**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**Form 10-Q**

 

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

 

**for the quarterly period ended March 31, 2008**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 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 itsCharter)

 

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

 

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

 

Registrant’s telephone number, including areacode:    **(414)964-5000**

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 
|   | YES | x | NO | o |
|--------|-----|---|----|---|

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

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

 
|   | YES | o | NO | x |
|--------|-----|---|----|---|

 

At May 05, 2008, there were 3,696,265 shares outstanding of theregistrant’s common stock, $0.005 par value per share.

 

 

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KOSS CORPORATION AND SUBSIDIARIES

FORM 10-Q

March 31, 2008

 

INDEX

 
|         | **Page**              |
|--------------|-----------------------|
|         | ** **            |
| PART I  | FINANCIAL INFORMATION |   |
|         |                  |   |
|         | Item 1                | Financial Statements |   |
|         |                  |   |   |
|         |                  | Condensed Consolidated Balance Sheets March 31, 2008 (Unaudited)  and June 30, 2007 | 3 |
|         |                  |   |   |
|         |                  | Condensed Consolidated Statements of Income Three months and nine  months ended March 31, 2008 and 2007 (Unaudited) | 4 |
|         |                  |   |   |
|         |                  | Condensed Consolidated Statements of Cash Flows Nine months ended  March 31, 2008 and 2007  (Unaudited) | 5 |
|         |                  |   |   |
|         |                  | Notes to Condensed Consolidated Financial  Statements March 31, 2008 (Unaudited) | 6 |
|         |                  |   |   |
|         | Item 2                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 9 |
|         |                  |   |   |
|         | Item 3                | Quantitative and Qualitative Disclosures  About Market Risk | 11 |
|         |                  |   |   |
|         | Item 4                | Controls and Procedures | 11 |
|         |                  |   |   |
| PART II | OTHER  INFORMATION    |   |
|         |                  |   |
|         | Item 1A               | Risk Factors | 12 |
|         | Item 2                | Unregistered Sales of Equity Securities and  Use of Proceeds | 12 |
|         | Item 6                | Exhibits | 13 |

 

2

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**PART IFINANCIAL INFORMATION**

 

**Item 1.    Financial Statements.**

 

KOSS CORPORATION AND SUBSIDIARIES

#####  

##### CONDENSED CONSOLIDATED BALANCE SHEETS

 
| ** **                                    | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **March 31, 2008** | ** ** | **June 30, 2007** | ** ** |
| ASSETS                                        |       |                         |       |                        |       |
| Current Assets:                               |       |                         |       |                        |       |
| Cash                                          |       | $                            | 3,050,839  |                        | $          | 4,187,682 |   |
| Accounts Receivable                           |       | 7,499,030                    |       | 7,938,913                   |       |
| Inventories                                   |       | 8,675,671                    |       | 9,923,544                   |       |
| Deferred income taxes                         |       | 1,940,597                    |       | 1,528,782                   |       |
| Other current assets                          |       | 519,550                      |       | 291,251                     |       |
| Total current assets                          |       | 21,685,687                   |       | 23,870,172                  |       |
|                                          |       |                         |       |                        |       |
| Property and equipment, net                   |       | 2,563,735                    |       | 2,567,139                   |       |
| Deferred income taxes                         |       | 423,928                      |       | 423,928                     |       |
| Other assets                                  |       | 2,211,584                    |       | 2,312,304                   |       |
|                                          |       | $                            | 26,884,934 |                        | $          | 29,173,543 |   |
|                                          |       |                         |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ INVESTMENT |       |                         |       |                        |       |
| Current liabilities:                          |       |                         |       |                        |       |
| Accounts payable                              |       | $                            | 1,301,484  |                        | $          | 1,371,152 |   |
| Accrued liabilities                           |       | 1,390,454                    |       | 2,282,155                   |       |
| Dividends payable                             |       | 480,514                      |       | 476,459                     |       |
| Total current liabilities                     |       | 3,172,452                    |       | 4,129,766                   |       |
|                                          |       |                         |       |                        |       |
| Deferred compensation                         |       | 989,153                      |       | 989,153                     |       |
| Derivative liability                          |       | 125,000                      |       | 125,000                     |       |
| Stockholders’ investment                 |       | 22,598,329                   |       | 23,929,624                  |       |
|                                          |       | $                            | 26,884,934 |                        | $          | 29,173,543 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

3

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KOSS CORPORATION AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 
| ** **                                 | ** ** | **Three Months** | ** ** | **Nine Months** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| **Period Ended March 31**   | ** ** | **2008**              | ** ** | **2007**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net Sales                                  |       | $                     | 10,003,648 |                 | $          | 9,601,291 |   | $ | 34,740,651 |   | $ | 35,148,974 |   |
| Cost of goods sold                         |       | 6,438,524             |       | 5,998,723            |       | 22,059,172 |   | 21,540,297 |   |
| Gross Profit                               |       | 3,565,124             |       | 3,602,568            |       | 12,681,479 |   | 13,608,677 |   |
| Selling general and administrative expense |       | 2,602,122             |       | 2,494,886            |       | 7,757,424 |   | 7,849,596 |   |
| Income from operations                     |       | 963,002               |       | 1,107,682            |       | 4,924,055 |   | 5,759,081 |   |
| Other income (expense)                     |       |                  |       |                 |       |   |   |   |   |
| Royalty income                             |       | 87,501                |       | 81,249               |       | 262,501 |   | 243,747 |   |
| Interest income                            |       | 11,929                |       | 45,842               |       | 109,120 |   | 112,991 |   |
| Interest expense                           |       | 0                     |       | 0                    |       | 0 |   | 0 |   |
| Income before income tax provision         |       | 1,062,432             |       | 1,234,773            |       | 5,295,676 |   | 6,115,819 |   |
| Provision for income taxes                 |       | 414,435               |       | 481,639              |       | 2,065,453 |   | 2,385,247 |   |
| Net Income                                 |       | $                     | 647,997    |                 | $          | 753,134 |   | $ | 3,230,223 |   | $ | 3,730,572 |   |
| Earnings per common share:                 |       |                  |       |                 |       |   |   |   |   |
| Basic                                      |       | $                     | 0.18       |                 | $          | 0.20 |   | $ | 0.88 |   | $ | 1.01 |   |
| Diluted                                    |       | $                     | 0.18       |                 | $          | 0.20 |   | $ | 0.87 |   | $ | 0.99 |   |
| Dividends per common share                 |       | $                     | 0.13       |                 | $          | 0.13 |   | $ | 1.39 |   | $ | 0.39 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

4

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KOSS CORPORATION AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| **Nine Months Ended March 31,**                                | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                               |       |       |       |       |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |       |       |       |       |
| Net income                                                                         |       | $          | 3,230,223  |       | $          | 3,730,572 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |       |       |       |       |
| Depreciation and amortization                                                      |       | 843,289    |       | 849,246    |       |
| Stock compensation expense                                                         |       | 408,789    |       | 422,010    |       |
| Net changes in operating assets and liabilities                                    |       | 113,359    |       | (2,538,113 | )          |
| Net cash provided by operating activities                                          |       | 4,595,660  |       | 2,463,715  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |       |       |       |       |
| Acquisition of equipment                                                           |       | (762,194   | )          | (297,016   | )          |
| Net cash used in investing activities                                              |       | (762,194   | )          | (297,016   | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |       |       |       |       |
| Dividends paid                                                                     |       | (5,115,390 | )          | (1,442,265 | )          |
| Purchase of common stock                                                           |       | (1,268,786 | )          | (1,594,750 | )          |
| Exercise of stock options                                                          |       | 1,413,867  |       | 500,566    |       |
| Net cash used in financing activities                                              |       | (4,970,309 | )          | (2,536,449 | )          |
| Net decrease in cash                                                               |       | (1,136,843 | )          | (369,750   | )          |
| Cash at beginning of period                                                        |       | 4,187,682  |       | 6,146,580  |       |
| Cash at end of period                                                              |       | $          | 3,050,839  |       | $          | 5,776,830 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

5

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KOSS CORPORATION AND SUBSIDIARIES

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2008

(Unaudited)

 

1.                                       CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

 

The financial statements presented herein are based on interimamounts.  In the opinion of management,all adjustments (consisting of normal recurring accruals) necessary to presentfairly the financial position, results of operations and cash flows at March 31,2008 and for all periods presented have been made. All significant intercompanytransactions have been eliminated. The income from operations for the quarterand nine months ended March 31, 2008 is not necessarily indicative of theoperating results for the full year.

 

Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted.  It is suggested that these condensedconsolidated financial statements be read in conjunction with the financialstatements and notes thereto included in the Registrant’s June 30, 2007Annual Report on Form 10-K.

 

2.                                       EARNINGS PERCOMMON SHARE

 

Basic earnings per common share are computed based on the weightedaverage number of common shares outstanding. The weighted average number of common shares outstanding for thequarters ending March 31, 2008 and 2007 were 3,690,371 and 3,678,289,respectively.  For the nine months ended March 31,2008 and 2007, the weighted average number of common shares outstanding was3,680,321 and 3,693,152, respectively. When dilutive, stock options are included as share equivalents using thetreasury stock method.  Common stockequivalents of 12,107 and 58,348 related to stock option grants were includedin the computation of the average number of shares outstanding for dilutedearnings per common share for the quarters ended March 31, 2008 and 2007,respectively.  Common stock equivalentsof 18,065 and 66,783 related tostock option grants were included in the computation of the average number ofshares outstanding for diluted earnings per common share for the nine monthsended March 31, 2008 and 2007, respectively.

 

3.                                       INCOMETAXES

 

Wefile income tax returns in the United States (Federal), Wisconsin (state) andvarious other state jurisdictions.  Weare not currently subject to income tax examinations in any of our significanttax jurisdictions.  Tax years open toexamination by tax authorities under the statute of limitations include fiscal2006 through 2007 for Federal and fiscal 2003 through 2007 for most statesjurisdictions.

 

Weadopted the provisions for FASB Interpretation No. 48 (FIN 48), Accountingfor Uncertainty in Income Taxes, on July 1, 2007.  As a result of the implementation of FIN 48,we did not recognize a significant change in the liability for unrecognized taxbenefits.  The total liability forunrecognized tax benefits was approximately $60,000 as of July 1,2007.  The liability does not include anamount for accrued penalties.   Werecognize interest and penalties related to unrecognized tax benefits in theprovision for income taxes.  We do notexpect a significant increase or decrease to the total amounts of unrecognizedtax benefits within the next 12 months.  

 

6

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Therewas no material change in the amount of unrecognized tax benefits during thefirst nine months ended March 31, 2008.

 

4.                                       INVENTORIES

 

                                                Theclassification of inventories is as follows:

 
| ** **                        | ** ** | **March 31, 2008** | ** ** | **June 30, 2007** | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials and work in process |       | $                            | 2,837,928  |                        | $          | 3,119,659 |   |
| Finished goods                    |       | 7,096,697                    |       | 8,062,839                   |       |
|                              |       | 9,934,625                    |       | 11,182,498                  |       |
| LIFO reserve                      |       | (1,258,954                   | )          | (1,258,954                  | )          |
|                              |       | $                            | 8,675,671  |                        | $          | 9,923,544 |   |

 

5.                                       STOCKPURCHASE AGREEMENT

 

The Company has an agreement with itsChairman, 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 torequire the estate to sell stock to the Company.  As such, this arrangement is accounted for asa written put option with the fair value of the put option recorded as aderivative liability.  The fair value ofthe option at March 31, 2008 was $125,000. The repurchase price is 95% of the fair market value of the common stockon the date that notice, if the estate elects, to repurchase is provided to theCompany.  Under the agreement, the totalnumber of shares to be repurchased will be sufficient to provide proceeds whichare the lesser of $2,500,000 or the amount of estate taxes and administrativeexpenses incurred by the Chairman’s estate. The Company may elect to pay thepurchase price in cash or may elect to pay cash equal to 25% of the totalamount due and to execute a promissory note for the balance, payable over fouryears, at the prime rate of interest. The Company maintains a $1,150,000 life insurance policy to fund asubstantial portion of this obligation. At March 31, 2008 and June 30, 2007, $125,000 has beenclassified as a derivative liability on the Company’s financial statements.

 

6.                                       DIVIDENDSDECLARED

 

On March 14, 2008, the Company declared a quarterly cash dividendof $0.13 per share for stockholders of record on March 31, 2008 to be paidApril 14, 2008.  Such dividendpayable has been recorded at March 31, 2008.

 

7.                                       STOCK-BASEDCOMPENSATION

 

In 1990, pursuant to therecommendation of the Board of Directors, the stockholders ratified thecreation of the Company’s 1990 Flexible Incentive Plan (the “1990 Plan”).  The 1990 Plan is administered by a committeeof the Board of Directors and provides for the granting of various stock-basedawards including stock options to eligible participants, primarily officers andcertain key employees.  A total of225,000 shares of common stock were available in the first year of the Plan’sexistence.  Each year thereafteradditional shares equal to 25% of the shares outstanding as of the first day ofthe applicable fiscal year were reserved for issuance pursuant to the 1990Plan.  On July 22, 1992, the Boardof Directors authorized the reservation of an additional 250,000 shares for the1990 Plan, which was approved by the stockholders.  In 1993, the Board of Directors authorizedthe reservation of an additional 300,000 shares for the 1990 Plan, which was 

 

7

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approved by thestockholders.  In 1997, the Board ofDirectors authorized the reservation of an additional 300,000 shares for the1990 Plan, which was approved by the stockholders.  In 2001, the Board of Directors authorizedthe reservation of an additional 300,000 shares for the 1990 Plan, which wasalso approved by the stockholders. Options generally vest over four or five years, with a maximum term offive to ten years.

 

We account for stock optionsand restricted stock issued under the plan in accordance with Statement ofAccounting Standards (‘SFAS’) No. 123 (R), “Share Based Payments”. Thefair value of each stock option grant was estimated as of the date of grantusing the Black-Scholes pricing model. The resulting compensation cost forfixed awards with graded vesting schedules is amortized on a straight-linebasis over the vesting period for the entire award. The fair value of eachrestricted stock grant was based on the market price of the underlying commonstock as of the date of grant. The resulting compensation cost is amortized ona straight-line basis over the vesting period.

 

A summary of stock optionactivity under the plan for the nine****monthsended March 31, 2008 is as follows:

 
| ** **                   | ** ** | **Number of Shares** | ** ** | **Range of Exercise Price  Per Share** | ** ** | **Average  Exercise Price** | ** ** |
|------------------------------|------------|--------------------------------|------------|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **(in thousands)**        | ** ** | ** **                                                 | ** ** | ** **                       | ** ** |
| Balance, June 30, 2007  |       | 585,662                        |       | $5.38-$28.80                                               |       | $                                | 21.08      |   |
| Granted                      |       | —                         |       | —                                                     |       | —                           |       |
| Exercised                    |       | (94,008                        | )          | $5.38-$17.38                                               |       | $                                | 15.04      |   |
| Forfeited                    |       | —                         |       | —                                                     |       | —                           |       |
| Balance, March 31, 2008 |       | 491,654                        |       | $5.38-$28.80                                               |       | $                                | 22.23      |   |

 

Therange of options as of March 31, 2008 is as follows:

 
| ** **    | ** ** | **Number of Options  Outstanding/Exercisable** | ** ** | **Weighted Average Exercise  Price Outstanding/Exercisable** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** ** |
|---------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| $15.75-$19.47 |       | 149,654 / 97,154                                         |       | $17.79 / $17.27                                                             |       | 3.7                                                                      |       |
| $21.42-$28.80 |       | 342,000 / 156,500                                        |       | $24.18 / $24.08                                                             |       | 3.4                                                                      |       |
|          |       | 491,654 /  253,654                                       |       | $22.23 / $21.47                                                             |       |                                                                     |       |

 

As of March 31, 2008, there was $950,817 of totalunrecognized compensation cost related to stock options granted under the plan.This cost is expected to be recognized over a weighted average period of 2.52years. Total unrecognized compensation cost will be adjusted for any futurechanges in estimated and actual forfeitures.

 

Total stock option compensation expense of $408,789 and$422,010 was recognized in the nine month periods ended March 31, 2008 and2007, respectively.

 

8

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

 

Financial Condition, Liquidity and CapitalResources

 

Cash provided by operating activities during the nine months ended March 31,2008 amounted to $4,595,660.  This was aresult of net income for the period adjusted for changes in operating assetsand liabilities, which arose primarily out of the decreases in accruedliabilities offset by increases in other current assets.

 

Capital expenditures for new equipment (including production tooling)were $762,194 for the nine months ended March 31, 2008.  Capital expenditures for fiscal year 2008 areexpected to be approximately $1.5 million. The Company expects to generate sufficient funds through operations tofund these expenditures.

 

Stockholders’ investment decreased to $22,598,329 at March 31,2008, from $23,929,624 at June 30, 2007. The decrease reflects net income offset by (i) the effect of stockoptions exercised, (ii) the purchase and retirement of common stock and (iii) dividends.

 

The Company amended its existing credit facility in November 2007,extending the maturity date of the unsecured line of credit to November 1,2008.  This credit facility provides forborrowings up to a maximum of $10,000,000. The Company can use this credit facility for working capital purposes orfor the purchase of its own common stock pursuant to the Company’s common stockrepurchase program.  Borrowings underthis credit facility bear interest at the bank’s prime rate, or LIBOR plus1.75%.  This credit facility includesfinancial covenants that require the Company to maintain a minimum tangible networth and specified current, interest coverage and leverage ratios.  The Company uses its credit facility fromtime to time, although there was no utilization of this credit facility at March 31,2008 or June 30, 2007.  The Companydid not utilize the credit facility for the nine months ended March 31,2008.

 

In April of 1995, the Board of Directors approved a stockrepurchase program authorizing the Company to purchase from time to time up to$2,000,000 of its common stock for its own account.  Subsequently, the Board of Directorsperiodically has approved increases in the stock repurchase program.  The most recent increase was for anadditional $2,000,000 in October 2006, for a maximum of $45,500,000.  The Company intends to effectuate all stockpurchases either on the open market or through privately negotiatedtransactions, and intends to finance all stock purchases through its own cashflow or by borrowing for such purchases.

 

For the quarter ended March 31, 2008, the Company did not purchaseany shares of its common stock.  For thenine months ended March 31, 2008, the Company purchased 62,812 shares ofits common stock at an average net price of $20.20 per share, for a total netpurchase price of $1,268,786.

 

From the commencement of the Company’s stock repurchase program throughMarch 31, 2008, the Company has purchased a total of 5,469,190 shares fora total gross purchase price of $52,710,627, (representing an average grosspurchase price of $9.64 per share) and a total net purchase price of$41,886,884 (representing an average net purchase price of $7.66 pershare).  The difference between the totalgross purchase price and the total net purchase price is the result of theCompany receiving from employees cash acquired from such employees pursuant tothe Company’s stock option program.  Indetermining the dollar amount available for additional purchases under thestock repurchase program, the Company uses the total net purchase price by theCompany for all stock purchases, as authorized by the Board of Directors.

 

9

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The Company also has an Employee Stock Ownership Plan and Trust (“ESOP”)pursuant to which shares of the Company’s common stock are purchased by theESOP for allocation to the accounts of ESOP participants. There were no ESOPpurchases of the Company’s common stock for the nine months ended March 31,2008.

 

Results of Operations

 

Net sales for the quarter ended March 31, 2008 rose approximately4% to $10,003,648 from $9,601,291 for the same period in 2007.  Net sales for the nine months ended March 31,2008 were $34,740,651 down approximately 1% compared with $35,148,974 duringthe same nine months one year ago.  Thedecrease was primarily attributable to reductions in shipments of stereo headphones toautomotive companies to include with the production of their cars.  Since the production of specific automobilemodels that include rear seat entertainment systems that make use of ourproducts appears to have been reduced, the Company has experienced acorresponding reduction in orders. Also, orders for the Company’s products frombox retailers continued to decline primarily due to model reductions whichoccurred during the fourth quarter of the Company’s prior fiscal year.

 

Gross profit as a percent of net sales was approximately 36% for thequarter ended March 31, 2008 down approximately 2% from the same period inthe prior year.  For the nine monthperiod ended March 31, 2008 and 2007, the gross profit percentage was approximately37% and approximately 39%, respectively.

 

Selling, general and administrative expenses for the quarter ended March 31,2008 were $2,602,122 or approximately 26% of net sales, compared to $2,494,886or approximately 26% of net sales for the same period in 2007.  For the nine month period ended March 31,2008, these expenses were $7,757,424 or approximately 22% of net sales,compared to $7,849,596 or approximately 22% of net sales, for the same periodin 2007.

 

For the third quarter ended March 31, 2008, income from operationswas $963,002 versus $1,107,682 for the same period in the prior year,approximately a 13% change.  Income fromoperations for the nine months ended March 31, 2008 was $4,924,055 ascompared to $5,759,081 for the same period in 2007, approximately a 15%change.  Income from operations decreasedprimarily as a result of increased expenses relating to new product engineeringand development for the nine month period ended March 31, 2008.

 

Netincome decreased by approximately 14%, from $753,134 to $647,997 for the samethree months.  Net income for the ninemonths decreased by approximately 13% from $3,730,572 to $3,230,223 for thesame nine months ended March 31, 2008. Net income decreasedprimarily as a result of increased expenses relating to new product engineeringand development for the nine month period ended March 31, 2008.  The gross margin reduction coupled with theincrease in promotional expenses and increases in spending for legal feesrelated to the protection of the Company’s intellectual property resulted in adecline in the profits for the nine month period ended March 31, 2008.

 

Royalty income for the quarter ended March 31, 2008 was $87,501,compared to $81,249 for the quarter ended March 31, 2007.  For the nine month period ended March 31,2008 royalty income was $262,501 compared to $243,747 for the nine month periodended March 31, 2007.

 

Interest income for the quarter ended March 31,2008 was $11,929 as compared to $45,842 for the same quarter in 2007.  For the nine month period ended March 31,2008 interest income was $109,120 compared to $112,991 for the same period in2007.  Interest income fluctuates inrelation to cash balances on hand throughout the year and fluctuations ininterest rates earned.

 

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The provision for income taxes for the quarter ended March 31,2008, was $414,435 compared with $481,639 for the same period last year.  For the nine months ended March 31,2008, the provision for income taxes was $2,065,453 compared with $2,385,247for the same period last year.  Theeffective tax rate was 39% for each of the quarters.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheetarrangements.

 

Recently Issued Financial Accounting Pronouncements

 

Effective July 1, 2007, the Company adopted FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes – an interpretation of FASBStatement No. 109” (“FASB Interpretation No. 48”).  This interpretation clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with Statement of Financial Accounting Standards No. 109, “Accountingfor Income Taxes,” by prescribing the minimum recognition threshold andmeasurement attribute a tax position taken or expected to be taken on a taxreturn is required to meet before being recognized in the financialstatements.  As a result of theimplementation of FASB Interpretation No. 48, the Company was not requiredto record any reduction in equity employed in the business at July 1, 2007to recognize the cumulative effect of the adoption of this standard

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk.**

 

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

 

###### **Item4.****           Controlsand Procedures.**

 

(a)                                  *Evaluation of DisclosureControls and Procedures*.  The Company maintains a system of disclosurecontrols and procedures that are designed to provide reasonable assurance thatinformation, which is required to be timely disclosed, is accumulated andcommunicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met.  The Company, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer/Chief Financial Officer, after evaluatingthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15(d)-15(e) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of the end of theperiod covered by this report, has concluded that the Company’s disclosurecontrols and procedures are effective to provide reasonable assurance thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to theCompany’s management, including its principal executive officer and principalfinancial officer, as appropriate to allow timely decisions regarding requireddisclosure and are effective to provide reasonable assurance that suchinformation is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms.

 

11

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(b)                                 *Changes in InternalControls*.  The Company’s internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))is designed to provide reasonable assurances regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  There were no changes in the Company’sinternal control over financial reporting that occurred during the Company’smost recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.  However, because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected.

 

**PART II**

**OTHER INFORMATION**

 

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

 

None.

 

**Item 1A.****                          RiskFactors.**

** **

Inaddition to the other information set forth in this report, you shouldcarefully consider the risk factors discussed in our Annual Report on Form 10-Kfor the year ended June 30, 2007, which could materially affect ourbusiness, financial condition or future results.  The risks described in our Annual Report on Form 10-Kare not the only risks facing our Company. Additional risk and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

 

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

 

The following table presents information withrespect to purchases of common stock of the Company made during the threemonths ended March 31, 2008, by the Company.

 

**COMPANY REPURCHASES OFEQUITY SECURITIES**

** **
| **Period (2008)**                  | ** ** | **Total # of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Approximate Dollar Value of Shares Available under  Repurchase Plan** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
|                                    |       |                                        |       |                                         |       |                                                                                                         |       |                                                                                                  |       |
| January 1 – January 31   |       | 0                                           |       | $                                            | 0.00       |                                                                                                         | 0          |                                                                                                  | $          | 2,184,133 |   |
|                                    |       |                                        |       |                                         |       |                                                                                                         |       |                                                                                                  |       |
| February 1 – February 29 |       | 0                                           |       | $                                            | 0.00       |                                                                                                         | 0          |                                                                                                  | $          | 2,184,133 |   |
|                                    |       |                                        |       |                                         |       |                                                                                                         |       |                                                                                                  |       |
| March 1 – March 31       |       | 0                                           |       | $                                            | 0.00       |                                                                                                         | 0          |                                                                                                  | $          | 2,184,133 |   |

** **

12

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** **

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**(1) In April of 1995,the Board of Directors approved a stock repurchase program authorizing theCompany to purchase from time to time up to $2,000,000 of its common stock forits own account.  Subsequently, the Boardof Directors periodically has approved increases in the stock repurchaseprogram.  The most recent increase wasfor an additional $2,000,000 in October 2006, for a maximum of $45,500,000of which $43,315,867 had been expended through March 31, 2008.**

** **

**Item 3.****                                  DefaultsUpon Senior Securities.**

 

None.

 

**Item 4.**                                  **Submissionof Matters to a Vote of Security Holders.**

 

None.

 

**Item 5.****                                  OtherInformation.**

 

None.

 

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

** **

See Exhibit Index attached hereto.

 

**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING STATEMENTS**

** **

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

 

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

 

13

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concerns), borrowing costs, changes in tax rates, pending or threatenedlitigation and investigations, and other risk factors which may be detailedfrom time to time in the Company’s Securities and Exchange Commission filings.

 

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

 

Signatures

 

Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

 
|   | KOSS CORPORATION        |
|--------|-------------------------|
|   |                    |
|   |                    |
|   | Date: May 15, 2008 |   | /s/ Michael J. Koss |
|   |                    |   | Michael J. Koss |
|   |                    |   | Vice Chairman, President, |
|   |                    |   | Chief Executive Officer, |
|   |                    |   | Chief Financial Officer |
|   |                    |   |   |
|   |                    |   |   |
|   | Date: May 15, 2008 |   | /s/ Sue Sachdeva |
|   |                    |   | Sue Sachdeva |
|   |                    |   | Vice President—Finance, |
|   |                    |   | Secretary |

 

14

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**EXHIBIT INDEX**

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

 

15

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| 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.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer/Chief Financial Officer *                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 32.1   |   | Section 1350  Certification of Chief Executive Officer/Chief Financial Officer **                                                                                                                                                                                                                                                   |

 

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

 

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