**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C.  20549**

 

**AMENDMENT NO. 1 TO**

 

**FORM 10-K/A**

 
| **x**  | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|--------|----------------------------------------------------------------------------------------------------------|
|   | ** **                                                                                               |
|   | **For the fiscal year ended  June 30, 2010**                                                        |
|   | ** **                                                                                               |
|   | **OR**                                                                                                   |
|   | ** **                                                                                               |
| **o**  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**COMMISSION FILE NUMBER0-3295**

 

**KOSS CORPORATION******(Exact name of registrant as specifiedin its charter)

 

| **Delaware**                                                    | ** ** | **39-1168275**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (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’s telephone number, includingarea code: **(414) 964-5000**

 

Securitiesregistered pursuant 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)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.  Yeso  No x

 

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

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes  x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes  o  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

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” inRule 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 inRule 12b-2 of the Exchange Act).  Yes o No x

 

Theaggregate market value of the common voting stock held by nonaffiliates of theregistrant as of December 31, 2009 was approximately $13,772,465****(based on the $5.51 per share closingprice of the Company’s common stock as reported on the NASDAQ Stock Market onDecember 31, 2009.

 

OnSeptember 10, 2010, 7,382,706 shares of voting common stock wereoutstanding.

 

Documents Incorporated by Reference

 

Part IIIof this Form 10-K incorporates by reference information from KossCorporation’s Proxy Statement for its 2010 Annual Meeting of Stockholders filedwith the Commission under Regulation 14A within 120 days of the end of thefiscal year covered by this Form 10-K.

 

 

 

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Explanatory Note

 

Thepurpose of this Amendment No. 1 to Form 10-K/A is to supplement andclarify the Company’s disclosures in Item 9A. Controls and Procedures.  Other than the revisions to Item 9A. Controlsand Procedures and the filing of the Exhibits attached hereto, no other changeshave been made to this Annual Report on Form 10-K.

 

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**ITEM 9A.****                                           ****CONTROLS AND PROCEDURES.**

 

**Disclosure Controls and Procedures****.**

 

Disclosurecontrols and procedures (as defined in Rules 13(a)-15(e) and15(d)-15(e)) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”) are designed to ensure that (1) information required to be disclosedin reports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in SEC rules andforms; and (2) that such information is accumulated and communicated tomanagement, including the principal executive officer and principal financialofficer, to allow timely decisions regarding required disclosures.  There are inherent limitations to theeffectiveness of any system of disclosure controls and procedures, includingthe possibility of human error, the circumvention or overriding of controls andprocedures and collusion to circumvent and conceal the overriding of controlsand procedures.  Accordingly, eveneffective disclosure controls and procedures can only provide reasonableassurance of achieving their control objectives.

 

TheCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures as of June 30, 2010.  As discussed in “Changes in Internal Controls”below, the Company recently implemented remedial measures in response to thepreviously disclosed unauthorized transactions. Although the Company’s managementbelieves that these remedial measures have addressed the weaknesses in theCompany’s disclosure controls and procedures, the Company must allow asufficient amount of time to elapse to permit testing of these controls inorder to confirm their effectiveness. Subject to this testing and confirmation process, management believesthat the Company’s disclosure controls and procedures will be deemedeffective.  However, as a result of theCompany’s inability to complete the testing and confirmation process, managementhas concluded that the Company’s disclosure controls and procedures as of June 30,2010 were not effective.

 

TheCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, continues to evaluate the effectiveness of the Company’sdisclosure controls and procedures to identify any additional enhancements thatmay provide greater comfort that the Company’s disclosure controls andprocedures are effective to provide reasonable assurance that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate 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’s Annual Report on InternalControls over Financial Reporting***.*

 

TheCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, is responsible for establishing and maintaining adequate internalcontrol of financial reporting (as defined in Exchange ActRules 13(a)-15(f) and 15(d)-15(f)) and designing such internalcontrols to provide reasonable assurances regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States of America.  Because ofinherent limitations, a system of internal control over financial reporting maynot prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate due to change inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

Managementconducted its evaluation of the effectiveness of its internal control overfinancial reporting based on the framework in “Internal Control-IntegratedFramework” issued by the Committee of 

 

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SponsoringOrganizations of the Treadway Commission (“COSO”).  Based on this assessment, the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,has concluded that the Company’s internal controls and operating procedureswere circumvented during the fiscal year and the circumvention was concealedfrom management as previously described in the Form 10-K/A for June 30,2009.  The Company has alreadyimplemented the internal control improvements described in Changes in InternalControls below, and the Company is planning to implement a new computer systemtowards the end of fiscal year 2011 that will further enhance the segregationof duties within information technology. Based on the criteria set forth by COSO in “Internal Control-IntegratedFramework,” although the Company’s management believes that these enhancementsand remedial measures have addressed the weaknesses in the Company’s disclosurecontrols and procedures, the Company must allow a sufficient amount of time toelapse to permit testing of these controls in order to confirm their effectiveness.  Subject to this testing and confirmationprocess, management believes that the Company’s disclosure controls andprocedures will be deemed effective. However, as a result of the Company’s inability to complete the testingand confirmation process, management has concluded that the Company’s internalcontrols over financial reporting as of June 30, 2010 were not effective.

 

Changesin Internal Controls

 

TheCompany has identified how its controls over financial reporting werecircumvented and how it is addressing these matters below.

 

·                        *Auditor review*.  The circumvention of the Company’s internalcontrols and procedures was not detected as part of the Company’s annual auditsand quarterly reviews by its former independent auditor, Grant Thornton,LLP.  As described in Item 3 Legal Proceedings,on June 24, 2010, the Company filed an action against Grant Thornton, LLPand Ms. Sachdeva.

 

·                        *Wire transfers and cashier’s checks.*  Approximately $30,900,000 or98.1% of the total $31,500,000 of unauthorized transactions from fiscal year2005 through December 2009 was misappropriated by circumventing theCompany’s internal controls and other operating procedures for the payment ofCompany expenditures by using wire transfers or cashier’s checks from theCompany’s bank accounts to pay for personal expenditures.  Of the $30,900,000, approximately $8,500,000was misappropriated by use of these means during 2009.  Misappropriations by use of wire transfers orcashier’s checks totaled $10,300,000 during 2010.  These unauthorized transactions were processedby circumventing the Company’s policy that all invoices over $5,000 wererequired to be submitted and approved by Michael Koss as the CEO, and allaccounts payable checks generated from the Company’s accounts payable systemwere signed by the CEO.  Moreover, wiretransfers were to be used only for authorized transactions including certaininventory purchases and transfers of funds between the Company’s bankaccounts.  Wire transfers for inventorypurchases and the recurring expense items required the approval by severalemployees including authorized Vice Presidents, while the wire transfersbetween the Company’s bank accounts were processed and approved by Ms. Sachdevaand one of the other terminated employees in the accounting department.  Ms. Sachdeva, by herself and/or bydirecting other employees in the accounting department, ordered cashier’schecks from the Company’s bank accounts to pay for personal expendituresdirectly, thereby circumventing the internal controls and procedures asdescribed above so that these payments would not be submitted through theCompany’s normal accounts payable system. Ms. Sachdeva, by herself and/or by directing others in theaccounting department, processed wire transfers from the Company’s bankaccounts to pay for personal expenditures directly, thereby circumventing theinternal controls and procedures as described above so that these paymentswould not be submitted through the Company’s normal accounts payablesystem.  This has been remediated by: (1) disallowingthe use of any cashier’s checks; 

 

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(2) enforcing that all wiretransfers are initiated within the financial function and electronicallyapproved by the CEO; and (3) performing an enhanced review, reconciliationand reporting of cash activities.

 

·                        *Petty cash, manual checks and traveler’s checks*.  The remainingmisappropriations of approximately $600,000 or 1.9% from the total amount of$31,500,000 from fiscal year 2005 through December 2009 were carried outby circumventing the Company’s internal controls and other standard operatingprocedures involving the Company’s petty cash system, manual check system andpolicy for using traveler’s checks.  Indoing so, the Company’s policy requiring that all expense reports be submittedand approved by the CEO was circumvented. Out of the estimated $600,000 of these types of transactions,approximately $91,000 occurred during 2009. Approximately $107,000 of misappropriations involving the use of theCompany’s petty cash system, manual check system and traveler’s checks policyoccurred during 2010.  Remediation ofthese issues has been accomplished by: (1) eliminating the petty cash fundso all reimbursements run through normal controlled accounts payable channels; (2) eliminatingthe use of manual checks so all check disbursements are generated from theCompany’s accounts payable system check run; and (3) eliminating the useof traveler’s checks.

 

·                        *Recording of unauthorized transactions.*  Ms. Sachdeva and one ofthe other terminated employees concealed the unauthorized transactions byrecording numerous erroneous accounting entries in various accounts to hide thetrue nature of the transactions.  TheCompany has improved the controls and procedures related to journal entries andaccount reconciliations to include improved segregation of duties, review andapproval of reconciliations, and approval of all manual journal entries.

 

·                        *Performance and review of accountreconciliations. *The Company’s internal controls and procedures included the performanceand review of key account reconciliations, including cash, by the accountingdepartment employees including Ms. Sachdeva, who collectively had over 50 yearsof experience at the Company.  Ms. Sachdevaand one of the other terminated employees further concealed the unauthorizedtransactions by failing to properly perform and review these key accountreconciliations on a regular basis, and failing to properly perform the Company’speriod end financial close and reporting processes that were designed toaccurately report the Company’s financial information.  The account reconciliation process has beenimproved and includes proper segregation of duties as well as review andapproval by another person in the financial function.

 

·                        *Corporate standards and whistleblower policy.*  The three terminated employees,including Ms. Sachdeva, failed to comply with the Company’s establishedstandards of integrity, ethical values and its Code of Conduct, Code of Ethicsand Whistleblower policy.  The Companyhas taken steps to reinforce these policies with all of its employees, officersand directors.

 

·                        *Application of GAAP.*  The terminated employees, including Ms. Sachdeva,as the principal accounting officer in charge of financial reporting failed toproperly apply the Company’s established accounting policies and adherence withGAAP.  As a result, certain establishedaccounting policies were not applied correctly and resulted in inaccuracies,both from the fraudulent activity directed by Ms. Sachdeva and themisapplication of GAAP.  The affectedaccounts include equipment and leasehold improvements, cash surrender value oflife insurance, accrued deferred compensation, accrued product warrantyobligations and income taxes payable.  Aspart of the restatement of the consolidated financial statements, the accounts 

 

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were reviewed in detail andreconciled.  Integral to thereconciliation process was a review of all critical accounting estimates.

 

·                        *Information Technology.*  The Company’s internal controlsand procedures relating to the Company’s computer system for processingfinancial transactions were manipulated to conceal the unauthorizedtransactions.  The Company expects toimplement a new computer system that will be used to improve its processing offinancial transactions and overall segregation of duties towards the end offiscal 2011.

 

Webelieve the changes to our system of internal controls resulting from theseefforts have enhanced the Company’s control over financial reporting.  We continue to diligently and vigorouslyreview our financial and reporting controls and procedures.  As we continue to evaluate and work to improveour internal control over financial reporting, we may take additional measuresto address any additional control deficiencies we may identify.

 

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EXHIBIT INDEX

 
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                            |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                    |
| 3.1                  |       | Amended and Restated  Certificate of Incorporation of Koss Corporation, as in effect on  November 19, 2009. Filed as Exhibit 3.1 to the Company’s Quarterly  Report on Form 10-Q for the period ended December 31, 2009 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.     |

 

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| 10.12  |   | Credit Agreement dated  May 12, 2010, between Koss Corporation and JPMorgan Chase Bank, N.A.  Filed as Exhibit 10.12 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2010 and incorporated by  reference herein.              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.13  |   | Pledge and Security  Agreement dated May 12, 2010, between Koss Corporation and JPMorgan  Chase Bank, N.A. Filed as Exhibit 10.13 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended March 31, 2010 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, 2010 and incorporated herein  by reference.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                   |
| 21     |   | List  of Subsidiaries of Koss Corporation.*                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                   |
| 23     |   | Consent of Baker Tilly  Virchow Krause, LLP. Filed as Exhibit 23 to the Company’s Annual Report on  Form 10-K for the year ended June 30, 2010 and incorporated herein by  reference.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Rule 13(a)-14(a)/15(d)-14(a) Certification  of Chief Executive Officer *                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                   |
| 31.2   |   | Rule 13(a)-14(a)/15(d)-14(a) Certification  of Chief Financial Officer*                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                   |
| 32.1   |   | Section 1350  Certification of Chief Executive Officer **                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                   |
| 32.2   |   | Section 1350  Certification of Chief Financial Officer**                                                                                                                                                                                                                          |

 

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SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| KOSS CORPORATION |                         |   |
|------------------|------------------------------|--------|
|             |                         |   |   |
| By:              | /s/ Michael J. Koss          |   |  Dated: October 12, 2010 |
|             | Michael J. Koss              |   |   |
|             | Vice Chairman                |   |   |
|             | President                    |   |   |
|             | Chief Executive Officer      |   |   |
|             | Chief Operating Officer      |   |   |
|             |                         |   |   |
|             |                         |   |   |
| By:              | /s/ David D. Smith           |   |  Dated: October 12, 2010 |
|             | David D. Smith               |   |   |
|             | Executive Vice President     |   |   |
|             | Chief Financial Officer      |   |   |
|             | Principal Accounting Officer |   |   |
|             | Secretary                    |   |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities indicated on October 12, 2010.

 

 
| /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   |

 

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