Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**for thequarterly period ended September 30, 2010**

** **

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**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                              |       | (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 areacode: **(414) 964-5000**

 

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

 

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

 

Indicateby check mark 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 oNo x

 

At October 25, 2010, there were 7,382,706 shares outstanding ofthe registrant’s common stock.

 

 

 

----

Table ofContents

 

KOSS CORPORATION AND SUBSIDIARY

FORM 10-Q

September 30, 2010

 

INDEX

 
| ** **   | ** **            | ** **                                                                                                         | **Page** |
|--------------|-----------------------|--------------------------------------------------------------------------------------------------------------------|----------|
|         |                  |                                                                                                               |     |
| PART I  | FINANCIAL INFORMATION |                                                                                                               |     |
|         |                  |                                                                                                               |     |   |
|         | Item 1.               | Financial  Statements                                                                                              |     |   |
|         |                  |                                                                                                               |     |   |
|         |                  | Condensed  Consolidated Statements of Operations (Unaudited)   Three months ended September 30, 2010 and 2009 |     | 3 |
|         |                  |                                                                                                               |     |   |
|         |                  | Condensed  Consolidated Balance Sheets   September 30, 2010 (Unaudited) and June 30, 2010                |     | 4 |
|         |                  |                                                                                                               |     |   |
|         |                  | Condensed  Consolidated Statements of Cash Flows (Unaudited)   Three months ended September 30, 2010 and 2009 |     | 5 |
|         |                  |                                                                                                               |     |   |
|         |                  | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                  |     | 6 |
|         |                  |                                                                                                               |     |   |
|         | Item 2.               | Management’s Discussion and Analysis  of Financial Condition and Results of Operations                        |     | 13 |
|         |                  |                                                                                                               |     |   |
|         | Item 3.               | Quantitative and Qualitative  Disclosures About Market Risk                                                        |     | 16 |
|         |                  |                                                                                                               |     |   |
|         | Item 4.               | Controls and Procedures                                                                                            |     | 16 |
|         |                  |                                                                                                               |     |
| PART II | OTHER INFORMATION     |                                                                                                               |     |
|         |                  |                                                                                                               |     |
|         | Item 1.               | Legal Proceedings                                                                                                  |     | 17 |
|         |                  |                                                                                                               |     |   |
|         | Item 1A.              | Risk Factors                                                                                                       |     | 17 |
|         |                  |                                                                                                               |     |   |
|         | Item 2.               | Unregistered Sales of Equity  Securities and Use of Proceeds                                                       |     | 17 |
|         |                  |                                                                                                               |     |   |
|         | Item 3.               | Defaults Upon Senior Securities                                                                                    |     | 17 |
|         |                  |                                                                                                               |     |   |
|         | Item 4.               | (Removed and Reserved)                                                                                             |     | 17 |
|         |                  |                                                                                                               |     |   |
|         | Item 5.               | Other Information                                                                                                  |     | 17 |
|         |                  |                                                                                                               |     |   |
|         | Item 6.               | Exhibits                                                                                                           |     | 17 |

 

2

----

Table ofContents

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.    FinancialStatements.**

 

KOSS CORPORATION ANDSUBSIDIARY

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)

 
| **Three Months Ended September 30,**    | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                   |       | $          | 10,032,134 |       | $          | 11,614,645 |   |
| Cost of goods sold                                          |       | 5,670,525  |       | 5,964,673  |       |
| Gross profit                                                |       | 4,361,609  |       | 5,649,972  |       |
|                                                        |       |       |       |       |       |
| Operating Expenses:                                         |       |       |       |       |       |
| Selling, general and administrative expenses                |       | 3,104,664  |       | 2,739,298  |       |
| Unauthorized transactions                                   |       | —     |       | 5,324,164  |       |
| Unauthorized transaction related costs and  recoveries, net |       | 266,284    |       | —     |       |
| Total Operating Expenses                                    |       | 3,370,948  |       | 8,063,462  |       |
|                                                        |       |       |       |       |       |
| Income (loss) from operations                               |       | 990,661    |       | (2,413,490 | )          |
|                                                        |       |       |       |       |       |
| Other Income (Expense):                                     |       |       |       |       |       |
| Interest income                                             |       | 20         |       | 3          |       |
| Interest expense                                            |       | (104,660   | )          | (58,978    | )          |
| Total Other Expense, net                                    |       | (104,640   | )          | (58,975    | )          |
|                                                        |       |       |       |       |       |
| Income (loss) before income tax provision  (benefit)        |       | 886,021    |       | (2,472,465 | )          |
|                                                        |       |       |       |       |       |
| Income tax provision (benefit)                              |       | 323,162    |       | (878,715   | )          |
|                                                        |       |       |       |       |       |
| Net income (loss)                                           |       | $          | 562,859    |       | $          | (1,593,750 | ) |
|                                                        |       |       |       |       |       |
| Earnings (loss) per common share:                           |       |       |       |       |       |
| Basic                                                       |       | $          | 0.08       |       | $          | (0.22 | ) |
| Diluted                                                     |       | $          | 0.08       |       | $          | (0.22 | ) |
|                                                        |       |       |       |       |       |
| Dividends declared per common share                         |       | $          | 0.060      |       | $          | 0.065 |   |

 

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

 

3

----

Table of Contents

 

KOSS CORPORATION ANDSUBSIDIARY

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                             | ** ** | **(Unaudited)**                  | ** ** | ** **                  | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **                                                                                             | ** ** | **September 30, 2010** | ** ** | **June 30, 2010** | ** ** |
| ASSETS                                                                                                 | ** ** | ** **                       | ** ** | ** **                  | ** ** |
| Current Assets:                                                                                        |       |                             |       |                        |       |
| Cash and cash equivalents                                                                              |       | $                                | 165,019    |                        | $          | 125,496 |   |
| Accounts receivable, less allowance for doubtful  accounts of $832,610 and $757,535, respectively      |       | 5,236,198                        |       | 4,213,327                   |       |
| Inventories                                                                                            |       | 9,134,713                        |       | 8,457,325                   |       |
| Prepaid expenses                                                                                       |       | 497,831                          |       | 254,658                     |       |
| Income taxes receivable                                                                                |       | 249,962                          |       | 928,550                     |       |
| Deferred income taxes                                                                                  |       | 1,231,395                        |       | 1,144,086                   |       |
| Total Current Assets                                                                                   |       | 16,515,118                       |       | 15,123,442                  |       |
|                                                                                                   |       |                             |       |                        |       |
| Equipment and leasehold improvements, net                                                              |       | 2,370,094                        |       | 2,392,772                   |       |
|                                                                                                   |       |                             |       |                        |       |
| Other Assets:                                                                                          |       |                             |       |                        |       |
| Product software development costs                                                                     |       | 2,655,047                        |       | 2,366,828                   |       |
| Deferred income taxes                                                                                  |       | 2,376,913                        |       | 2,527,764                   |       |
| Cash surrender value of life insurance                                                                 |       | 3,684,945                        |       | 3,339,485                   |       |
| Total Other Assets                                                                                     |       | 8,716,905                        |       | 8,234,077                   |       |
|                                                                                                   |       |                             |       |                        |       |
| Total Assets                                                                                           |       | $                                | 27,602,117 |                        | $          | 25,750,291 |   |
|                                                                                                   |       |                             |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                              |       |                             |       |                        |       |
| Current Liabilities:                                                                                   |       |                             |       |                        |       |
| Accounts payable                                                                                       |       | $                                | 5,383,736  |                        | $          | 4,794,598 |   |
| Accrued liabilities                                                                                    |       | 3,165,300                        |       | 4,514,724                   |       |
| Dividends payable                                                                                      |       | 442,962                          |       | 442,962                     |       |
| Total Current Liabilities                                                                              |       | 8,991,998                        |       | 9,752,284                   |       |
|                                                                                                   |       |                             |       |                        |       |
| Long-Term Liabilities:                                                                                 |       |                             |       |                        |       |
| Line of credit                                                                                         |       | 3,575,000                        |       | 1,250,000                   |       |
| Deferred compensation                                                                                  |       | 1,808,924                        |       | 1,752,459                   |       |
| Derivative liability                                                                                   |       | 125,000                          |       | 125,000                     |       |
| Other liabilities                                                                                      |       | 678,300                          |       | 678,300                     |       |
| Total Long-Term Liabilities                                                                            |       | 6,187,224                        |       | 3,805,759                   |       |
|                                                                                                   |       |                             |       |                        |       |
| Total Liabilities                                                                                      |       | 15,179,222                       |       | 13,558,043                  |       |
|                                                                                                   |       |                             |       |                        |       |
| Stockholders’ Equity:                                                                             |       |                             |       |                        |       |
| Common stock, $0.005 par value, authorized  20,000,000 shares; issued and outstanding 7,382,706 shares |       | 36,914                           |       | 36,914                      |       |
| Paid in capital                                                                                        |       | 1,602,846                        |       | 1,492,096                   |       |
| Retained earnings                                                                                      |       | 10,783,135                       |       | 10,663,238                  |       |
| Total Stockholders’ Equity                                                                        |       | 12,422,895                       |       | 12,192,248                  |       |
|                                                                                                   |       |                             |       |                        |       |
| Total Liabilities and Stockholders’ Equity                                                        |       | $                                | 27,602,117 |                        | $          | 25,750,291 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

4

----

Table ofContents

 

KOSS CORPORATION ANDSUBSIDIARY

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)

 
| **Three Months Ended September 30,**                              | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                  |       |       |       |       |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |       |       |       |       |
| Net income (loss)                                                                     |       | $          | 562,859    |       | $          | (1,593,750 | ) |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |       |       |       |       |
| Provision for doubtful accounts                                                       |       | 73,397     |       | 241,112    |       |
| Loss on disposals of equipment and leasehold  improvements                            |       | —     |       | 961        |       |
| Depreciation of equipment and leasehold  improvements                                 |       | 158,144    |       | 172,088    |       |
| Stock-based compensation expense                                                      |       | 110,750    |       | 112,190    |       |
| Change in deferred income taxes                                                       |       | 63,542     |       | (1,908,455 | )          |
| Change in cash surrender value of life insurance                                      |       | 3,043      |       | 71,180     |       |
| Deferred compensation                                                                 |       | 56,465     |       | 52,805     |       |
| Net changes in operating assets and liabilities  (Note 9)                             |       | (2,098,527 | )          | (715,164   | )          |
| Net cash used in operating activities                                                 |       | (1,070,327 | )          | (3,567,033 | )          |
|                                                                                  |       |       |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |       |       |       |       |
| Maturity of investments                                                               |       | —     |       | 25,000     |       |
| Life insurance premiums paid                                                          |       | (348,503   | )          | (348,503   | )          |
| Purchase of equipment and leasehold improvements                                      |       | (135,466   | )          | (355,818   | )          |
| Product software development expenditures                                             |       | (288,219   | )          | (140,936   | )          |
| Net cash used in investing activities                                                 |       | (772,188   | )          | (820,257   | )          |
|                                                                                  |       |       |       |       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |       |       |       |       |       |
| Net proceeds from line of credit                                                      |       | 2,325,000  |       | 2,750,000  |       |
| Net increase in outstanding checks in excess of  funds on deposit                     |       | —     |       | 621,393    |       |
| Dividends paid to stockholders                                                        |       | (442,962   | )          | (479,876   | )          |
| Net cash provided by financing activities                                             |       | 1,882,038  |       | 2,891,517  |       |
|                                                                                  |       |       |       |       |       |
| Net increase (decrease) in cash and cash  equivalents                                 |       | 39,523     |       | (1,495,773 | )          |
| Cash and cash equivalents at beginning of period                                      |       | 125,496    |       | 1,498,876  |       |
| Cash and cash equivalents at end of period                                            |       | $          | 165,019    |       | $          | 3,103 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

5

----

Table ofContents

 

KOSS CORPORATION AND SUBSIDIARY

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

1.             CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

 

The unaudited condensed consolidated financial statements presentedherein are based on interim amounts. In the opinion of management, alladjustments (consisting of normal recurring accruals) necessary to presentfairly the financial position, results of operations and cash flows as of andfor the three months ended September 30, 2010 and for all periodspresented have been made. All significant intercompany accounts andtransactions have been eliminated. The results of operations for the threemonths ended September 30, 2010 are not necessarily indicative of theoperating results for the full year.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples in the United States of America (“GAAP”) have been condensed oromitted. These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Registrant’s June 30, 2010 Annual Report on Form 10-Kand the Amendment No. 1 to the Annual Report on Form 10-K/A.

 

2.             UNAUTHORIZED TRANSACTIONS

 

InDecember 2009, the Company learned of significant unauthorizedtransactions, which totaled approximately $31,500,000 from fiscal 2005 through December 2009.The volume of these unauthorized transactions was $10,286,988 from July 1,2009 until the unauthorized transactions were discovered in December 2009**.**In the three months ended September 30, 2009, theunauthorized transactions were $5,324,164.

 

Theunauthorized transactions line in the Condensed Consolidated Statements ofOperations represents the total of identified unauthorized transactions in theperiod presented.

 

Theunauthorized transaction related costs and recoveries, net line in theCondensed Consolidated Statements of Operations is comprised of the legal andprofessional fees for legal defense costs as well as legal fees related tocertain claims initiated against third parties (see Note 12). The recoveriesrepresent amounts received under the Company’s insurance and othermiscellaneous credits related to the unauthorized transactions. For the threemonths ended September 30, 2010, these costs and recoveries were asfollows:

 
| Legal fees                                                  |   | $        | 612,544 |   |
|-------------------------------------------------------------|--------|----------|---------|--------|
| Professional fees                                           |   | 16,877   |    |
| Total costs                                                 |   | 629,421  |    |
|                                                        |   |     |    |
| Insurance recoveries                                        |   | (363,137 | )       |
|                                                        |   |     |    |
| Unauthorized transaction related costs and  recoveries, net |   | $        | 266,284 |   |

 

6

----

Table ofContents

 

3.                                       EARNINGS (LOSS)PER COMMON AND COMMON STOCK EQUIVALENT SHARE

 

Basicearnings (loss) per common share are computed based on the weighted-averagenumber of common shares outstanding. There were 7,382,706 weighted-averagenumber of common shares outstanding for both of the three months ending September 30,2010 and 2009. When dilutive, stock options are included in earnings per shareas share equivalents using the treasury stock method. For the three monthsended September 30, 2010, there were no common stock equivalents relatedto stock option grants that were included in the computation of theweighted-average number of shares outstanding for diluted earnings per sharebecause the exercise price was higher than the average market price for thequarter. For the three months ended September 30, 2009 there were nocommon stock equivalents related to stock option grants that were included inthe computation of the weighted-average number of shares outstanding fordiluted loss per share. Shares under option of 1,203,308 were excluded fromdiluted weighted-average common shares outstanding for the three months ended September 30,2009 as they would be anti-dilutive due to the Company’s net loss for thequarter.

 

4.                                       INCOME TAXES

 

The Company files income taxreturns in the United States (Federal), Wisconsin (state) and various otherstate jurisdictions. Tax years open to examination by tax authorities under thestatute of limitations include fiscal 2007 through 2010 for Federal and fiscal2006 through 2010 for most state jurisdictions. There is an open examination bythe Wisconsin Department of Revenue for the period July 1, 2005 through June 30,2009.

 

The total liability forunrecognized tax benefits was $300,000 as of September 30, 2010 and June 30,2010. The liability does not include an amount for accrued penalties. TheCompany recognizes penalties related to unrecognized tax benefits in theprovision for income taxes. The Company recognizes interest related tounrecognized tax benefits as interest expense. As part of the unauthorizedtransactions, the Company has accrued interest of $739,703 and $657,546 at September 30,2010 and June 30, 2010, respectively. The Company does not expect asignificant increase or decrease to the total amounts of unrecognized taxbenefits within the next 12 months. There was no change in the amount ofunrecognized tax benefits during the three months ended September 30,2010.

 

5.             INVENTORIES

 

Theclassification of inventories is as follows:

 
| ** **     | ** ** | **September 30, 2010** | ** ** | **June 30, 2010** | ** ** |
|----------------|------------|----------------------------------|------------|-----------------------------|------------|
| Raw materials  |       | $                                | 2,882,541  |                        | $          | 2,407,715 |   |
| Finished goods |       | 6,252,172                        |       | 6,049,610                   |       |
|           |       | $                                | 9,134,713  |                        | $          | 8,457,325 |   |

 

6.             STOCK PURCHASEAGREEMENT

 

TheCompany has an agreement with its Chairman, John C. Koss, in the event of hisdeath, at the request of the executor of the estate, to repurchase his Companycommon stock from his estate. The Company does not have the right to requirethe estate to sell stock to the Company. As such, this arrangement is accountedfor as a written put option with the fair value of the put option recorded as aderivative liability.

 

Thefair value of the option at September 30, 2010 and June 30, 2010 was$125,000. The repurchase price is 95% of the fair value of the common stock onthe date that notice to repurchase is provided to the Company. The total numberof shares to be repurchased will be sufficient to provide proceeds which are

 

7

----

Table of Contents

 

thelesser of $2,500,000 or the amount of estate taxes and administrative expensesincurred by the Chairman’s estate. The Company may elect to pay the purchaseprice in cash or may elect to pay cash equal to 25% of the total amount due andto execute a promissory note for the balance, payable over four years, at theprime rate of interest. The Company maintains a $1,150,000 life insurancepolicy to fund a substantial portion of this obligation.

 

7.             DIVIDENDS DECLARED

 

OnAugust 19, 2010, the Company declared a quarterly cash dividend of $0.06per share for the stockholders of record on September 30, 2010 to be paid October 15,2010. Such dividend payable has been recorded at September 30, 2010.

 

8.                                       STOCK OPTIONS

 

In1990, pursuant to the recommendation of the Board of Directors, thestockholders ratified the creation of the Company’s 1990 Flexible IncentivePlan (the “1990 Plan”). The 1990 Plan is administered by a committee of theBoard of Directors and provides for the granting of various stock-based awardsincluding stock options to eligible participants, primarily officers andcertain key employees. A total of 225,000 shares of common stock were availablein the first year of the 1990 Plan’s existence. Each year thereafter additionalshares equal to 0.25% of the shares outstanding as of the first day of theapplicable fiscal year were reserved for issuance pursuant to the 1990 Plan. OnJuly 22, 1992, the Board of Directors authorized the reservation of anadditional 250,000 shares for the 1990 Plan, which was approved by thestockholders. In 1993, the Board of Directors authorized the reservation of anadditional 300,000 shares for the 1990 Plan, which was approved by thestockholders. In 1997, the Board of Directors authorized the reservation of anadditional 300,000 shares for the 1990 Plan, which was approved by thestockholders. In 2001, the Board of Directors authorized the reservation of anadditional 300,000 shares for the 1990 Plan, which was also approved by thestockholders. As of September 30, 2010, there are 170,506 optionsavailable for future grants. Options vest over a four or five year period, witha maximum term of five 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 expected term of awards granted is determined basedon historical experience with similar awards, giving consideration to theexpected term and vesting schedules. The expected volatility is determinedbased on the Company’s historical stock prices over the most recent periodcommensurate with the expected term of the award. The risk-free interest rateis based on U.S. Treasury zero-coupon issues with a remaining term commensuratewith the expected term of the award. Expected pre-vesting option forfeituresare based on historical data.

 

8

----

Table of Contents

 

Asummary of stock option activity under the plan for the three****months ended September 30, 2010 is asfollows:

 
| ** **                                     | ** ** | **Number  of Shares** | ** ** | **Stock  Options  Price  Range** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life - Years** | ** ** | **Aggregate  Intrinsic  Value of In-  The-Money  Options** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|----------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Shares under option at June 30, 2010      |       | 1,159,308                  |       | $3.90 - $14.40                   |       | $                                      | 9.12       |                                                                  | 3.66       |                                                                 | $          | — |   |
| Granted                                        |       | 385,000                    |       | $5.24 - $5.76                    |       | $                                      | 5.40       |                                                                  |       |                                                                 |       |   |
| Exercised                                      |       | —                     |       | —                           |       | —                                 |       |                                                                  |       |                                                                 |       |
| Expired                                        |       | (70,000                    | )          | $9.56                            |       | $                                      | 9.56       |                                                                  |       |                                                                 |       |   |
| Forfeited                                      |       | —                     |       | —                           |       | —                                 |       |                                                                  |       |                                                                 |       |
| Shares under option at September 30, 2010 |       | 1,474,308                  |       | $3.90 - $14.40                   |       | $                                      | 8.17       |                                                                  | 4.36       |                                                                 | $          | — |   |
|                                           |       |                       |       |                             |       |                                   |       |                                                                  |       |                                                                 |       |
| Exercisable as of June 30, 2010           |       | 627,308                    |       | $7.76 - $14.40                   |       | $                                      | 10.72      |                                                                  |       |                                                                 |       |   |
| Exercisable as of September 30, 2010      |       | 640,308                    |       | $6.275 - $14.40                  |       | $                                      | 10.36      |                                                                  |       |                                                                 |       |   |

 

Asummary of intrinsic value and cash received from stock option exercises andfair value of vested stock options for the three months ended September 30,2010 and 2009 is as follows:

 
| ** **                                       | ** ** | **Three Months  Ended  September 30, 2010** | ** ** | **Three Months  Ended  September 30, 2009** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Total intrinsic value of stock options exercised |       | $                                                          | —     |                                                       | $          | — |   |
| Cash received from stock option exercises        |       | $                                                          | —     |                                                       | $          | — |   |
| Total fair value of stock options vested         |       | $                                                          | 132,817    |                                                       | $          | 45,772 |   |

 

9

----

Table of Contents

 

9.             ADDITIONAL CASH FLOW INFORMATION

 

The net changes in cash as aresult of changes in operating assets and liabilities consist of the followingfor the three months ended:

 
| ** **                                             | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **2010**               | ** ** | **2009**               | ** ** |
|                                                   |       |                   |       |                   |       |
| Accounts receivable                                    |       | $                      | (1,096,268 | )                      | $          | (2,732,950 | ) |
| Inventories                                            |       | (677,388               | )          | (325,875               | )          |
| Prepaid expenses and other assets                      |       | (243,173               | )          | (287,946               | )          |
| Income taxes                                           |       | 678,588                |       | 779,741                |       |
| Accounts payable                                       |       | 589,138                |       | 1,804,690              |       |
| Accrued liabilities                                    |       | (1,349,424             | )          | 47,176                 |       |
| Net change                                             |       | $                      | (2,098,527 | )                      | $          | (715,164 | ) |
|                                                   |       |                   |       |                   |       |
| Net cash (refunded) paid during the three months  for: |       |                   |       |                   |       |
| Income taxes                                           |       | $                      | (418,968   | )                      | $          | 250,000 |   |
| Interest                                               |       | $                      | 19,260     |                   | $          | — |   |

 

10.                                 CREDITFACILITIES

 

On February 16, 2009,the Company entered into a credit facility with Harris N.A. for an unsecuredline of credit facility for up to a maximum of $10,000,000 up to and including January 29,2010. On October 9, 2009 the credit facility was extended to December 31,2010. The credit facility replaced the Company’s previous credit facility,which was terminated and contained substantially the same terms as the Company’snew credit facility. The Company could use the credit facility for workingcapital, to refinance existing indebtedness, for stock repurchase and forgeneral corporate purposes. Borrowings under the credit facility bore interestat either the bank’s most recently publicly announced prime rate or at a LondonInterbank Offered Rate (“LIBOR”) based rate plus 1.25% as determined inaccordance with the loan agreement. The weighted-average interest rate for thethree months ended September 30, 2009 was 3.25% on $2,750,000 ofoutstanding borrowings. The credit facility included certain financialcovenants that required the Company to maintain a minimum tangible net worth,liabilities to tangible net worth ratios and interest coverage ratios. TheCompany used its credit facility from time to time, although there was noutilization of this credit facility at June 30, 2009. The Company’s creditfacility with Harris N.A. was terminated on May 12, 2010 and theoutstanding balance of $5,863,349 as of that date was fully repaid.

 

On May 12, 2010, theCompany entered into a new secured credit facility with JPMorgan Chase Bank,N.A. (“Lender”). The Credit Agreement dated May 12, 2010 between theCompany and the Lender (“Credit Agreement”) provides for an $8,000,000revolving secured credit facility with interest rates either ranging from 0.0%to 0.75% over the Lender’s most recently publicly announced prime rate or 2.0%to 3.0% over LIBOR, depending on the Company’s leverage ratio. The CreditAgreement expires on July 31, 2013. In addition to the revolving loans,the Credit Agreement also provides that the Company may, from time to time,request the Lender to issue letters of credit for the benefit of the Company ofup to a sublimit of $2,000,000 and subject to certain other limitations. The loans may be used only for general corporate purposes of the Company.

 

TheCredit Agreement contains certain affirmative, negative and financial covenantscustomary for financings of this type. The negative covenants include restrictionson other indebtedness, liens,

 

10

----

Table ofContents

 

fundamentalchanges, certain investments, asset sales, sale and leaseback transactions andtransactions with affiliates, among other restrictions.  The financial covenants include a minimumcurrent ratio, minimum tangible net worth and maximum leverage ratiorequirements.  The Company and the Lenderalso entered into the Pledge and Security Agreement dated May 12, 2010under which the Company granted the Lender a security interest in substantiallyall of the Company’s assets in connection with the Company’s obligations underthe Credit Agreement.  At September 30,2010 and June 30, 2010, the outstanding balance on this credit facilitywas $3,575,000 and $1,250,000, respectively. The applicable interest rates at September 30, 2010 were 2.76% on$3,500,000 of outstanding balance and 3.75% on $75,000 of outstandingbalance.  The weighted average interestrate in effect in the borrowings outstanding as of September 30, 2010 and June 30,2010 was 2.78% and 3.02%, respectively.

 

11.           STOCKHOLDERS’ EQUITY

 

The following tablesummarizes the changes in stockholders’ equity for the three month periodsended:

 
| ** **                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2010**               | ** ** | **2009**               | ** ** |
|                             |       |                   |       |                   |       |
| Net income (loss)                |       | $                      | 562,859    |                   | $          | (1,593,750 | ) |
| Dividends declared               |       | (442,962               | )          | (479,876               | )          |
| Stock-based compensation expense |       | 110,750                |       | 112,190                |       |
|                             |       | $                      | 230,647    |                   | $          | (1,961,436 | ) |

 

12.           LEGAL MATTERS

 

Sincelearning of the unauthorized transactions in December 2009, the Company hasbeen named in the matters described below. The Company has also initiated certain actions against third parties,which are also described below, and may bring additional claims against otherthird parties.

 

·                  On January 11, 2010, the Companyreceived a letter from a law firm stating that it represented a shareholder anddemanding that the Company’s Board of Directors investigate and take legalaction against all responsible parties to ensure compensation for the Company’slosses 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, a class actioncomplaint was filed in federal court in Wisconsin against the Company, MichaelKoss and Sujata Sachdeva. The suit alleges violations of Section 10(b), Rule 10b-5and Section 20(a) of the Exchange Act relating to the unauthorizedtransactions and requests an award of compensatory damages in an amount to beproven at trial. An amended complaint was filed on September 10, 2010adding Grant Thornton LLP as a defendant. See David A. Puskala v. KossCorporation, et al., United States District Court, Eastern District ofWisconsin, Case No. 2:2010cv00041.

 

·                  On January 26, 2010, the SEC’s Divisionof Enforcement advised the Company that it obtained a formal order ofinvestigation in connection with the unauthorized transactions. The Companyvoluntarily brought the unauthorized transactions to the SEC staff’s attentionwhen they were discovered in December 2009, and is cooperating with theongoing SEC investigation.

 

11

----

Table ofContents

 

·                      On February 16and 18, 2010, separate shareholder derivative suits were filed in MilwaukeeCounty Circuit Court in connection with the previously disclosed unauthorizedtransactions. The first suit names as defendants Michael Koss, John Koss Sr.,the other Koss directors, Sujata Sachdeva, Grant Thornton LLP, and KossCorporation (as a nominal defendant); the second suit names the same partiesexcept Grant Thornton LLP. Among other things, both suits allege variousbreaches of fiduciary and other duties, and seek recovery of unspecifieddamages and other relief. See *Ruiz v. Koss, et al*.,Circuit Court, Milwaukee County, Wisconsin, No. 10CV002422 (February 16,2010) and *Mentkowski v. Koss, et al*., CircuitCourt, Milwaukee County, Wisconsin, No. 10CV002290 (February 18,2010).  These two shareholder derivativesuits have been consolidated under Master File No. 10CV002422.

 

·                      On February 18,2010, the Company filed an action against American Express Company, AmericanExpress Travel Related Services Company, Inc., AMEX Card Services Company,Decision Science, and Pamela S. Hopkins in Superior Court of Maricopa County,Arizona, case no. CV2010-006631, alleging various claims of aiding and abettingbreach of fiduciary duty, aiding and abetting fraud, conversion, and negligencerelating to the unauthorized transactions.

 

·                      On June 24,2010, the Company filed an action against its former independent auditor, GrantThornton, LLP, and Ms. Sachdeva, in Circuit Court of Cook County, Illinois,alleging various claims of accounting malpractice, negligent misrepresentation,and fraud relating to the unauthorized transactions.

 

Theultimate resolution of these matters is not determinable.

 

12

----

Table ofContents

 

**Item 2.****          ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

**Overview**

 

***Unauthorized Transactions*** — In December 2009,the Company learned of significant unauthorized transactions which totaledapproximately $31,500,000 from fiscal 2005 through December 2009.  The volume of these unauthorized transactionswas $10,286,988 from July 1, 2009 until the unauthorized transactions werediscovered in December 2009**. **In the three months ended September 30,2009, the unauthorized transactions were $5,324,164.

 

***Operations*** — Net sales for the three months ended September 30declined to $10,032,134 in 2010 compared with $11,614,645 in2009.  This $1,582,511 decrease in net sales was primarily driven bylower sales in the export market.  Includingthe unauthorized transaction and unauthorized transaction related costs andrecoveries, net as expenses, the Company had income from operations of $990,661for the three months ended September 30, 2010, compared to a loss fromoperations of $2,413,490 for the three months ended September 30,2009.  The increased income from operations was primarily driven bythe there not being any unauthorized transactions during the three months endedSeptember 30, 2010 compared to $5,324,164 for the three months ended September 30,2009.  The reduction in unauthorizedtransactions was partially offset by lower sales and a decrease in the grossprofit percentage, which was 43.5% for the three months ended September 30,2010 compared to 48.6% for the same period last year.  Operating income, excluding the unauthorizedtransactions and related costs and recoveries, was $1,256,945 in 2010 or 12.5%of net sales for the three months ended September 30, 2010 compared to$2,910,674 or 25.1% of net sales for the three months ended September 30,2009.

 

**Results of Operations**

 

**ThreeMonths Ended September 30, 2010 to Three Months Ended September 30,2009**

 

***Sales and Gross Profit***

 

Netsales for the three months ended September 30, 2010 totaled $10,032,134,compared with $11,614,645 in the three months ended September 30,2009.  This $1,582,511 decrease in net sales was driven by lowersales to distributors importing products into Europe and Scandinavia.

 

Grossprofit in the three months ended September 30, 2010 was $4,361,609 or 43.5%of net sales compared to $5,649,972 or 48.6% of net sales in the three monthsended September 30, 2009.  Thedecreased gross margin percentage was due to higher freight costs forimportation of products, the unfavorable impact of the absorption of overheadon the lower sales volume and lower sales of one of the most profitableproducts.  Freight is higher as apercentage of sales due to higher shipping costs and a lower value of purchasedproduct per shipment.  Overhead costswere higher on lower sales volume.  Theprimary increase in costs was due to spending approximately $66,000 onprototypes and engineering tests for products expected to be introduced laterin fiscal 2011.  Sales of a veryprofitable product mix to foreign distributors were approximately $1,200,000lower in the three months ended September 30, 2010 than they were in thesame period last year.

 

***Selling, General and Administrative Expenses***

 

Selling,general and administrative expenses for the three months ended September 30,2010 were $3,104,664, as compared to $2,739,298 for the three months ended September 30,2009.   The increase in selling, general and administrative expenseswas the result of increased legal and professional fees for 

 

13

----

Table ofContents

 

generalcorporate initiatives, including patent filings and defense.  These increased costs were partially offsetby lower provisions for doubtful accounts.

 

***Unauthorized Transactions***

 

Inthe three months ended September 30, 2010, the Company incurred a net costof $266,284 for the defense of legal actions related to the unauthorizedtransactions and related to certain claims initiated against third parties.  Included in the net cost for the three monthsended September 30, 2010 were $363,137 of insurance recoveries.

 

Inthe three months ended September 30, 2009, the unauthorized transactionstotaled $5,324,164.

 

***Operating Income***

 

Inthe three months ended September 30, 2010, the Company had operatingincome, including the unauthorized transaction related costs and recoveries, of$990,661 compared to an operating loss, including the unauthorized transactionsas expense, of $2,413,490 in the three months ended September 30,2009.  The increase in operating income was primarily the result ofno unauthorized transactions.  Theelimination of unauthorized transactions was partially offset by the lowergross profit percentage and lower volume.  Operating income, excluding the unauthorized transactions and relatedcosts and recoveries, was $1,256,945 in the three months ended September 30,2010 or 12.5% of net sales compared to $2,910,674 or 25.1% of net sales in thethree months ended September 30, 2009.

 

***Provision for Income Taxes***

 

Incometax provision for the three months ended September 30, 2010 was $323,162as compared to a benefit of $878,715 in the three months ended September 30,2009.  The effective income tax rate was 36.5% and 35.5% for thethree months ended September 30, 2010 and 2009, respectively.

 

**Liquidity and Capital Resources**

 

***Operating Activities***

 

Duringthe three months ended September 30, 2010, cash used in operations was$1,070,327, as compared to $3,567,033 used in the three months ended September 30,2009.  Working capital was $7,523,120 atSeptember 30, 2010 and $5,371,158 at June 30, 2010.  The net increase in working capital of$2,151,962 from June 30, 2010 primarily represents the increase inaccounts receivable and inventory.  Theaccounts receivable increased because of the increase in sales in the threemonths ended September 30, 2010 compared to the three months ended June 30,2010.  These were partially offset by adecrease in accounts payable and accrued liabilities because of the efforts toget more current with the Company’s primary vendors. As of September 30,2010 the Company had open commitments of approximately $1,065,000 for softwareand new product development.

 

***Investing Activities***

 

Cashused in investing activities for the three months ended September 30, 2010was $772,188 as compared to $820,257 used in investing activities for the threemonths ended September 30, 2009.  Cash used in investingactivities for both periods was largely due to life insurance premiums paid andcapital expenditures, which mainly consisted of product software developmentcosts and tooling to support production.

 

14

----

Table ofContents

 

***Financing Activities***

 

Netcash provided by financing activities was $1,882,038 in the three months ended September 30,2010 and $2,891,517 in the three months ended September 30, 2009.  In the three months ended September 30,2010, the Company received $2,325,000 from borrowing on its line of creditoffset by a $442,962 dividend payment. In the three months ended September 30, 2009, there was borrowingof $2,750,000 on the line of credit offset a dividend payment of $479,876. TheCompany intends to continue its regular quarterly dividends for the foreseeablefuture.

 

Inthe quarters ended September 30, 2010 and 2009, there were no purchases ofcommon stock and no stock options were exercised.

 

***Liquidity***

 

Inaddition to capital expenditures for tooling and completion of the softwaredevelopment, the Company has interest payments on its line of credit,commitments with vendors to reduce the outstanding balance and planned normalquarterly dividend payments.  The Companybelieves that cash generated from operations, together with borrowingsavailable under its credit facility, provide it with adequate liquidity to meetoperating requirements, debt service requirements, accounts payable reduction,planned capital expenditures, and dividend payments.  The long-termoutlook for the business remains positive, however, the Company continuallyreevaluates new product offerings, inventory levels and capital expenditures toensure that it is effectively allocating resources in line with current marketconditions.

 

***Credit Facilities***

 

On May 12, 2010, the Company entered into a new secured creditfacility with JPMorgan Chase Bank, N.A. (“Lender”).  The Credit Agreement dated May 12, 2010between the Company and the Lender (“Credit Agreement”) provides for an$8,000,000 revolving secured credit facility and for letters of credit for thebenefit of the Company of up to a sublimit of $2,000,000.  The Credit Agreement expires on July 31,2013.  The Company and the Lender alsoentered into the Pledge and Security Agreement dated May 12, 2010 underwhich the Company granted the Lender a security interest in substantially allof the Company’s assets in connection with the Company’s obligations under theCredit Agreement.  The balance on thisfacility was $3,575,000 as of September 30, 2010.

 

***Off-Balance Sheet Arrangements***

 

The Company has no other off-balance sheet arrangements other than thelease for the facility in Milwaukee, Wisconsin, which it leases from itsChairman, John C. Koss.  OnAugust 15, 2007, the lease was renewed for a period of five years, and isbeing accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 peryear.  Management believes the lease ison terms no less favorable to the Company than those that could be obtainedfrom an independent party.  The Companyis responsible for all property maintenance, insurance, taxes, and other normalexpenses related to ownership.  Allfacilities are in good repair and, in the opinion of management, are suitableand adequate for the Company’s business purposes.

 

15

----

Table ofContents

 

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

 

Not applicable.

 

**Item 4.  Controls and Procedures.**

 

**DisclosureControls and Procedures.**

 

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

 

TheCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures as of September 30,2010.  As discussed in “Changes inInternal Controls” section of the Company’s Form 10-K/A for the periodended June 30, 2010, the Company recently implemented remedial measures inresponse to the previously disclosed unauthorized transactions. Although theCompany’s management believes that these remedial measures have addressed theweaknesses in the Company’s disclosure controls and procedures, the Companymust allow a sufficient amount of time to elapse to permit testing of thesecontrols in order to confirm their effectiveness.  Subject to this testing and confirmationprocess, management believes that the Company’s disclosure controls andprocedures will be deemed effective. However, as a result of the Company’s inability to complete the testingand confirmation process, management has concluded that the Company’sdisclosure controls and procedures as of September 30, 2010 were noteffective.  Management believes that therequired testing and confirmation process will be completed by the time the Form 10-Qis filed for the quarter ended March 31, 2011.

 

**Changes inInternal Controls over Financial Reporting**.

 

The Company’s internalcontrol 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.  However, because of theinherent 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. There were no changes in the Company’s internal control over financialreporting that occurred during the Company’s most recent fiscal quarter thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

16

----

Table of Contents

 

**PART II**

**OTHER INFORMATION**

 

**Item 1.****                                                          ****LegalProceedings.**

 

Asof September 30, 2010, the Company has been named in several litigationmatters and has initiated certain actions against third parties related to theunauthorized transactions.  A descriptionof these legal matters is included at Note 12 to the Condensed Consolidatedfinancial statements included herein and in the Form 10-K for the periodended June 30, 2010, which description is incorporated herein byreference.

 

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

 

Notapplicable.

 

**Item 2.****                                                          ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

The following table presents information withrespect to purchases of common stock of the Company made during the threemonths ended September 30, 2010, by the Company.

 

**COMPANY REPURCHASES OF EQUITY SECURITIES**

** **
| **Period (2010)**                | ** ** | **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 –  September 30 |       | —                                      |       | $                                            | 0.00       |                                                                                                                   | —     |                                                                                                   | $          | 2,139,753 |   |
|                                       |            |                                             |            |                                              |            |                                                                                                                        |            |                                                                                                        |            |  |  |

 

----

(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 ofwhich $43,360,247 had been expended through September 30, 2010.

 

**Item 3.****                                                          ****Defaults Upon Senior Securities**

 

None.

 

**Item 4.****                                                          ****(Removed and Reserved)**

 

**Item 5.****                                                          ****Other Information**

 

None.

 

**Item 6.****                                                          ****Exhibits**

 

See Exhibit Index attached hereto.

 

17

----

Table ofContents

 

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This Form 10-Q contains forward-looking statementswithin the meaning of that term in the Private Securities Litigation Reform Actof 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 future events,the effects of pending 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-looking statements are inherently subject torisks and uncertainties, some of which cannot be predicted or quantified basedon current expectations.  Consequently,future events and actual results could differ materially from those set forthin, contemplated by, or underlying the forward-looking statements contained inthis Form 10-Q, or in other Company filings, press releases, orotherwise.  In addition to the factorsdiscussed in this Form 10-Q, other factors that could contribute to orcause such differences include, but are not limited to, developments in any oneor more of the following areas: future fluctuations in economic conditions, thereceptivity of consumers to new consumer electronics technologies, the rate andconsumer acceptance of new product introductions, competition, pricing, thenumber and nature of customers and their product orders, production by thirdparty vendors, foreign manufacturing, sourcing and sales (including foreigngovernment regulation, trade and importation concerns), borrowing costs,changes in tax rates, pending or threatened litigation and investigations, andother risk factors which may be detailed from time to time in the Company’sSecurities and Exchange Commission filings.

 

Readers are cautioned not to place undue relianceon any 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.

 

18

----

Table ofContents

 

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             |   |                          |
|-------------------------------|--------|-------------------------------|
|                          |   |                          |
|                          |   |                          |
| /s/  Michael J. Koss          |   | Dated:  November 1, 2010 |
| Michael  J. Koss              |   |                          |
| Vice  Chairman                |   |                          |
| President                     |   |                          |
| Chief  Executive Officer      |   |                          |
| Chief  Operating Officer      |   |                          |
|                          |   |                          |
|                          |   |                          |
| /s/  David D. Smith           |   | Dated:  November 1, 2010 |
| David  D. Smith               |   |                          |
| Executive  Vice President     |   |                          |
| Chief  Financial Officer      |   |                          |
| Principal  Accounting Officer |   |                          |
| Secretary                     |   |                          |

 

19

----

Table ofContents

 

**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.     |

 

----

Table of Contents

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

 

----

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

 

----