KOSS CORP - Quarter Report: 2005 December (Form 10-Q)

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended December 31, 2005

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

KOSS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

A DELAWARE CORPORATION		39-1168275
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

4129 North Port Washington Avenue, Milwaukee, Wisconsin		53212
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (414) 964-5000

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 þ                    NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer o       Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).

YES o                    NO þ

At February 7, 2006, there were 3,686,275 shares outstanding of the registrant’s common stock, $0.005 par value per share.

 

 

KOSS CORPORATION AND SUBSIDIARIES
FORM 10-Q
December 31, 2005

INDEX

		Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
December 31, 2005 (Unaudited) and June 30, 2005			3
Condensed Consolidated Statements of Income (Unaudited)
Three months and six months ended December 31, 2005 and 2004			4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended December 31, 2005 and 2004			5
Notes to Condensed Consolidated Financial Statements (Unaudited) December 31, 2005			6-9
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			9-11
Item 3 Quantitative and Qualitative Disclosures About Market Risk			11
Item 4 Controls and Procedures			11-12
PART II OTHER INFORMATION
Item 6 Exhibits			13
Rule 13a-14(a)/15d-14(a) Certification of CEO/CFO
Section 1350 Certification of CEO/CFO

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		(Unaudited)
		December 31, 2005				June 30, 2005
ASSETS
Current Assets:
Cash		$	4,839,303			$	5,218,698
Accounts Receivable			11,597,999				8,763,968
Inventories			9,362,126				7,595,803
Other current assets			1,368,833				1,987,779
Total current assets			27,168,261				23,566,248
Property and equipment, net			3,226,977				2,993,700
Deferred income taxes			315,531				315,531
Other assets			2,327,320				2,365,982
		$	33,038,089			$	29,241,461
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current liabilities:
Accounts payable		$	4,391,957			$	3,012,736
Accrued liabilities			2,660,477				1,841,862
Income taxes			1,023,999				692,538
Dividends payable			479,385				486,918
Total current liabilities			8,555,818				6,034,054
Deferred compensation			961,165				961,165
Derivative liability			125,000				125,000
Stockholders’ investment			23,396,106				22,121,242
		$	33,038,089			$	29,241,461

See accompanying notes to the condensed consolidated financial statements.

KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three Months								Six Months
Period Ended December 31		2005				2004				2005				2004
Net Sales		$	15,435,597			$	10,225,079			$	27,385,438			$	19,197,659
Cost of goods sold			9,397,027				6,266,461				16,671,989				11,816,068
Gross Profit			6,038,570				3,958,618				10,713,449				7,381,591
Selling general and administrative expense			2,849,784				2,456,825				5,297,401				4,576,346
Income from operations			3,188,786				1,501,793				5,416,048				2,805,245
Other income (expense)
Royalty income			100,307				484,614				201,918				636,070
Interest income			40,825				12,678				75,470				16,876
Interest expense			0				0				0				0
Income before income tax provision			3,329,918				1,999,085				5,693,436				3,458,191
Provision for income taxes			1,298,672				779,643				2,220,972				1,348,838
Net Income		$	2,031,246			$	1,219,442			$	3,472,464			$	2,109,353
Earnings per common share:
Basic		$	0.55			$	0.33			$	0.93			$	0.57
Diluted		$	0.53			$	0.31			$	0.92			$	0.55
Dividends per common share		$	0.13			$	0.13			$	0.26			$	0.26

See accompanying notes to the condensed consolidated financial statements.

KOSS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Six Months Ended December 31,		2005				2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,472,464			$	2,109,353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			503,061				401,975
Increase in allowance for doubtful accounts			193,000				—
Net changes in operating assets and liabilities			(1,652,645	)			2,760,271
Net cash provided by operating activities			2,515,880				5,271,599
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment			(697,675	)			(818,116	)
Net cash used in investing activities			(697,675	)			(818,116	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid			(966,173	)			(960,121	)
Purchase of common stock			(1,231,427	)			(2,130,625	)
Exercise of stock options			—				123,400
Net cash used in financing activities			(2,197,600	)			(2,967,346	)
Net increase (decrease) in cash			(379,395	)			1,486,137
Cash at beginning of period			5,218,698				2,110,917
Cash at end of period		$	4,839,303			$	3,597,054

See accompanying notes to the condensed consolidated financial statements.

KOSS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Unaudited)

1.		CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
		The financial statements presented herein are based on interim amounts. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows at December 31, 2005 and for all periods presented have been made. All significant intercompany transactions have been eliminated. The income from operations for the quarter and six months ended December 31, 2005 is not necessarily indicative of the operating results for the full year.
		Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Registrant’s June 30, 2005 Annual Report on Form 10-K.
2.		EARNINGS PER COMMON SHARE
		Basic earnings per common share are computed based on the weighted average number of common shares outstanding. The weighted average number of common shares outstanding for the quarters ending December 31, 2005 and 2004 were 3,696,796 and 3,692,970, respectively. For the six months ended December 31, 2005 and 2004, weighted average number of common shares outstanding were 3,716,337 and 3,856,895, respectively. When dilutive, stock options are included as share equivalents using the treasury stock method. Common stock equivalents of 124,450 and 132,392 related to stock option grants were included in the computation of the average number of shares outstanding for diluted earnings per common share for the quarters ended December 31, 2005 and 2004, respectively. Common stock equivalents of 72,180 and 147,380 related to stock option grants were included in the computation of the average number of shares outstanding for diluted earnings per common share for the six months ended December 31, 2005 and 2004, respectively.
3.		INVENTORIES
		The classification of inventories is as follows:

		December 31, 2005				June 30, 2005
Raw materials and work in process		$	4,962,789			$	3,649,069
Finished goods			5,272,730				4,820,127
			10,235,519				8,469,196
LIFO reserve			(873,393	)			(873,393	)
		$	9,362,126			$	7,595,803

4.		STOCK PURCHASE AGREEMENT
		The Company has an agreement with its Chairman, John C. Koss, to, at the request of the executor of the estate, repurchase Company common stock from his estate in the event of his death. 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 option at December 31, 2005 was $125,000. The repurchase price is 95% of the fair market value of the common stock on the date that notice, if the estate elects, to repurchase is provided to the Company. Under the agreement, the total number of shares to be repurchased 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. 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. At December 31, 2005 and June 30, 2005, $125,000 has been classified as a derivative liability on the Company’s financial statements.
5.		DIVIDENDS DECLARED
		On December 20, 2005, the Company declared a quarterly cash dividend of $0.13 per share for stockholders of record on December 31, 2005 to be paid January 13, 2006. Such dividend payable has been recorded at December 31, 2005.
6.		STOCK-BASED COMPENSATION
		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 the 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 Plan’s existence. Each year thereafter additional shares equal to .25% of the shares outstanding as of the first day of the applicable fiscal year were reserved for issuance pursuant to the 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. Options generally vest at 25% each anniversary date after grant, with a maximum term of five to ten years.
		During December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Shared-Based Payments” (“SFAS 123R”), which changed the accounting for equity compensation programs. Under SFAS 123R, companies that award share-based payments to employees, including stock options, must begin to recognize the expense of these awards in the financial statements at the time the employees receive the awards. As allowed by SFAS 123 and SFAS 148, the Company elected to follow APB Opinion No. 25 (“APB 25”) in accounting for its stock option plan until the effective date of SFAS 123R. The accounting as provided by SFAS 123R was effective for the Company beginning July 1, 2005, which was the beginning of the Company’s current fiscal year. The adoption of SFAS 123R’s fair value method has an impact on the Company’s results of operations, although it does not have an impact on the overall financial position.
		The effect of applying the expense recognition provisions of SFAS 123R on income before provision for income taxes, net income and basic and diluted earnings per share for the three months ended December 31, 2005 is presented below:

						Change
						from SFAS
Three months ended December 31, 2005		As Reported				123R				Pro Forma
Income before income tax provision		$	3,329,918			$	98,992			$	3,428,910
Provision for income taxes			1,298,672				38,607				1,337,279
Net income			2,031,246				60,385				2,091,631
Earnings per share:
Basic earnings per share		$	0.55			$	0.02			$	0.57
Diluted earnings per share		$	0.53			$	0.02			$	0.55

		The fair value of each 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 was amortized on a straight line basis over the vesting period for the entire award.
		As of December 31, 2005, there was approximately $1,088,000 of total unrecognized compensation cost related to nonvested options granted under the plan. This cost is expected to be recognized over a weighted average period of 4.83 years.
		SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as financing cash flow, rather than as operating cash flow as required under the current standards. This requirement reduces the net cash provided by operation activities and increase the net cash from financing activities in periods after adoption. The Company cannot estimate what these amounts will be in the future because it will depend on, among other things, when employees exercise stock options. The effect of applying the provisions of SFAS 123R on cash flow from operations and cash flow from financing activities was not material for the three months or the six months ended December 31, 2005.
		Prior to fiscal 2006, the Company accounted for its stock-based employee compensation plan under the recognition and measurement principles of APB 25. All options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based employee compensation, for the three months ended December 31, 2004:

Three Months Ended December 31,		2004
Net income, as reported		$	1,219,442
Add: Total stock-based employee compensation recorded			26,187
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards outstanding			85,298
Pro forma net income		$	1,160,331
Earnings per share:
Basic-as reported		$	0.33
Basic-pro forma		$	0.31
Diluted-as reported		$	0.31
Diluted-pro forma		$	0.30

7.		SUBSEQUENT EVENT
		On January 12, 2006, a customer of the Company, Musicland Holding Corp., declared bankruptcy. As a result, the Company has recorded a reserve for the amounts due from

Musicland of $193,000 at December 31, 2005. This amount is reflected in the condensed consolidated statements of income for the periods ending December 31, 2005.

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

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities during the six months ended December 31, 2005 amounted to $2,515,880. This was a result of net income for the period adjusted for changes in operating assets and liabilities, which arose primarily out of increases in accounts receivable, accrued liabilities and income taxes payable.

Capital expenditures for new equipment (including production tooling) were $697,675 for the quarter. Capital expenditures for fiscal year 2006 are expected to be approximately $1.7 million. The Company expects to generate sufficient funds through operations to fund these expenditures.

Stockholders’ investment increased to $23,396,106 at December 31, 2005, from $22,121,242 at June 30, 2005. The increase reflects net income offset by the effect of the purchase and retirement of common stock and dividends declared and paid.

The Company amended its existing credit facility in November 2005, extending the maturity date of the unsecured line of credit to November 1, 2006. This credit facility provides for borrowings up to a maximum of $10,000,000. The Company can use this credit facility for working capital purposes or for the purchase of its own common stock pursuant to the Company’s common stock repurchase program. Borrowings under this credit facility bear interest at the bank’s prime rate, or LIBOR plus 1.75%. This credit facility includes financial covenants that require the Company to maintain a minimum tangible net worth and specified current, interest coverage and leverage ratios. The Company uses its credit facility from time to time, although there was no utilization of this credit facility at December 31, 2005 or June 30, 2005. The Company did not utilize the credit facility during the quarter ended December 31, 2005.

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. The most recent increase was for an additional $2,000,000 in January 2006, for a maximum of $42,500,000. The Company intends to effectuate 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.

For the six months ended December 31, 2005, the Company purchased 57,948 shares of its common stock at an average net price of $21.25 per share, for a total net purchase price of $1,231,427.

From the commencement of the Company’s stock repurchase program through December 31, 2005, the Company has purchased a total of 5,357,952 shares for a total gross purchase price of $44,230,162, (representing an average gross purchase price of $8.26 per share) and a total net purchase price of $37,753,227 (representing an average net purchase price of $7.05 per share). The difference between the total gross purchase price and the total net purchase price is the result of the Company receiving from employees cash acquired from such employees pursuant to the Company’s stock option program. In determining the dollar amount available for additional purchases under the stock repurchase program, the Company uses the total net purchase price by the Company for all stock purchases, as authorized by the Board of Directors.

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

December 31, 2005. However, during the quarter ended December 31, 2005, the Company did purchase 25,548 shares of the Company’s common stock from the ESOP at an average price of $23.16 per share for a total purchase price of $591,807.

Results of Operations

Net sales for the second quarter ended December 31, 2005 rose 51% to $15,435,597 from $10,225,079 for the same period in 2004. Net sales for the six months ended December 31, 2005 were $27,385,438 up 43% compared with $19,197,659 during the same six months one year ago.

Net sales increased for the quarter and six months ended December 31, 2005, as a result of a number of factors. Seasonal holiday sales were strong for the Company, and retailers and distributors increased stock levels of Koss stereophones throughout the quarter. In addition, export sales, most notably to Europe, increased significantly. This quarter’s 120% increase in export sales brings the six month increase in export sales to 106% for the period ending December 31, 2005 and complements the 82% increase in export sales we reported for the year ending June 30, 2005, and the 72% increase in export sales we reported for the year ending June 30, 2004.

Gross profit as a percent of net sales was 39% for the quarter ended December 31, 2005 unchanged from the same period in the prior year. For the six month periods ended December 31, 2005 and 2004, the gross profit percentage was 39% and 38% respectively.

Selling, general and administrative expenses for the quarter ended December 31, 2005 were $2,849,784 or 18% of net sales, compared to $2,456,825 or 24% of net sales for the same period in 2004. For the six month period ended December 2005, these expenses were $5,297,401 or 19% of net sales, compared to $4,576,346 or 24% of net sales, for the same period in 2004.

For the second quarter ended December 31, 2005, income from operations was $3,188,786 versus $1,501,793 for the same period in the prior year, a 112% change. Income from operations for the six months ended December 31, 2005 was $5,416,048 as compared to $2,805,245 for the same period in 2004, a 93% change. Income from operations increased primarily as a result of increased net sales for the quarter and six months ended December 31, 2005.

Net income increased by 67%, from $1,219,442 to $2,031,246 for the same three months. Net income for the six months increased by 65% from $2,109,353 compared to $3,472,464 for the same six months ending December 31, 2004. Net income increased primarily as a result of increased net sales for the quarter and six months ended December 31, 2005.

Royalty income for the quarter ended December 31, 2005 was $100,307, compared to $484,614 for the quarter ended December 31, 2005. For the six month period ended December 31, 2005 royalty income was $201,918 compared to $636,070 for the period ending December 31, 2004. The decrease in royalty income was primarily a result of the terminated license agreement with Jiangsu Electronics Industries Limited (Jiangsu). Effective November 23, 2004, the Company terminated the License Agreement dated November 15, 1991, as subsequently amended, between the Company and Jiangsu (the “Jiangsu License Agreement”). As a result of the termination, other than Jiangsu’s post-termination right to sell Company-approved licensed products, as set forth in the Jiangsu License Agreement, Jiangsu no longer has the right to use certain Company trademarks in connection with the manufacture, marketing and distribution of Jiangsu’s products under the Jiangsu License Agreement. Royalty income on all previously approved products, which are already in the pipeline, is still owed to the Company.

Effective June 30, 2003, the Company entered into a License Agreement (the “License Agreement”) with Sonigem Products, Inc. (“Sonigem”) of Ontario, Canada whereby the Company licensed to Sonigem the

right to sell video and communications products under the Koss brand name. This License Agreement covers Canada, requiring royalty payments by Sonigem through June 30, 2010, subject to certain minimum annual royalty amounts. To further enhance the relationship between the Company and Sonigem, on June 30, 2005, the Company announced the extension of its licensing agreement for electronics products with Sonigem. The Amendment to the License Agreement with Sonigem was effective August 1, 2005 (the “Amendment”). The Amendment provides Sonigem with the exclusive right and license to use certain Company trademarks in Canada in connection with the manufacture, production, distribution and sale of an increased number of licensed products, with the prior approval of the Company. In consideration for these increased rights, the Amendment also provides for increased minimum royalty payments payable to the Company, which may partially offset the previously discussed reductions in royalty income from the terminated Jiangsu License Agreement.

Interest income for the quarter was $40,825 as compared to $12,678 for the same quarter in 2004. For the six month period interest income was $75,470 compared to $16,876. Interest income fluctuates in relation to cash balances on hand throughout the year and fluctuations in interest rates earned.

The provision for income taxes for the quarter ended December 31, 2005, was $1,298,672 compared with $779,643 for the same period last year. For the six months ended December 31, 2005, the provision for income taxes was $2,220,972 compared with $1,348,838 for the same period last year. The increases were due to significantly improved results of operations. The effective tax rate was 39% for each of the quarters.

Recently Issued Financial Accounting Pronouncements

During December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Shared-Based Payments”, which changed the accounting for equity compensation programs (“SFAS 123R”). Under SFAS 123R, companies that award share-based payments to employees, including stock options, must begin to recognize the expense of these awards in the financial statements at the time the employees receive the awards. As allowed by SFAS 123 and SFAS 148, the Company elected to follow APB Opinion No. 25 in accounting for its stock option plan until the effective date of SFAS 123R. The accounting as provided by SFAS 123R is effective for the Company beginning July 1, 2005, which was the beginning of the Company’s current fiscal year. For the quarter ended December 31, 2005, the impact of the adoption of SFAS 123R reduced pre-tax earnings by $98,992. For the six months ended December 31, 2005, the impact of the adoption of SFAS 123R reduced pre-tax earnings by $197,984. During the rest of fiscal 2006, the impact of the adoption of SFAS 123R is expected to reduce pre-tax earnings by approximately $132,000. For more information about SFAS 123R, see Note 6, “Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

In management’s opinion, the Company does not engage in any material risk sensitive activities and does not have any market risk sensitive instruments, other than the Company’s commercial credit facility used for working capital purposes and stock repurchases as disclosed in the “Financial Condition, Liquidity and Capital Resources” section of the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” above.

Item 4. Controls and Procedures.

(a)

Evaluation of Disclosure Controls and Procedures. The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to

		management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer/Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, has concluded 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 principal executive officer and principal 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.
(b)		Changes in Internal Controls. The Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q 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-Q 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-Q, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “forecasts” 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-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, 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.

PART II
OTHER INFORMATION

Item 6 Exhibits

          See Exhibit Index attached hereto.

Signatures

Pursuant to the requirements of the Securities and 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
Date: February 14, 2006				/s/ Michael J. Koss
				Michael J. Koss
				Vice Chairman, President,
				Chief Executive Officer,
				Chief Financial Officer
Date: February 14, 2006				/s/ Sue Sachdeva
				Sue Sachdeva
				Vice President—Finance, Secretary

EXHIBIT INDEX

Exhibit No.		Exhibit Description
3.1		Certificate of Incorporation of Koss Corporation. Filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference.
3.2		By-Laws of Koss Corporation, as in effect on September 25, 1996. Filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference.
10.1		Death Benefit Agreement with John C. Koss. Filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference.
10.2		Stock Purchase Agreement with John C. Koss. Filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference.
10.3		Salary Continuation Resolution for John C . Koss. Filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference.
10.4		1983 Incentive Stock Option Plan. Filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference.
10.5		Assignment of Lease to John C. Koss. Filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1988 and incorporated herein by reference.
10.6		Addendum to Lease. Filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1988 and incorporated herein by reference.
10.7		Amendment to Lease. Filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2000 and incorporated herein by reference.
10.8		Partial Assignment, Termination and Modification of Lease. Filed as Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2001 and incorporated herein by reference.
10.9		Restated Lease. Filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2001 and incorporated herein by reference.
10.10		1990 Flexible Incentive Plan. Filed as Exhibit 25 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1990 and incorporated herein by reference.
10.11		Consent of Directors (Supplemental Executive Retirement Plan for Michael J. Koss dated March 7, 1997). Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference.

Exhibit No.		Exhibit Description
10.12		Loan Agreement, effective as of February 17, 1995. Filed as Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference.
10.13		Amendment to Loan Agreement dated June 15, 1995, effective as of February 17, 1995. Filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1995 and incorporated herein by reference.
10.14		Amendment to Loan Agreement dated April 29, 1999. Filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1999 and incorporated herein by reference.
10.15		Amendment to Loan Agreement dated December 15, 1999. Filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2000 and incorporated herein by reference.
10.16		Amendment to Loan Agreement dated October 10, 2001. Filed as Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 and incorporated herein by reference.
10.17		License Agreement dated June 30, 1998 between Koss Corporation and Logitech Electronics Inc. (including Addendum to License Agreement dated June 30, 1998). Filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1998 and incorporated herein by reference.
10.18		Amendment and Extension Agreement between Koss Corporation and Logitech Electronics Inc. dated May 1, 2001. Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference.
10.19		License Agreement dated June 30, 2003 between Koss Corporation and Sonigem Products, Inc. Filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2005 and incorporated herein by reference.
10.20		Amendment to License Agreement dated August 1, 2005, between Koss Corporation and Sonigem Products, Inc. Filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2005 and incorporated herein by reference.
31		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer/Chief Financial Officer *
32		Section 1350 Certification of Chief Executive Officer/Chief Financial Officer **
*        Filed herewith
**      Furnished herewith