**SECURITIESAND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**Form 10-Q**

 

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

**for thequarterly period ended September 30, 2007**

** **

**OR**

 

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

 

**CommissionFile Number 0-3295**

 

**KOSSCORPORATION**

(Exact Name ofRegistrant as Specified in its Charter)

 

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

 

| **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 befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

YES  x        NO  o

 

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

 
| Large accelerated filer | o | Accelerated filer | o | Non-accelerated filer | x |
|-------------------------|---|-------------------|---|-----------------------|---|

 

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

 

YES  o        NO  x

 

At November 2, 2007, there were 3,666,757 sharesoutstanding of the registrant’s common stock, $0.005 par value per share.

 

 

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KOSSCORPORATION AND SUBSIDIARIESFORM 10-QSeptember 30, 2007

 

INDEX

 
| ** ** | ** **             | ** **                                                                                                   | **Page** |
|------------|------------------------|--------------------------------------------------------------------------------------------------------------|----------|
|       |                   |                                                                                                         |     |
| PART I     | FINANCIAL  INFORMATION |                                                                                                         |
|       |                   |                                                                                                         |     |
|       | Item 1                 | Financial  Statements                                                                                        |     |
|       |                   |                                                                                                         |     |
|       |                   | Condensed  Consolidated Balance Sheets (Unaudited)  September 30, 2007 and June 30, 2007                     | 3        |
|       |                   |                                                                                                         |     |
|       |                   | Condensed  Consolidated Statements of Income (Unaudited)  Three months ended September 30, 2007 and 2006     | 4        |
|       |                   |                                                                                                         |     |
|       |                   | Condensed  Consolidated Statements of Cash Flows (Unaudited)  Three months ended September 30, 2007 and 2006 | 5        |
|       |                   |                                                                                                         |     |
|       |                   | Notes to Condensed  Consolidated Financial Statements (Unaudited) September 30, 2007                         | 6-8      |
|       |                   |                                                                                                         |     |
|       | Item  2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                  | 8-10     |
|       |                   |                                                                                                         |     |
|       | Item 3                 | Quantitative and  Qualitative Disclosures About Market Risk                                                  | 10       |
|       |                   |                                                                                                         |     |
|       | Item 4                 | Controls and Procedures                                                                                      | 10       |
|       |                   |                                                                                                         |     |
| PART II    | OTHER  INFORMATION     |                                                                                                         |
|       |                   |                                                                                                         |     |
|       | Item 1A                | Risk Factors                                                                                                 | 11       |
|       |                   |                                                                                                         |     |
|       | Item 2                 | Unregistered Sales of  Equity Securities and Use of Proceeds                                                 | 11       |
|       |                   |                                                                                                         |     |
|       | Item 4                 | Submission of Matters to a  Vote of Security Holders                                                         | 12       |
|       |                   |                                                                                                         |     |
|       | Item 6                 | Exhibits                                                                                                     | 13       |

 

2

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PART IFINANCIAL INFORMATION

 

**Item 1. Financial Statements.**

 

KOSSCORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
| ** **                                     | ** ** | **September 30, 2007** | ** ** | **June 30, 2007** | ** ** |
|------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ASSETS                                         |       |                   |       |              |       |
| Current  Assets:                               |       |                   |       |              |       |
| Cash                                           |       | $                      | 5,951,504  |              | $          | 4,187,682 |   |
| Accounts  receivable                           |       | 8,211,761              |       | 7,938,913         |       |
| Inventories                                    |       | 9,871,356              |       | 9,923,544         |       |
| Income  taxes                                  |       | 2,036,254              |       | 1,528,782         |       |
| Other  current assets                          |       | 247,280                |       | 291,251           |       |
|                                           |       |                   |       |              |       |
| Total  current assets                          |       | 26,318,155             |       | 23,870,172        |       |
|                                           |       |                   |       |              |       |
| Property  and equipment, net                   |       | 2,557,058              |       | 2,567,139         |       |
| Deferred  income taxes                         |       | 423,928                |       | 423,928           |       |
| Other  assets                                  |       | 2,285,631              |       | 2,312,304         |       |
|                                           |       |                   |       |              |       |
|                                           |       | $                      | 31,584,772 |              | $          | 29,173,543 |   |
|                                           |       |                   |       |              |       |
| LIABILITIES  AND STOCKHOLDERS’ INVESTMENT |       |                   |       |              |       |
| Current  liabilities:                          |       |                   |       |              |       |
| Accounts  payable                              |       | $                      | 2,777,329  |              | $          | 1,371,152 |   |
| Accrued  liabilities                           |       | 2,217,595              |       | 2,282,155         |       |
| Dividends  payable                             |       | 478,241                |       | 476,459           |       |
|                                           |       |                   |       |              |       |
| Total  current liabilities                     |       | 5,473,165              |       | 4,129,766         |       |
|                                           |       |                   |       |              |       |
| Deferred  compensation                         |       | 989,153                |       | 989,153           |       |
| Derivative  liability                          |       | 125,000                |       | 125,000           |       |
| Stockholders’  investment                 |       | 24,997,454             |       | 23,929,624        |       |
|                                           |       |                   |       |              |       |
|                                           |       | $                      | 31,584,772 |              | $          | 29,173,543 |   |

 

See accompanying notes.

 

3

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KOSSCORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 
| **Three  Months Ended September 30,**        | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|
|                                         |       |      |       |      |       |
| Net  sales                                   |       | $         | 12,637,606 |      | $          | 13,325,099 |   |
| Cost  of goods sold                          |       | 7,845,626 |       | 7,729,555 |       |
| Gross  profit                                |       | 4,791,980 |       | 5,595,544 |       |
| Selling,  general and administrative expense |       | 2,784,026 |       | 2,932,801 |       |
|                                         |       |      |       |      |       |
| Income  from operations                      |       | 2,007,954 |       | 2,662,743 |       |
| Other  income (expense)                      |       |      |       |      |       |
| Royalty  income                              |       | 131,250   |       | 81,249    |       |
| Interest  income                             |       | 50,440    |       | 32,538    |       |
|                                         |       |      |       |      |       |
| Income  before income tax provision          |       | 2,189,644 |       | 2,776,530 |       |
| Provision  for income taxes                  |       | 853,970   |       | 1,082,850 |       |
| Net  income                                  |       | $         | 1,335,674  |      | $          | 1,693,680 |   |
|                                         |       |      |       |      |       |
| Earnings  per common share:                  |       |      |       |      |       |
| Basic  earnings per common share             |       | $         | 0.36       |      | $          | 0.46 |   |
| Diluted  earnings per common share           |       | $         | 0.36       |      | $          | 0.45 |   |
|                                         |       |      |       |      |       |
| Dividends  per common share                  |       | $         | 0.13       |      | $          | 0.13 |   |

 

See accompanying notes.

 

4

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KOSSCORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| **Three  Months Ended September 30,**                                              | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |       |       |       |       |
| Net  income                                                                        |       | $          | 1,335,674  |       | $          | 1,693,680 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |       |       |       |       |
| Depreciation  and amortization                                                     |       | 281,096    |       | 283,082    |       |
| Net  changes in operating assets and liabilities                                   |       | 793,722    |       | (3,746,757 | )          |
|                                                                               |       |       |       |       |       |
| Net  cash provided by (used in) operating activities                               |       | 2,410,492  |       | (1,779,995 | )          |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |       |       |       |       |
| Acquisition  of equipment                                                          |       | (244,342   | )          | (72,925    | )          |
| Net  cash used in investing activities                                             |       | (244,342   | )          | (72,925    | )          |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                             |       |       |       |       |       |
| Dividends  paid                                                                    |       | (476,459   | )          | (481,479   | )          |
| Purchase  of common stock                                                          |       | (1,039,204 | )          | (308,143   | )          |
| Exercise  of stock options                                                         |       | 1,113,335  |       | 23,524     |       |
| Net  cash used in financing activities                                             |       | (402,328   | )          | (766,098   | )          |
| Net  increase (decrease) in cash                                                   |       | 1,763,822  |       | (2,619,018 | )          |
| Cash  at beginning of period                                                       |       | 4,187,682  |       | 6,146,580  |       |
| Cash  at end of period                                                             |       | $          | 5,951,504  |       | $          | 3,527,562 |   |

 

See accompanying notes.

 

5

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KOSSCORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September30, 2007(Unaudited)

 

1.             CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

 

The financial statements presented herein are based oninterim amounts. In the opinion of management, all adjustments (consisting onlyof normal recurring accruals) necessary to present fairly the financialposition, results of operations and cash flows at September 30, 2007 andfor all periods presented have been made. The income from operations for thequarter ended September 30, 2007 is not necessarily indicative of the operatingresults for the full year.

 

Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted. It is suggested that these condensed consolidatedfinancial statements be read in conjunction with the financial statements andnotes thereto included in the Registrant’s June 30, 2007 Annual Report on Form10-K.

 

2.             EARNINGSPER COMMON SHARE

 

Basic earnings per common share are computed based onthe weighted average number of common shares outstanding. The weighted averagenumber of common shares outstanding for the quarters ending September 30, 2007and 2006 were 3,670,782 and 3,709,936, respectively. When dilutive, stockoptions are included as share equivalents using the treasury stock method. Commonstock equivalents of 29,191 and 65,857 related to stock option grants wereincluded in the computation of the average number of shares outstanding fordiluted earnings per common share for the quarters ended September 30, 2007 and2006, respectively.

 

3.             INCOMETAXES

 

We file income taxreturns in the United States (Federal), Wisconsin (state) and various otherstate jurisdictions. We are not currently subject to income tax examinations inany of our significant tax jurisdictions. Tax years open to examination by taxauthorities under the statute of limitations include fiscal 2006 through 2007for Federal and fiscal 2003 through 2007 for most state jurisdictions.

 

We adopted the provisionsfor FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in IncomeTaxes, on July 1, 2007. As a result of the implementation of FIN 48, we did notrecognize a significant change in the liability for unrecognized tax benefits. Thetotal liability for unrecognized tax benefits was approximately $60,000 as of July1, 2007. The liability does not include an amount for accrued penalties. Werecognize interest and penalties related to unrecognized tax benefits in theprovision for income taxes. We do not expect a significant increase or decreaseto the total amounts of unrecognized tax benefits within the next 12 months. Therewas no material change in the amount of unrecognized tax benefits during thefirst three months ended September 30, 2007.

 

6

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4.             INVENTORIES

 

The classification of inventories is as follows:

 
| ** **                         | ** ** | **September 30, 2007** | ** ** | **June 30, 2007** | ** ** |
|------------------------------------|------------|------------------------|------------|-------------------|------------|
|                               |       |                   |       |              |       |
| Raw  materials and work in process |       | $                      | 3,780,820  |              | $          | 3,119,659 |   |
| Finished  goods                    |       | 7,349,490              |       | 8,062,839         |       |
|                               |       | 11,130,310             |       | 11,182,498        |       |
| LIFO  reserve                      |       | (1,258,954             | )          | (1,258,954        | )          |
|                               |       | $                      | 9,871,356  |              | $          | 9,923,544 |   |

 

5.             STOCKPURCHASE AGREEMENT

 

The Company has an agreement with its Chairman, JohnC. Koss, to, at the request of the executor of the estate, repurchase Companycommon stock from his estate (only upon the election of the estate) in theevent of his death. The Company does not have the right to require the estateto sell stock to the Company. As such, this arrangement is accounted for as awritten put option with the fair value of the put option recorded as a derivativeliability. The fair value of the option at September 30, 2007, was $125,000. Therepurchase price is 95% of the fair market value of the common stock on thedate that notice, if the estate elects, to repurchase is provided to theCompany. Under the agreement, the total number of shares to be repurchased willbe sufficient to provide proceeds which are the lesser of $2,500,000 or theamount of estate taxes and administrative expenses incurred by the Chairman’sestate. The Company may elect to pay the purchase price in cash or may elect topay cash equal to 25% of the total amount due and to execute a promissory notefor the balance, payable over four years, at the prime rate of interest. TheCompany maintains a $1,150,000 life insurance policy to fund a substantialportion of this obligation. At September 30, 2007 and June 30, 2007, $125,000has been classified as a derivative liability on the Company’s financialstatements.

 

6.             DIVIDENDSDECLARED

 

On September 14, 2007, the Company declared a quarterlycash dividend of $0.13 per share for stockholders of record on September 28,2007 to be paid October 15, 2007. Such dividend payable has been recorded atSeptember 30, 2007.

 

On November 6, 2007, the Company declared a specialcash dividend of $1.00 per share for the stockholders of record on November 16,2007 to be paid December 17, 2007.

 

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”). The1990 Plan is administered by a committee of the Board of Directors and providesfor the granting of various stock-based awards including stock options toeligible participants, primarily officers and certain key employees. A total of225,000 shares of common stock were available in the first year of the Plan’sexistence. Each year thereafter additional shares equal to .25% of the sharesoutstanding as of the first day of the applicable fiscal year were reserved forissuance pursuant to the 1990 Plan. On July 22, 1992, the Board of Directorsauthorized the reservation of an additional 250,000 shares for the 1990 Plan,which was approved by the stockholders. In 1993, the Board of Directorsauthorized the reservation of an additional 300,000 shares for the 1990 Plan,which was approved by the stockholders. In 1997, the Board of Directorsauthorized the reservation of an additional 300,000 shares for the 1990 Plan,which was approved by the stockholders. In 2001, 

 

7

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the Board of Directorsauthorized the reservation of an additional 300,000 shares for the 1990 Plan,which was also approved by the stockholders. Options generally vest over fourof five years, with a maximum term of five to ten years.

 

We account for stock optionsand restricted stock issued under the plan in accordance with Statement ofFinancial Accounting 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 three months ended September 30, 2007 is asfollows:

 
|                                       | ** ** | **Number of****Shares** | ** ** | **Range of Exercise  Prices per****Share** | ** ** | **Weighted  Average****Exercise  Price** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| Shares  under option at June 30, 2007      |       | 585,662                 |       | $5.38-$28.80                               |       | $                                        | 21.08      |   |
| Granted                                    |       | —                  |       | —                                     |       | —                                   |       |
| Forfeited                                  |       | —                  |       | —                                     |       | —                                   |       |
| Exercised                                  |       | (64,500                 | )          | $15.75-$17.38                              |       | $                                        | 17.26      |   |
| Shares  under option at September 30, 2007 |       | 521,162                 |       | $5.38-$28.80                               |       | $                                        | 21.55      |   |

 

Therange of options as of September 30, 2007 is as follows:

 
| **Range of  Exercise Prices** | ** ** | **Number  of Options  Outstanding/Exercisable** | ** ** | **Weighted  Average  Exercise Price  Outstanding/Exercisable** | ** ** | **Weighted  Average  Remaining  Contractual Life (In   Years)** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
|   $5.38  - $6.73    |       | 17,500 / 17,500                                 |       | $6.15 / $6.15                                                  |       | 2.2                                                             |       |
| $15.75  - $19.47              |       | 161,662 / 95,412                                |       | $17.66 / $17.02                                                |       | 3.5                                                             |       |
| $21.42  - $28.80              |       | 342,000 / 156,500                               |       | $24.18 / $24.14                                                |       | 4.2                                                             |       |
|                          |       | 521,162 / 269,412                               |       | $21.55 / $20.45                                                |       |                                                            |       |

 

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

 

Financial Condition, Liquidity and Capital Resources

 

Cash provided by operating activities during thequarter ended September 30, 2007 amounted to $2,410,492. This was a result ofnet income for the period adjusted for changes in operating assets and currentliabilities.

 

Capital expenditures for new equipment (includingproduction tooling) were $244,342 for the quarter. Capital expenditures forfiscal year 2008 are expected to be approximately $2.6 million. The Companyexpects to generate sufficient funds through operations to fund theseexpenditures.

 

8

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Stockholders’ investment increased to $24,997,454 atSeptember 30, 2007, from $23,939,624 at June 30, 2007. The increase reflectsnet income offset by (i) the effect of the purchase and retirement of commonstock and (ii) dividends declared.

 

The Company amended its existing credit facility inNovember 2007, extending the maturity date of the unsecured line of credit toNovember 1, 2008. This credit facility provides for borrowings up to a maximumof $10,000,000. The Company can use this credit facility for working capitalpurposes or for the purchase of its own common stock pursuant to the Company’scommon stock repurchase program. Borrowings under this credit facility bearinterest at the bank’s prime rate, or LIBOR plus 1.75%. This credit facilityincludes financial covenants that require the Company to maintain a minimumtangible net worth and specified current interest coverage, and leverageratios, with which the Company is currently in compliance. The Company uses itscredit facility from time to time, although there was no utilization of thiscredit facility during the quarter ended September 30, 2007.

 

In April of 1995, the Board of Directors approved astock repurchase program authorizing the Company to purchase from time to timeup to $2,000,000 of its common stock for its own account. Subsequently, theBoard of Directors periodically has approved increases in the stock repurchaseprogram. The most recent increase was for an additional $2,000,000 in October2006, 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 September 30, 2007, the Companypurchased 50,792 shares of its common stock at an average net price of $20.46per share, for a total net purchase price of $1,039,204.

 

From the commencement of the Company’s stockrepurchase program through September 30, 2007, the Company has purchased atotal of 5,457,170shares for a total gross purchase price of $52,481,045 (representing an averagegross purchase price of $9.62 per share) and a total net purchase price of $41,657,302(representing an average net purchase price of $7.63 per share). The differencebetween the total gross purchase price and the total net purchase price is theresult of the Company purchasing from certain employees shares of the Company’sstock acquired by such employees pursuant to the Company’s stock option program.In determining the dollar amount available for additional purchases under thestock repurchase program, the Company uses the total net purchase price paid bythe Company for all stock purchases, as authorized by the Board of Directors.

 

The Company also has an Employee Stock Ownership Planand Trust (“ESOP”) pursuant to which shares of the Company’s stock arepurchased by the ESOP for allocation to the accounts of ESOP participants. Therewere no ESOP purchases for the quarter ended September 30, 2007.

 

Results of Operations

 

Net sales for the first quarter ended September 30,2007 decreased by 5% to $12,637,606 compared with $13,325,099 for the sameperiod in 2006. The decrease is primarily attributable to the decline in salesin export markets throughout Europe, which fell 30% compared to the same periodlast year.

 

Gross profit as a percent of net sales was 38% for thequarter ended September 30, 2007 and 42% for the quarter ended September 30,2006. The decrease is primarily due to the Company experiencing a lessprofitable model mix.

 

9

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Selling, general and administrative expenses for thequarter ended September 30, 2007 were $2,784,026 or 22% of net sales, comparedto $2,932,801 or 22% of net sales for the same period in 2006.

 

For the first quarter endedSeptember 30, 2007, income from operations was $2,007,954 versus $2,662,743 forthe same period in the prior year, a 25% decrease. Net income for the quarterfell by 21% to $1,335,674 from $1,693,680 for the same period in 2006. Thedecreases in income from operations and net income are primarily due to adecline in European sales across all market classes.

 

Royalty income for the quarter ended September 30,2007 was $131,250, compared with $81,249 for the quarter ended September 30,2006.

 

Interest income for thequarter was $50,440 as compared to $32,538 for the same quarter in 2006. Interestincome fluctuates in relation to cash balances on hand throughout the year andfluctuations in interest rates earned.

 

The provision for income taxes was $853,970 and$1,082,850 for the quarter ended September 30, 2007 and 2006, respectively. Theeffective tax rate was 39% for each quarter.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements.

 

Recently Issued Financial Accounting Pronouncements

 

Effective July 1, 2007, the Company adopted FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109” (“FASB Interpretation No. 48”). Thisinterpretation clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with Statement ofFinancial Accounting Standards No. 109, “Accounting for Income Taxes,” byprescribing the minimum recognition threshold and measurement attribute a taxposition taken or expected to be taken on a tax return is required to meetbefore being recognized in the financial statements. As a result of theimplementation of FASB Interpretation No. 48, the Company was not required torecord any reduction in earnings employed in the business at July 1, 2007 torecognize the cumulative effect of the adoption of this standard.

 

**Item3. Quantitative and Qualitative Disclosures AboutMarket 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 Condition and Results of Operations,” above.

 

**Item4. Controls and Procedures.**

** **

(a)           *Evaluation of DisclosureControls and Procedures*. TheCompany maintains a system of disclosure controls and procedures that aredesigned to provide reasonable assurance that information, which is required tobe timely disclosed, is accumulated and communicated to management in a timelyfashion. A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. The Company, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer/Chief Financial Officer, after 

 

10

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evaluatingthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of1934, as amended (the “Exchange Act”)) as of the end of the period covered bythis report, has concluded that the Company’s disclosure controls andprocedures are effective to provide reasonable assurance that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the Company’smanagement, including its principal executive officer and principal financialofficer, as appropriate to allow timely decisions regarding required disclosureand are effective to provide reasonable assurance that such information isrecorded, processed, summarized, and reported within the time periods specifiedin the SEC’s rules and forms.

 

(b)           *Changes in InternalControls*. The Company’sinternal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) is designed to provide reasonable assurances regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. There were no changes in the Company’s internal controlover financial reporting that occurred during the Company’s most recent fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting. However,because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within the Company have been detected.

 

**PART IIOTHER INFORMATION**

 

**Item1A.**                 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 our business,financial condition or future results. The risks described in our Annual Reporton Form 10-K are not the only risks facing our Company. Additional risk anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

**Item2.**                    Unregistered Sales of EquitySecurities and Use of Proceeds

** **

Thefollowing table presents information with respect to purchases of common stockof the Company made during the quarter ended September 30, 2007, by theCompany.

 

**COMPANYREPURCHASES OF EQUITY SECURITIES**

 
| **Period  (2007)**               | ** ** | **Total # of   Shares   Purchased** | ** ** | **Average   Price Paid   per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Approximate Dollar Value of  Shares Available under  Repurchase Plan** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| July  1 –July 31            |       | 0                                   |       | $                                    | 0.00       |                                                                           | 0          |                                                                     | $          | 2,066,377 |   |
| August  1 – August 31       |       | 0                                   |       | $                                    | 0.00       |                                                                           | 0          |                                                                     | $          | 2,066,377 |   |
| September  1 – September 30 |       | 50,792                              |       | $                                    | 20.46      |                                                                           | 50,792     |                                                                     | $          | 1,027,169 |   |

 

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(1)  In April of 1995, the Board of Directorsapproved a stock repurchase program authorizing the Company to purchase fromtime 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 stockrepurchase program. The most recently approved increase was for additionalpurchases of $2,000,000, which occurred in October 2006, for an aggregatemaximum of $45,500,000, of which $44,472,831 had been expended throughSeptember 30, 2007.

 

11

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**Item4.**                    Submission of Matters to Vote ofSecurity Holders

** **

(a)           OnOctober 10, 2007, an Annual Meeting of Stockholders was held.

 

(b)           Proxiesfor the election of directors were solicited pursuant to Regulation 14. Therewas no solicitation in opposition to management’s nominees, and all suchnominees were elected.

 

(c)           Therewere 3,669,569 shares of common stock eligible to vote at the Annual Meeting,of which 3,513,101 shares were present at the Annual Meeting in person or byproxy, which constituted a quorum. The following is a summary of the results ofthe voting:

 
| ** **                                 | ** ** | **Number of Votes** | ** ** | **Broker**   | ** ** |
|--------------------------------------------|------------|---------------------|------------|--------------|------------|
| ** **                                 | ** ** | **For**             | ** ** | **Withheld** | ** ** | **Non-Votes** | ** ** |
| Nominees  for 1-year terms ending in 2008: |       |                |       |         |       |   |   |
|                                       |       |                |       |         |       |   |   |
| John  C. Koss                              |       | 3,483,348           |       | 29,753       |       | 0 |   |
| Thomas  L. Doerr                           |       | 3,483,393           |       | 29,708       |       | 0 |   |
| Michael  J. Koss                           |       | 3,482,734           |       | 30,367       |       | 0 |   |
| Lawrence  S. Mattson                       |       | 3,482,213           |       | 30,888       |       | 0 |   |
| Theodore  H. Nixon                         |       | 3,483,752           |       | 29,349       |       | 0 |   |
| John  J. Stollenwerk                       |       | 3,480,979           |       | 32,122       |       | 0 |   |

 
| ** **                                                                                    | ** ** | **Number of Votes** | ** ** | ** **  | ** ** | **Broker**  | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                    | ** ** | **For**             | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| Appointment  of Grant Thornton LLP as independent auditors for the year ending June 30,  2008 |       | 3,491,387           |       | 3,408       |       | 18,305      |       | 0 |   |

 

12

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**Item6.**                    Exhibits

** **

See Exhibit Index attached hereto.

 

**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This Form 10-Q contains forward-looking statementswithin the meaning of that term in the Private Securities Litigation Reform Actof 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934). Additional written or oral forward-lookingstatements may be made by the Company from time to time in filings with theSecurities Exchange Commission, press releases, or otherwise. Statementscontained in this Form 10-Q that are not historical facts are forward-lookingstatements made pursuant to the safe harbor provisions of the Act. Forward-lookingstatements may include, but are not limited to, projections of revenue, incomeor loss and capital expenditures, statements regarding future operations,anticipated financing needs, compliance with financial covenants in loanagreements, plans for acquisitions or sales of assets or businesses, plansrelating 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 Form10-Q, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans”and variations thereof and similar expressions are intended to identify forward-lookingstatements.

 

Forward-looking statements are inherently subject torisks and uncertainties, some of which cannot be predicted or quantified basedon current expectations. Consequently, future events and actual results coulddiffer materially from those set forth in, contemplated by, or underlying theforward-looking statements contained in this Form 10-Q, or in other Companyfilings, press releases, or otherwise. In addition to the factors discussed inthis Form 10-Q, other factors that could contribute to or cause suchdifferences include, but are not limited to, developments in any one or more ofthe following areas:  future fluctuationsin economic conditions, the receptivity of consumers to new consumer electronicstechnologies, the rate and consumer acceptance of new product introductions,competition, pricing, the number and nature of customers and their productorders, production by third party vendors, foreign manufacturing, sourcing andsales (including foreign government regulation, trade and importationconcerns), borrowing costs, changes in tax rates, pending or threatenedlitigation and investigations, fluctuations in currency exchange rates andother risk factors which may be detailed from time to time in the Company’sSecurities and Exchange Commission filings.

 

Readers are cautioned not to place undue reliance onany forward-looking statements contained herein, which speak only as of thedate hereof. The Company undertakes no obligation to publicly release theresult of any revisions to these forward-looking statements that may be made toreflect events or circumstances after the date hereof or to reflect theoccurrence of unexpected events.

 

13

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Signatures

 

Pursuant to the requirements of the Securities andExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

KOSSCORPORATION

 

 
| Date:  | November 14, 2007 |                             |   | /s/ Michael J. Koss |
|--------|-------------------|----------------------------------|--------|---------------------|
|   |              | Michael J. Koss                  |
|   |              | Vice Chairman,  President,       |
|   |              | Chief Executive Officer  and     |
|   |              | Chief Financial Officer          |
|   |              |                             |
|   |              |                             |
| Date:  | November 14, 2007 |                             |   | /s/ Sujata Sachdeva |
|   |              | Sujata Sachdeva                  |
|   |              | Vice President—Finance  and |
|   |              | 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. |

 

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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     |   | 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                                                                                                                                                                                                                                                                                            |

 

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