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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2010
OR
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3295
KOSS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
39-1168275
(I.R.S. Employer Identification No.)
4129 North Port Washington Avenue, Milwaukee, Wisconsin
(Address of principal executive offices
53212
(Zip Code)
Registrant’s telephone number, including area code: (414) 964-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock $0.005 par value
Name of Each Exchange on Which Registered
The Nasdaq Stock Market LLC
NONE
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134)
No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134)
No ⌧
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:134) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer (cid:134)
Non-accelerated filer (cid:134)
(Do not check if a smaller reporting company)
Accelerated filer (cid:134)
Smaller reporting company ⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No ⌧
The aggregate market value of the common voting stock held by nonaffiliates of the registrant as of December 31, 2009 was
approximately $13,772,465 (based on the $5.51 per share closing price of the Company’s common stock as reported on the NASDAQ
Stock Market on December 31, 2009.
On September 10, 2010, 7,382,706 shares of voting common stock were outstanding.
Documents Incorporated by Reference
Part III of this Form 10-K incorporates by reference information from Koss Corporation’s Proxy Statement for its 2010 Annual
Meeting of Stockholders filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by
this Form 10-K.
Table of Contents
KOSS CORPORATION
FORM 10-K
JUNE 30, 2010
INDEX
PART I
Item 1.
Item 1A.
Item 2.
Item 3.
PART II
Item 5.
Item 7.
Item 8.
Item 9.
Item 9A.
PART IV
Item 15.
Business
Risk Factors
Properties
Legal Proceedings
Securities
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Auditors on Accounting and Financial Disclosure
Controls and Procedures
Exhibits and Financial Statement Schedules
2
Page
5
8
13
13
14
15
20
20
20
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EXPLANATORY NOTE
In December 2009, Koss Corporation (the “Company”) learned of certain unauthorized transactions made by Sujata Sachdeva, its
former Vice President of Finance and Principal Accounting Officer. The Company first learned of the unauthorized transactions on
December 18, 2009, when Michael Koss received a call from American Express security informing him that certain wire transfers
were being made from Koss corporate bank accounts to pay personal American Express expenses of Ms. Sachdeva. These wire
transfers were part of the unauthorized transactions made by Ms. Sachdeva resulting in the misappropriation of approximately
$31,500,000 from fiscal year 2005 through December 2009. The Company subsequently learned that Ms. Sachdeva colluded with two
other employees of the accounting department in the misappropriation and circumvention of the Company’s then existing internal
controls and established operating procedures. The collusion of these former employees, and the actions the Company took to remedy
such collusion and circumvention, are described in detail in the Company’s Annual Report on Form 10-K/A filed for the year ended
June 30, 2009 and in “Item 9A. Controls and Procedures” in this Annual Report on Form 10-K. In July 2010, Ms. Sachdeva pleaded
guilty in the criminal case filed against her; and her sentencing is currently scheduled for November 18, 2010. Additional legal
proceedings related to the unauthorized transactions are described in “Item 3. Legal Proceedings” of this Annual Report on Form 10-
K.
As a result of the unauthorized transactions, the Company restated its previously issued consolidated financial statements and related
notes thereto for the fiscal year ended June 30, 2009, and for the three month period ended September 30, 2009. These restatements
were disclosed in the Company’s Annual Report on Form 10-K/A for the year ended June 30, 2009 and its Quarterly Report on
Form 10-Q/A for the three months ended September 30, 2009, respectively. The Company also amended its Quarterly Reports on
Form 10-Q/A for the three months ended December 31, 2009 and March 31, 2010 to include condensed consolidated financial
statements and related notes thereto, which were delayed as a result of the restatements. All of these amended reports were filed on
June 30, 2010, and should be read in conjunction with this Annual Report on Form 10-K. The financial effect of the unauthorized
transactions during fiscal year 2010 is described in “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and in Note 2 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of that term in the Private Securities
Litigation Reform Act of 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the
Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-K that are not historical facts are
forward-looking statements made pursuant to the 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, statements regarding future operations, anticipated
financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans
relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and
possible litigation and assumptions relating to the foregoing. In addition, when used in this Form 10-K, the words “anticipates,”
“believes,” “estimates,” “expects,” “intends,” “plans” and variations thereof and similar expressions are intended to identify forward-
looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on
current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by,
or underlying the forward-looking statements contained in this Form 10-K, or in other Company filings, press releases, or otherwise.
In addition to the factors discussed in this Form 10-K, other factors that could contribute to or cause such differences include, but are
not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, the receptivity of
consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition,
pricing, the number and nature of customers and their product orders, production by third party vendors, foreign manufacturing,
sourcing, and sales (including foreign government regulation, trade and importation concerns), borrowing costs, changes in tax rates,
pending or threatened litigation and investigations, and other risk factors which may be detailed from time to time in the Company’s
Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.
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ITEM 1. BUSINESS.
GENERAL
PART I
As used herein, the term “Company” means Koss Corporation and its consolidated wholly-owned subsidiary, Koss Classics Ltd.
(“Koss Classics”), unless the context otherwise requires. The Company was incorporated in Delaware in 1971.
The Company operates in the audio/video industry segment of the home entertainment industry through its design, manufacture and
sale of stereo headphones and related accessory products. The Company reports its results as a single reporting segment, as the
Company’s principal business line is the design, manufacture and sale of stereo headphones and related accessories.
The Company’s products are sold through national retailers, international distributors, audio specialty stores, the Internet, direct mail
catalogs, regional department store chains, discount department stores, military exchanges and prisons under the “Koss” name. The
Company also sells products to distributors for resale to school systems, and directly to other manufactures for inclusion with their
own products. The Company has more than 250 domestic dealers and its products are carried in approximately 17,000 domestic retail
outlets and numerous retailers worldwide. International markets are served by domestic sales representatives and a sales office in
Switzerland which utilizes independent distributors in several foreign countries. The Company has one subsidiary, Koss Classics.
Ninety-nine percent of the Company’s products are stereo headphones for listening to music. The products are not significantly
differentiated by their retail sales channel or application with the exception of products sold to school systems and prisons. There are
no other product line differentiations other than the quality of the sound produced by the stereo headphone itself, which is highly
subjective. The business could also be classified by distribution channel.
The Company sources complete headphones manufactured to its specifications from various manufacturers in Asia as well as raw
materials used to produce headphones at its plant in Milwaukee. Management believes that it has sources of complete headphones and
raw materials that are adequate for its needs.
There are no employment or compensation commitments between the Company and its dealers. The Company has several
independent manufacturer’s representatives as part of its distribution efforts. The Company typically signs one year contracts with
these manufacturer’s representatives. These agreements are seldom renewed in writing, but continue from year to year. The
Company has a manufacturer’s representative agreement with a firm in Detroit to work exclusively in the automotive arena. The
automotive representative is paid 2% for all business in this area. The Company’s remaining agreements with distributors, past or
present, pertain to distribution arrangements in foreign countries. The arrangements with foreign distributors do not contemplate that
the Company pays any compensation other than any profit the distributors make upon their sale of the Company’s products. The
Company has the right to terminate these agreements with foreign distributors without cause.
INTELLECTUAL PROPERTY
John C. Koss is recognized for creating the stereophone industry with the first SP3 stereophone in 1958. The Company regularly
applies for registration of its trademarks in many countries around the world in which it does business, and over the years the
Company has had numerous trademarks registered and patents issued in countries in North America, South America, Asia, Europe,
Africa, and Australia. The Company currently has approximately 394 trademarks registered in 87 countries around the world and
patents in 26 countries. The Company has trademarks to protect the brand name, Koss, and its logo on its products. These trademarks
are maintained throughout the countries in which the Company sells its products. The Company also holds many design patents that
protect the unique visual appearance of some of its products. These trademarks and patents are
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important to differentiate the Company from its competitors. Certain of the Company’s trademarks are of material value and
importance to the conduct of its business. The Company considers protection of its proprietary developments important; however, the
Company’s business is not, in the opinion of management, materially dependent upon any single trademark or patent. During the year
ended June 30, 2010, the Company took steps to update and monitor its patents and trademarks to protect its intellectual property
around the world.
SEASONALITY
Although retail sales of consumer electronics have typically been higher during the holiday season, stereophones have also seen
increased interest as gift items over the years. Management of the Company believes that its business and industry segment are no
longer seasonal as evidenced by the fact that 59% of net sales occurred in the first six months of the year ended June 30, 2010, and
41% of net sales occurred in the latter six months of the year. Management believes that the reason for this level performance of sales
to retailers is related to the fact that stereo headphones have become replacement items for portable electronic products. Therefore,
upgrades and replacements appear to have as much interest over the course of the year as gifts of stereophones during the holiday
season.
WORKING CAPITAL AND BACKLOG
The Company’s working capital needs do not differ substantially from those of its competitors in the industry and generally reflect the
need to carry significant amounts of inventory to meet delivery requirements of its customers. From time to time, although rarely, the
Company may extend payment terms to its dealers for a special promotion. For instance, the Company has in the past offered a 90-
120 day payment period for certain customers, such as computer retailers and office supply stores. Based on historical trends,
management does not expect these practices to have any material effect on net sales or net income. The Company’s backlog of orders
as of June 30, 2010 is not considered material in relation to net sales during 2010 or anticipated 2011 net sales.
CUSTOMERS
The Company markets a line of products used by consumers to listen to music, DVD’s in vehicles, sound bytes on computer systems,
and other audio related media. The Company distributes these products through retail channels in the U.S. and independent
distributors throughout the rest of the world. The Company markets its products to approximately 17,000 domestic retailers and
numerous retailers worldwide. During 2010, the Company’s sales to its largest single customer, Tura Scandinavia AB, were
approximately 25% of net sales and sales to Wal-Mart Stores, Inc. accounted for 17% of 2010 net sales. In 2009, net sales to Tura
Scandinavia AB and Wal-Mart Stores, Inc, accounted for 17% and 22% of consolidated net sales, respectively. The Company is
dependent upon its ability to retain a base of retailers and distributors to sell the Company’s line of products. Loss of retailers and
distributors means loss of product placement. The Company has broad distribution across many channels including specialty stores,
mass merchants, electronics stores, and computer retailers. Management believes that any loss of revenues would be partially offset
by a corresponding decrease, on a percentage basis, in expenses; thereby partially reducing the impact on the Company’s operating
income. The five largest customers of the Company (including Tura Scandinavia AB and Wal-Mart Stores, Inc.) accounted for
approximately 52% and 54% of total net sales in 2010 and 2009, respectively.
COMPETITION
The Company focuses on the stereo headphone industry. In the stereophone market, the Company competes directly with
approximately five major competitors, several of which are large and diversified and have greater total assets and resources than the
Company. The Company’s single product focus is unique in the marketplace. The extent to which retailers view the Company as an
innovative vendor of high quality headphone products, and a provider of excellent after sales customer service, is the extent to which
the Company maintains a competitive advantage. The Company relies upon its unique sound, quality workmanship, brand
identification, engineering skills, and customer service to maintain its competitive position.
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RESEARCH AND DEVELOPMENT
The amount expensed on engineering and research activities relating to the development of new products or the improvement of
existing products was approximately $766,000 during 2010 as compared with $1,559,000 during 2009. These activities were
conducted by both Company personnel and outside consultants. The Company expects that research and development costs will
continue and it is planning to introduce a new offering during fiscal year 2011.
ENVIRONMENTAL MATTERS
The Company believes that it has materially complied with all currently existing federal, state and local statutes and regulations
regarding environmental standards and occupational safety and health matters to which it is subject. During the years 2010 and 2009,
the amounts incurred in complying with federal, state and local statutes and regulations pertaining to environmental standards and
occupational safety and health laws and regulations did not materially affect the Company’s operating results or financial condition.
EMPLOYEES
As of June 30, 2010, the Company employed 65 people, who are all non-union. The Company also utilizes temporary personnel.
FOREIGN SALES
The Company’s competitive position and risks relating to the conduct of its business in foreign markets are comparable to the
domestic market. In addition, the governments of foreign nations may elect to erect trade barriers on imports. The creation of
additional barriers would reduce the Company’s net sales and profit. In addition, any fluctuations in currency exchange rates could
affect the pricing of the Company’s products and divert customers who might choose to purchase lower-priced, less profitable
products, and could affect overall demand for the Company’s products. For further information, see Part II, Item 7 and Note 14 to the
consolidated financial statements accompanying this Form 10-K.
The Company has a small sales office in Switzerland to service the international export marketplace. The Company is not aware of
any material risks in maintaining this operation. Loss of this office would result in a transfer of sales and marketing responsibility.
The Company sells its products to independent distributors in countries and regions outside the United States including Europe, the
Middle East, Africa, Asia, South America, Latin America, the Caribbean, and Mexico. The Company sells products in the Canadian
market through a distributor who services smaller specialty accounts. During the last two years, net sales of all Koss products, were
distributed as follows:
U.S.
Europe
All other countries
Net sales
2010
20,182,347
17,710,672
2,705,703
40,598,722
$
$
$
$
2009
24,222,039
15,744,430
1,750,645
41,717,114
In addition to a manufacturing facility in the United States, the Company uses contract manufacturing facilities in the People’s
Republic of China, Taiwan and South Korea. These independent supplier entities are distant from the Company, which means that we
are at risk of business interruptions due to natural disasters, war, disease and government intervention through tariffs or trade
restrictions that are of less concern domestically. The Company maintains finished goods inventory in its U.S. facility to mitigate this
risk. The Company’s goal is to stock finished goods inventory at an average of approximately 90 days demand per item. Recovery of
a single facility through replacement of a supplier in the event of a disaster or suspension of supply could take 120 days. The
Company believes that it could restore production of its top ten selling models (which represent approximately 70% of the Company’s
sales revenue) within one year. The Company is also at risk if the trade restrictions are
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introduced on its products based upon country of origin. In addition, most increases in tariffs and freight charges would not be
acceptable to pass along to the Company’s customers and would directly impact the Company’s profits.
AVAILABLE INFORMATION
The Company’s internet website is http://www.koss.com. The Company makes available free of charge through its internet website
the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all
amendments to those reports as soon as reasonably practicable after they are electronically filed with (or furnished to) the SEC. These
reports and other information regarding the Company are also available on the SEC’s internet website at http://www.sec.gov.
ITEM 1A. RISK FACTORS.
Investing in the Company’s common stock involves a high degree of risk. Any of the following risks could have a material adverse
effect on the Company’s financial condition, liquidity and results of operations or prospects, financial or otherwise.
REDUCTION IN PRESENT LEVELS OF CASH FLOW COULD ADVERSELY AFFECT THE COMPANY’S BUSINESS
The Company’s primary source of liquidity over the past 12 months has been operating cash flows. The Company’s future cash flows
from operations (on both a short term and long term basis) are dependent upon, but not limited to:
•
•
•
•
•
•
the Company’s ability to attract new customers that will sell the Company’s products and pay for them;
the Company’s ability to retain the Company’s existing customers at the level of sales previously produced;
the volume of sales for these customers;
the loss of business of one or more primary customers;
changes in types of products that the customers purchase in their sales mix;
poor or deteriorating economic conditions which would directly impact the ability of the Company’s customers to
remain in business and pay for their products on a timely basis;
• Management’s ability to minimize the impact of requests for increases in material or labor cost increases; and
•
the ability to collect in full and in a timely manner amounts due to the Company.
In addition, as noted above, the Company’s cash flow is also dependent, to some extent, upon the ability to maintain operating
margins. The continuing general downturn in economic conditions or other events that caused the Company’s customers to turn to
lower-priced, lower-margin products, could cause the Company’s cash flow and profitability to be materially and adversely affected.
FAILURE TO ATTRACT AND RETAIN CUSTOMERS TO SELL THE COMPANY’S PRODUCTS COULD ADVERSELY
AFFECT SALES VOLUME AND FUTURE PROFITABILITY
The Company markets a line of products used by consumers to listen to music. The Company distributes these products through retail
channels in the U.S. and independent distributors throughout the rest of the world. The Company is dependent upon its ability to
retain an existing base of customers to sell the Company’s line of products. Loss of customers means loss of product placement. The
Company has broad distribution across many channels including specialty stores, mass merchants, electronics stores and computer
retailers. Any loss of a customer directly translates into a reduction in sales volume which can only be replaced by adding a similar
number of representative retail outlets. The inability of the Company’s sales and marketing staff to obtain new distribution outlets
translates into a lack of future growth and possibly a setback in sales volumes when loss of
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current customers occur. For example, the loss of a customer representing 10% of the Company’s business would translate into a
reduction in revenues of up to 10% based upon the point through the year that the customer was lost. Attracting a new customer
during the course of a year could have 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 it decides to offer for sale. Such changes can occur arbitrarily throughout the course of a
year which can cause reductions in sales revenues in proportion to the number of retail outlets that the store represents in the market.
The Company may not be able to maintain customers or model selections and therefore may experience a reduction in its sales
revenue until a model is restored to the mix or a lost customer is replaced by a new customer. A reduction in sales volume would
cause a reduction in profitability. The Company’s failure to retain existing customers, obtain new customers or develop new product
lines that customers would choose to offer to consumers could significantly affect the Company’s future profitability. The loss of
business of one or more principal customers or a change in the sales volume from a particular customer could have a material adverse
effect on the Company’s sales volume and profitability.
SHIFT IN CUSTOMER SPECIFICATIONS TO LOWER PRICED ITEMS CAN REDUCE PROFIT MARGINS
NEGATIVELY IMPACTING PROFITABILITY
The Company sells a line of products with a suggested retail price ranging from less than $10 up to $1,000. The gross margin for each
of these models is unique in terms of percentages. The price range of the products also produces a different level of actual dollar
contribution per unit. For example, a product with a gross margin contribution of 50% might yield a $5 contribution for one item,
while another item may feature a 30% gross margin which could yield $50. The Company finds the low priced portion of the market
most competitive and therefore most subject to pressure on gross margin percentages, which tends to lower profit contributions.
Retail preference for lower priced items can reduce profit margins and contributions. The risk is that a shift in retail customer
specifications toward lower priced items can lead to lower gross margins and lower profit contributions per unit of sale. Due to the
range of products that the Company sells, the product sales mix can produce a variation in terms of a range of profit margins. Some
customers sell a limited range of products that yield lower profit margins than others. Most notably, the budget priced headphone
segment of the market below $10 retail, which is distributed through computer stores, office supply stores and mass market retailers,
tends to yield the lowest gross margins. An increase in business with these types of accounts, if coupled with a simultaneous
reduction in sales to customers with higher gross margins, would reduce profit margins and profitability.
POOR ECONOMIC CONDITIONS CAN RESTRICT OR LIMIT PRODUCT PLACEMENT, SALES AND
REPLENISHMENT WHICH COULD DECREASE PROFITS
Deteriorating or weak economic conditions, or a forecast for the same, can trigger changes in inventory stocking at retail customers.
This may in turn lead to a reduction in model offerings and/or out of stock situations. If a retail customer of the Company does not
have adequate supply of the Company’s products to offer for sale in a retail store, consumers may choose another competitive model
instead. Customers operating retail stores anticipate future sales demands and stock inventory accordingly. Whenever a general
economic slowdown occurs, at both the domestic and/or foreign level, sales volume levels and re-order volume levels change. These
changes directly impact the Company’s sales and profitability. The Company is not in a position to determine how it will be affected
by these circumstances, how extensive the effects may be, or for how long the Company may be impacted by these circumstances.
The Company’s customers respond to changes in economic conditions and any adverse changes in economic conditions can therefore
restrict product placement, availability, sales, replenishment and ultimately profitability. These conditions exist domestically and
internationally.
MANAGEMENT IS SUBJECT TO DECISIONS MADE OUTSIDE ITS CONTROL WHICH COULD DIRECTLY AFFECT
FUTURE PROFITABILITY
Retail customers determine which products they will stock for resale. The Company competes with other manufacturers to secure
shelf space in retail stores for the Company’s products. During the course of a year, changes in the customers’ management personnel
can ultimately lead to changes in the stock assortment offered to consumers. These changes are often arbitrary. In addition to changes
in personnel within the Company’s
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customers, it is also possible that a strategic decision can be made by a retail customer to consolidate vendors, or to discontinue certain
product categories altogether. In these instances, the Company’s management team may not be able to convince customers to reverse
such decisions. The Company’s management team is also engaged in the effective procurement, assembly and manufacture of
products. The ability to negotiate with suppliers, maintain productivity and hold the line on cost increases can be subjected to
pressures outside the control of management. For example, increases in fuel costs can increase freight rates. Increases of this nature
can seldom be avoided and the Company may not be able to pass such increases along to its customers. Management’s effective
control of the manufacturing processes will have a direct impact on the Company’s future profitability. The Company regularly
makes decisions that affect production schedules, shipping schedules, employee levels and inventory levels. The Company’s ability to
make effective decisions in managing these areas has a direct effect on future profitability.
ACCOUNTS RECEIVABLE AMOUNTS DUE FROM OUR CUSTOMERS CAN BE LOST AS A RESULT OF CUSTOMER
BANKRUPTCY, OPERATIONAL DIFFICULTY, OR FAILURE TO PAY, NEGATIVELY IMPACTING FUTURE
PROFITABILITY
The Company has significant accounts receivable or other amounts due from the Company’s customers. The outstanding accounts
receivable, net of allowance for doubtful accounts, at the end of the last four quarters averaged approximately $5,563,000. Terms of
payment for customers generally range from cash in advance of delivery to net 120 day credit terms. These credit arrangements are
negotiated at unspecified and irregular intervals. The largest customers generate the largest receivable balances. If a customer
develops operational difficulty it is not uncommon to temporarily suspend payment to vendors. The Company is subject to this risk in
the retail marketplace. From time to time a customer may develop severe operating losses which can lead to a bankruptcy. In these
cases, the Company may lose most of the outstanding balance due. Occasionally, the Company has been current with a customer at
the time such an event occurs. The more material risk is that of losing the revenue of the customer which might be more onerous than
losing the current outstanding accounts receivable. In addition, many companies that will typically insure accounts receivables will
not do so for the Company’s largest mass market customers. The risk is that the Company derives most of the Company’s sales
revenue and profits from selling products to retailers for resale to consumers. The failure of the Company’s customers to pay in full
amounts due to the Company could negatively affect future profitability.
COMPANY PROFITS CAN SUFFER FROM INTERRUPTIONS IN SUPPLY CHAIN
The Company uses contract manufacturing facilities in the People’s Republic of China, Taiwan and South Korea. These independent
suppliers are distant from the Company which means that the Company is at risk of business interruptions due to natural disaster, war,
disease and government intervention through tariffs or trade restrictions that are of less concern domestically. Therefore, if there are
any interruptions in the supply chain for any of these reasons, this could directly impact the Company’s profits in a negative way. The
Company is also at risk if trade restrictions are imposed on the Company’s products based upon country of origin. In addition, any
increase in tariffs and freight charges may not be acceptable to pass along to the Company’s customers and could directly impact the
Company’s profits.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES COULD AFFECT PRICING OF PRODUCTS AND CAUSE
CUSTOMERS TO PURCHASE LOWER-PRICED, LESS PROFITABLE PRODUCTS AND COULD AFFECT OVERALL
DEMAND FOR THE COMPANY’S PRODUCTS
The Company receives a material portion of its sales and profits from business in Europe. To the extent that the value of the U.S.
dollar increases relative to currencies in those jurisdictions, it increases the cost of the Company’s products in those jurisdictions,
which could create negative pressure on the overall demand for the Company’s products. The Company gets paid by its international
customers in U.S. dollars. To the extent that increased prices arising from currency fluctuations decrease the overall demand for the
Company’s products or motivate customers to purchase lower-priced, lower profit products, the Company’s sales, profits and cash
flows could be adversely affected.
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COMPANY PROFITS CAN SUFFER FROM INCREASING MANUFACTURING COSTS IN CHINA AS A RESULT OF
INCREASED WAGES AND WAGE TAXES
The Company uses contract manufacturing facilities in the People’s Republic of China. An increase in the cost of labor or taxes on
wages in China 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 the Company is at risk of higher manufacturing costs associated with goods manufactured in China.
Significant increases in wages or wage taxes paid by contract manufacturing facilities may increase the cost of goods manufactured in
China which could have a material adverse effect on the Company’s profit margins and profitability.
THE COMPANY USES THIRD PARTY CARRIERS TO SHIP ITS PRODUCTS WHICH MAY PASS ON INCREASES IN
TRANSPORTATION-RELATED FUEL COST TO THE COMPANY WHICH CAN REDUCE PROFIT MARGINS
NEGATIVELY IMPACTING PROFITABILITY
The Company uses numerous third party carriers to ship product, both domestically and internationally. If the price of fuel increases
and the carriers choose to pass on the increase to the Company, freight costs may increase. As a result, the Company’s freight cost is
impacted by changes in fuel prices. Fuel prices affect freight costs to both customer’s location and the Company’s distribution center.
Increases in fuel prices and surcharges and other factors have increased and may continue to increase freight costs in the future. The
inflationary pressure of higher fuel costs and continued increase in transportation-related costs could have a material adverse effect on
the Company’s profit margins and profitability.
CONSISTENCY OF THE COMPANY’S BUSINESS WITH SEVERAL U.S. RETAILERS
The Company is particularly concerned about the consistency of business with several U.S. retailers. The recent tightening of credit
availability worldwide caused all retailers to sharply curtail inventory increases. In addition, many retailers have been negatively
impacted by the economic recession. The Company has experienced some consolidation in product lines and item elimination, or
reductions at several big box retailers. Finally, the Company is subject to fluctuations in production of the Company’s automobile
customers and the potential impact that might have upon the Company’s rear seat entertainment products for the automotive market in
the coming year.
THE COMPANY IS CURRENTLY UNABLE TO ASSESS THE AMOUNTS THAT MAY BE RECOVERED THROUGH
THE PROCEEDS FROM THE SALE OF ITEMS SEIZED BY LAW ENFORCEMENT, INSURANCE, POTENTIAL
CLAIMS AGAINST THIRD PARTIES OR TAX REFUNDS.
The Company has estimated that the amount of the unauthorized transactions is approximately $31,500,000 since fiscal year 2005
through December 31, 2009 as described in the Company’s Form 10-K/A for June 30, 2009 that was filed on June 30, 2010. Over
25,000 items have been seized by law enforcement authorities. Although the Company intends to pursue proceeds from the sale of
items seized by law enforcement authorities, as well as from insurance coverage, potential claims against third parties and tax refunds,
the Company cannot reasonably assess the amounts or timing of such recoveries. Through the date of issuance of this 10-K, the
Company has received $1,746,469 from its insurance company. The Company’s inability to recover its losses could have a significant
and adverse effect on its future financial condition.
LEGAL PROCEEDINGS RELATED TO THE UNAUTHORIZED TRANSACTIONS MAY ADVERSELY AFFECT THE
COMPANY’S RESULTS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION.
As further described in Item 3 Legal Proceedings, the Company is currently addressing several legal matters related to the
unauthorized transactions. The Company is unable at this time to quantify its exposure, if any. The costs of dealing with these matters
and any penalties and awards that may be assessed against the Company could
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be substantial and may adversely affect the Company’s future results of operations, cash flows and financial condition.
THE COMPANY’S STOCK PRICE MAY FLUCTUATE AS A RESULT OF THE UNAUTHORIZED TRANSACTIONS
AND BECAUSE OF THE UNCERTAINTIES ABOUT THEIR EFFECT ON THE COMPANY’S FINANCIAL CONDITION.
Uncertainties about the effect of the unauthorized transactions and significant developments related to the unauthorized transactions,
such as the legal matters described above or the results and recommendations of the Independent Investigation could cause fluctuation
in the Company’s stock price. The Company’s common stock could also be subject to wide fluctuations in response to additional
business factors such as the following:
• the sale or availability for sale of substantial amounts of the Company’s common stock;
• actual or anticipated fluctuations in the Company’s operating results or its competitors’ operating results;
• announcements by the Company or its competitors of new products;
• capacity changes, significant contracts, acquisitions or strategic investments;
• the Company’s growth rate and its competitors’ growth rates;
• changes in stock market analyst recommendations regarding the Company, its competitors or the industry in general,
or lack of analyst coverage of the Company’s common stock;
• sales of the Company’s common stock by its executive officers, directors and significant stockholders or sales of
substantial amounts of common stock; and
• changes in accounting principles.
THE COMPANY’S INTERNAL CONTROL OVER FINANCIAL REPORTING FAILED TO TIMELY DETECT AND
PREVENT THE UNAUTHORIZED TRANSACTIONS AND IT IS POSSIBLE THAT WE HAVE NOT IMPLEMENTED
EFFECTIVE REMEDIAL MEASURES.
The Company’s internal controls as of June 30, 2009 were not effective in that they failed to timely detect and prevent the
circumvention of the internal controls and procedures relating to the unauthorized transactions. Management believes it has
implemented remedial measures to address the issues identified, but a sufficient amount of time has not yet elapsed to test these
internal controls and procedures to confirm whether they are effective. Thus, there is no assurance that these deficiencies have been
adequately addressed or that the Company has discovered all of the deficiencies that may exist in the internal control over financial
reporting. The Independent Investigation is ongoing and it is possible that the Company and/or the Independent Committee may
identify additional deficiencies regarding the Company’s internal control over financial reporting.
THE RESTATEMENT OF THE COMPANY’S CONSOLIDATED FINANCIAL STATEMENTS HAS SUBJECTED THE
COMPANY TO INCREASED COSTS FOR ACCOUNTING AND LEGAL FEES.
The Company issued restated consolidated financial statements in the Annual Report on Form 10-K/A for June 30, 2009 that was filed
on June 30, 2010. This restatement was because of errors in previously issued financial statements caused by the unauthorized
transactions. This restatement has subjected the Company to significant costs in the form of accounting, legal fees and similar
professional fees, in addition to the substantial diversion of time and attention of the Company’s Chief Financial Officer and members
of its accounting department in preparing the restatement. Although the restatement is complete, no assurance can be given that the
Company will not incur additional costs associated with the restatement.
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ITEM 2. PROPERTIES.
The Company leases its facility in Milwaukee, Wisconsin from its Chairman. On August 15, 2007, the lease was renewed for a period
of five years, ending June 30, 2013 and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed
rate of $380,000 per year. The Company is responsible for all property maintenance, insurance, taxes, and other normal expenses
related to ownership. All facilities are in good repair and, in the opinion of management, are suitable and adequate for the Company’s
business purposes.
ITEM 3. LEGAL PROCEEDINGS.
As of June 30, 2010, the Company is party to the matters related to the unauthorized transactions described below:
• On January 11, 2010, the Company received a letter from a law firm stating that it represented a shareholder and
demanding that the Company’s Board of Directors investigate and take legal action against all responsible parties to
ensure compensation for the Company’s losses stemming from the unauthorized transactions. The Company’s legal
counsel has responded preliminarily to the letter indicating that the Board of Directors will determine the
appropriate course of action after the Independent Investigation is completed.
• On January 15, 2010, a class action complaint was filed in federal court in Wisconsin against the Company, Michael
Koss and Sujata Sachdeva. The suit alleges violations of Section 10(b), Rule 10b-5 and Section 20(a) of the
Exchange Act relating to the unauthorized transactions and requests an award of compensatory damages in an
amount to be proven at trial. See David A. Puskala v. Koss Corporation, et al., United States District Court, Eastern
District of Wisconsin, Case No. 2:2010cv00041.
• On January 26, 2010, the SEC’s Division of Enforcement advised the Company that it obtained a formal order of
investigation in connection with the unauthorized transactions. The Company voluntarily brought the unauthorized
transactions to the SEC staff’s attention when they were discovered in December 2009, and is cooperating with the
ongoing SEC investigation.
• On February 16 and 18, 2010, separate shareholder derivative suits were filed in Milwaukee County Circuit Court in
connection with the previously disclosed unauthorized transactions. The first suit names as defendants Michael
Koss, John Koss Sr., the other Koss directors, Sujata Sachdeva, Grant Thornton, LLP, and Koss Corporation (as a
nominal defendant); the second suit names the same parties except Grant Thornton, LLP. Among other things, both
suits allege various breaches of fiduciary and other duties, and seek recovery of unspecified damages 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., Circuit Court, Milwaukee County, Wisconsin, No. 10CV002290 (February 18,
2010). These two shareholder derivative suits have been consolidated under Master File No. 10CV002422.
• On February 18, 2010, the Company filed an action against American Express Company, American Express 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
abetting breach of fiduciary duty, aiding and abetting fraud, conversion, and negligence relating to the unauthorized
transactions.
• On June 24, 2010, the Company filed an action against its former independent auditor, Grant Thornton, 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION ON COMMON STOCK
The Company’s common stock is traded on The Nasdaq Stock Market under the trading symbol KOSS. There were approximately
535 record holders of the Company’s common stock as of August 1, 2010. This number does not include individual participants in
security position listings. The quarterly high and low sale prices of the Company’s common stock for the last two fiscal years as well
as dividends declared are shown below.
Quarter Ended
September 30, 2008
December 31, 2008
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010
High
Low
Per Share
Dividend
$
$
$
$
$
$
$
$
9.46
8.36
6.30
7.98
7.725
8.12
6.00
5.83
$
$
$
$
$
$
$
$
6.76
4.63
4.675
5.875
5.52
5.50
3.76
5.04
$
$
$
$
$
$
$
$
0.065
0.065
0.065
0.065
0.065
0.06
0.06
0.06
The Company’s stockholders are entitled to receive dividends as may be declared by the Board of Directors and paid out of funds
legally available therefore. The Company began paying dividends for the quarter ended September 30, 2002 and has paid a dividend
for each quarter since, including the last fiscal quarter ended June 30, 2010. On May 17, 2010 the Company announced its quarterly
dividend of $0.06 per share for stockholders of record on June 30, 2010. The dividend was distributed on or around July 15, 2010.
Although the Company anticipates it will continue to pay a quarterly dividend, the decision to pay dividends and the amount of such
dividends are within the sole discretion of the Board of Directors, who meet quarterly. The decision to pay dividends will depend on
the Company’s operating results, financial condition, tax considerations, alternative uses for such funds, and other factors the Board of
Directors deem relevant, and there can be no assurance that dividends will be paid in the future.
COMPANY REPURCHASES OF EQUITY SECURITIES
Period (2010)
April 1-April 30
May 1-May 31
June 1-June 30
Total
Number
of Shares
Purchased
0
0
0
Average
Price Paid
per Share
0.00
0.00
0.00
$
$
$
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan (1)
0
0
0
$
$
$
Approximate Dollar Value of
Shares Available under
Repurchase Plan
2,139,753
2,139,753
2,139,753
(1) In April of 1995, the Board of Directors approved a stock repurchase 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 Directors periodically has approved
increases in the stock repurchase program. As of June 30, 2010, the most recently approved increase was for additional purchases of
$2,000,000, which occurred in October of 2006, for an aggregate maximum of $45,500,000, of which $43,360,247 had been expended
through June 30, 2010.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial
position, cash flows, indebtedness and other key financial information of the Company for fiscal years 2010 and 2009. For a more
complete understanding of this discussion, please read the Notes to Consolidated Financial Statements included in this report.
Overview
The Company developed stereo headphones in 1958 and has been a leader in the industry. We market a complete line of high-fidelity
stereophones, speaker-phones, computer headsets, telecommunications headsets, active noise canceling stereophones, wireless
stereophones and compact disc recordings of American Symphony Orchestras on the Koss Classics label. We operate as one business
segment.
Unauthorized Transactions — In December 2009, the Company learned of significant unauthorized transactions which totaled
approximately $31,500,000 from fiscal 2005 through December 2009. The volume of these unauthorized transactions was $8,498,434
in 2009, and $10,286,988 from July 1, 2009 until the unauthorized transactions were discovered in December 2009. As a result of
these unauthorized transactions, the Company restated its consolidated financial statements on Form 10-K/A for June 30, 2009.
Operations — Net sales declined to $40,598,722 in 2010 compared with $41,717,114 in 2009. This $1,118,392 decrease in net sales
was primarily driven by soft retail sales in the United States and increased promotions with one major customer. Including the
unauthorized transactions as an expense, the Company had a loss from operations of $4,955,767 in 2010, compared to a loss from
operations of $340,094 in 2009. The increased loss from operations was primarily driven by the increased unauthorized transactions,
decrease in gross profit from 44.5% to 41.6%, unauthorized transaction related costs and lower sales volume. In 2010 and 2009, the
losses related to the unauthorized transactions, exclusive of corrections for accounting errors, were $10,286,988 and $8,498,434,
respectively, an increase of $1,788,554 in 2010. The 2010 operating results also included $1,666,986 of unauthorized transaction
related costs net of recoveries. Operating income, excluding the unauthorized transactions and related costs and recoveries, was
$6,998,207 in 2010 or 17.2% of net sales compared to $8,158,340 or 19.6% of net sales in 2009.
Sales and Gross Profit
2010 Results of Operations Compared with 2009
Net sales for 2010 totaled $40,598,722, compared with $41,717,114 in 2009. This $1,118,392 or 2.7% decrease in net sales was
driven by soft retail sales in the United States and increased promotions of approximately $700,000 with one major customer in the
United States. The decline came in the United States as export sales increased 16.7% from the 2009 level.
Gross profit in 2010 was $16,868,411 or 41.6% of net sales compared to $18,548,692 or 44.5% of net sales in 2009. This decreased
gross margin percentage was driven by increased cost of promotions and increased overhead spending. The increased cost of
promotions totaled approximately $700,000 for the agreed period which occurred in advance of significant sales volumes for this
customer. The overhead spending increased by approximately $357,000 as a result of spending approximately $169,000 for
prototypes and engineering tests for products expected to be introduced in fiscal 2011 and for increased fringe benefit costs of
$87,000.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2010 were $9,870,204, as compared to $10,390,352 for 2009. The decrease in
selling, general and administrative expenses was the result of decreased new product research and development activities, not
participating in a large dealer show and a loss on fixed asset disposals in 2009. New product development decreased from
approximately $1,559,000 in 2009 to approximately $766,000 in 2010 due to timing of project phases as we focus on expanding the
product line in high-end stereo headphones and expand consumers’ listening options with new products. Spending on new product
development in 2011 is anticipated to be similar to 2010 levels. In 2009, the Company participated in the Consumer Electronics Show
but did not participate in 2010. Disposals of equipment and leasehold improvements resulted in a loss of approximately $10,000 in
2010 and $224,000 in 2009. These decreases were partially offset by increased legal fees in support of general corporate activities and
patent work.
Unauthorized Transactions
In 2010, the unauthorized transactions totaled $10,286,988 compared to $8,498,434 in 2009.
After learning of the unauthorized transactions in December 2009, the Company incurred net cost of $1,666,986 in the second half of
fiscal 2010. These net costs related to investigation of the unauthorized transactions, defense of legal actions, restatement of the
financial statements for the years ended June 30, 2009 and 2008 and the quarter ended September 30, 2009, and issuance of the
quarterly reports for December 31, 2009 and March 31, 2010. This net cost was comprised of approximately $3,580,000 of legal and
professional fees partially offset by approximately $1,913,000 of recoveries. Included in recoveries is approximately $1,746,000 of
insurance proceeds.
Operating Loss
2010 had an operating loss including the unauthorized transactions of $4,955,767 compared to operating loss of $340,094 in
2009. The increased operating loss was primarily driven by the increased unauthorized transactions, unauthorized transaction related
costs, lower gross profit of 41.6% for 2010 and 44.5% for 2009 and lower sales volume. Operating income, excluding the
unauthorized transactions and related costs and recoveries, was $6,998,207 in 2010 or 17.2% of net sales compared to $8,158,340 or
19.6% of net sales in 2009.
Provision for Income Tax Benefit
Income tax benefit for 2010 was $1,812,417 as compared to $75,434 of income tax benefit in 2009. The effective income tax rate was
33.7% in 2010 and 22.7% in 2009. For 2010, the effective tax rate is driven by changes to the valuation allowance. The main
variance in effective tax rate for 2009 compared to the combined federal and state statutory rate of 37% was the impact of permanent
tax differences in a year that was close to breakeven earnings.
Operating Activities
Liquidity and Capital Resources
We currently use cash generated from operations and underlying working capital as financial measurements to evaluate the
performance of our operations and our ability to meet our financial obligations. We require working capital investment to maintain
our position as a leading developer and manufacturer of high quality stereophones. The primary drivers of these requirements are
production costs, distribution costs and finished goods inventories to support our customers’ requirements for short lead time. As part
of our continuous improvement of purchasing and manufacturing processes, we continue to strive for alignment of inventory levels
with customer demand and current production schedules.
During 2010, cash provided by operations was $982,631, and during 2009, cash provided by operations was $2,646,146. Working
capital was $5,371,158 at June 30, 2010 and $6,308,239 at June 30, 2009. The net decrease
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in working capital of $937,081 from June 30, 2009 to June 30, 2010 represents primarily the decrease in cash and cash equivalents and
increases in accounts payable and accrued liabilities. The unauthorized transactions in 2010 were funded through cash, delays in
payments of trade payables and borrowing on the line of credit. Although significant progress was made since discovery of the
unauthorized transactions in the latter part of 2010 to pay off some of these outstanding balances, accounts payable and the line of
credit are still elevated above 2009 levels. The increase in accrued liabilities was driven by accrued legal fees related to the
investigation of the unauthorized transactions and the defense of various legal actions.
Investing Activities
Cash used in investing activities for 2010 was $1,760,333 as compared to $2,345,298 used in investing activities for 2009. Cash used
in investing activities for 2010 was driven by $797,042 of capital expenditures, including tooling to support production, and $639,788
of product software development expenditures. In 2009, capital expenditures for tooling and other equipment was $1,018,057 and
$1,053,738 was spent on product software development expenditures. Budgeted capital expenditures for equipment and product
software for year 2011 are approximately $2,500,000. The Company expects to generate sufficient funds through operations to fund
these expenditures.
Financing Activities
Net cash used in financing activities declined from $1,964,205 in 2009 to $595,678 in 2010. Dividends paid to stockholders declined
from $1,920,585 in 2009 to $1,845,678 in 2010. The Company intends to continue to pay regular quarterly dividends for the
foreseeable future. As of June 30, 2010, the Company had net borrowing of $1,250,000 on its line of credit. On August 31, 2010, the
Company had net borrowing of $2,800,000 and availability of $5,189,000.
There were no purchases of common stock in 2010 under the stock repurchase program. In 2009, the Company purchased $43,620 of
common stock. No stock options were exercised in 2010 or 2009.
Liquidity
In addition to capital expenditures for tooling and completion of the software development, the Company has interest payments on its
line of credit, commitments with vendors to reduce the outstanding balance and planned normal quarterly dividend payments. The
Company believes that cash generated from operations, together with borrowings available under its credit facility, provide it with
adequate liquidity to meet operating requirements, debt service requirements, accounts payable reduction, planned capital
expenditures, and dividend payments. The long-term outlook for the business remains positive, however, the Company continually
reevaluates new product offerings, inventory levels and capital expenditures to ensure that it is effectively allocating resources in line
with current market conditions.
Credit Facilities
On May 12, 2010, the Company entered into a new secured credit facility with JPMorgan Chase Bank, N.A. (“Lender”). The Credit
Agreement dated May 12, 2010 between the Company and the Lender (“Credit Agreement”) provides for an $8,000,000 revolving
secured credit facility and for letters of credit for the benefit 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 also entered into the Pledge and Security Agreement dated May 12, 2010
under which the Company granted the Lender a security interest in substantially all of the Company’s assets in connection with the
Company’s obligations under the Credit Agreement. The balance on this facility was $1,250,000 as of June 30, 2010.
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Stock Repurchase Program
In April 1995, the Board of Directors approved a stock repurchase 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 Directors periodically has approved increases of
between $1,000,000 to $5,000,000 in the stock repurchase program. As of June 30, 2010, the most recently approved increase was for
additional purchases of $2,000,000, which occurred in October 2006, for an aggregate maximum of $45,500,000, of which
$43,360,247 had been expended through June 30, 2010. The Company intends to effect all stock purchases either on the open market
or through privately negotiated transactions and intends to finance all stock purchases through its own cash flow or by borrowing for
such purchases.
There were no stock repurchases under the program in 2010. During 2009, the Company purchased 7,996 shares of its common stock
at an average net price of $5.46 per share, for a total purchase price of $43,620. As of June 30, 2010, the Board of Directors has
authorized the repurchase by the Company of up to $2,139,753 in Company common stock at the discretion of the Chief Executive
Officer of the Company. Future stock purchases under this program are dependent on management’s assessment of value versus
market price.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than the lease for the facility in Milwaukee, Wisconsin, which it leases
from its Chairman. On August 15, 2007, the lease was renewed for a period of five years, ending June 30, 2013, and is being
accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per year. The Company is
responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership. The facility is in good
repair and, in the opinion of management, is suitable and adequate for the Company’s business purposes.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates and
judgments, including those related to doubtful accounts, product returns, excess inventories, warranties, impairment of long-lived
assets, deferred compensation, income taxes and other contingencies. We base our estimates on historical experience and assumptions
that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Revenue Recognition
The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery
has occurred; the seller’s price to the buyer is fixed and determinable; and collectibility is reasonably assured. When these criteria are
generally satisfied, the Company recognizes revenue. The Company also offers certain customers the right to return products that do
not meet the standards agreed with the customer. The Company continuously monitors such product returns, and while such returns
have historically been minimal, the Company cannot guarantee that they will continue to experience the same return rates that they
have experienced in the past. Any significant increase in product quality failure rates and the resulting credit returns could have a
material adverse impact on the Company’s operating results for the period or periods in which such returns materialize.
The Company provides for certain sales incentives. The Company records a provision for estimated incentives based upon the
incentives offered to customers on product related sales in the same period as the related revenues are recorded. The provision is
recorded as a reduction of sales. The Company also records a provision for estimated sales returns and allowances on product related
sales in the same period as the related revenues are
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recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical
data the Company uses to calculate these estimates does not properly reflect future returns, adjustments may be required in future
periods.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the
customer’s current credit worthiness, as determined by the review of the customer’s current credit information. The Company
continuously monitors collections and payments from customers and maintains a provision for estimated credit losses based upon the
Company’s historical experience and any specific customer collection issues that have been identified. The Company values accounts
receivable net of an allowance for doubtful accounts. The allowance is calculated based upon the Company’s evaluation of specific
customer accounts where the Company has information that the customer may have an inability to meet its financial obligations. In
these cases, the Company uses its judgment, based on the best available facts and circumstances and records a specific reserve for that
customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are re-
evaluated and adjusted as additional information is received that impacts the amount reserved. However, the ultimate collectability of
the unsecured receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without
warning.
Inventories
The Company values its inventories at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method.
As of June 30, 2010, 100% of the Company’s inventory was valued using LIFO. Valuing inventories at the lower of cost or market
requires the use of estimates and judgment. The Company continues to use the same techniques to value inventory as have been used
in the past. Our customers may cancel their orders or change purchase volumes. This, or certain additional actions, could create
excess inventory levels, which would impact the valuation of our inventories. Any actions taken by our customers that could impact
the value of our inventory are considered when determining the lower of cost or market valuations. The Company regularly reviews
inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical usage and
production requirements. If the Company is not able to achieve its expectations of the net realizable value of the inventory at its
current value, the Company would have to adjust its reserves accordingly.
Product Software Development Costs
Product software development costs consist of costs incurred by outside parties for the development of software used to support new
products. These assets have been evaluated to ensure that the capitalized costs do not exceed the estimated net realizable value of the
related products. As part of the impairment analysis, we use a discounted cash flow model based on estimated sales to be derived in
the future use of the asset and other estimated costs directly related to the product. No amortization was recorded in 2010 or 2009 as
the related products have not yet been introduced. The Company expects the products to be introduced during fiscal year 2011.
The discounted cash flow model involves many assumptions, including operating results forecasts and discount rates. Inherent in the
operating results forecasts are certain assumptions regarding revenue growth rates, projected cost saving initiatives and projected long-
term growth rates. The Company performed impairment testing as of June 30, 2010 and 2009 and no impairment was identified.
Product Warranty Obligations
Products sold are generally covered by a lifetime warranty. We record accruals for potential warranty claims based on prior product
returns experience. Warranty costs are accrued at the time revenue is recognized. These warranty costs are based upon management’s
assessment of past claims and current experience. However, actual claims could be higher or lower than amounts estimated, as the
amount and value of warranty claims are subject to variation as a result of many factors that cannot be predicted with certainty.
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Income Taxes
We estimate the effective tax rate expected to be applicable for the full fiscal year. If the actual results are different from these
estimates, adjustments to the effective tax rate may be required in the period such determination is made. Additionally, discrete items
are treated separately from the effective rate analysis and are recorded separately as an income tax provision or benefit at the time they
are recognized.
Deferred income taxes are accounted for under the asset and liability method whereby deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using statutory tax
rates. Deferred income tax provisions are based on changes in the deferred tax assets and liabilities from period to period.
Additionally, we analyze our ability to recognize the net deferred income tax assets created in each jurisdiction in which we operate to
determine if valuation allowances are necessary based on the “more likely than not” criteria.
New Accounting Pronouncements
Applicable new accounting pronouncements are set forth under Item 15 of this annual report and are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements attached hereto.
ITEM 9. CHANGES AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures.
Disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e)) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) are designed to ensure that (1) information required to be disclosed in reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (2)
that such information is accumulated and communicated to management, including the principal executive officer and principal
financial officer, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human error, the circumvention or overriding of controls and
procedures and collusion to circumvent and conceal the overriding of controls and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurance of achieving their control objectives.
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2010. As discussed in
“Changes in Internal Controls” below, the Company recently implemented remedial measures in response to the previously disclosed
unauthorized transactions. Although the Company’s management believes that these remedial measures have addressed the
weaknesses in the Company’s disclosure controls and procedures, the Company must allow a sufficient amount of time to elapse to
permit testing of these controls in order to confirm their effectiveness. Subject to this testing and confirmation process, management
believes that the Company’s disclosure controls and procedures will be deemed effective.
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The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, continues to evaluate the
effectiveness of the Company’s disclosure controls and procedures to identify any additional enhancements that may provide greater
comfort that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Controls over Financial Reporting.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control of financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) and
designing such internal controls to provide reasonable assurances regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally accepted in the United States of
America. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted its evaluation of the effectiveness of its internal control over financial reporting based on the framework in
“Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on this assessment, the Company’s management, including its Chief Executive Officer and Chief Financial Officer,
has concluded that the Company’s internal controls and operating procedures were circumvented during the fiscal year and the
circumvention was concealed from management as previously described in the Form 10-K/A for June 30, 2009. The Company has
already implemented the internal control improvements described in Changes in Internal Controls below, and the Company is
planning to implement a new computer system towards the end of fiscal year 2011 that will further enhance the segregation of duties
within information technology. Based on the criteria set forth by COSO in “Internal Control-Integrated Framework,” although the
Company’s management believes that these enhancements and remedial measures have addressed the weaknesses in the Company’s
disclosure controls and procedures, the Company must allow a sufficient amount of time to elapse to permit testing of these controls in
order to confirm their effectiveness. Subject to this testing and confirmation process, management believes that the Company’s
disclosure controls and procedures will be deemed effective.
Changes in Internal Controls
The Company has identified how its controls over financial reporting were circumvented and how it is addressing these matters below.
• Auditor review. The circumvention of the Company’s internal controls and procedures was not detected as part of the
Company’s annual audits and quarterly reviews by its former independent auditor, Grant Thornton, LLP. As described in
Item 3 Legal Proceedings, on June 24, 2010, the Company filed an action against Grant Thornton, LLP and Ms. Sachdeva.
• Wire transfers and cashier’s checks. Approximately $30,900,000 or 98.1% of the total $31,500,000 of unauthorized
transactions from fiscal year 2005 through December 2009 was misappropriated by circumventing the Company’s internal
controls and other operating procedures for the payment of Company expenditures by using wire transfers or cashier’s
checks from the Company’s bank accounts to pay for personal expenditures. Of the $30,900,000, approximately
$8,500,000 was misappropriated by use of these means during 2009. Misappropriations by use of wire transfers or
cashier’s checks totaled $10,300,000 during 2010. These unauthorized transactions were processed by circumventing the
Company’s policy that all invoices over $5,000 were required to be submitted and approved by
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Michael Koss as the CEO, and all accounts payable checks generated from the Company’s accounts payable system were
signed by the CEO. Moreover, wire transfers were to be used only for authorized transactions including certain inventory
purchases and transfers of funds between the Company’s bank accounts. Wire transfers for inventory purchases and the
recurring expense items required the approval by several employees including authorized Vice Presidents, while the wire
transfers between the Company’s bank accounts were processed and approved by Ms. Sachdeva and one of the other
terminated employees in the accounting department. Ms. Sachdeva, by herself and/or by directing other employees in the
accounting department, ordered cashier’s checks from the Company’s bank accounts to pay for personal expenditures
directly, thereby circumventing the internal controls and procedures as described above so that these payments would not
be submitted through the Company’s normal accounts payable system. Ms. Sachdeva, by herself and/or by directing others
in the accounting department, processed wire transfers from the Company’s bank accounts to pay for personal expenditures
directly, thereby circumventing the internal controls and procedures as described above so that these payments would not
be submitted through the Company’s normal accounts payable system. This has been remediated by: (1) disallowing the
use of any cashier’s checks; (2) enforcing that all wire transfers are initiated within the financial function and electronically
approved by the CEO; and (3) performing an enhanced review, reconciliation and reporting of cash activities.
• Petty cash, manual checks and traveler’s checks. The remaining misappropriations of approximately $600,000 or 1.9%
from the total amount of $31,500,000 from fiscal year 2005 through December 2009 were carried out by circumventing the
Company’s internal controls and other standard operating procedures involving the Company’s petty cash system, manual
check system and policy for using traveler’s checks. In doing so, the Company’s policy requiring that all expense reports
be submitted and approved by the CEO was circumvented. Out of the estimated $600,000 of these types of transactions,
approximately $91,000 occurred during 2009. Approximately $107,000 of misappropriations involving the use of the
Company’s petty cash system, manual check system and traveler’s checks policy occurred during 2010. Remediation of
these issues has been accomplished by: (1) eliminating the petty cash fund so all reimbursements run through normal
controlled accounts payable channels; (2) eliminating the use of manual checks so all check disbursements are generated
from the Company’s accounts payable system check run; and (3) eliminating the use of traveler’s checks.
• Recording of unauthorized transactions. Ms. Sachdeva and one of the other terminated employees concealed the
unauthorized transactions by recording numerous erroneous accounting entries in various accounts to hide the true nature
of the transactions. The Company has improved the controls and procedures related to journal entries and account
reconciliations to include improved segregation of duties, review and approval of reconciliations, and approval of all
manual journal entries.
• Performance and review of account reconciliations. The Company’s internal controls and procedures included the
performance and review of key account reconciliations, including cash, by the accounting department employees including
Ms. Sachdeva, who collectively had over 50 years of experience at the Company. Ms. Sachdeva and one of the other
terminated employees further concealed the unauthorized transactions by failing to properly perform and review these key
account reconciliations on a regular basis, and failing to properly perform the Company’s period end financial close and
reporting processes that were designed to accurately report the Company’s financial information. The account
reconciliation process has been improved and includes proper segregation of duties as well as review and approval by
another person in the financial function.
• Corporate standards and whistleblower policy. The three terminated employees, including Ms. Sachdeva, failed to comply
with the Company’s established standards of integrity, ethical values and its Code of Conduct, Code of Ethics and
Whistleblower policy. The Company has taken steps to reinforce these policies with all of its employees, officers and
directors.
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• Application of GAAP. The terminated employees, including Ms. Sachdeva, as the principal accounting officer in charge of
financial reporting failed to properly apply the Company’s established accounting policies and adherence with GAAP. As
a result, certain established accounting policies were not applied correctly and resulted in inaccuracies, both from the
fraudulent activity directed by Ms. Sachdeva and the misapplication of GAAP. The affected accounts include equipment
and leasehold improvements, cash surrender value of life insurance, accrued deferred compensation, accrued product
warranty obligations and income taxes payable. As part of the restatement of the consolidated financial statements, the
accounts were reviewed in detail and reconciled. Integral to the reconciliation process was a review of all critical
accounting estimates.
• Information Technology. The Company’s internal controls and procedures relating to the Company’s computer system for
processing financial transactions were manipulated to conceal the unauthorized transactions. The Company expects to
implement a new computer system that will be used to improve its processing of financial transactions and overall
segregation of duties towards the end of fiscal 2011.
We believe the changes to our system of internal controls resulting from these efforts have enhanced the Company’s control over
financial reporting. We continue to diligently and vigorously review our financial and reporting controls and procedures. As we
continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address
any additional control deficiencies we may identify.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this report:
1. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended June 30, 2010 and 2009
Consolidated Balance Sheets as of June 30, 2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended June 30, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2010 and 2009
Notes to Consolidated Financial Statements
25
26
27
28
29
30
2. Financial Statement Schedules
All schedules have been omitted because the information is not applicable, is not material or because the information
required is included in the consolidated financial statements or the notes thereto.
3. Exhibits Filed
See Exhibit Index attached hereto.
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To the Board of Directors
Koss Corporation
Milwaukee, Wisconsin
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of Koss Corporation and Subsidiary (the “Company”) as of June 30,
2010 and 2009, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Koss Corporation and Subsidiary as of June 30, 2010 and 2009 and the results of their operations and their cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 16 to the consolidated financial statements, the Company has been named in several legal matters. In addition,
the Company has also initiated certain legal actions against third parties.
/s/ Baker Tilly Virchow Krause, LLP
Milwaukee, Wisconsin
September 20, 2010
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Table of Contents
KOSS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30,
Net sales
Cost of goods sold
Gross profit
Operating Expenses:
Selling, general and administrative expenses
Unauthorized transactions
Unauthorized transaction related costs and recoveries, net
Total Operating Expenses
Loss from operations
Other Income (Expense):
Royalty income
Interest income
Interest expense
Total Other Income (Expense), net
Loss before income tax benefit
Income tax benefit
Net loss
Loss per common share:
Basic
Diluted
Dividends declared per common share
The accompanying notes are an integral part of these consolidated financial statements.
26
2010
2009
$ 40,598,722
23,730,311
16,868,411
$
41,717,114
23,168,422
18,548,692
9,870,204
10,286,988
1,666,986
21,824,178
10,390,352
8,498,434
—
18,888,786
(4,955,767)
(340,094)
—
263
(429,138)
(428,875)
208,750
15,503
(216,751 )
7,502
(5,384,642)
(332,592)
(1,812,417)
(75,434)
$
(3,572,225) $
(257,158)
$
$
$
(0.48) $
(0.48) $
(0.03)
(0.03)
0.245
$
0.260
Table of Contents
KOSS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of June 30,
ASSETS
Current Assets:
respectively
Inventories
Prepaid expenses
Income taxes receivable
Deferred income taxes
Total Current Assets
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $757,535 and $1,588,923,
Equipment and leasehold improvements, net
Other Assets:
Product software development costs
Deferred income taxes
Cash surrender value of life insurance
Other assets
Total Other Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued liabilities
Dividends payable
Income taxes payable
Total Current Liabilities
Long-Term Liabilities:
Line of credit
Deferred compensation
Derivative liability
Other liabilities
Total Long-Term Liabilities
Total Liabilities
Stockholders’ Equity:
Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding
7,382,706 shares
Paid in capital
Retained earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
27
2010
2009
$
125,496
$
1,498,876
4,213,327
8,457,325
254,658
928,550
1,144,086
15,123,442
4,660,727
8,708,835
151,337
—
1,385,497
16,405,272
2,392,772
2,240,572
2,366,828
2,527,764
3,339,485
—
8,234,077
1,727,040
6,311,282
2,917,223
25,000
10,980,545
$ 25,750,291
$
29,626,389
$
4,794,598
4,514,724
442,962
—
9,752,284
$
3,122,721
2,090,054
479,876
4,404,382
10,097,033
1,250,000
1,752,459
125,000
678,300
3,805,759
—
1,541,240
125,000
725,000
2,391,240
13,558,043
12,488,273
36,914
1,492,096
10,663,238
12,192,248
36,914
1,056,975
16,044,227
17,138,116
$ 25,750,291
$
29,626,389
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KOSS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for doubtful accounts
Loss on disposals of equipment and leasehold improvements
Depreciation of equipment and leasehold improvements
Stock-based compensation expense
Provision for deferred income taxes
Increase in cash surrender value of life insurance
Deferred compensation
Net changes in operating assets and liabilities (see note 10)
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of investments
Life insurance premiums paid
Purchases of equipment and leasehold improvements
Product software development expenditures
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit
Dividends paid to stockholders
Purchase of treasury shares
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes are an integral part of these consolidated financial statements.
28
2010
2009
$
(3,572,225) $
(257,158)
374,961
9,670
635,172
435,121
4,024,929
(73,759)
211,219
(1,062,457)
982,631
25,000
(348,503)
(797,042)
(639,788)
(1,760,333)
1,250,000
(1,845,678)
—
(595,678)
245,537
224,286
728,054
442,660
(2,755,314)
(58,564)
214,542
3,862,103
2,646,146
75,000
(348,503)
(1,018,057)
(1,053,738)
(2,345,298)
—
(1,920,585)
(43,620)
(1,964,205)
(1,373,380)
1,498,876
125,496
$
(1,663,357)
3,162,233
1,498,876
$
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KOSS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Balance, July 1, 2008
Net loss
Dividends declared
Stock-based compensation expense
Purchase and cancellation of treasury shares
Balance, June 30, 2009
Net loss
Dividends declared
Stock-based compensation expense
Balance, June 30, 2010
Common Stock
Shares
7,390,702
—
—
—
(7,996)
7,382,706
—
—
—
7,382,706
$
$
Amount
36,954
—
—
—
(40)
36,914
—
—
—
36,914
Paid in
Capital
$
657,895
—
—
442,660
(43,580)
1,056,975
—
—
435,121
$ 1,492,096
Retained
Earnings
$ 18,221,451
(257,158)
(1,920,066)
—
—
16,044,227
(3,572,225)
(1,808,764)
—
$ 10,663,238
Total
$ 18,916,300
(257,158)
(1,920,066)
442,660
(43,620)
17,138,116
(3,572,225)
(1,808,764)
435,121
$ 12,192,248
The accompanying notes are an integral part of these consolidated financial statements.
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KOSS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
NATURE OF BUSINESS — Koss Corporation (“Koss”) and its wholly-owned subsidiary (collectively the “Company”), a Delaware
Corporation, reports its finances as a single reporting segment, as the Company’s principal business line is the design, manufacture
and sale of stereo headphones and related accessories. The Company leases its plant and office in Milwaukee, Wisconsin. In
addition, the Company has more than 250 domestic dealers and its products are carried by approximately 17,000 domestic retailers
and numerous retailers worldwide. International markets are served by domestic sales representatives and a sales office in
Switzerland which utilizes independent distributors in several foreign countries. The Company has one subsidiary, Koss Classics Ltd.
(“Koss Classics”).
BASIS OF CONSOLIDATION — The consolidated financial statements include the accounts of Koss and its subsidiary, Koss
Classics, which is a wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.
STOCK SPLIT — On September 10, 2009, NASDAQ notified the Company that it no longer met the minimum 750,000 publicly
held shares requirement under Listing Rule 5450(b)(1)(B). The Company remedied its noncompliance with Listing Rule 5450(b)(1)
(B) by implementing a two-for-one forward stock split on December 1, 2009. All share and per-share data have been adjusted
retroactively to give effect to the stock split.
CONCENTRATION OF CREDIT RISK — The Company operates in the audio/video industry segment of the home entertainment
industry through its design, manufacture and sale of stereo headphones and related accessory products. The Company’s products are
sold through national retailers, international distributors, audio specialty stores, the Internet, direct mail catalogs, regional department
store chains and military exchanges under the “Koss” name and dual label. The Company grants unsecured credit to its domestic and
international customers based on the extension of credit from 30 to 120 days, depending on the customer. Collection is dependent on
the retailing industry economy. The vast majority of international customers, outside of Canada, are sold on a cash against documents
or cash in advance basis. Approximately 20% and 14% of the Company’s accounts receivable at June 30, 2010 and 2009,
respectively, were foreign receivables denominated in U.S. dollars.
REVENUE RECOGNITION — Revenue is recognized by the Company when all of the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred; the seller’s price to the buyer is fixed and determinable; and collectibility is
reasonably assured. These criteria are generally satisfied upon shipment of the Company’s products. The Company may periodically
offer slotting fees, cooperative advertising programs, rebates and sales discounts and the estimated costs for these items are accrued
for at the time revenue is recognized. These amounts are recorded as a reduction to sales.
ROYALTY INCOME — The Company recognizes royalty income when earned under the terms of its license agreements.
Historically, royalty payments were calculated based upon predetermined percentages of net sales of the licensed products or based
upon minimum quarterly royalty payments, as set forth in the Company’s license agreements. Royalty income is booked monthly, on
an accrual basis, and the amount that the Company accrues is the monthly equivalent of the minimum royalty payment. When the
royalty payments are received each quarter, the Company then applies the payment to accounts receivable accordingly. In 2009, the
Company had one license agreement that terminated in the fourth quarter of 2009. As of June 30, 2010 the Company had no license
agreements in effect that would provide for royalty income.
SHIPPING AND HANDLING FEES AND COSTS — Shipping and handling fees are included in cost of goods sold within the
accompanying consolidated statements of operations.
RESEARCH AND DEVELOPMENT — Research and development activities charged to operations amounted to approximately
$766,000, in 2010 and $1,559,000 in 2009.
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ADVERTISING COSTS — Advertising costs included within selling, general and administrative expenses in the accompanying
consolidated statements of operations were approximately $57,000 in 2010 and $130,000 in 2009. Such costs are expensed as
incurred.
INCOME TAXES — The Company operates as a C Corporation under the Internal Revenue Code of 1986, as amended (the “Code”).
Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily
represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. As
changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes.
The differences relate principally to different methods used for depreciation for income tax purposes, net operating losses,
capitalization requirements of the Code, allowances for doubtful accounts and inventory valuation methods, unauthorized transactions,
warranty reserves, and other income tax related carryforwards. Valuation allowances are established when necessary to reduce
deferred income tax assets to the amount expected to be realized.
EARNINGS (LOSS) PER COMMON SHARE — Earnings (loss) per common share is calculated under the provisions of Topic 260
in the Accounting Standards Codification which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings
(loss) per common share includes no dilution and is computed by dividing net income (loss) by the weighted average common shares
outstanding for the period. Diluted earnings (loss) per common share reflect the potential dilution of securities that could share in the
earnings of an entity.
CASH AND CASH EQUIVALENTS — The Company considers depository accounts and investments with a maturity at the date of
acquisition and expected usage of three months or less to be cash and cash equivalents. The Company maintains its cash on deposit at
commercial banks located in the United States of America. The Company periodically has cash balances in excess of insured
amounts. The Company has not experienced and does not expect to incur any losses on these deposits.
ACCOUNTS RECEIVABLE — Accounts receivable consists of unsecured trade receivables due from customers. The Company
performs credit evaluations of its customers and does not require collateral to establish an account receivable. The Company evaluates
collectibility of accounts receivable based on a number of factors. Accounts receivable are considered to be past due if unpaid one
day after their due date. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review
of the past due item, general economic conditions and the industry as a whole. The Company writes off accounts receivable when
they become uncollectible. There were no recoveries of previously written-off accounts receivable during 2010 or 2009. Changes in
the allowance for doubtful accounts are as follows:
Year Ended June 30,
2010
2009
Balance,
Beginning
of Year
$
$
1,588,923
1,343,386
Provision
Charged to
Expense
374,961
245,537
Amounts
Written-off
(1,206,349) $
— $
Balance at
End Year
757,535
1,588,923
INVENTORIES — As of June 30, 2010 and 2009, 100% of the Company’s inventory was valued at the lower of last-in, first-out
(“LIFO”) cost or market. If the first-in, first-out (“FIFO”) method of inventory accounting had been used by the Company for
inventories valued at LIFO, inventories would have been $793,972 and $776,307 higher than reported at June 30, 2010 and 2009,
respectively. The Company did not maintain any work-in-process inventories at June 30, 2010 and 2009.
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The components of inventories at June 30 are as follows:
Raw materials
Finished goods
2010
2,407,715
6,049,610
8,457,325
$
$
2009
2,019,919
6,688,916
8,708,835
$
$
EQUIPMENT AND LEASEHOLD IMPROVEMENTS — Equipment and leasehold improvements are stated at cost. Depreciation
and amortization is provided using the straight-line method over the estimated useful lives of the respective assets. Leasehold
improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.
Major expenditures for property and equipment and significant renewals are capitalized. Maintenance, repairs and minor renewals are
expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation and
amortization are removed from the accounts and any resulting gains or losses are included in operations.
PRODUCT SOFTWARE DEVELOPMENT COSTS — The Company follows the guidance of ASC 985-20 “Costs of Software to be
Sold, Leased, or Marketed” when capitalizing development costs associated with software to be incorporated into its products. The
cost of purchased software technology is capitalized and stated at the lower of unamortized cost or expected net realizable value.
Software is subject to rapid technological obsolescence and future revenue estimates supporting the capitalized software cost can be
negatively affected based upon competitive products, services and pricing. Such adverse developments could reduce the estimated net
realizable value of our product software development costs and could result in impairment or a shorter estimated life. Such events
would require us to take a charge in the period in which the event occurs or to increase the amortization expense in future periods and
would have a negative effect on our results of operations. At a minimum, we review for impairments each balance sheet date. The
Company expects to launch the related products and begin amortization in 2011.
LIFE INSURANCE POLICIES — The Company carries its cash surrender value of life insurance at values stated by the insurance
carriers, reduced by the value of outstanding policy loans made to the insured, or at the amount the Company would receive in the
case of split-dollar arrangements. Increases in cash surrender value are included in other income in the Consolidated Statements of
Operations. The carrying value of cash surrender value of life insurance has been reduced by $61,157 of policy loans at June 30, 2010
and 2009.
INVESTMENTS — Included in “Other Assets” at June 30, 2009 is $25,000 of Israel government bonds which matured in July 2009.
Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at cost, adjusted for amortization of premiums and discounts to maturity.
PRODUCT WARRANTY OBLIGATIONS — Estimated future warranty costs related to products are charged to cost of goods sold
during the period the related revenue is recognized. The product warranty liability reflects the Company’s best estimate of probable
obligations under those warranties. As of June 30, 2010 and 2009, the Company has recorded a warranty reserve of $1,017,450 and
$1,087,000, respectively. (See Note 11)
DEFERRED COMPENSATION — The Company’s deferred compensation liabilities are for a current and former officer and are
calculated based on compensation, years of service and mortality tables. The related expense is included in selling, general and
administrative expenses in the Consolidated Statements of Operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS — Cash and cash equivalents, accounts receivable and accounts payable
approximate fair value based on the short maturity of these instruments.
IMPAIRMENT OF LONG-LIVED ASSETS — The Company evaluates the recoverability of the carrying amount of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The
Company evaluates the recoverability of equipment and leasehold improvements and product software development costs annually or
more frequently if events or circumstances
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indicate that an asset might be impaired. If an asset is considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell. Management determines fair value using discounted future cash flow analysis or other
accepted valuation techniques. Management believes that there has not been any impairment of the Company’s long-lived assets as of
June 30, 2010 and 2009.
LEGAL COSTS — All legal costs related to litigation are charged to operations as incurred except settlements, which are expensed
when a claim is probable and can be estimated. Recoveries of legal costs are recorded when the amount and items to be paid are
confirmed by the insurance company.
STOCK-BASED COMPENSATION — The Company has a stock-based employee compensation plan, which is described more fully
in Note 6. The Company accounts for stock-based compensation in accordance with ASC 718. Under the fair value recognition
provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment,
including estimating future volatility of the Company’s stock, the amount of share-based awards that are expected to be forfeited and
the expected term of awards granted. The Company estimates the fair value of stock options granted using the Black-Scholes option
valuation model. The fair value of all awards is amortized on a straight-line basis over the vesting periods. The expected term of
awards granted represent the period of time they are expected to be outstanding. The Company determines the expected term based on
historical experience with similar awards, giving consideration to the contractual terms and vesting schedules. The Company
estimates the expected volatility of its common stock at the date of grant based on the historical volatility of its common stock. The
volatility factor used in the Black-Scholes option valuation model is based on the Company’s historical stock prices over the most
recent period commensurate with the estimated expected term of the awards. The risk-free interest rate used in the Black-Scholes
option valuation model is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term
commensurate with the expected term of the awards. Pre-vesting option forfeitures are estimated using historical actual forfeitures.
Stock-based compensation is recorded only for those options expected to vest. If actual results differ significantly from these
estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted.
USE OF ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS — Certain amounts previously reported have been reclassified to conform to the current presentation.
2. UNAUTHORIZED TRANSACTIONS
In December 2009, the Company learned of significant unauthorized transactions, which totaled approximately $31,500,000 from
fiscal 2005 through December 2009. The volume of these unauthorized transactions was $8,498,434 in fiscal year 2009 and
$10,286,988 from July 1, 2009 until the unauthorized transactions were discovered in December 2009. As a result of these
unauthorized transactions, the Company restated its consolidated financial statements on Form 10-K/A for June 30, 2009.
The unauthorized transactions line in the Consolidated Statements of Operations represents the total of identified unauthorized
transactions in those years.
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The unauthorized transaction related costs and recoveries, net line in the Consolidated Statements of Operations is comprised of the
legal fees for the investigation, restatement and legal defense costs as well as professional fees for the forensic accountants,
restatement support professionals and general accounting support. The recoveries represent amounts received under the Company’s
insurance and other miscellaneous credits related to the unauthorized transactions. For the year ended June 30, 2010, these costs and
recoveries were as follows:
Legal fees
Professional fees
Total costs
Insurance proceeds
Other recoveries
Total recoveries
$
2,335,985
1,243,733
3,579,718
(1,746,469)
(166,263)
(1,912,732)
Unauthorized transaction related costs and recoveries, net
$
1,666,986
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The major categories of equipment and leasehold improvements at June 30, 2010 and 2009 are summarized as follows:
Machinery and equipment
Furniture and office equipment
Tooling
Display booths
Computer equipment
Leasehold improvements
Assets in progress
Less: accumulated depreciation and amortization
Equipment and leasehold improvements, net
34
Estimated
Useful Lives
5-10 years
5-10 years
5-10 years
5-7 years
3-5 years
5-10 years
N/A
$
$
2010
629,757 $
383,554
4,160,970
287,180
724,448
1,746,763
814,335
8,747,007
6,354,235
2,392,772
$
2009
701,925
370,611
4,498,535
288,183
777,790
1,706,478
337,903
8,681,425
6,440,853
2,240,572
Table of Contents
4. EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings (loss) per share are computed based on the weighted-average number of common shares outstanding. The weighted-
average number of common shares outstanding for the years ended June 30, 2010 and 2009 were 7,382,706 and 7,386,250,
respectively. When dilutive, stock options are included in earnings per share as share equivalents using the treasury stock method.
For the years ended June 30, 2010 and 2009 there were no common stock equivalents related to stock option grants that were included
in the computation of the weighted-average number of shares outstanding for diluted loss per share. Shares under option of 1,159,308
and 863,308 were excluded from the diluted weighted average common shares outstanding for the years ended June 30, 2010 and
2009 as they would be anti-dilutive due to the Company’s net loss for the year.
5. CREDIT FACILITIES
On February 16, 2009, the Company entered into a credit facility with Harris N.A. for an unsecured line of credit 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’s new credit facility. The Company could use the credit facility for working capital, to refinance existing
indebtedness, for stock repurchase and for general corporate purposes. Borrowings under the credit facility bore interest at either the
bank’s most recently publicly announced prime rate or at a London Interbank Offered Rate (“LIBOR”) based rate plus 1.25% as
determined in accordance with the loan agreement. The credit facility included certain financial covenants that required the Company
to maintain a minimum tangible net worth, liabilities to tangible net worth ratios and interest coverage ratios. The Company used its
credit facility from time to time, although there was no utilization of this credit facility at June 30, 2009. The Company’s credit
facility with Harris N.A. was terminated on May 12, 2010 and the outstanding balance of $5,863,349 as of that date was fully repaid.
On May 12, 2010, the Company entered into a new secured credit facility with JPMorgan Chase Bank, N.A. (“Lender”). The Credit
Agreement dated May 12, 2010 between the Company and the Lender (“Credit Agreement”) provides for an $8,000,000 revolving
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 Credit Agreement 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 of up 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.
The Credit Agreement contains certain affirmative, negative and financial covenants customary for financings of this type. The
negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, asset sales, sale and
leaseback transactions and transactions with affiliates, among other restrictions. The financial covenants include a minimum current
ratio, minimum tangible net worth and maximum leverage ratio requirements. The Company and the Lender also entered into the
Pledge and Security Agreement dated May 12, 2010 under which the Company granted the Lender a security interest in substantially
all of the Company’s assets in connection with the Company’s obligations under the Credit Agreement. At June 30, 2010, the
outstanding balance on this credit facility was $1,250,000. The applicable interest rates at June 30, 2010 were 2.84% on $1,000,000 of
outstanding balance and 3.75% on $250,000 of outstanding balance. The weighted average interest rate in effect in the borrowings
outstanding as of June 30, 2010 was 3.02%.
6. STOCK OPTIONS
In 1990, pursuant to the recommendation of the Board of Directors, the stockholders ratified the creation of the Company’s 1990
Flexible Incentive Plan (the “1990 Plan”). The 1990 Plan is administered by a committee of the Board of Directors and provides for
granting of various stock-based awards including stock options to eligible participants, primarily officers and certain key employees.
A total of 225,000 shares of common stock were available in the first year of the 1990 Plan’s existence. Each year thereafter
additional shares equal to 0.25% of the shares outstanding as of the first day of the applicable fiscal year were reserved for issuance
pursuant to the
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1990 Plan. On July 22, 1992, the Board of Directors authorized the reservation of an additional 250,000 shares for the 1990 Plan,
which was approved by the stockholders. In 1993, the Board of Directors authorized the reservation of an additional 300,000 shares
for the 1990 Plan, which was approved by the stockholders. In 1997, the Board of Directors authorized the reservation of an
additional 300,000 shares for the 1990 Plan, which was approved by the stockholders. In 2001, the Board of Directors authorized the
reservation of an additional 300,000 shares for the 1990 Plan, which was also approved by the stockholders. As of June 30, 2010,
there are 485,506 options available for future grants. Options vest over a four or five year period from the date of grant, with a
maximum term of five to ten years.
The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model. The resulting
compensation cost for fixed awards with graded vesting schedules is amortized on a straight-line basis over the vesting period for the
entire award. The expected term of awards granted is determined based on historical experience with similar awards, giving
consideration to the expected term and vesting schedules. The expected volatility is determined based on the Company’s historical
stock prices over the most recent period commensurate with the expected term of the award. The risk-free interest rate is based on
U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected term of the award. Expected pre-vesting
option forfeitures are based on historical data.
As of June 30, 2010, there was approximately $706,000 of total unrecognized compensation cost related to stock options granted
under the 1990 Plan. This cost is expected to be recognized over a weighted average period of 2.87 years. Total unrecognized
compensation cost will be adjusted for any future changes in estimated and actual forfeitures. The Company recognized stock-based
compensation expense of $435,121 and $442,660 in 2010 and 2009, respectively. These expenses were included in selling, general
and administrative expenses.
There was no cash received from stock option exercises during 2010 or 2009.
The per share weighted average fair value of the stock options granted during the year ended June 30, 2010 was $1.49. The fair value
of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted
in 2009. For the options granted in 2010, the Company used the following weighted-average assumptions:
Expected stock price volatility
Risk free interest rate
Expected dividend yield
Expected forfeitures
Expected life of options
2010
45%
2.40%
4.14%
1.50%
4.7 years
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The following table identifies options granted, exercised, cancelled, or available for exercise pursuant to the 1990 Plan:
Shares under option at June 30, 2008
Granted
Exercised
Expired
Forfeited
Shares under option at June 30, 2009
Granted
Exercised
Expired
Forfeited
Shares under option at June 30, 2010
Exercisable as of June 30, 2009
Exercisable as of June 30, 2010
Number of
Shares
1,123,308
—
—
(260,000)
—
863,308
390,000
—
—
(94,000)
1,159,308
Stock
Options
Price Range
$7.76 - $14.40
—
—
$12.055
—
$7.76 - $14.40
$3.90 - $6.905
$6.275 - $13.09
$3.90 - $14.40
532,808
627,308
$7.76 - $14.40
$7.76 - $14.40
$
$
$
$
$
$
$
$
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life - Years
Aggregate
Intrinsic
Value of
In-The-
Money
Options
3.90
$
816
3.99
$
—
3.66
$
—
10.75
—
—
12.055
—
10.35
6.39
9.16
9.12
10.72
10.72
A summary of intrinsic value and cash received from stock option exercises and fair value of vested stock options for the fiscal years
ended June 30, 2010 and 2009 is as follows:
Total intrinsic value of stock options exercised
Cash received from stock option exercises
Total fair value of stock options vested
2010
—
—
349,599
$
$
$
$
$
$
2009
—
—
440,137
Total options of 390,000 were granted during the year ended June 30, 2010 at a price equal to or greater than the market value of the
common stock on the date of grant. These options had a weighted-average exercise price of $6.39. No options were granted during
the year ended June 30, 2009.
7. STOCK PURCHASE AGREEMENTS
The Company has an agreement with its Chairman, John C. Koss, in the event of his death, at the request of the executor of his estate,
to repurchase his Company common stock from his estate. The Company does not have the right to require the estate to sell stock to
the Company. As such, this arrangement is accounted for as a written put option with the fair value of the put option recorded as a
derivative liability.
The fair value of the written put option at both June 30, 2010 and 2009 was $125,000. The repurchase price is 95% of the fair market
value of the common stock on the date that notice to repurchase is provided to the Company. The total number of shares to be
repurchased will be sufficient to provide proceeds which are the lesser of $2,500,000 or the amount of estate taxes and administrative
expenses incurred by the Chairman’s estate.
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Table of Contents
The Company may elect to pay the purchase price in cash or may elect to pay cash equal to 25% of the total amount due and to
execute a promissory note for the balance, payable over four years, at the prime rate of interest. The Company maintains a $1,150,000
life insurance policy to fund a substantial portion of this obligation.
In April 1995, the Board of Directors approved a stock repurchase 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 Directors periodically has approved increases in
the stock repurchase program. As of June 30, 2010, the most recently approved increase was for additional purchases of $2,000,000,
which occurred in October 2006, for an aggregate maximum of $45,500,000, of which $43,360,247 had been expended through
June 30, 2010. The Company repurchased 7,996 shares for $43,620 in 2009. No shares were repurchased in 2010.
8. INCOME TAXES
The Company utilizes the liability method of accounting for income taxes. The liability method measures the expected income tax
impact of future taxable income and deductions implicit in the consolidated balance sheets. The income tax benefit in 2010 and 2009
consists of the following:
Year Ended June 30,
Current:
Federal
State
Deferred
2010
2009
$
$
(5,848,321) $
10,975
4,024,929
(1,812,417) $
2,251,167
428,713
(2,755,314)
(75,434)
The 2010 and 2009 tax benefit results in an effective rate different than the federal statutory rate because of the following:
Year Ended June 30,
Federal income tax benefit at statutory rate
State income taxes, net of federal tax benefit
Increase in valuation allowance
Research and development tax credits
Other
Total income tax benefit
2010
(1,830,778) $
(56,783)
109,683
(14,550)
(19,989)
(1,812,417) $
$
$
2009
(113,081)
(14,716)
123,159
(126,848)
56,052
(75,434)
Temporary differences which give rise to deferred income tax assets and liabilities at June 30 include:
Deferred Income Tax Assets:
Deferred compensation
Stock-based compensation
Accrued expenses and reserves
Package design and trademarks
Unauthorized transactions
Federal and state net operating loss carryforwards
Valuation allowance
Deferred Income Tax Liabilities:
Equipment and leasehold improvements
Capitalized research and development costs
Other
Net deferred income tax asset
38
2010
2009
$
$
648,409
698,891
1,395,982
81,000
2,220,000
528,622
(1,027,204)
4,545,700
(219,600)
(653,325)
(925)
$
3,671,850
$
570,259
588,785
1,630,520
100,609
6,392,045
28,736
(917,521)
8,393,433
(264,968)
(416,603)
(15,083)
7,696,779
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As of June 30, 2010, the Company had unused net operating loss carryforwards of approximately $8,700,000 to offset against future
state taxable income. The state net operating loss carryforwards expire at various dates beginning in 2011 and continuing through
2025.
Deferred income tax assets as presented on the consolidated balance sheets:
Current deferred income tax assets
Noncurrent deferred income tax assets
Net deferred income tax assets
2010
1,144,086
2,527,764
3,671,850
$
$
2009
1,385,497
6,311,282
7,696,779
$
$
Deferred income tax balances reflect the effects of temporary differences between the tax bases of assets and liabilities and their
carrying amounts. These differences are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.
The recognition of these deferred tax balances will be realized through normal recurring operations and, as such, the Company has
recorded the full value of such expected benefits.
Accounting Standards Codification (“ASC”) Topic 740 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. There were no significant
matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the
Company’s consolidated financial statements for the year ended June 30, 2010. As part of the unauthorized transactions, the
Company has accrued interest of $660,989 and $354,644 at June 30, 2010 and 2009, respectively.
Additionally, ASC Topic 740 provides guidance on the recognition of interest and penalties related to income taxes. There were no
penalties related to income taxes that have been accrued or recognized as of and for the years ended June 30, 2010 and 2009. The
Company records interest related to unrecognized tax benefits in interest expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized tax benefits at beginning of year
Gross decreases — tax positions in prior years
Unrecognized tax benefits at end of year
2010
300,000
—
300,000
$
$
$
$
2009
300,000
—
300,000
The Company files income tax returns in the United States federal jurisdiction and in a state jurisdiction. The Company’s federal tax
returns through tax year June 30, 2006 are settled and the income tax returns for tax years beginning July 1, 2006 are open. Most state
jurisdictions have tax returns open for tax years beginning July 1, 2005. There is an open examination by the Wisconsin Department
of Revenue for the period July 1, 2005 through June 30, 2009.
The following are the changes in the valuation allowance:
Year Ended June 30,
2010
2009
Balance,
Beginning
of Year
$
$
(917,521)
(794,362)
Increase in
Valuation
Allowance
(109,683)
(123,159)
Release of
Valuation
Allowance
Balance at
End Year
— $
— $
(1,027,204)
(917,521)
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9. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of the following:
Cooperative advertising and promotion allowances
Accrued returns
Product warranty obligations
Interest
Payroll taxes and other employee benefits
Legal and professional fees
Other
2010
677,844
407,576
339,150
660,989
167,171
2,009,656
252,338
4,514,724
$
$
2009
401,483
364,773
362,000
354,644
208,180
135,739
263,235
2,090,054
$
$
10. ADDITIONAL CASH FLOW INFORMATION
The net changes in cash as a result of changes in operating assets and liabilities consist of the following:
Accounts receivable
Inventories
Income taxes receivable
Prepaid expenses
Income taxes payable
Accounts payable
Accrued liabilities
Other liabilities
Net change
Net cash (refunded) paid during the year for:
Income taxes
Interest
11. PRODUCT WARRANTY OBLIGATIONS
2010
$
72,439
251,510
(928,550)
(103,321)
(4,404,382)
1,671,877
2,424,670
(46,700)
(1,062,457) $
2009
3,264,731
(276,500)
—
47,818
1,480,076
(73,387)
(580,635)
—
3,862,103
(678,512) $
$
122,793
1,190,000
—
$
$
$
$
The Company records a liability for product warranty obligations at the time of sale based upon historical warranty experience. The
Company’s products carry a lifetime warranty. The Company also records a liability for specific warranty matters when they become
known and are reasonably estimated. The Company’s current and non-current product warranty obligations are included in accrued
liabilities and other liabilities, respectively, in the consolidated balance sheets. Changes to the product warranty obligations for the
years ended June 30, 2010 and 2009 are as follows:
Year Ended June 30,
2010
2009
Balance,
Beginning
of Year
$
$
1,087,000
1,112,000
Provision
Charged to
Expense
325,226
324,695
Warranty
Expenses
Incurred
(394,776) $
(349,695) $
Balance at
End Year
1,017,450
1,087,000
The warranty obligation is recorded as a current and long-term liability.
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12. EMPLOYEE BENEFIT PLANS
Substantially all domestic employees are participants in the Koss Employee Stock Ownership Trust under which an annual
contribution in either cash or common stock may be made at the discretion of the Board of Directors. The expense recorded for such
cash contributions approximated $5,000 and $30,000 during 2010 and 2009, respectively.
The Company maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees
of the Company who have completed one full fiscal quarter of service. Matching contributions can be made at the discretion of the
Board of Directors. For fiscal years 2010 and 2009, the matching contribution was 100% of employee contributions to the plan.
Vesting of Company contributions occurs immediately. Company contributions were $323,540 and $312,822 during 2010 and 2009,
respectively.
13. DEFERRED COMPENSATION
The Company has deferred compensation agreements with a former and current officer.
The Board of Directors entered into an agreement to continue the Chairman’s 1991 base salary for the remainder of his life. These
payments begin upon the Chairman’s retirement, and since the Chairman has not retired, he is not currently receiving any payments
under this arrangement. The Company has a deferred compensation liability of $494,755 and $421,469 recorded as of June 30, 2010
and 2009, respectively. Deferred compensation expense of $73,286 and $66,808 was recognized under this arrangement in 2010 and
2009, respectively.
The Board of Directors has approved a supplemental retirement plan with an officer that calls for annual cash compensation following
retirement from the Company in an amount equal to 2% of base salary, as defined in the agreement, multiplied by the number of years
of service to the Company. The retirement payments are to be paid monthly to the officer until his death and then to his surviving
spouse monthly until her death. The Company has a deferred compensation liability of $1,257,704 and $1,119,771 recorded as of
June 30, 2010 and 2009, respectively. Deferred compensation expense of $137,933 and $147,734 was recognized under this
arrangement in 2010 and 2009, respectively.
The Company uses life insurance policies to cover its deferred compensation agreements.
14. FOREIGN SALES AND SIGNIFICANT CUSTOMERS
The Company’s net foreign sales amounted to $20,416,375 during 2010 and $17,495,075 during 2009.
The Company’s sales by region are as follows:
U.S.
Europe
All other countries
Net sales
$
$
2010
20,182,347 $
17,710,672
2,705,703
40,598,722
$
2009
24,222,039
15,744,430
1,750,645
41,717,114
Sales during 2010 and 2009 to the Company’s five largest customers, which are generally large national retailers or foreign
distributors, represented approximately 52% and 54% of the Company’s net sales, respectively. Included in these percentages, sales to
a single U.S. customer represented approximately 17% and 22%, of the Company’s net sales during 2010 and 2009, respectively. Net
sales to a single Scandinavian distributor represented approximately 25% and 17%, of the Company’s total sales during 2010 and
2009, respectively.
Included in accounts receivable as of June 30, 2010 and 2009 was 50% and 49%, respectively, due from the Company’s five largest
customers.
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15. COMMITMENTS AND CONTINGENCIES
The Company leases its facility in Milwaukee, Wisconsin from its Chairman. On August 15, 2007, the lease was renewed for a period
of five years, ending June 30, 2013, and is being accounted for as an operating lease. The lease extension maintained the rent at a
fixed rate of $380,000 per year. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses
related to ownership. Total rent expense was $380,000 in both 2010 and 2009.
In July 2010, the Company entered into agreements totaling approximately $1,578,000 for software and new product development.
The term of these commitments is less than one year.
16. LEGAL MATTERS
Since learning of the unauthorized transactions in December 2009, the Company has been 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 other third parties.
• On January 11, 2010, the Company received a letter from a law firm stating that it represented a shareholder and
demanding that the Company’s Board of Directors investigate and take legal action against all responsible parties to
ensure compensation for the Company’s losses stemming from the unauthorized transactions. The Company’s legal
counsel has responded preliminarily to the letter indicating that the Board of Directors will determine the appropriate
course of action after the Independent Investigation is completed.
• On January 15, 2010, a class action complaint was filed in federal court in Wisconsin against the Company, Michael
Koss and Sujata Sachdeva. The suit alleges violations of Section 10(b), Rule 10b-5 and Section 20(a) of the Exchange
Act relating to the unauthorized transactions and requests an award of compensatory damages in an amount to be proven
at trial. See David A. Puskala v. Koss Corporation, et al., United States District Court, Eastern District of Wisconsin,
Case No. 2:2010cv00041.
• On January 26, 2010, the SEC’s Division of Enforcement advised the Company that it obtained a formal order of
investigation in connection with the unauthorized transactions. The Company voluntarily brought the unauthorized
transactions to the SEC staff’s attention when they were discovered in December 2009, and is cooperating with the
ongoing SEC investigation.
• On February 16 and 18, 2010, separate shareholder derivative suits were filed in Milwaukee County Circuit Court in
connection with the previously disclosed unauthorized transactions. The first suit names as defendants Michael Koss,
John Koss Sr., the other Koss directors, Sujata Sachdeva, Grant Thornton, LLP, and Koss Corporation (as a nominal
defendant); the second suit names the same parties except Grant Thornton, LLP. Among other things, both suits allege
various breaches of fiduciary and other duties, and seek recovery of unspecified damages 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., Circuit Court, Milwaukee County, Wisconsin, No. 10CV002290 (February 18, 2010). These two
shareholder derivative suits have been consolidated under Master File No. 10CV002422.
• On February 18, 2010, the Company filed an action against American Express Company, American Express 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 abetting breach of
fiduciary duty, aiding and abetting fraud, conversion, and negligence relating to the unauthorized transactions.
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• On June 24, 2010, the Company filed an action against its former independent auditor, Grant Thornton, 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.
The ultimate resolution of these matters is not determinable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
KOSS CORPORATION
By: /s/ Michael J. Koss
Michael J. Koss
Vice Chairman
President
Chief Executive Officer
Chief Operating Officer
By: /s/ David D. Smith
David D. Smith
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Secretary
Dated: September 20, 2010
Dated: September 20, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated on September 20, 2010.
/s/ John C. Koss
John C. Koss, Director
/s/ Lawrence S. Mattson
Lawrence S. Mattson, Director
/s/ Thomas L. Doerr
Thomas L. Doerr, Director
/s/ Michael J. Koss
Michael J. Koss, Director
/s/ John J. Stollenwerk
John J. Stollenwerk, Director
/s/ Theodore H. Nixon
Theodore H. Nixon, Director
44
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Exhibit No.
EXHIBIT INDEX
Exhibit Description
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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. *
Table of Contents
23.1
31.1
31.2
32.1
32.2
*
**
Consent of Baker Tilly Virchow Krause, LLP*
Rule 13(a)-14(a)/15(d)-14(a) Certification of Chief Executive Officer *
Rule 13(a)-14(a)/15(d)-14(a) Certification of Chief Financial Officer *
Section 1350 Certification of Chief Executive Officer **
Section 1350 Certification of Chief Financial Officer **
Filed herewith
Furnished herewith
KOSS CORPORATION
CODE OF ETHICS
Exhibit 14
The Board of Directors (the “Board”) of Koss Corporation, a Delaware corporation (the “Company”), have adopted this Code of
Ethics for the Company’s directors, officers and employees (the “Code”).
I. PURPOSE
This Code is intended to focus the Board, management and our employees on areas of ethical risk, provide guidance to help
them recognize and deal with ethical issues, provide mechanisms to report unethical or unlawful conduct, and to help
enhance and formalize our culture of integrity, honesty and accountability. This Code is also designed to establish the
policies and appropriate standards concerning business conduct, responsibilities and conflicts of interest. This Code applies
to the directors and employees of the Company.
II. WAIVERS
Any waiver of Parts III A and B of this Code with respect to a director, an executive officer, and each financial or accounting
officer at the level of the principal accounting officer or controller or above, may be made only by the Board and shall be
promptly disclosed as required in accordance with the rules and regulations promulgated by the SEC and Nasdaq. Waivers
with respect to other employees may be made only by the Board. The Board shall carefully evaluate any requested waiver
and shall ensure that all waivers of this Code will not harm the Company or its reputation. No waivers of the requirements of
Parts III. C through G of this Code may be granted.
III. POLICIES
A. Conflicts of Interest
The Company requires disclosure of related-party transactions and conflicts of interest, and seeks to avoid such
transactions as well as the appearance of conflicts, where practicable. A conflict of interest occurs when the private
investments, business affairs or financial interests of an individual employee or the employee’s immediate family
interfere with the interests, assets, or business of the Company as a whole. Potential conflicts must be fully and
promptly disclosed to the Company’s designated Compliance Officer, his/her designee or a member of the Board.
B. Corporate Opportunities
This Code prohibits (i) taking personally, participating or investing in on a personal basis, or diverting to others any
business or investment opportunities that the employee learns about through the use of corporate property,
information or position or that are discovered or disclosed in the course of the Company’s business, (ii) using
Company property, information or position for personal gain, and (iii) competing with the Company. Directors and
employees owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises.
C. Confidentiality
Directors and employees of the Company should maintain the confidentiality of information entrusted to them by
the Company or its customers, except when disclosure is authorized or legally mandated. Confidential information
includes all non-public information that might be of use to competitors, or harmful to the Company or its customers,
if disclosed.
1
D. Fair Dealing
Each director and employee of the Company should endeavor to deal fairly with the Company’s customers,
suppliers, competitors and employees. None should attempt to take unfair advantage of anyone through
manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair-
dealing practice.
E. Protection and Proper Use of Company Assets
Directors and employees should protect the Company’s assets and seek to ensure the proper use of the Company’s
and its customers’ property, electronic communication systems, information resources, materials, facilities, and
equipment. All assets should be used and maintained with reasonable care and respect, guarding against waste and
abuse, and Company assets or property should never be borrowed or removed without express permission from the
department head responsible for that asset. In the case of executive officers and directors, any loan or removal of
Company property or assets requires approval by the Chairman of the Board of Directors and disclosure to the
Board. Directors and employees should be cost-conscious and alert to opportunities to improve performance while
reducing costs. All Company assets should be used only for legitimate business purposes.
F. Compliance with Laws, Rules and Regulations
Directors and employees of the Company will conduct the business of the Company in accordance with all
applicable laws, rules and regulations, and shall comply with applicable policies and procedures of the Company,
including this Code.
G. Reporting of Illegal or Unethical Behavior
Directors and employees of the Company must report any knowledge or reasonable suspicion of violations of any
laws, rules or regulations or any violations of this Code. Such report must comply with the reporting procedures
described in Section IV(A) of this Code.
H. Disclosure.
The information in the Company’s public communications, including SEC filings, must be full, fair, accurate, timely
and understandable. All directors and employees of the Company are responsible for acting in furtherance of this
policy. In particular, directors and executive officers are required to maintain familiarity with the disclosure
requirements applicable to the Company commensurate with their duties and are prohibited from knowingly
misrepresenting, omitting or causing others to misrepresent or omit, material facts about the Company to others,
whether within or outside the Company, including the Company’s independent auditors. In addition, any director or
employee who has a supervisory role in the Company’s disclosure process has an obligation to discharge such
supervisory responsibilities in good faith and in the Company’s best interests.
IV. COMPLIANCE STANDARDS AND PROCEDURES
This Code is designed to provide a method to report conduct that directors and employees suspect violates this Code. The
Company encourages participation by all employees in this effort.
If actions have taken place, may be taking place, or may be about to take place that violate any law, rule or regulation or any
provision of this Code, it should be brought to the attention of appropriate authorities within the Company.
A. Procedure to Report Violations or Suspected Violations
1. Failure to report a known violation of these policies may result in disciplinary action up to and including
dismissal. If an employee has knowledge of or reasonably suspects misconduct or a violation of this Code,
the matter should first be brought to the attention
2
of his/her immediate supervisor or, in the case of a director with knowledge, to the attention of the Chief
Executive Officer or the Board.
2. If the conduct in question involves a reporting individual’s supervisor, the reporting individual believes that
a supervisor has not dealt with the matter properly, or feels they cannot discuss the matter with a
supervisor, the reporting individual may raise the matter with the next level of management or report it to
the Board. If a reporting individual is uncomfortable reporting to any of the above persons, or feels that the
report has not been dealt with properly, the individual may report it directly to the Compliance Officer or a
representative of the Board.
3. In reviewing a report, a manager should consider whether the report alleges or implicates a violation of this
Code and if so, he or she must report it immediately to the next level of management and the Company’s
designated Compliance Officer, or where appropriate, to a representative of the Board.
4. When reporting misconduct or suspected misconduct, the Company prefers that the reporting individual
discloses his/her identity in order to facilitate the Company’s ability to take appropriate steps to address the
report, including conducting an investigation. If anyone wishes to remain anonymous, he/she may do so;
however, they should be aware that if they do not identify themselves, the Company may not have
sufficient information to properly investigate their allegations. When a report relates to an accounting or
auditing issue, the complaint procedures adopted by the Audit Committee of the Board supersede these
provisions, but only to the extent these provisions are inconsistent.
5. Any employee involved in any capacity in an investigation of a possible violation of any law, rule or
regulation, or any provision of this Code, should maintain the confidentiality of the investigation and
should not discuss the subject matter of the investigation with anyone other than those participating in the
investigation, unless required by law or when seeking their own legal advice, if necessary.
B. Consequences of Failure to Comply
1. If a director or employee violates this Code, fails to properly report a violation of this Code or intentionally
submits a false report, he/she will be subject to discipline. In the event of a violation of any law, rule or
regulation, the violation may be reported to the appropriate law enforcement authorities. The discipline
imposed will vary depending on the nature, severity, and frequency of the violation as well as the status of
the person involved. Discipline will be imposed for violations of this Code, failure to report violations and
withholding relevant and material information concerning violations. Directors and employees will be
informed of the charges against them and will be given the opportunity to explain their actions before any
disciplinary action is imposed.
2. Varying levels of disciplinary action may be imposed, including:
(a) Verbal Warning
(b) Written Warning
(c) Written Reprimand
(d) Probation
(e) Suspension
(f) Termination or Removal
3
3. Offenders may also be subject to criminal prosecution and civil liability, including compensating the
Company or other injured parties for their loss.
4. No employee may be retaliated against for reporting in good faith to the Company, in accordance with this
Code, any suspected misconduct or violation of this Code. Any employee who believes he or she has been
retaliated against, or threatened with retaliation, should inform the Director of Human Resources, the
Compliance Officer or a representative of the Board immediately. Employees or directors who violate this
non-retaliation policy will be subject to discipline. Individuals are expected to act responsibly and ethically
in reporting under this Code. Employees and directors must not use this Code or any of its procedures in
bad faith or in a false or frivolous manner.
4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement Nos. 333-89872, 333-37986 and 333-20405 on Form S-8
of our report dated September 20, 2010, relating to the consolidated financial statements of Koss Corporation and Subsidiary, which
includes an explanatory paragraph related to legal matters described in Note 16 to the consolidated financial statements, as of and for
the years ended June 30, 2010 and 2009, appearing in this Annual Report on Form 10-K of Koss Corporation for the year ended
June 30, 2010.
Exhibit 23.1
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
Milwaukee, Wisconsin
September 20, 2010
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael J. Koss, certify that:
1. I have reviewed this annual report on Form 10-K of Koss Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13
(a)-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f))
for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to
me by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: September 20, 2010
/s/ Michael J. Koss
Michael J. Koss
Chief Executive Officer, President and
Chief Operating Officer
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David D. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of Koss Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13
(a)-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f))
for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to
me by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: September 20, 2010
/s/ David D. Smith
David D. Smith
Executive Vice President and
Chief Financial Officer
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
Exhibit 32.1
I, Michael J. Koss, Chief Executive Officer of Koss Corporation (the “Company”), hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(i) the Annual Report on Form 10-K of the Company for the year ended June 30, 2010 (the “Report”) fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: September 20, 2010
/s/ Michael J. Koss
Michael J. Koss
Chief Executive Officer, President and
Chief Operating Officer
Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
Exhibit 32.2
I, David D. Smith, Chief Financial Officer of Koss Corporation (the “Company”), hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(i) the Annual Report on Form 10-K of the Company for the year ended June 30, 2010 (the “Report”) fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: September 20, 2010
/s/ David D. Smith
David D. Smith
Executive Vice President and
Chief Financial Officer