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UNITEDSTATES

SECURITIESAND EXCHANGE COMMISSIONWashington, D.C.20549

 

**Form 10-Q**

 

**x****                     ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934for the quarterly period ended September 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**                                           |
|-----------------------------------------------------------------|
| (Exact Name of Registrant as Specified in its Charter)          |
|                                                            |   |   |
| **A DELAWARE CORPORATION**                                      | ** ** | **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, including area code:        |   | **(414) 964-5000** |

 

Indicateby check mark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  Noo

 

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 whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.).   Yes oNo x

 

At November 2,2009, there were 3,691,353 shares outstanding of the registrant’s common stock.

 

 

 

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KOSS CORPORATION AND SUBSIDIARIES

FORM 10-Q

September 30, 2009

 

INDEX

 
| ** **   | ** **            | ** **                                                                                                        | **Page** |
|--------------|-----------------------|-------------------------------------------------------------------------------------------------------------------|----------|
|         |                  |                                                                                                              |     |
| PART I  | FINANCIAL INFORMATION |                                                                                                              |
|         |                  |                                                                                                              |     |
|         | Item 1                | Financial Statements                                                                                              |     |
|         |                  |                                                                                                              |     |
|         |                  | Condensed  Consolidated Balance Sheets September 30, 2009 (Unaudited) and  June 30, 2009                | 3        |
|         |                  |                                                                                                              |     |
|         |                  | Condensed  Consolidated Statements of Income (Unaudited) Three months ended  September 30, 2009 and 2008     | 4        |
|         |                  |                                                                                                              |     |
|         |                  | Condensed  Consolidated Statements of Cash Flows (Unaudited) Three months ended  September 30, 2009 and 2008 | 5        |
|         |                  |                                                                                                              |     |
|         |                  | Notes to  Condensed Consolidated Financial Statements (Unaudited) September 30,  2009                        | 6-9      |
|         |                  |                                                                                                              |     |
|         | Item 2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       | 9-12     |
|         |                  |                                                                                                              |     |
|         | Item 3                | Quantitative  and Qualitative Disclosures About Market Risk                                                       | 12       |
|         |                  |                                                                                                              |     |
|         | Item 4                | Controls and  Procedures                                                                                          | 12       |
|         |                  |                                                                                                              |     |
| PART II | OTHER INFORMATION     |                                                                                                              |
|         |                  |                                                                                                              |     |
|         | Item 1                | Legal Proceedings                                                                                                 | 13       |
|         |                  |                                                                                                              |     |
|         | Item 1A               | Risk Factors                                                                                                      | 13       |
|         |                  |                                                                                                              |     |
|         | Item 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                                      | 13       |
|         |                  |                                                                                                              |     |
|         | Item 3                | Defaults Upon  Senior Securities                                                                                  | 13       |
|         |                  |                                                                                                              |     |
|         | Item 4                | Submission of  Matters to Vote of Security-Holders                                                                | 13-14    |
|         |                  |                                                                                                              |     |
|         | Item 5                | Other Information                                                                                                 | 14       |
|         |                  |                                                                                                              |     |
|         | Item 6                | Exhibits                                                                                                          | 14       |
|              |                       |                                                                                                                   |          |  |

 

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.    FinancialStatements.**

 

KOSS CORPORATION ANDSUBSIDIARIES

 

##### CONDENSED CONSOLIDATEDBALANCE SHEETS

#####  

| ** **                                                   | ** ** | **September 30, 2009** | ** ** | **June 30, 2009** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **(Unaudited)**             | ** ** | ** **             | ** ** |
| ASSETS                                                       |       |                        |       |                   |       |
| Current assets:                                              |       |                        |       |                   |       |
| Cash                                                         |       | $                           | 2,847,643  |                   | $          | 1,664,407 |   |
| Accounts receivable                                          |       | 10,280,462                  |       | 8,679,606              |       |
| Inventories                                                  |       | 10,371,604                  |       | 9,763,158              |       |
| Deferred income taxes                                        |       | 720,121                     |       | 720,121                |       |
| Other current assets                                         |       | 920,153                     |       | 179,549                |       |
| Total current assets                                         |       | 25,139,983                  |       | 21,006,841             |       |
| Property and equipment, net                                  |       | 4,364,028                   |       | 4,076,198              |       |
| Deferred income taxes                                        |       | 1,237,727                   |       | 1,237,727              |       |
| Other assets                                                 |       | 2,160,586                   |       | 2,149,586              |       |
| Total Assets                                                 |       | $                           | 32,902,324 |                   | $          | 28,470,352 |   |
|                                                         |       |                        |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’ INVESTMENT                |       |                        |       |                   |       |
| Current liabilities:                                         |       |                        |       |                   |       |
| Line of credit                                               |       | $                           | 2,750,000  |                   | $          | — |   |
| Accounts payable                                             |       | 2,428,020                   |       | 1,810,466              |       |
| Accrued liabilities                                          |       | 1,935,695                   |       | 1,153,089              |       |
| Dividends payable                                            |       | 479,876                     |       | 479,876                |       |
| Income tax payable                                           |       | 287,681                     |       | 175,568                |       |
| Total current liabilities                                    |       | 7,881,272                   |       | 3,618,999              |       |
| Deferred compensation                                        |       | 1,095,961                   |       | 1,095,961              |       |
| Derivative liability                                         |       | 125,000                     |       | 125,000                |       |
| Stockholders’ investment                                |       | 23,800,091                  |       | 23,630,392             |       |
| Total Liabilities & Stockholders’  Investments |       | $                           | 32,902,324 |                   | $          | 28,470,352 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

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KOSS CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 
| **Three Months Ended  September 30,**  | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|---------------------------------------------|------------|-----------|------------|-----------|------------|
|                                        |       |      |       |      |       |
| Net sales                                   |       | $         | 10,796,853 |      | $          | 11,486,034 |   |
| Cost of goods sold                          |       | 6,679,562 |       | 7,085,574 |       |
| Gross profit                                |       | 4,117,291 |       | 4,400,460 |       |
| Selling, general and administrative expense |       | 3,188,800 |       | 2,998,527 |       |
| Income from operations                      |       | 928,491   |       | 1,401,933 |       |
| Other income (expense)                      |       |      |       |      |       |
| Royalty income                              |       | —    |       | 58,333    |       |
| Interest income                             |       | —    |       | 14,053    |       |
| Income before income tax provision          |       | 928,491   |       | 1,474,319 |       |
| Provision for income taxes                  |       | 362,112   |       | 560,555   |       |
| Net income                                  |       | $         | 566,379    |      | $          | 913,764 |   |
|                                        |       |      |       |      |       |
| Earnings per common share:                  |       |      |       |      |       |
| Basic earnings per common share             |       | $         | 0.15       |      | $          | 0.25 |   |
| Diluted earnings per common share           |       | $         | 0.15       |      | $          | 0.25 |   |
|                                        |       |      |       |      |       |
| Dividends per common share                  |       | $         | 0.13       |      | $          | 0.13 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

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KOSS CORPORATION ANDSUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| **Three Months Ended  September 30,**                                | ** ** | **2009**   | ** ** | **2008**  | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|-----------|------------|
|                                                                      |       |       |       |      |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                     |       |       |       |      |       |
| Net income                                                                |       | $          | 566,379    |      | $          | 913,764 |   |
| Adjustments to reconcile net income to net cash by  operating activities: |       |       |       |      |       |
| Depreciation and amortization                                             |       | 252,107    |       | 289,899   |       |
| Net changes in operating assets and liabilities                           |       | (1,363,103 | )          | 980,370   |       |
|                                                                      |       |       |       |      |       |
| Net cash used in provided by operating activities                         |       | (544,617   | )          | 2,184,033 |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                     |       |       |       |      |       |
| Acquisition of equipment                                                  |       | (542,271   | )          | (941,493  | )          |
| Net cash used in investing activities                                     |       | (542,271   | )          | (941,493  | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                     |       |       |       |      |       |
| Proceeds from line of credit                                              |       | 2,750,000  |       | —    |       |
| Dividends paid                                                            |       | (479,876   | )          | (480,395  | )          |
| Net cash provided by (used in) financing  activities                      |       | 2,270,124  |       | (480,395  | )          |
| Net increase in cash                                                      |       | 1,183,236  |       | 762,145   |       |
| Cash at beginning of period                                               |       | 1,664,407  |       | 3,322,873 |       |
| Cash at end of period                                                     |       | $          | 2,847,643  |      | $          | 4,085,018 |   |
|                                                                      |       |       |       |      |       |

Seeaccompanying notes to the condensed consolidated financial statements.

 

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KOSS CORPORATION ANDSUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

1.                                       CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

 

OnJuly 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (“ASC”) 105-10,*The FASB Accounting Standards Codification and Hierarchy of GenerallyAccepted Accounting Principles, a replacement of FASB Statement No. 162*).This pronouncement establishes the FASB ASC as the source of authoritativeaccounting principles recognized by the FASB to be applied in preparation offinancial statements in conformity with generally accepted accounting principlesin the United States of America. The adoption of this standard had no impact onthe Company’s consolidated financial statements.

 

Theunaudited condensed consolidated financial statements presented herein arebased on interim amounts.  In the opinionof management, all adjustments (consisting of normal recurring accruals)necessary to present fairly the financial position, results of operations andcash flows at September 30, 2009 and for all periods presented have beenmade. All significant intercompany transactions have been eliminated. Theincome from operations for the quarter ended September 30, 2009 is notnecessarily indicative of the operating results for the full year.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted.  It is suggested that these condensedconsolidated financial statements be read in conjunction with the financialstatements and notes thereto included in the Registrant’s June 30, 2009Annual Report on Form 10-K.

 

2.                                       EARNINGS PERCOMMON SHARE

 

Basicearnings per common share are computed based on the weighted average number ofcommon shares outstanding.  The weightedaverage number of common shares outstanding for the quarters ending September 30,2009 and 2008 were 3,691,353 and 3,695,351, respectively.  When dilutive, stock options are included asshare equivalents using the treasury stock method.  For the quarter ended September 30, 2009there were 2,134 common stock equivalents related to stock option grantsexcluded in the computation of the average number of shares outstanding fordiluted earnings per common share as inclusion would have been anti-dilutive.  For the quarter ended September 30, 2008there were no common stock equivalents.

 

3.                                       INCOME TAXES

 

We file income tax returnsin the United States (Federal), Wisconsin (state) and various other statejurisdictions.  We are not currentlysubject to income tax examinations in any of our significant taxjurisdictions.  Tax years open toexamination by tax authorities under the statute of limitations include fiscal2006 through 2008 for Federal and fiscal 2005 through 2008 for most statesjurisdictions.

 

The total liability forunrecognized tax benefits was approximately $66,000 as of September 30,2009.  The liability does not include anamount for accrued penalties.   Werecognize interest and penalties related to unrecognized tax benefits in theprovision for income taxes.  We do notexpect a significant increase or decrease to the total amounts of unrecognizedtax benefits within 

 

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the next 12 months.  There was no change in the amount ofunrecognized tax benefits during the three months ended September 30,2009.

 

4.                                       INVENTORIES

 

The classification of inventories is as follows:

 
| ** **                        | ** ** | **September 30, 2009** | ** ** | **June 30, 2009** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|------------------------|------------|
| Raw materials and work in process |       | $                                | 4,744,356  |                   | $          | 2,599,309 |   |
| Finished goods                    |       | 6,412,626                        |       | 7,949,227              |       |
|                              |       | 11,156,982                       |       | 10,548,536             |       |
| LIFO reserve                      |       | (785,378                         | )          | (785,378               | )          |
|                              |       | $                                | 10,371,604 |                   | $          | 9,763,158 |   |

 

5.                                       STOCK PURCHASEAGREEMENT

 

The Company has an agreement with its Chairman, John C. Koss,to, at the request of the executor of the estate, repurchase Company commonstock from his estate in the event of his death.  The Company does not have the right torequire the estate to sell stock to the Company.  As such, this arrangement is accounted for asa written put option with the fair value of the put option recorded as aderivative liability.  The fair value ofthe option at September 30, 2009 was $125,000.  The repurchase price is 95% of the fairmarket value of the common stock on the date that notice, if the estate elects,to repurchase is provided to the Company. Under the agreement, the total number of shares to be repurchased willbe sufficient to provide proceeds which are the lesser of $2,500,000 or theamount of estate taxes and administrative expenses incurred by the Chairman’sestate. 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.  At September 30, 2009 and June 30,2009, $125,000 has been classified as a derivative liability on the Company’sfinancial statements.

 

6.                                       DIVIDENDSDECLARED

 

OnSeptember 16, 2009, the Company declared a quarterly cash dividend of$0.13 per share for the stockholders of record on September 30, 2009 to bepaid October 15, 2009.  Suchdividend payable has been recorded at September 30, 2009.

 

7.                                       STOCK-BASED COMPENSATION

 

In 1990, pursuant to therecommendation of the Board of Directors, the stockholders ratified thecreation of the Company’s 1990 Flexible Incentive Plan (the “1990 Plan”).  The 1990 Plan is administered by a committeeof the Board of Directors and provides for the granting of various stock-basedawards including stock options to eligible participants, primarily officers andcertain key employees.  A total of225,000 shares of common stock were available in the first year of the Plan’sexistence.  Each year thereafteradditional shares equal to 25% of the shares outstanding as of the first day ofthe applicable fiscal year were reserved for issuance pursuant to the 1990Plan.  On July 22, 1992, the Boardof Directors authorized the reservation of an additional 250,000 shares for the1990 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 

 

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additional 300,000 shares forthe 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. Options generally vest over four or five years, with a maximum term offive to ten years.

 

The fair value of each stockoption grant was estimated as of the date of grant using the Black-Scholespricing model. The resulting compensation cost for fixed awards with gradedvesting schedules is amortized on a straight-line basis over the vesting periodfor the entire award. The fair value of each restricted stock grant was basedon the market price of the underlying common stock as of the date of grant. Theresulting compensation cost is amortized on a straight-line basis over thevesting period.

 

A summary of stock optionactivity under the plan for the three****monthsended September 30, 2009 is as follows:

 
| ** **                       | ** ** | **Number of Shares********(in thousands)** | ** ** | **Range of Exercise Price  Per Share** | ** **     | **Average  Exercise Price** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------|----------------|-----------------------------|------------|
| Balance, June 30, 2009      |       | 431,654                                    |       | $                                      | 15.51 - $28.80 |                        | $          | 20.70 |   |
| Granted                          |       | 170,000                                    |       | $                                      | 12.55 - $13.81 |                        | $          | 13.51 |   |
| Exercised                        |       | —                                     |       | —                                 |           | —                      |       |
| Forfeited                        |       | —                                     |       | —                                 |           | —                      |       |
| Balance, September 30, 2009 |       | 601,654                                    |       | $                                      | 12.55 - $28.80 |                        | $          | 18.67 |   |

 

Therange of options as of September 30, 2009 is as follows:

 
| ** ** | ** **      | **Number  of Options  Outstanding/Exercisable** | ** **        | **Weighted  Average Exercise  Price Outstanding/Exercisable** | ** **     | **Weighted  Average  Remaining Contractual  Life (Years)** |
|------------|-----------------|-------------------------------------------------|-------------------|---------------------------------------------------------------|----------------|------------------------------------------------------------|
| $          | 12.55  - $15.75 |                                            | 206,654 / 20,654  |                                                          | $              | 13.89 / $15.70                                             |   | 6.1 |
| $          | 16.76  - $19.47 |                                            | 183,000 / 99,500  |                                                          | $              | 17.72 / $17.97                                             |   | 3.6 |
| $          | 21.42  - $28.80 |                                            | 212,000 / 159,000 |                                                          | $              | 24.16 / $24.14                                             |   | 3.4 |
|       |            | 601,654 / 279,154                               |              | $                                                             | 18.67 / $21.31 |                                                       |   |

 

8.                                       CREDIT FACILITY

 

On February 16, 2009,the Company entered into a new credit facility for an unsecured line of creditfor up to a maximum of $10,000,000 up to and including January 29, 2010.On October 9, 2009 this credit facility was extended to December 31,2010.  The Company can use the new creditfacility for working capital, to refinance existing indebtedness, for stockrepurchase and for general corporate purposes. Borrowings under this credit facility bear interest at either the bank’smost recently publicly announced prime rate or at a LIBOR-based rate determinedin accordance with the loan agreement. This credit facility includes financialcovenants that require the Company to maintain a minimum tangible net worth,liabilities to tangible net worth ratios and interest coverage ratios.  Outstanding draws on this credit facility at September 30,2009 amount to $2,750,000.  There was noutilization of this credit facility at June 30, 2009.

 

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9.                                       RECENT ACCOUNTING PRONOUNCEMENTS

 

In August 2009, theFinancial Accounting Standards Board (“FASB”) issued FASB Accounting StandardsUpdate No. 2009-05, Fair Value Measurements and Disclosures (“ASU 2009-05”),which is effective for financial statements issued for interim and annualperiods ending after August 2009. ASU 2009-05 amends FASB AccountingStandards Codification (“FASB ASC”) Topic 820-10 (“FASB ASC 820-10”). Theupdate provides clarification on the techniques for measurement of fair valuerequired of a reporting entity when a quoted price in an active market for anidentical liability is not available. This update had no impact on the Company’sfinancial position, results of operations or cash flows.

 

In May 2009, the FASBissued expanded guidance on disclosing subsequent events, codified within ASCTopic 855-10, which establishes accounting and disclosure standards for eventsthat occur after the balance sheet date but before financial statements areissued or are available to be issued. It defines financial statements asavailable to be issued, requiring the disclosure of the date through which anentity has evaluated subsequent events and the basis for that date, whether itbe the date the financial statements were issued or the date they were availableto be issued. This standard had no impact on the Company’s financial position,results of operations or cash flows.

 

10.                                 SUBSEQUENT EVENT

 

Subsequent events have beenevaluated through November 6, 2009, the date the financial statements wereissued.

 

On October 7, 2009, theBoard of Directors voted to recommend to the Company’s stockholders that theCompany’s Restated Certificate of Incorporation be amended to increase thenumber of authorized shares of the Company’s Common Stock from 8,500,000 sharesto 20,000,000 shares. At that meeting, the Board of Directors alsoconditionally approved a two-for-one forward stock split to be effected in theform of a stock dividend of one share of Common Stock for each share of CommonStock outstanding on or about November 20, 2009, the proposed record datefor the stock split.  The stock split isconditioned upon approval by the stockholders of the proposed amendment to theRestated Certificate of Incorporation increasing the number of shares ofauthorized Company Common Stock. The special meeting of stockholders to vote onthe proposed amendment is scheduled to be held on November 19, 2009.  If the proposed amendment is approved, thestock split will be effected and the stock dividend pursuant to the stock splitwill be distributed to the Company’s stockholders on or about December 1,2009.

 

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

 

Financial Condition,Liquidity and Capital Resources

 

Cashused in operating activities during the three months ended September 30,2009 amounted to $544,617. This was a result of net income for the periodadjusted for changes in operating assets and ** **current liabilities.

 

Capital expenditures for new equipment (including production tooling)were $542,271 for the three months ended September 30, 2009.  Capital expenditures for fiscal year 2010 areexpected to be approximately $2 million. The Company expects to generate sufficient funds through operations tofund these expenditures.

 

Stockholders’ investment increased to $23,800,091 at September 30,2009, from $23,630,392 at June 30, 2009. The net increase reflects net income and is offset by the effect ofdividends declared and stock compensation expense.

 

On February 16, 2009,the Company entered into a new credit facility for an unsecured line of creditfor up to a maximum of $10,000,000 up to and including January 29, 2010.On October 9, 2009 this credit 

 

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facility was extended to December 31,2010.  The Company can use the new creditfacility for working capital, to refinance existing indebtedness, for stockrepurchase and for general corporate purposes. Borrowings under this credit facility bear interest at either the bank’smost recently publicly announced prime rate or at a LIBOR-based rate determinedin accordance with the loan agreement. This credit facility includes financialcovenants that require the Company to maintain a minimum tangible net worth,liabilities to tangible net worth ratios and interest coverage ratios.  Outstanding draws on this credit facility at September 30,2009 amount to $2,750,000.  There was noutilization of this credit facility at June 30, 2009.

 

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.  The most recent increase was for anadditional $2,000,000 in October 2006, for a maximum of $45,500,000.  The Company intends to effectuate all stockpurchases either on the open market or through privately negotiatedtransactions, and intends to finance all stock purchases through its own cashflow or by borrowing for such purchases.

 

For the quarter ended September 30, 2009, the Company purchased noshares of its common stock.

 

From the commencement of the Company’s stock repurchase program throughSeptember 30, 2009, the Company has purchased a total of 5,474,102 sharesfor a total gross purchase price of $52,768,873 (representing an average grosspurchase price of $9.64 per share) and a total net purchase price of$41,945,130 (representing an average net purchase price of $7.66 pershare).  The difference between the totalgross purchase price and the total net purchase price is the result of theCompany receiving from employees cash acquired from such employees pursuant tothe Company’s stock option program.  Indetermining the dollar amount available for additional purchases under thestock repurchase program, the Company uses the total net purchase price by theCompany for all stock purchases, as authorized by the Board of Directors.

 

The Company also has an Employee Stock Ownership Plan and Trust (“ESOP”)pursuant to which shares of the Company’s common stock are purchased by theESOP for allocation to the accounts of ESOP participants.  There were no ESOP purchases of the Company’scommon stock for the three months ended September 30, 2009.

 

Results of Operations

 

Net sales for the first quarter ended September 30, 2009 declinedby 6% to $10,796,583 from $11,486,034 for the same period in 2008.  The decrease is primarily the result of softretail sales in the United States and Europe.

 

Gross profit as a percent of net sales was 38% for the quarter ended September 30,2009 compared to 38% for the quarter ended September 30, 2008.

 

Selling, general and administrative expenses for the quarter ended September 30,2009 were $3,188,800 or 30% of net sales, compared to $2,998,527 or 26% of netsales for the same period in 2008.  Thisincrease is due to extra costs incurred related to engineering, researchdevelopment and marketing.

 

For the first quarter ended September 30, 2009, income fromoperations was $928,491 versus $1,401,933 for the same period in the prioryear, a 37% decrease.  Net income for thequarter fell by 38% to $566,379 from $913,764 for the same period in 2008.  The decreases in income from operations andnet income are primarily due to spending on new product development, softretail sales worldwide and a less profitable product mix.

 

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Royalty income forthe quarter ended September 30, 2009 was zero compared to $58,333 for thequarter ended September 30, 2008. The decrease in royalty income was the result of the termination of thelicense for the Company’s sole licensee.

 

Interest income for the quarter was zerocompared to $14,053 for the same quarter in 2008.  Interest income fluctuates in relation tocash balances on hand throughout the year and fluctuations in interest ratesearned.

 

The provision forincome taxes was $362,112 and $560,555 for the quarters ended September 30,2009 and 2008, respectively.   Theeffective tax rate was 39% for each quarter.

 

Recent AccountingPronouncements

 

InAugust 2009, the Financial Accounting Standards Board (“FASB”) issued FASBAccounting Standards Update No. 2009-05, Fair Value Measurements andDisclosures (“ASU 2009-05”), which is effective for financial statements issuedfor interim and annual periods ending after August 2009. ASU 2009-05amends FASB Accounting Standards Codification (“FASB ASC”) Topic 820-10 (“FASBASC 820-10”). The update provides clarification on the techniques formeasurement of fair value required of a reporting entity when a quoted price inan active market for an identical liability is not available. This update hadno impact on the Company’s financial position, results of operations or cashflows.

 

InMay 2009, the FASB issued expanded guidance on disclosing subsequentevents, codified within ASC Topic 855-10, which establishes accounting anddisclosure standards for events that occur after the balance sheet date butbefore financial statements are issued or are available to be issued. Itdefines financial statements as available to be issued, requiring thedisclosure of the date through which an entity has evaluated subsequent eventsand the basis for that date, whether it be the date the financial statementswere issued or the date they were available to be issued. This standard had noimpact on the Company’s financial position, results of operations or cashflows.

 

Recent Developments

 

On September 10, 2009,Nasdaq notified the Company that it no longer met the 750,000 minimum publiclyheld shares requirement under Listing Rule 5450(b)(1)(B) forcontinued listing on The Nasdaq Global Market. On September 24, 2009, the Company submitted its compliance plan toNasdaq proposing to implement a two-for-one forward stock split of the Company’sCommon Stock.  The proposed stock splitwould cause the Company’s total number of publicly held shares to exceed the750,000 minimum threshold while maintaining the Company’s compliance withNasdaq’s other continued listing requirements. On September 29, 2009,Nasdaq granted the Company an extension of time in order to allow the Companyto regain compliance with Nasdaq’s listing requirements. The Company mustregain compliance by December 24, 2009.

 

At a meeting held on October 7,2009, the Board of Directors conditionally approved a two-for-one forward stocksplit to be effected in the form of a stock dividend of one share of CommonStock for each share of Common Stock outstanding on or about November 20,2009, the proposed record date for the stock split. The stock split is conditionedupon approval by the stockholders of an increase in the number of authorizedshares of the Common Stock of the Company from 8,500,000 shares to 20,000,000shares.  A special meeting ofstockholders to vote on the proposed increase is scheduled to be held on November 19,2009.  If approved, the stock split willbe effected and the stock dividend will be distributed to the Company’sstockholders on or about December 1, 2009.

 

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Off-Balance SheetArrangements

 

The Company has nooff-balance sheet arrangements.

 

**Item 3.****          ****Quantitative and QualitativeDisclosures About Market Risk.**

 

Not applicable.

 

**Item 4.****          ****Controls and Procedures.**

######  

(a)                                  *Evaluationof Disclosure Controls and Procedures*.  The Company maintains a system of disclosurecontrols and procedures that are designed to provide reasonable assurance thatinformation, which is required to be timely disclosed, is accumulated andcommunicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met.  The Company, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer/Chief Financial Officer, after evaluatingthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of the end of theperiod covered by this report, has concluded that the Company’s disclosurecontrols and procedures 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 principal executive officer and principal financialofficer, as appropriate to allow timely decisions regarding required disclosureand are effective to provide reasonable assurance that such information isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

 

(b)                                 *Changesin Internal Controls*.  The Company’sinternal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) is designed to provide reasonable assurances regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  There were no changes in theCompany’s internal control over financial reporting that occurred during theCompany’s most recent fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.  However, because ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 1             Legal Proceedings**

 

None.

 

**Item 1A          Risk Factors**

** **

Notapplicable.

 

**Item 2             Unregistered Sales of Equity Securities and Use of Proceeds**

 

The following table presents information withrespect to purchases of common stock of the Company made during the quarterended September 30, 2009, by the Company.

 

**COMPANY REPURCHASES OF EQUITY SECURITIES**

** **
| **Period (2009)**                        | ** ** | **Total # 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** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
|                                     |       |                              |       |                               |       |                                                                                |       |                                                                     |       |
| July 1 —  July 31         |       | —                            |       | $                                  | 0.00       |                                                                                | —     |                                                                     | $          | 2,125,887 |   |
|                                     |       |                              |       |                               |       |                                                                                |       |                                                                     |       |
| August 1 — August 31      |       | —                            |       | $                                  | 0.00       |                                                                                | —     |                                                                     | $          | 2,125,887 |   |
|                                     |       |                              |       |                               |       |                                                                                |       |                                                                     |       |
| September 1 —September 30 |       | —                            |       | $                                  | 0.00       |                                                                                | —     |                                                                     | $          | 2,125,887 |   |

----

**(1)   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.  The most recent increase was for anadditional $2,000,000 in October 2006, for a maximum of $45,500,000 of which$43,374,113 had been expended through September 30, 2009.**

** **

**Item 3             DefaultsUpon Senior Securities**

** **

**None.**

** **

**Item 4**             Submission of Matters to Vote ofSecurity-Holders

** **

(a)                                  On October 7, 2009, an AnnualMeeting of Stockholders was held.

 

(b)                                 Proxies for the election of directorswere solicited pursuant to Regulation 14. There was no solicitation in opposition to management’s nominees, andall such nominees were elected.

 

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(c)                                  There were 3,695,351 shares of commonstock eligible to vote at the Annual Meeting, of which 3,493,473 shares werepresent at the Annual Meeting in person or by proxy, which constituted a quorum.  The following is a summary of the results ofthe voting:

 
| ** **                                 | ** ** | **Number of Votes** | ** ** | **Broker**   |
|--------------------------------------------|------------|---------------------|------------|--------------|
| ** **                                 | ** ** | **For**             | ** ** | **Withheld** | ** ** | **Non-Votes** |
| Nominees  for 1-year terms ending in 2010: |       |                |       |         |   |   |
|                                       |       |                |       |         |   |   |
| John  C. Koss                              |       | 3,480,540           |       | 12,933       |   | 0 |
| Thomas  L. Doerr                           |       | 3,479,940           |       | 13,533       |   | 0 |
| Michael  J. Koss                           |       | 3,479,745           |       | 13,728       |   | 0 |
| Lawrence  S. Mattson                       |       | 3,479,031           |       | 14,442       |   | 0 |
| Theodore  H. Nixon                         |       | 3,480,340           |       | 13,133       |   | 0 |
| John  J. Stollenwerk                       |       | 3,480,140           |       | 13,133       |   | 0 |

 
| ** **                                                                                         | ** ** | **Number of Votes** | ** ** | **Broker**  |
|----------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------|
| ** **                                                                                         | ** ** | **For**             | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** |
| Appointment  of Grant Thornton LLP as independent auditors for the year ending  June 30, 2010 |       | 3,490,289           |       | 474         |   | 2,710 |   | 0 |

 

**Item 5             OtherInformation**

** **

None.

 

**Item 6             Exhibits**

** **

See Exhibit Index attached hereto.

 

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**Tableof Contents**

 

**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING STATEMENTS**

** **

This Form 10-Q contains forward-looking statements within themeaning of that term in the Private Securities Litigation Reform Act of 1995(the “Act”) (Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by theCompany from time to time in filings with the Securities Exchange Commission,press releases, or otherwise.  Statementscontained in this Form 10-Q that are not historical facts areforward-looking statements made pursuant to the safe harbor provisions of theAct.  Forward-looking statements mayinclude, but are not limited to, projections of revenue, income or loss andcapital expenditures, statements regarding future operations, anticipatedfinancing needs, compliance with financial covenants in loan agreements, plansfor acquisitions or sales of assets or businesses, plans relating to productsor services of the Company, assessments of materiality, predictions of futureevents, the effects of pending and possible litigation, and assumptionsrelating to the foregoing.  In addition,when used in this Form 10-Q, the words “anticipates,” “believes,” “estimates,”“expects,” “intends,” “plans,” “forecasts” and variations thereof and similarexpressions are intended to identify forward-looking statements.

 

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

 

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

 

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Signatures

 

Pursuant to the requirementsof the Securities and Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                         | KOSS  CORPORATION          |
|------------------------------|----------------------------|
|                         |                       |
| Date:  November 6, 2009 | */s/*                      | *Michael  Koss* |
|                         | Michael  J. Koss           |
|                         | Vice  Chairman, President, |
|                         | Chief  Executive Officer,  |
|                         | Chief  Financial Officer   |
|                         |                       |
| Date:  November 6, 2009 | */s/*                      | *Sue  Sachdeva* |
|                         | Sue  Sachdeva              |
|                         | Vice  President-Finance,   |
|                         | Secretary                  |

 

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**EXHIBIT INDEX**

 
| **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. |

 

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| 10.12  |   | 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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.13  |   | 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.                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.14  |   | 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.                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.15  |   | 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.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.16  |   | 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.                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 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 **                                                                                                                                                                                                                                                   |

----

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

 

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