Table of Contents

 

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-Q**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**for thequarterly period ended March 31, 2010**

 

**OR**

 

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

 

**CommissionFile Number: 0-3295**

 

**KOSS CORPORATION**

(Exact Name ofRegistrant as Specified in its Charter)

 

| **A DELAWARE  CORPORATION**                                  | ** ** | **39-1168275**                        |
|--------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of                             |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                              |       |                                  |
|                                                         |       |                                  |
| **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 o  No x**(See Explanatory Note)**

 

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 that theregistrant 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                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

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

 

AtMay 17, 2010, there were 7,382,706 shares outstanding of the registrant’scommon stock, $0.005 par value per share.

 

 

 

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KOSS CORPORATION FORM 10-QMarch 31, 2010

 

INDEX

 
| ** **   | ** **            | **Page**                                                                                    |
|--------------|-----------------------|---------------------------------------------------------------------------------------------|
|         |                  |                                                                                        |
| PART I  | FINANCIAL INFORMATION |                                                                                        |
|         |                  |                                                                                        |
|         | Item 1                | Financial Statements                                                                        |   |
|         |                  |                                                                                        |   |
|         | Item 2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|         |                  |                                                                                        |   |
|         | Item 3                | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
|         |                  |                                                                                        |   |
|         | Item 4                | Controls and  Procedures                                                                    |   |
|         |                  |                                                                                        |
| PART II | OTHER INFORMATION     |                                                                                        |
|         |                  |                                                                                        |
|         | Item 1                | Legal Proceedings                                                                           |   |
|         |                  |                                                                                        |   |
|         | Item 1A               | Risk Factors                                                                                |   |
|         |                  |                                                                                        |   |
|         | Item 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
|         |                  |                                                                                        |   |
|         | Item 3                | Defaults upon  Senior Securities                                                            |   |
|         |                  |                                                                                        |   |
|         | Item 4                | Other Information                                                                           |   |
|         |                  |                                                                                        |   |
|         | Item 5                | Exhibits                                                                                    |   |

 

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**EXPLANATORYNOTE**

 

As discussed in theExplanatory Note to the Form 10-Q for the quarter ended December 31,2009, Koss Corporation (“Company”) discovered in December 2009 certainunauthorized financial transactions from at least its fiscal year ended June 30,2005 through December 2009.  As aresult of the unauthorized transactions, the Company will restate itspreviously issued consolidated financial statements for the fiscal years ended June 30,2008 and 2009 and for each of the quarterly periods in the fiscal years thenended, and for the quarter ended September 30, 2009.  Baker Tilly Virchow Krause,LLP (“Baker Tilly”),the Company’s independent auditor, has been engaged to audit the Company’srestated consolidated financial statements for the fiscal years ended June 30,2008 and 2009.  The Company intends toamend its annual report on Form 10-K for the fiscal year ended June 30,2009 and its quarterly reports on Form 10-Q for the quarters September 30,2009 and December 31, 2009, and expects these amendments to be filed nolater than June 30, 2010.  Becauseof these events described above, the Company’s unaudited consolidated financialstatements for the quarter ended March 31, 2010 are not yet available andare not included in this quarterly report on Form 10-Q.  The Company intends also to amend this Form 10-Qto include the quarterly unaudited consolidated financial statements as soon aspracticable after the restatements of the Company’s previously issuedconsolidated financial statements are completed.

 

The Company is alsoassisting an independent investigation being conducted by a committee ofindependent directors and its independent counsel (“Independent Investigation”).  The Company intends to pursue proceeds fromthe sale of items seized by law enforcement authorities, as wellas from insurance coverage, potential claims against third parties and taxrefunds.  The Company is also addressing the legalmatters described in Part II, Item 1 Legal Proceedings and continues tocooperate with law enforcement and regulatory authorities in theirinvestigations.

 

Because the Company isunable to file its quarterly unaudited consolidated financial statements inthis Form 10-Q, the Company may not be considered to be current in itsfilings under the Securities Exchange Act of 1934, as amended (“Exchange Act”)or in compliance with NASDAQ Listing Rule 5250(c)(1), which requires thetimely filing of financial statements in periodic reports.  In connection with  its partial filing of the Form 10-Q forthe quarter ended December 31, 2009, which also did not include quarterlyunaudited consolidated financial statements, the Company received from NASDAQ anotification of non-compliance with Listing Rule 5250(c)(1).  In the compliance plan submitted by theCompany, which has been accepted by NASDAQ, the Company proposed to file theamended Form 10-Q with the required quarterly unaudited financialstatements for the period ended December 31, 2009 no later than June 30,2010.

 

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PART I

FINANCIAL INFORMATION

 

**Item 1. Financial Statements.**

 

Theinformation required by this Item is not included in this Form 10-Q.  Please see the discussion in the ExplanatoryNote.

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

Becausethe Company’s unaudited consolidated financial statements for the quarter endedMarch 31, 2010 are not yet available and are not included in thisquarterly report on Form 10-Q, the Company is unable to providecomprehensive disclosure and discussion in this section.  The Company intends to file an amendment tothis Form 10-Q after the restatements of the Company’s previously issuedconsolidated financial statements are completed.

 

Results ofOperations for the Quarter Ended March 31, 2010

 

Aspreviously reported, the Company announced that preliminary estimates of theIndependent Investigation indicated that the amount of unauthorizedtransactions since fiscal year 2005 exceeded $31 million.  The Company’s results of operations have beenaffected during these years by the unauthorized transactions.  Although the unauthorizedtransactions ended in December 2009, the Company incurred investigationand other legal costs associated with the unauthorized transactions during thequarter ended March 31, 2010.  TheCompany is pursuing reimbursement of these expenses pursuant to its availableinsurance coverage.  The Company received$1 million of insurance proceeds under its fidelity coverage in thequarter.  Notwithstanding the disruptionresulting from the discovery of the unauthorized transactions in December 2009,the Company operated in the normal course of business during the quarter ended March 31,2010.

 

Liquidity andCapital Resources

 

TheCompany anticipates that its current liquidity and cash flow from operationswill meet its cash requirements for operations, including the additionalinvestigation costs related to the unauthorized transactions, and new productdevelopment.  The Company’s cash and cashequivalents have increased since discovery of the unauthorizedtransactions.  Although the Company hasincurred certain costs in connection with the investigation of and legalproceedings related to the unauthorized transactions, the Company is pursuingreimbursement of these costs through its available insurance coverage asdescribed above.

 

As of March 31,2010, the outstanding balance on the Company’s credit facility with Harris, N.A.  was $5.9 million.  This balance did not change during thequarter ended March 31, 2010. During the quarter, the Company was able to reduce outstanding amountsdue to suppliers by $4.9 million without drawing additional amounts on thiscredit facility.  On May 12, 2010,the Company repaid the entire $5.9 million balance on this credit facility andterminated the loan agreement with Harris, N.A.

 

On May 12, 2010, the Company entered into a newcredit facility with JPMorgan Chase Bank, N.A. As of May 17, 2010, which is the date of this filing, the Companyhad an outstanding balance of $3.4 million under this credit facility.   See the “Recent Developments” for additionaldescription of the new credit facility.

 

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Off-Balance SheetArrangements

 

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

 

**RecentDevelopments**

 

On May 12, 2010, the Company entered into a newsecured credit facility with JPMorgan Chase Bank, N.A. (“Lender”).  The Credit Agreement dated May 12, 2010between the Company and the Lender (“Credit Agreement”) provides for an $8million revolving secured credit facility with interest rates either rangingfrom 0.0% to 0.75% over the Lender’s most recently publicly announced primerate or 2.0% to 3.0% over LIBOR, depending on the Company’s leverageratio.  The Credit Agreement expires on July 31,2013 (“Maturity Date”).  Accrued andunpaid interest on loans under the Credit Agreement is due and payablemonthly.  Lender may accelerate repaymentof any amounts outstanding if any event of default, as more fully described inthe Credit Agreement, shall occur.  Inaddition to the revolving loans, the Credit Agreement also provides that the Companymay, from time to time, request the Lender to issue letters of credit for thebenefit of the Company of up to a sublimit of $2 million, and subject tocertain other limitations.  The loans may be used onlyfor general corporate purposes of the Company.

 

The Credit Agreement contains certain affirmative,negative and financial covenants customary for financings of this type.  The negative covenants include restrictionson other indebtedness, liens, fundamental changes, certain investments, assetsales, sale and leaseback transactions, and transactions with affiliates, amongother restrictions.  The financialcovenants include a minimum current ratio, minimum tangible net worth andmaximum leverage ratio requirements.

 

The Company and the Lender also entered into thePledge and Security Agreement dated May 12, 2010 (the “Security Agreement”)under which the Company granted the Lender a security interest in the Company’spersonal property and other assets in connection with the Company’s obligationsunder the Credit Agreement.

 

On May 12, 2010, the Company also terminatedits loan agreement with Harris, N.A. and repaid the entire $5.9 million balanceoutstanding.

 

The descriptions of the Credit Agreement and theSecurity Agreement are qualified in their entirety by the actual agreements,which have been filed as exhibits to this quarterly report on Form 10-Q.

 

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Recently IssuedFinancial Accounting Pronouncements

 

None.

 

**Item 3.  Quantitativeand Qualitative Disclosures about Market Risk.**

 

Notapplicable.

 

**Item 4.  Controls andProcedures.**

 

(a)                                  *Evaluationof Disclosure Controls and Procedures*.  The Company maintains a system of disclosurecontrols and procedures that were designed to and believed to provide reasonableassurance that information, which is required to be timely disclosed, isaccumulated and communicated to management in a timely fashion.  A control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurance thatthe objectives of the control system are met. It is possible for even the best control system to be circumvented bythose with the intent, knowledge and opportunity to do so.

 

The Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, is reevaluating theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) of the Exchange Act) toidentify any enhancements that may provide greater comfort that the Company’sdisclosure controls and procedures are effective to provide reasonableassurance that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is accumulated andcommunicated to the Company’s management, including its principal executiveofficer and principal financial officer, as appropriate to allow timelydecisions regarding required disclosure and are effective to provide reasonableassurance that such information is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules andforms.  In particular, the Company iscurrently working with outside consultants on its plan to document, assess andtest the Company’s internal control over financial reporting in anticipation ofcomplying with Section 404 of Sarbanes-Oxley as required.

 

(b)                                 *Changesin Internal Controls*.  The Company’sinternal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) was designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud within the Company have been detected.  Numerous actions were taken beginning in lateDecember 2009 following the discovery of the unauthorized transactions,including changes relating to the Company’s banking procedures and certainother internal policies and procedures. These actions, many of which occurred during the Company’s most recentfiscal quarter, enhance, and are expected to improve, the Company’s internalcontrol over financial reporting.  Otherimprovements relating to enhancing the Company’s internal controls relate toincreased documentation of the Company’s controls, improved accountreconciliations, and additional review and approval processes.  The Company is planning to provide a moredetailed description of these actions in the amended Form 10-K for thefiscal year ended June 30, 2009, as described in the Explanatory Note.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 1.****                                                          ****Legal Proceedings**

 

The Company became subject to the following materiallegal proceedings during the period covered by this quarterly report as aresult of the unauthorized transactions:

 

·                  On January 11, 2010,the Company received a letter from a law firm stating that it represented ashareholder and demanding that the Company’s Board of Directors investigate andtake legal action against all responsible parties to ensure compensation for theCompany’s losses stemming from the unauthorized transactions.  The Company’s legal counsel has respondedpreliminarily to the letter indicating that the Board of Directors willdetermine the appropriate course of action after the Independent Investigationis completed.

 

·                  On January 15, 2010, aclass action complaint was filed in federal court in Wisconsin against theCompany, Michael Koss and Sujata Sachdeva. The suit alleges violations of Section 10(b), Rule 10b-5 and Section 20(a) ofthe Exchange Act relating to the unauthorized transactions and requests anaward of compensatory damages in an amount to be proven at trial.  *See* David A.Puskala v. Koss Corporation, et al., United States District Court, EasternDistrict of Wisconsin, Case No. 2:2010cv00041.

 

·                  On January 26, 2010,the SEC’s Division of Enforcement advised the Company that it obtained a formalorder of investigation in connection with the unauthorized transactions. TheCompany voluntarily brought the unauthorized transactions to the SEC staff’sattention when they were discovered in December 2009, and is cooperatingfully with the ongoing SEC investigation.

 

·                  On February 16 and 18, 2010, separate shareholderderivative suits were filed in Milwaukee County Circuit Court in connectionwith the previously disclosed unauthorized transactions. The first suit namesas defendants Michael Koss, John Koss Sr., the other Koss directors, SujataSachdeva, Grant Thornton LLP, and Koss Corporation (as a nominal defendant);the second suit names the same parties except Grant Thornton LLP. Among otherthings, both suits allege various breaches of fiduciary and other duties, andseek recovery of unspecified damages and other relief. See Ruiz v. Koss, etal., Circuit Court, Milwaukee County, Wisconsin, No. 10CV002422 (February 16,2010) and Mentkowski v. Koss, et al., Circuit Court, Milwaukee County,Wisconsin, No. 10CV002290 (February 18, 2010).  These two shareholder derivative suits havebeen consolidated under Master File No. 10CV002422.

 

**Item 1A.****                                                 ****Risk Factors**

 

In addition to the other information set forth inthis report and the reports referenced therein, you should also carefullyconsider the risk factors discussed below, which could materially affect theCompany’s business, financial condition or operating results.  These risks are not the only risks facing theCompany.  Additional risk anduncertainties not currently known that the Company currently deems to beimmaterial also may materially adversely affect the Company’s business,financial condition or operating results.

 

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***The Company is currently determining the extent towhich the unauthorized transactions will affect the Company’s previously issuedconsolidated financial statements.***

 

As described in the Explanatory Note, the Company isrestating its previously issued consolidated financial statements since fiscalyear 2008 because of the unauthorized transactions during that period.  The restatements could result in materiallyadverse adjustments to the Company’s previously reported financial results.

 

***The Company is currently unable to assess theamounts that may be recovered through the proceeds from the sale of itemsseized by law enforcement, insurance, potential claims against third parties ortax refunds.***

 

The Company has estimated that the amount of theunauthorized transactions exceeds $31 million since fiscal year 2005.  Over 25,000 items have been seized by lawenforcement authorities. Although the Company intends to pursue proceeds from the sale of items seized bylaw enforcement authorities, as well as from insurance coverage, potentialclaims against third parties and tax refunds, the Company cannot reasonablyassess the amounts or timing of such recoveries.  The Company’s inability to recover its lossescould have a significant and adverse effect on its future financial condition.

 

***The Company’s inability to file its quarterlyfinancial statements on Form 10-Q in a timely manner could result in aloss of liquidity for the Company’s common stock if its shares are delisted bythe NASDAQ Stock Exchange.***

 

On February 16, 2010, the Company filed apartial 10-Q for the period ended December 31, 2009 that did not includequarterly financial statements.  NASDAQpreviously notified the Company of its noncompliance with Listing Rule 5250(c)(1),and accepted the Company’s plan to file by June 30, 2010 its amended quarterly unauditedfinancial statements for the period ended December 31, 2009.  This partial 10-Q for theperiod ended March 31, 2010 also does not include quarterly financialstatements, and likely will result in another notification by NASDAQ of theCompany’s noncompliance with Listing Rule 5250(c)(1).  If the Company is unable to provide thesequarterly financial statements on a timeline that is acceptable to NASDAQ, thenthe Company’s shares may be delisted. Such delisting may cause a loss of liquidity for shares of the Company’scommon stock.  The Company is workingdiligently to complete the restatements of the Company’s previously issuedconsolidated financial statements since fiscal year 2008 and the Companyintends to amend the applicable periodic reports as promptly as it is able to doso.  Although the Company is planning tofile the restatements by June 30, 2010, the Company cannot predict withcertainty when these financial statements will actually be available or whataction NASDAQ will take in response to the partial filing of this Form 10-Q.

 

***Legal proceedings related to the unauthorizedtransactions may adversely affect the Company’s financial condition.***

 

As further described in Part II, Item 1, LegalProceedings, the Company is currently addressing several legal matters related to the unauthorized transactions. The Company isunable at this time to quantify its exposure, if any.  The costs of dealing with these matters andany penalties and awards that may be assessed against the Company could besubstantial, and may adversely affect the Company’s financial condition.

 

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***The Company’s stock price may fluctuate as a resultof the unauthorized transactions and because of the uncertainties about theireffect on the Company’s financial condition.***

 

Uncertainties about the effect of the unauthorizedtransactions and significant developments related to the unauthorizedtransactions, such as the results of the restatements of the Company’spreviously issued consolidated financial statements, the legal mattersdescribed above or the results and recommendations of the IndependentInvestigation, could cause fluctuation in the Company’s stock price.  The Company’scommon stock could also be subject to wide fluctuations in response toadditional business factors such as the following:

 

·                  the sale or availability forsale of substantial amounts of the Company’s common stock;

 

·                  actual or anticipatedfluctuations in the Company’s operating results or its competitors’ operatingresults;

 

·                  announcements by the Companyor its competitors of new products;

 

·                  capacity changes,significant contracts, acquisitions or strategic investments;

 

·                  the Company’s growth rateand its competitors’ growth rates;

 

·                  changes in stock marketanalyst recommendations regarding the Company, its competitors or the industrygenerally, or lack of analyst coverage of the Company’s common stock;

 

·                  sales of the Company’scommon stock by its executive officers, directors and significant stockholdersor sales of substantial amounts of common stock; and

 

·                  changes in accountingprinciples.

 

***Reduction in present levels ofcash flow could adversely affect the Company’s business.***

 

The Company’s primary source of liquidity over thepast 12 months has been operating cash flows.  The Company’s future cashflows from operations (on both a short term and long term basis) are dependentupon, but not limited to:

 

·                       the Company’s ability to attract newcustomers that will sell the Company’s products and pay for them;

 

·                       the Company’s ability to retain theCompany’s existing customers at the level of sales previously produced;

 

·                       the volume of sales for these customers;

 

·                       the loss of business of one or moreprimary customers;

 

·                       changes in types of products that thecustomers purchase in their sales mix;

 

·                       poor or deteriorating economic conditionswhich would directly impact the ability of the Company’s customers to remain inbusiness and pay for their products on a timely basis;

 

·                       management’s ability to hold the line onany requests for increases in material or labor cost increases; and

 

·                       the ability to collect in full and in atimely manner, amounts due to the Company.

 

Inaddition, as noted above, the Company’s cash flow is also dependent, to someextent, upon the ability to maintain operating margins.  The continuinggeneral downturn in economic conditions or other events that caused the Company’scustomers to turn to lower-priced, lower-margin products, the Company’s cashflow and profitability could be materially and adversely affected.

 

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***Failure to attract and retain customers to sell the Company’s productscould adversely affect sales volume and future profitability.***

 

The Company markets a line of products used byconsumers to listen to music.  The Company distributes these productsthrough retail channels in the U.S. and independent distributors throughout therest of the world.  The Company is dependent upon the Company’s ability toretain an existing base of customers to sell the Company’s line ofproducts.  Loss of customers means loss of product placement.  TheCompany has broad distribution across many channels including specialty stores,mass merchants, electronics stores and computer retailers.  Sincedistribution is broadly based, any loss of a customer directly translates intoa reduction in sales volume which can only be replaced by replacing a similarnumber of representative retail outlets.  The inability of the Company’ssales and marketing staff to obtain new distribution outlets translates into alack of future growth and possibly a setback in sales volumes when loss ofcurrent customers occur.  For example, the loss of a customer representing10% of the Company’s business would translate into a reduction in revenues ofup to 10% based upon the point through the fiscal year that the customer waslost.  Attracting a new customer during the course of a fiscal year couldhave a positive impact or simply replace an account which has been lost. In addition, a customer can decide to make a change in the models that itdecides to offer for sale.  Such changes can take place arbitrarilythroughout the course of a year which can cause reductions in sales revenues inproportion to the number of retail outlets that the store represents in themarket.  The Company may not be able to maintain customers or modelselections and therefore experience a reduction in its sales revenue until amodel is restored to the mix or a customer is replaced by a new customer. A reduction in sales volume would cause a reduction in profitability.  TheCompany’s failure to retain existing customers, obtain new customers or developnew product lines that customers would choose to offer to consumers couldsignificantly affect the Company’s future profitability.  The loss ofbusiness of one or more principal customers or a change in the sales volumefrom a particular customer could have a material adverse effect on the Company’ssales volume and profitability.

 

***Shift in customer specificationsto lower priced items can reduce profit margins negatively, impactingprofitability.***

 

The Company sells a line of products with a suggestedretail price ranging from less than $10 up to $1,000.  The gross marginfor each of these models is unique in terms of percentages.  The pricerange of the products also produces a different level of actual dollarcontribution per unit.  For example a product with a gross margincontribution of 50% might yield a $5.00 contribution for one item, whileanother item may feature a 30% gross margin which could yield $50.00.  TheCompany finds the low priced portion of the market most competitive andtherefore most subject to pressure on gross margin percentages, which tends tolower profit contributions.  Retail preference for lower priced items canreduce profit margins and contributions.  The risk is that a shift inretail customer specifications toward lower priced items can lead to lowergross margins and lower profit contributions per unit of sale.  Due to therange of products that the Company sells, the product sales mix can produce avariation in terms of a range of profit margins.  Some customers sell alimited range of products that yield lower profit margins than others. Most notably, the budget priced headphone segment of the market below $10.00retail which is distributed through computer stores, office supply stores, andmass market retailers tend to yield the lowest gross margins.  An increasein business with these types of accounts, if coupled with a simultaneousreduction in sales to customers with higher gross margins would reduce profitmargins and profitability.

 

***Poor economic conditions canrestrict or limit product placement, sales and replenishment which coulddecrease profits.***

 

Deteriorating or weak economic conditions, or aforecast for the same, can trigger changes in inventory stocking atretail.  This may in turn lead to a reduction in model offerings and toout of stock situations.  If a retail customer of the Company does nothave adequate stocks of the Company’s products to offer for sale in a retailstore, consumers may choose another competitive model instead.  Customersoperating retail stores anticipate future sales demands and inventory productsaccordingly.  Whenever a general economic slowdown occurs, at both thedomestic or foreign level, sales volume levels and re-orders change. These changes directly impact the Company’s sales and profitability.  TheCompany is not in a position to determine how it will be affected by thesecircumstances, how extensive the effects may be, or for how long the Companymay be impacted by these circumstances.  The Company’s customers respondto changes in economic conditions and any adverse changes in economicconditions can therefore restrict product placement, availability, sales,replenishment and ultimately profitability.  These conditions existdomestically and internationally.

 

***Management is subject todecisions made outside its control which could directly affect futureprofitability.***

 

Retail customers determine which products they willstock for resale.  The Company competes with other manufacturers to secureshelf space in retail stores for the Company’s products.  During thecourse of a year, changes in the customers’ management personnel can ultimatelylead to changes in the stock assortment offered to consumers.  Thesechanges are often arbitrary.  In addition to changes in personnel withinthe Company’s customers, it is also possible that a strategic decision can bemade by a retail customer to consolidate vendors, or to discontinue certainproduct categories altogether.  In these instances, the Company’smanagement team may not able to convince customers to reverse suchdecisions.  The Company’s management team is also engaged in the effectiveprocurement, assembly, and manufacture of products.  The ability tonegotiate with suppliers, maintain productivity, and hold the line on costincreases can be subjected to pressures outside the control ofmanagement.  For example, increases in fuel costs can increase rates offreight.  Increases of this nature can seldom be avoided and the Companymay not be able to pass such increases along to its customers.  Management’seffective control of the manufacturing processes will have a direct impact onthe Company’s future profitability.  The Company regularly makes decisionsthat affect production schedules, shipping schedules, employee levels, andinventory levels.  The Company’s ability to make effective decisions inmanaging these areas has a direct effect on future profitability.

 

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***Accounts receivable amounts duefrom our customers can be lost as a result of customer bankruptcy, operationaldifficulty, or failure to pay, negatively impacting future profitability.***

 

The Company has significant accounts receivable orother amounts due from the Company’s customers.  Terms of payment forcustomers generally range from cash in advance to net 90 day creditterms.  These credit arrangements are negotiated at unspecified andirregular intervals.  The largest customers generate the largestreceivable balances.  If a customer develops operational difficulty it isnot uncommon to temporarily suspend payment to vendors.  The Company issubject to this risk in the retail marketplace.  From time to time acustomer may develop severe operating losses which can lead to abankruptcy.  In these cases, the Company may lose most of the outstandingbalance due.  Occasionally, the Company has been current with a customerat the time such an event occurs.  The more material risk is that oflosing the revenue of the customer which might be more onerous than losing thecurrent outstanding accounts receivable.  In addition, many companies thatwill insure accounts receivables will not do so for the Company’s largest massmarket customers.  The Company derives most of its sales revenue andprofits from selling products to retailers for resale to consumers.  Thefailure of the Company’s customers to pay in full amounts due to the Companycould negatively affect future profitability.

 

***Company profits can suffer frominterruptions in supply chain.***

 

The Company uses contract manufacturing facilities inMainland China, Taiwan, and South Korea.  These independent supplierentities are distant from the Company which means that the Company is at riskof business interruptions due to natural disaster, war, disease, and governmentintervention through tariffs or trade restrictions that are of less concerndomestically.  An additional area of concern for the Company is with thecontinuing “War on Terror” and the most recent developments in North Korea,Iran, and Lebanon.  Three of our largest distributors outside the U.S.have already experienced a general tightening of the availability of credit inrecent months, which we believe to be partly a result of certain of theseexternal concerns.  Therefore, if there are any interruptions in thesupply chain for any of these reasons, this could directly impact the Company’sprofits in a negative way.  The Company is also at risk if traderestrictions are imposed on the Company’s products based upon country oforigin.  In addition, any increase in tariffs and freight charges may notbe acceptable to pass along to the Company’s customers and could directlyimpact the Company’s profits.

 

***Fluctuations in currency exchangerates could affect pricing of products and cause customers to purchaselower-priced, less profitable products and could affect overall demand for theCompany’s products.***

 

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

 

***Company profits can suffer fromincreasing manufacturing costs in China as a result of increased wages and wagetaxes.***

 

The Company uses contract manufacturing facilities inMainland China.  An increase in the cost of labor or taxes on wages inChina may lead to an increase in the cost of goods manufactured in China. The cost of labor and wage taxes have increased in China which means that theCompany is at risk of higher manufacturing costs associated with goodsmanufactured in China.  Additionally, in response to inflationaryconcerns, wages in certain provinces in China have recently increased and maycontinue to do so in the future.  Significant increases in wages or wagetaxes paid by contract manufacturing facilities may increase the cost of goodsmanufactured in China which could have a material adverse effect on the Company’sprofit margins and profitability.

 

***The Company uses third partycarriers to ship its products which may pass on increases intransportation-related fuel cost to the Company which can reduce profitmargins, negatively impacting profitability.***

 

The Company uses numerous third party carriers to shipproduct, both domestically and internationally.  If the price of fuelcontinues to increase and the carriers choose to pass on these increase to theCompany, our freight costs may increase.  As a result, the Company’sfreight cost is impacted by changes in fuel prices.  Fuel prices affectfreight costs to both our customer’s location and our distributioncenter.  Increase in fuel prices and surcharges and other factors haveincreased and may continue to increase freight costs in the future.  Thisinflationary pressure of higher fuel costs and continued increase intransportation-related fuel costs could have a material adverse effect on theCompany’s profit margins and profitability.

 

***Consistency of the Company’sbusiness with several U.S. retailers.***

 

The Company is concerned about the consistency ofbusiness with several U.S. retailers for the coming year.  The recenttightening of credit availability worldwide caused all retailers to sharplycurtail inventory increases in advance of this year’s holiday season.  TheCompany has already seen some consolidation in product lines, and itemelimination, or reductions at several big box retailers.  The Company alsorecognizes the struggle that many of the Company’s automobile customers havebeen reporting in the news, and the potential impact that a reduction inautomobile unit sales might have upon our rear seat entertainment products’ forthe automotive market in the coming fiscal year.

 

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***We may not be able to enforce or protect our intellectual propertyrights, which may harm our ability to compete and harm our business.***

 

Our ability to enforce our patents, copyrights,licenses, trademarks and other intellectual property rights is subject togeneral litigation risks, as well as uncertainty as to the enforceability ofour intellectual property rights in various countries. When we seek to enforceour rights, we are often subject to claims that the intellectual property rightis invalid, is otherwise not enforceable, or is licensed to the party againstwhom we are asserting a claim. In addition, our assertion of intellectualproperty rights often results in the other party seeking to assert allegedintellectual property rights of its own or assert other claims against us,which could harm our business.

 

Third parties may assert against us or our customersalleged patent, copyright, trademark, or other intellectual property rights totechnologies that are important to our business. Any claims that our productsor processes infringe the intellectual property rights of others, regardless ofthe merit or resolution of such claims, could cause us to incur significantcosts in responding to, defending, and resolving such claims, and may divertthe efforts and attention of our management and technical personnel from ourbusiness.

 

As a result of such intellectual property claims, wecould be required or otherwise decide that it is appropriate to:

 

·                  pay damages related to third-partyinfringement or other claims;

·                  discontinue manufacturing, using, orselling particular products;

·                  discontinue using certain technology orprocesses;

·                  develop other technology, which could betime-consuming and costly or may not be possible; and/or

·                  license technology from a third partyclaiming infringement, which license may not be available on commerciallyreasonable terms.

 

In addition, governments may adopt regulations, andgovernments or courts may render decisions, requiring compulsory licensing ofintellectual property to others, or governments may require that products meetspecified standards that serve to favor local companies.  Our inability to enforce our intellectualproperty rights under these circumstances may harm our competitive position andour business.

 

The occurrence of any of the foregoing could result inunexpected expenses or require us to recognize an impairment of our assets,which would reduce the value of our assets and increase expenses. In addition,if we alter or discontinue our production of affected items, our revenue couldbe harmed.

 

**Item 2.****                                                        ****Unregistered Sales ofEquity Securities and Use of Proceeds**

 

In April of 1995, theBoard of Directors approved a stock repurchase program authorizing the Companyto purchase its common stock from time to time for its own account.  No purchases were made by the Company underthe stock repurchase program during the quarter ended March 31, 2010.

 

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**Item 3.****                                                        ****Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****                                                        ****Other Information**

 

None.

 

**Item 5.****                                                        ****Exhibits**

 

See Exhibit Indexattached hereto.

 

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

 

This Form 10-Qcontains forward-looking statements within the meaning of that term in thePrivate Securities Litigation Reform Act of 1995 (the “Act”) (Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934).  Additional written or oralforward-looking statements may be made by the Company from time to time infilings with the Securities Exchange Commission, press releases, or otherwise.  Statements contained in this Form 10-Qthat are not historical facts are forward-looking statements made pursuant tothe safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to,projections of revenue, income or loss and capital expenditures, statementsregarding future operations, anticipated financing needs, compliance withfinancial covenants in loan agreements, plans for acquisitions or sales ofassets or businesses, plans relating to products or services of the Company,assessments of materiality, predictions of future events, the effects ofpending and possible litigation, and assumptions relating to theforegoing.  In addition, when used inthis Form 10-Q, the words “anticipates,” “believes,” “estimates,” “expects,”“intends,” “plans” and variations thereof and similar expressions are intendedto identify forward-looking statements.

 

Forward-lookingstatements are inherently subject to risks and uncertainties, some of whichcannot be predicted or quantified based on current expectations.  Consequently, future events and actualresults could differ materially from those set forth in, contemplated by, orunderlying the forward-looking statements contained in this Form 10-Q, orin 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 followingareas:  future fluctuations in economicconditions, the receptivity of consumers to new consumer electronicstechnologies, the rate and consumer acceptance of new product introductions,competition, pricing, the number and nature of customers and their productorders, production by third party vendors, foreign manufacturing, sourcing andsales (including foreign government regulation, trade and importationconcerns), borrowing costs, changes in tax rates, pending or threatenedlitigation and investigations, fluctuations in currency exchange rates andother risk factors which may be detailed from time to time in the Company’sSecurities and Exchange Commission filings.

 

Readers are cautioned not to place undue reliance onany forward-looking statements contained herein, which speak only as of thedate hereof.  The Company undertakes noobligation to publicly release the result of any revisions to theseforward-looking statements that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unexpected events.

 

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Signatures

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
| ** **               | **KOSS  CORPORATION**                                                               |
|--------------------------|-------------------------------------------------------------------------------------|
| ** **               | ** **                                                                          |
|                     |                                                                                |
| Date:  May 17, 2010 | */s/  Michael J. Koss*                                                              |
|                     | Michael J. Koss                                                                     |
|                     | Vice Chairman,  President and                                                       |
|                     | Chief Executive  Officer                                                            |
|                     |                                                                                |
|                     |                                                                                |
| Date:  May 17, 2010 | */s/  David D. Smith*                                                               |
|                     | David D. Smith                                                                      |
|                     | Executive Vice President, Chief Financial Officer and Principal  Accounting Officer |

 

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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.     |
|                 |       |                                                                                                                                                                                                                                                                                   |
| 10.12                |       | Credit Agreement dated May 12, 2010, between Koss Corporation  and JPMorgan Chase Bank, N.A.*                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                   |
| 10.13                |       | Pledge and Security Agreement dated May 12, 2010, between Koss  Corporation and JPMorgan Chase Bank, N.A.*                                                                                                                                                                        |

 

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*Filed herewith

 

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