | $          | 3,722,062 |   |
| Finished goods |       | 6,170,740 |       | 5,652,282 |       |
| Total          |       | $         | 9,763,158  |      | $          | 9,374,344 |   |

 

DISTRIBUTION NETWORK—TheCompany includes inbound freight charges, purchasing and receiving costs,inspection costs, warehousing costs, internal transfer costs, and other costsof distribution in the “cost of goods sold” line item.

 

EQUIPMENT AND LEASEHOLDIMPROVEMENTS—Depreciation is provided on a straight-line basis over theestimated 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 ANDDEVELOPMENT—Research and development expenditures charged to operationsamounted to approximately $1,948,000, in 2009 and $981,000 in 2008.

 

SHIPPING AND HANDLING FEESAND COSTS—Shipping and handling fees charged to customers are included in netsales, and shipping and handling costs incurred by the Company are included incost of goods sold within the accompanying consolidated statements of income.

 

ADVERTISINGCOSTS—Advertising costs included within selling, general, and administrativeexpenses in the accompanying consolidated statements of income were $195,000 in2009 and $228,000 in 2008.  Such costsare expensed as incurred.

 

26

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INVESTMENTS—Included in “Other Assets” of $2,149,586 in 2009 and$2,029,123 in 2008, is approximately $25,000 of Israel government bondswith  a maturity date of  July 2009.  Securities are classified as held-to-maturitywhen the Company has the positive intent and ability to hold the securities tomaturity.  Held-to-maturity securitiesare stated at cost, adjusted for amortization of premiums and discounts tomaturity.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS—Cash, accounts receivable, andaccounts payable recorded in the consolidated balance sheets approximate fairvalue based on the short maturity of these instruments.

 

USE OF ESTIMATES—The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

STOCK-BASED COMPENSATION—The Company has a stock-based employeecompensation plan, which is described more fully in Note 4.  The Company accounts for stock-based compensationin accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R),“Share Based Payments.”  Under the fairvalue recognition provisions of this statement, share-based compensation costis measured at the grant date based on the fair value of the award and isrecognized as expense over the vesting period. Determining the fair value of share-based awards at the grant daterequires judgment, including estimating future volatility of the Company’sstock, the amount of share-based awards that are expected to be forfeited andthe expected term of awards granted.  TheCompany estimates the fair value of stock options granted using theBlack-Scholes option valuation model. The fair value of all awards is amortized on a straight-line basis overthe vesting periods.  The expected termof awards granted represent the period of time they are expected to beoutstanding.  The Company determines theexpected term based on historical experience with similar awards, givingconsideration to the contractual terms and vesting schedules.  The Company estimates the expected volatilityof its common stock at the date of grant based on the historical volatility ofits common stock.  The volatility factorused in the Black-Scholes option valuation model is based on the Company’shistorical stock prices over the most recent period commensurate with theestimated expected term of the awards. The risk-free interest rate used in the Black-Scholes option valuationmodel is based on the implied yield currently available on U.S. Treasuryzero-coupon issues with a remaining term commensurate with the expected term ofthe awards.  Pre-vesting optionforfeitures are estimated using historical actual forfeitures.  Stock-based compensation is recorded only forthose options expected to vest.  Ifactual results differ significantly from these estimates, stock-basedcompensation expense and the Company’s results of operations could bematerially impacted.

 

NEW ACCOUNTING PRONOUNCEMENTS—Effective July 1, 2008, the Company implemented SFAS No. 157, “FairValue Measurements” (“SFAS 157”) related to its financial assets andliabilities, which defines fair value, establishes a framework for itsmeasurement, and expands disclosures about fair value measurements. Theadoption of SFAS 157 did not have an impact on the measurement of theCompany’s financial assets and liabilities, nor did it result in additionaldisclosures.

 

In February 2008,the FASB issued FASB Staff Position No. 157-2 (“FSP 157-2”), which delayedthe effective date by which companies must adopt certain provisions ofStatement of Financial Accounting Standards No. 157, Fair ValueMeasurements (“SFAS 157”). FSP 157-2 defers the effective date ofSFAS 157 for all nonfinancial assets and nonfinancial liabilities, exceptfor items that are recognized or disclosed at fair value in the financialstatements on a recurring basis, to fiscal years beginning after November 15,2008, and interim periods within those fiscal years. The adoption of thisstandard is not anticipated to have a material impact on our financialposition, results of operations, or cash flows.

 

In May 2009, the FASB issued Statement 165, SubsequentEvents, to incorporate the accounting and disclosure requirements forsubsequent events into U.S. generally accepted accounting principles. Statement165 introduces new terminology, defines a date through which management mustevaluate subsequent events, and lists the circumstances under which an entitymust recognize and disclose events or transactions occurring after the balancesheet date. We adopted Statement 165 as of June 30, 2009. We evaluated ourJune 30, 2009 financial statements for subsequent events through August 4,2009, the date the financial statements were available to be issued. We are notaware of any subsequent events which would require recognition or disclosure inthe financial statements.

 

In June 2009,FASB issued, “Accounting Standards Update No. 2009-1, Topic 105 —GenerallyAccepted Accounting Principles amendments based on the Statement of FinancialStandards No. 168 — the FASB Accounting Standard Codifications and theHierarchy of Generally Accepted Accounting Principles and Statement ofFinancial Accounting Standard No. 168, the FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles, areplacement of FASB Statement No. 62.” The Accounting Standards Update andSFAS No. 168 make the FASB Codification the authoritative source of GAAP.The FASB Codification is effective for interim and annual reporting periodsending after September 15, 2009. We will update GAAP referencing for our September 30,2009 Form 10-Q.  The FASBCodification is not expected to have a material impact on our financialreporting.

 

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RECLASSIFICATIONS—Certain amounts in the prior year financialstatements have been reclassified to conform to current year presentation.

 

2.                                       EARNINGS PERCOMMON AND COMMON EQUIVALENT SHARE

 

Basic earnings per share are computed based on the weighted averagenumber of common shares outstanding.  Theweighted-average number of common shares outstanding for the fiscal years endedJune 30, 2009 and 2008, were 3,692,981 and 3,684,256, respectively.  When dilutive, stock options are included inearnings per share as share equivalents using the treasury stock method. Forthe fiscal year ended June 30, 2009 there were no common stock equivalentsrelated to stock option grants were included in the computation of theweighted-average number of shares outstanding for diluted earnings pershare.  Common stock equivalents of11,213, related to stock option grants were included in the computation of theweighted-average number of shares outstanding for diluted earnings per sharefor the fiscal year ended June 30, 2008.

 

3.                                       CREDIT FACILITY

 

On February 16, 2009, the Company entered into a new creditfacility for an unsecured line of credit for up to a maximum of $10,000,000 upto and including January 29, 2010. This credit facility replaces the Company’s previous credit facility,which has been terminated and contained substantially the same terms as theCompany’s new credit facility.  TheCompany can use the new credit facility for working capital, to refinanceexisting indebtedness, for stock repurchase and for general corporatepurposes.  Borrowings under this creditfacility bear interest at either the bank’s most recently publicly announcedprime rate or at a LIBOR-based rate determined in accordance with the loanagreement. This credit facility includes financial covenants that require theCompany to maintain a minimum tangible net worth, liabilities to tangible networth ratios and interest coverage ratios. The Company uses its credit facility from time to time, although therewas no utilization of this credit facility at June 30, 2009 or 2008.

 

4.                                       STOCK OPTIONSAND STOCK PURCHASE AGREEMENTS

 

In 1990, pursuant to the recommendation of the Board of Directors, thestockholders ratified the creation of the Company’s 1990 Flexible IncentivePlan (the “1990 Plan”).  The 1990 Plan isadministered by a committee of the Board of Directors and provides for grantingof 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 firstyear of the Plan’s existence.  Each yearthereafter additional shares equal to 0.25% of the shares outstanding as of thefirst day of the applicable fiscal year were reserved for issuance pursuant tothe 1990 Plan.  On July 22, 1992,the Board of Directors authorized the reservation of an additional 250,000shares for the 1990 Plan, which was approved by the stockholders.  In 1993, the Board of Directors authorizedthe reservation of an additional 300,000 shares for the 1990 Plan, which wasapproved by the stockholders.  In 1997,the Board of Directors authorized the reservation of an additional 300,000shares for the 1990 Plan, which was approved by the stockholders.  In 2001, the Board of Directors authorizedthe reservation of an additional 300,000 shares for the 1990 Plan, which wasalso approved by the stockholders.  As ofJuly 31, 2009, there are 988,475 options available for future grants.  Options vest over a four or five year periodfrom the date of grant, with a maximum term of five to ten years.

 

During December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Shared-BasedPayments” (“SFAS No. 123(R)”), which changed the accounting for equitycompensation programs. Under SFAS No. 123R, companies that awardshare-based payments to employees, including stock options, must recognize theexpense of these awards in the financial statements at the time the employeesreceive the awards. As allowed by SFAS No. 123(R) and SFAS 148, theCompany elected to follow APB Opinion No. 25 (“APB 25”) in accounting forits stock option plan until the effective date of SFAS No. 123(R). Theaccounting as provided by SFAS No. 123(R) was effective for the 

 

28

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Company beginning July 1, 2005. The adoption of SFAS No. 123(R)’sfair value method had an impact on the Company’s results of operations,although it did not have an impact on the overall financial position. Theimpact on cash flows from operations was not material.

 

The fair value of each stock option grant was estimated as of the dateof grant using the Black-Scholes pricing model. The resulting compensation cost for fixed awards with graded vestingschedules is amortized on a straight-line basis over the vesting period for theentire award.  The expected term ofawards granted is determined based on historical experience with similarawards, giving consideration to the expected term and vesting schedules.  The expected volatility is determined basedon the Company’s historical stock prices over the most recent periodcommensurate with the expected term of the award.  The risk-free interest rate is based on U.S.Treasury zero-coupon issues with a remaining term commensurate with theexpected term of the award.  Expectedpre-vesting option forfeitures are based on historical data.

 

As of June 30, 2009, there was approximately $718,143 of totalunrecognized compensation cost related to stock options granted under theplan.  This cost is expected to berecognized over a weighted average period of 1.68 years.  Total unrecognized compensation cost will beadjusted for any future changes in estimated and actual forfeitures.

 

There was no cash received from stock option exercises during 2009.Cash received from stock option exercises was approximately $1,414,000 during2008. There were no income tax benefits from stock option exercised in 2009.The income tax benefits from stock option exercises was approximately($287,000) during 2008.

 

The fair value of each option granted is estimated on the date of grantusing the Black-Scholes option-pricing model with the followingweighted-average assumptions:

 
| ** **                       | ** ** | **2008**  | ** ** |
|----------------------------------|------------|-----------|------------|
| Expected stock  price volatility |       | 35.00     | %          |
| Risk free interest  rate         |       | 2.90      | %          |
| Expected  dividend yield         |       | 2.27      | %          |
| Expected  forfeitures            |       | 1.50      | %          |
| Expected life of  options        |       | 4.7 years |       |

 

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 June 30, 2007 |       | 585,662            |       | $                                 | 5.38-$28.80  |                    | $          | 21.08 |   |
| Granted                                    |       | 110,000            |       |                              | 15.51-$17.06 |                    | $          | 16.78 |   |
| Forfeited                                  |       | (40,000            | )          |                              | 17.32        |                    | $          | 17.32 |   |
| Exercised                                  |       | (94,008            | )          |                              | 5.38-$17.38  |                    | $          | 15.04 |   |
| Shares under  option at June 30, 2008 |       | 561,654            |       |                              | 15.51-$28.80 |                    | $          | 21.49 |   |
| Granted                                    |       | —             |       |                              | —       |                    | $          | — |   |
| Forfeited                                  |       | (130,000           | )          |                              | 24.11        |                    | $          | 24.11 |   |
| Exercised                                  |       | —             |       |                              | —       |                    | $          | — |   |
| Shares under  option at June 30, 2009 |       | 431,654            |       | $                                 | 15.51-$28.80 |                    | $          | 20.70 |   |

 

29

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The range of options as of June 30, 2009 is as follows:

 
| **Range of  Exercise Prices** | ** ** | **Number of Options  Outstanding/Exercisable** | ** ** | **Weighted Average Exercise  Price Outstanding/Exercisable** | ** ** | **Weighted Average  Remaining  Contractual Life (In Years)** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| $15.51 - $19.47                         |       | 219,654 / 107,404                                        |       | $17.37 - $17.46                                                             |       | 4.3                                                                              |       |
| $21.42 - $22.01                         |       | 132,000 / 102,000                                        |       | $21.74 - $21.84                                                             |       | 4.0                                                                              |       |
| $26.18 - $28.80                         |       | 80,000 / 57,000                                          |       | $28.15 - $28.25                                                             |       | 3.2                                                                              |       |
|                                    |       | 431,654 / 266,404                                        |       | $20.70 - $21.44                                                             |       |                                                                             |       |

 

No options were granted in fiscal year ended June 30, 2009. Totaloptions of 110,000 were granted at a price greater than the market value on thedate of grant, and had a weighted-average exercise price of $16.78 in 2008.

 

The Company has an agreement with its Chairman, John C. Koss, in theevent of his death, at the request of the executor of his estate, to repurchasehis Company common stock from his estate. The Company does not have the right to require the estate to sell stockto the Company.  As such, thisarrangement is accounted for as a written put option with the fair value of theput option recorded as a derivative liability.

 

The fair value of the written put option at June 30, 2009 and 2008was $125,000.  The repurchase price is95% of the fair market value of the common stock on the date that notice torepurchase is provided to the Company. The total number of shares to be repurchased will be sufficient toprovide proceeds which are the lesser of $2,500,000 or the amount of estatetaxes and administrative expenses incurred by the Chairman’s estate.  The Company may elect to pay the purchaseprice in cash or may elect to pay cash equal to 25% of the total amount due andto execute a promissory note for the balance, payable over four years, at theprime rate of interest.  The Companymaintains a $1,150,000 life insurance policy to fund a substantial portion ofthis obligation.

 

In April of 1995, the Board of Directors approved a stockrepurchase 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 Directorsperiodically has approved increases in the stock repurchase program.  As of June 30, 2009, the most recentlyapproved increase was for additional purchases of $2,000,000, which occurred inOctober of 2006, for an aggregate maximum of $45,500,000, of which$43,374,113 had been expended through June 30, 2009. The Companyrepurchased 3,998 shares for $43,620 in 2009 and 63,723 shares for $1,283,413in 2008.

 

5.                                       INCOME TAXES

 

The Company utilizes the liability method of accounting for incometaxes.  The liability method measures theexpected income tax impact of future taxable income and deductions implicit inthe consolidated balance sheets.  Theprovision for income taxes in 2009 and 2008 consists of the following:

 
| **Year Ended June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Current:                               |       |     |       |     |       |
| Federal                                |       | $        | 1,094,000  |     | $          | 2,884,452 |   |
| State                                  |       | (76,000  | )          | 333,949  |       |
| Deferred                               |       | (107,000 | )          | (302,121 | )          |
|                                   |       | $        | 911,062    |     | $          | 2,916,280 |   |

 

30

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The 2009 and 2008 tax provision results in an effective rate differentthan the federal statutory rate due to the following:

 
| **Year Ended June 30,**                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Federal income  tax at statutory rate                     |       | $        | 981,828    |     | $          | 2,572,070 |   |
| State income  taxes, net of federal tax (expense) benefit |       | (150,251 | )          | 319,913  |       |
| Other                                                     |       | 79,485   |       | 24,297   |       |
| Total provision  for income taxes                         |       | $        | 911,062    |     | $          | 2,916,280 |   |

 

Temporary differences which give rise todeferred income tax assets and liabilities at June 30, include:

 
| ** **                           | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|
| Deferred Income Tax Assets:          |       |      |       |      |       |
| Deferred compensation                |       | $         | 405,000    |      | $          | 388,000 |   |
| Accrued expenses and reserves        |       | 373,000   |       | 386,000   |       |
| SFAS No. 123(R) expense    |       | 751,000   |       | 603,000   |       |
| Package design and trademarks        |       | 102,000   |       | 123,000   |       |
| Other                                |       | 374,000   |       | 488,000   |       |
|                                 |       | 2,005,000 |       | 1,988,000 |       |
| Deferred Income Tax Liabilities:     |       |      |       |      |       |
| Equipment and leasehold improvements |       | (21,000   | )          | (111,000  | )          |
| Other                                |       | (26,000   | )          | (26,000   | )          |
| Net deferred income tax asset        |       | $         | 1,958,000  |      | $          | 1,851,000 |   |

 

Deferred tax assets as presented on the consolidated balance sheets:

 
| ** **                    | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|-------------------------------|------------|-----------|------------|-----------|------------|
| Current deferred tax assets   |       | $         | 720,000    |      | $          | 784,000 |   |
| Long-term deferred tax assets |       | 1,238,000 |       | 1,067,000 |       |
| Net deferred tax assets       |       | $         | 1,958,000  |      | $          | 1,851,000 |   |

 

Deferred income tax balances reflect the effects of temporarydifferences between the tax bases of assets and liabilities and their carryingamounts.  These differences are stated atenacted tax rates expected to be in effect when taxes are actually paid orrecovered.  The recognition of thesedeferred tax balances will be realized through normal recurring operations andas such the Company has recorded the full value of such expected benefits.

 

Effective July 1, 2007, theCompany adopted FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes (FIN 48), which clarifies the accounting for uncertainty in incometaxes recognized in the financial statements in accordance with FASB Statement109, Accounting for Income Taxes. This interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken, or expected to be taken, in a tax return.There were no significant matters determined to be unrecognized tax benefitstaken or expected to be taken in a tax return that have been recorded on theCompany’s financial statements for the year ended  June 30, 2009.

 

Additionally, FIN 48 provides guidanceon the recognition of interest and penalties related to income taxes. Therewere no interest or penalties related to income taxes that have been accrued orrecognized as of and for the years ended June 30, 2009 and 2008.

 

A reconciliation of the beginning and ending amount ofunrecognized tax benefits is as follows:

 
| Unrecognized tax benefits,  June 30, 2008       |   | $        | 267,440 |   |
|------------------------------------------------------|--------|----------|---------|--------|
| Gross  decreases — tax positions in prior years |   | (201,440 | )       |
| Unrecognized  tax benefits, June 30, 2009       |   | $        | 66,000  |   |

 

The Company files income tax returns inthe United States federal jurisdiction and in a state jurisdiction. The Company’sfederal tax returns through tax year June 30, 2005 are settled, and theincome tax returns for tax years beginning June 30, 2006 are open.

 

31

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6.                                       ACCRUEDLIABILITIES

 

Accrued liabilities at June 30 consist of the following:

 
| ** **                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Employee  compensation                            |       | $        | 46,011     |     | $          | 308,118 |   |
| Cooperative  advertising and promotion allowances |       | 701,063  |       | 740,064  |       |
| Payroll taxes  and other employee benefits        |       | 203,712  |       | 175,281  |       |
| Other                                             |       | 202,303  |       | 585,004  |       |
|                                              |       | $        | 1,153,089  |     | $          | 1,808,467 |   |

 

7.             ADDITIONAL CASHFLOW INFORMATION

 

The net changes in cash as a result of changes in operating assets andliabilities consist of the following:

 
| ** **           | ** ** | **2009**   | ** ** | **2008**  | ** ** |
|----------------------|------------|------------|------------|-----------|------------|
| Accounts  receivable |       | $          | 1,392,033  |      | $          | (2,151,569 | ) |
| Inventories          |       | (388,814   | )          | 489,200   |       |
| Prepaid expenses     |       | 325,257    |       | (100,823  | )          |
| Income taxes         |       | (171,939   | )          | 638,758   |       |
| Accounts payable     |       | (1,140,255 | )          | 1,579,569 |       |
| Accrued  liabilities |       | (655,300   | )          | (473,688  | )          |
| Net change           |       | $          | (639,018   | )         | $          | (18,533 | ) |

 
| ** **                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Net cash paid  during the year for: |       |     |       |     |       |
| Interest                            |       | $        | —     |     | $          | — |   |
| Income taxes                        |       | $        | 1,190,000  |     | $          | 2,215,285 |   |

 

8.                                       EMPLOYEEBENEFIT PLANS

 

Substantially all domestic employees are participants in the Company’sEmployee Stock Ownership Plan and Trust under which an annual contribution ineither cash or common stock may be made at the discretion of the Board ofDirectors.  The expense recorded for suchcontributions approximated $30,000 in 2009 and $100,000 in 2008.

 

32

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The Company maintains aretirement savings plan under Section 401(k) of the Internal RevenueCode.  This plan covers all employees ofthe Company who have completed one full fiscal quarter of service.  Matching contributions can be made at the discretionof the Board of Directors.  For calendaryears 2009 and 2008, the matching contribution was 100% of employeecontributions to the plan, not to exceed 10% of the employee’s annualcompensation.  Vesting of Companycontributions occurs immediately. Company contributions were approximately $312,822 and $374,000 during2009 and 2008.

 

9.                                       DEFERREDCOMPENSATION

 

TheCompany has deferred compensation agreements with a former and current officer.

 

The Board of Directors hasentered into an agreement to continue the Chairman’s current base salary forthe remainder of his life.  Thesepayments begin upon the Chairman’s retirement, and since the Chairman has notretired, he is not currently receiving any of these payments under thisarrangement.  The Company has a deferredcompensation liability of $400,000 recorded as of June 30, 2009 and 2008.

 

The Board of Directors hasapproved a supplemental retirement plan with an officer that calls for annualcash compensation following retirement from the Company in an amount equal to2% of base salary multiplied by the number of years of service to theCompany.  The retirement payments are tobe paid monthly to the officer until his death and then to his surviving spousemonthly until her death.  The Company hasa deferred compensation liability of $695,961 and $647,482 recorded as of June 30,2009 and 2008, respectively.

 

10.                                 INDUSTRYSEGMENT INFORMATION, FOREIGN SALES AND SIGNIFICANT CUSTOMERS

 

The Company has one line ofbusiness—the design, manufacture, and sale of stereophones and relatedaccessories.

 

The Company’s export salesamounted to $17,832,258 during 2009 and $19,142,563 during 2008.

 

Sales during 2009 and 2008to the Company’s five largest customers represented approximately 51% and 46%of the Company’s total sales, respectively. Included in these percentages, sales to a single customer representedapproximately 21%, and 17%, of the Company’s total sales during 2009 and 2008,respectively.  These customers generallyare large, national retailers.

 

11.           COMMITMENTS AND CONTINGENCIES

 

The Company leases its mainplant and offices in Milwaukee, Wisconsin from its Chairman.  On August 15, 2007, the lease wasrenewed for a period of five years, and is being accounted for as an operatinglease.  The lease extension maintainedthe rent at a fixed rate of $380,000 per year. At anytime during this period the Company has the option to renew thelease for an additional five years for the period commencing July 1, 2013and ending June 30, 2018 under the same terms and conditions.  The Company is responsible for all propertymaintenance, insurance, taxes, and other normal expenses related toownership.  Total rent expense, whichincludes this lease, approximated $416,000 in 2009 and $416,000 in 2008.

 

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This Annual Report on Form 10-Kcontains forward-looking statements within the meaning of that term in thePrivate Securities Litigation Reform Act of 1995 (the “Act”) (Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934).  Additional written or oralforward-looking statements may be made by the Company from time to time infilings with the Securities Exchange Commission, press releases, or otherwise.  Statements contained in this Form 10-Kthat are not historical facts are forward-looking statements made pursuant tothe 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, statementsregarding future operations, 

 

33

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anticipated financing needs,compliance with financial covenants in loan agreements, plans for acquisitionsor sales of assets or businesses, plans relating to products or services of theCompany, assessments of materiality, predictions of future events, the effectsof pending and possible litigation, and assumptions relating to theforegoing.  In addition, when used in thisForm 10-K, the words “anticipates,” “believes,” or “estimates,” “expects,”“intends,” “plans” and variations thereof and similar expressions are intendedto identify forward-looking statements.

 

Forward-looking statementsare inherently subject to risks and uncertainties, some of which cannot bepredicted or quantified based on current expectations.  Consequently, future events and actualresults could differ materially from those set forth in, contemplated by, orunderlying the forward-looking statements contained in this Form 10-K, orin 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, butare 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 rateand consumer acceptance of new product introductions, competition, pricing, thenumber and nature of customers and their product orders, production by thirdparty vendors, foreign manufacturing, sourcing, and sales (including foreigngovernment regulation, trade, and importation concerns), borrowing costs,changes in tax rates, pending or threatened litigation and investigations, andother risk factors which may be detailed from time to time in the Company’sSecurities and Exchange Commission filings.

 

Readers are cautioned not toplace undue reliance on any forward-looking statements contained herein, whichspeak only as of the date hereof.  TheCompany undertakes no obligation to publicly release the result of anyrevisions to these forward-looking statements that may be made to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunexpected events.

 

34

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SIGNATURES

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| KOSS CORPORATION |                          |   |
|------------------|-------------------------------|--------|
|             |                          |   |   |
| By:              | /s/ Michael J. Koss           |   | Dated: August 24,  2009 |
|             | Michael J. Koss               |   |   |
|             | Vice Chairman                 |   |   |
|             | President                     |   |   |
|             | Chief Executive Officer       |   |   |
|             | Chief Operating Officer  and  |   |   |
|             | Chief Financial Officer       |   |   |
|             |                          |   |   |
| By:              | /s/ Sujata Sachdeva           |   | Dated: August 24,  2009 |
|             | Sujata Sachdeva               |   |   |
|             | Vice President - Finance      |   |   |
|             | Principal Accounting  Officer |   |   |
|             | Secretary                     |   |   |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the Registrant and in the capacitiesindicated on August 24, 2009.

 

 
| /s/ John C. Koss              |   | /s/ Michael J. Koss           |
|-------------------------------|--------|-------------------------------|
| John C. Koss, Director        |   | Michael J. Koss, Director     |
|                          |   |                          |
|                          |   |                          |
| /s/ Lawrence S. Mattson       |   | /s/ John J. Stollenwerk       |
| Lawrence S. Mattson, Director |   | John J. Stollenwerk, Director |
|                          |   |                          |
|                          |   |                          |
| /s/ Thomas L. Doerr           |   | /s/ Theodore H. Nixon         |
| Thomas L. Doerr, Director     |   | Theodore H. Nixon, Director   |

 

The signatures of the abovedirectors constitute a majority of the Board of Directors of Koss Corporation.

 

35

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| **OFFICERS  AND SENIOR MANAGEMENT** | ** ** | ** ** | **DIRECTORS**                                                                                                                                      |
|-------------------------------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |       |       |                                                                                                                                               |
| 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             |       |       | Michael J. Koss                                                                                                                                    |
|                                |       |       | Vice Chairman,  President                                                                                                                          |
| John C. Koss, Jr.                   |       |       | C.E.O., C.O.O., C.F.O                                                                                                                              |
| Vice President-Sales                |       |       | Koss Corporation                                                                                                                                   |
|                                |       |       |                                                                                                                                               |
| Sujata Sachdeva                     |       |       | Lawrence S. Mattson                                                                                                                                |
| Vice  President-Finance/Secretary   |       |       | Retired President                                                                                                                                  |
|                                |       |       | Oster Company                                                                                                                                      |
| Lenore Lillie                       |       |       |                                                                                                                                               |
| Vice  President-Operations          |       |       | John J. Stollenwerk                                                                                                                                |
|                                |       |       | Chairman                                                                                                                                           |
| Cheryl Mike                         |       |       | Allen-Edmonds Shoe  Corporation                                                                                                                    |
| Vice President-Human Resources/     |       |       |                                                                                                                                               |
| Customer Relations                  |       |       | Theodore H. Nixon                                                                                                                                  |
|                                |       |       | Chairman                                                                                                                                           |
| Declan Hanley                       |       |       | C.E.O                                                                                                                                              |
| Vice  President-International Sales |       |       | D.D. Williamson                                                                                                                                    |
|                                |       |       |                                                                                                                                               |
|                                |       |       |                                                                                                                                               |
| **ANNUAL  MEETING**                 |       |       |                                                                                                                                               |
|                                |       |       |                                                                                                                                               |
| October 7, 2009 –  9:00a.m.    |       |       | **TRANSFER  AGENT**                                                                                                                                |
| Milwaukee River Hilton  Inn         |       |       |                                                                                                                                               |
| 4700 N. Port Washington  Road       |       |       | Questions regarding  change of address, stock transfer, lost certificate or information on a  particular account should be directed in writing to: |
| Milwaukee, WI 53212                 |       |       |
|                                |       |       |
| **INDEPENDENT  AUDITORS**           |       |       |                                                                                                                                               |
|                                |       |       |                                                                                                                                               |
| Grant Thornton LLP                  |       |       | American Stock Transfer  & Trust Company                                                                                                       |
| Milwaukee, WI                       |       |       | 59 Maiden Lane                                                                                                                                     |
|                                |       |       | New York, NY 10038                                                                                                                                 |
| **LEGAL  COUNSEL**                  |       |       |                                                                                                                                               |
|                                |       |       |                                                                                                                                               |
| K & L GATES, LLB                |       |       | Shareholders Toll-free:  1-800-937-5449                                                                                                            |
| Dallas, TX                          |       |       |                                                                                                                                               |
|                                     |            |            |                                                                                                                                                    |  |  |

 

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EXHIBITINDEX

 
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                       |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                               |
| 3.1                  |       | Certificate of Incorporation of Koss Corporation.  Filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K  for the year ended June 30, 1996 and incorporated herein by reference.                                                                    |
|                 |       |                                                                                                                                                                                                                                                                               |
| 3.2                  |       | By-Laws of Koss Corporation, as in effect on  September 25, 1996. Filed as Exhibit 3.2 to the Company’s Annual  Report on Form 10-K for the year ended June 30, 1996 and  incorporated herein by reference.                                               |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.1                 |       | Death Benefit Agreement with John C. Koss. Filed as  Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the  year ended June 30, 1996 and incorporated herein by reference.                                                                          |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.2                 |       | Stock Purchase Agreement with John C. Koss. Filed as  Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the  year ended June 30, 1996 and incorporated herein by reference.                                                                         |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.3                 |       | Salary Continuation Resolution for John C . Koss.  Filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K  for the year ended June 30, 1996 and incorporated herein by reference.                                                                   |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.4                 |       | 1983 Incentive Stock Option Plan. Filed as  Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the  year ended June 30, 1996 and incorporated herein by reference.                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.5                 |       | Assignment of Lease to John C. Koss. Filed as  Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the  year ended June 30, 1988 and incorporated herein by reference.                                                                                |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.6                 |       | Addendum to Lease. Filed as Exhibit 10.8 to the  Company’s Annual Report on Form 10-K for the year ended June 30,  1988 and incorporated herein by reference.                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.7                 |       | Amendment to Lease. Filed as Exhibit 10.22 to  the Company’s Annual Report on Form 10-K for the year ended  June 30, 2000 and incorporated herein by reference.                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.8                 |       | Partial Assignment, Termination and Modification of Lease.  Filed as Exhibit 10.25 to the Company’s Annual Report on Form 10-K  for the year ended June 30, 2001 and incorporated herein by reference.                                                         |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.9                 |       | Restated Lease. Filed as Exhibit 10.26 to the  Company’s Annual Report on Form 10-K for the year ended June 30,  2001 and incorporated herein by reference.                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.10                |       | 1990 Flexible Incentive Plan. Filed as  Exhibit 25 to the Company’s Annual Report on Form 10-K for the year  ended June 30, 1990 and incorporated herein by reference.                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.11                |       | Consent of Directors (Supplemental Executive  Retirement Plan for Michael J. Koss dated March 7, 1997). Filed as  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 1997 and incorporated herein by reference. |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.12                |       | Loan Agreement, effective as of February 17,  1995. Filed as Exhibit 10 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 1995 and incorporated  herein by reference.                                                       |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.13                |       | Amendment to Loan Agreement dated June 15,  1995, effective as of February 17, 1995. Filed as Exhibit 10.13 to  the Company’s Annual Report on Form 10-K for the year ended  June 30, 1995 and incorporated herein by reference.                     |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.14                |       | Amendment to Loan Agreement dated April 29,  1999. Filed as Exhibit 10.14 to the Company’s Annual Report on  Form 10-K for the year ended June 30, 1999 and incorporated herein  by reference.                                                            |
|                 |       |                                                                                                                                                                                                                                                                               |
| 10.15                |       | Amendment to Loan Agreement dated December 15,  1999. Filed as Exhibit 10.15 to the Company’s Annual Report on  Form 10-K for the year ended June 30, 2000 and incorporated herein  by reference.                                                         |

 

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| 10.16  |   | Amendment to Loan Agreement dated October 10,  2001. Filed as Exhibit 10.16 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2001 and incorporated  herein by reference.                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.17  |   | License Agreement dated June 30, 1998 between  Koss Corporation and Logitech Electronics Inc. (including Addendum to License  Agreement dated June 30, 1998). Filed as Exhibit 10.18 to the Company’s  Annual Report on Form 10-K for the year ended June 30, 1998 and  incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.18  |   | Amendment and Extension Agreement between Koss  Corporation and Logitech Electronics Inc. dated May 1, 2001. Filed as  Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 2001 and incorporated herein by reference.                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.19  |   | License Agreement dated June 30, 2003 between  Koss Corporation and Sonigem Products, Inc. Filed as Exhibit 10.19  to the Company’s Annual Report on Form 10-K for the year ended  June 30, 2005 and incorporated herein by reference.                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.20  |   | Amendment to License Agreement dated August 1,  2005, between Koss Corporation and Sonigem Products, Inc. Filed as  Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the  year ended June 30, 2005 and incorporated herein by reference.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.21  |   | Loan Agreement dated February 16, 2009, between  Koss Corporation and Harris N.A., a national banking association. Filed as  Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2009 and incorporated by reference herein.                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 14     |   | Koss Corporation Code of Ethics. Filed as  Exhibit 14 to the Company’s Annual Report on Form 10-K for the year  ended June 30, 2004 and incorporated herein by reference.                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 21     |   | List of Subsidiaries of Koss Corporation*                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 23.1   |   | Consent of Grant Thornton LLP*                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 31     |   | Rule 13a-14(a)/15d-14(a) Certification of  Chief Executive Officer/Chief Financial Officer*                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 32     |   | Section 1350 Certification of Chief Executive  Officer/Chief Financial Officer**                                                                                                                                                                                                                                                   |

 

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| *  |   | Filed herewith     |
|----|--------|--------------------|
| ** |   | Furnished herewith |

 

38

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