**SECURITIES AND EXCHANGECOMMISSION**

**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 the quarterly period ended  December 31, 2007**                                                                                                                                                                                                                                                                                                       |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **                                                                           OR** |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                  |

 

Commission File Number **0-3295**

 

**KOSSCORPORATION**

(Exact Name of Registrant 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**

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

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

 

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

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

 

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

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

 

AtFebruary 7, 2008, there were 3,689,454 shares outstanding of theregistrant’s common stock, $0.005 par value per share.

 

 

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KOSS CORPORATION AND SUBSIDIARIES

FORM 10-Q

December 31, 2007

 

 

INDEX

 
| ** **   | ** ** | ** **            | ** ** | ** **                                                                                                                      | ** ** | **Page** |
|--------------|------------|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|         |       |                  |       |                                                                                                                            |       |     |
| PART I  |       | FINANCIAL INFORMATION |       |                                                                                                                            |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       | Item 1                |       | Financial  Statements                                                                                                           |       |     |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       |                  |       | Condensed Consolidated Balance Sheets   December 31, 2007 (Unaudited) and June 30, 2007                               |       | 3        |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       |                  |       | Condensed Consolidated Statements   of Income (Unaudited)   Three months and six months ended   December 31, 2007 and 2006 |       | 4        |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       |                  |       | Condensed Consolidated Statements of Cash   Flows (Unaudited)   Six months ended December 31, 2007 and 2006                |       | 5        |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       |                  |       | Notes to Condensed Consolidated Financial   Statements (Unaudited) December 31, 2007                                       |       | 6-8      |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       | Item 2                |       | Management’s  Discussion and Analysis of  Financial Condition and Results of Operations                                    |       | 9-11     |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       | Item 3                |       | Quantitative  and Qualitative Disclosures   About Market Risk                                                                   |       | 11       |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       | Item 4                |       | Controls and  Procedures                                                                                                        |       | 11       |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       |                  |       |                                                                                                                            |       |     |
| PART II |       | OTHER INFORMATION     |       |                                                                                                                            |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       | Item 1A               |       | Risk Factors                                                                                                                    |       | 12       |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       | Item 2                |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                    |       | 12       |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       | Item 4                |       | Submission  of Matters to Vote of Security-holders                                                                              |       | 13       |
|         |       |                  |       |                                                                                                                            |       |     |
|         |       | Item 6                |       | Exhibits                                                                                                                        |       | 13       |
|              |            |                       |            |                                                                                                                                 |            |          |  |  |

 

 

 

2

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.    FinancialStatements.**

 

**KOSS CORPORATION AND SUBSIDIARIES**

** **

##### **CONDENSED CONSOLIDATED BALANCE SHEETS**

#####  

| ** **                                     | ** ** | **(Unaudited)**            | ** ** | ** **             | ** ** |
|------------------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **December 31, 2007** | ** ** | **June 30, 2007** | ** ** |
| ASSETS                                         |       |                       |       |                   |       |
| Current Assets:                                |       |                       |       |                   |       |
| Cash                                           |       | $                          | 3,024,197  |                   | $          | 4,187,682 |   |
| Accounts Receivable                            |       | 8,362,842                  |       | 7,938,913              |       |
| Inventories                                    |       | 10,140,604                 |       | 9,923,544              |       |
| Income taxes                                   |       | 1,628,031                  |       | 1,528,782              |       |
| Other current assets                           |       | 889,877                    |       | 291,251                |       |
| Total current assets                           |       | 24,045,551                 |       | 23,870,172             |       |
|                                           |       |                       |       |                   |       |
| Property and equipment, net                    |       | 2,421,595                  |       | 2,567,139              |       |
| Deferred income taxes                          |       | 423,928                    |       | 423,928                |       |
| Other assets                                   |       | 2,267,556                  |       | 2,312,304              |       |
|                                           |       | $                          | 29,158,630 |                   | $          | 29,173,543 |   |
|                                           |       |                       |       |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ INVESTMENT |       |                       |       |                   |       |
| Current liabilities:                           |       |                       |       |                   |       |
| Accounts payable                               |       | $                          | 2,895,629  |                   | $          | 1,371,152 |   |
| Accrued liabilities                            |       | 2,471,752                  |       | 2,282,155              |       |
| Dividends payable                              |       | 478,519                    |       | 476,459                |       |
| Total current liabilities                      |       | 5,845,900                  |       | 4,129,766              |       |
|                                           |       |                       |       |                   |       |
| Deferred compensation                          |       | 989,153                    |       | 989,153                |       |
| Derivative liability                           |       | 125,000                    |       | 125,000                |       |
| Stockholders’ investment                  |       | 22,198,577                 |       | 23,929,624             |       |
|                                           |       | $                          | 29,158,630 |                   | $          | 29,173,543 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

3

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**KOSS CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

**(Unaudited)**

 
| ** **                                  | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|---------------------------------------------|------------|------------------|------------|----------------|------------|
| **Period Ended December 31**           | ** ** | **2007**         | ** ** | **2006**       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Sales                                   |       | $                | 12,099,397 |           | $          | 12,222,584 |   | $ | 24,737,003 |   | $ | 25,547,683 |   |
| Cost of goods sold                          |       | 7,775,022        |       | 7,812,019      |       | 15,620,648 |   | 15,541,574 |   |
| Gross Profit                                |       | 4,324,375        |       | 4,410,565      |       | 9,116,355 |   | 10,006,109 |   |
| Selling general and  administrative expense |       | 2,371,276        |       | 2,421,909      |       | 5,155,302 |   | 5,354,710 |   |
| Income from operations                      |       | 1,953,099        |       | 1,988,656      |       | 3,961,053 |   | 4,651,399 |   |
| Other income (expense)                      |       |             |       |           |       |   |   |   |   |
| Royalty income                              |       | 43,750           |       | 81,249         |       | 175,000 |   | 162,498 |   |
| Interest income                             |       | 46,751           |       | 34,611         |       | 97,191 |   | 67,149 |   |
| Interest expense                            |       | 0                |       | 0              |       | 0 |   | 0 |   |
| Income before income tax  provision         |       | 2,043,600        |       | 2,104,516      |       | 4,233,244 |   | 4,881,046 |   |
| Provision for income taxes                  |       | 797,048          |       | 820,758        |       | 1,651,018 |   | 1,903,608 |   |
| Net Income                                  |       | $                | 1,246,552  |           | $          | 1,283,758 |   | $ | 2,582,226 |   | $ | 2,977,438 |   |
| Earnings per common share:                  |       |             |       |           |       |   |   |   |   |
| Basic                                       |       | $                | 0.34       |           | $          | 0.35 |   | $ | 0.70 |   | $ | 0.80 |   |
| Diluted                                     |       | $                | 0.34       |           | $          | 0.34 |   | $ | 0.70 |   | $ | 0.79 |   |
| Dividends per common share                  |       | $                | 1.13       |           | $          | 0.13 |   | $ | 1.26 |   | $ | 0.26 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

4

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**KOSS CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 
| **Six Months Ended December 31,**                                             | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                               |       |       |       |       |       |
| CASH FLOWS FROM OPERATING                                                          |       |       |       |       |       |
| ACTIVITIES:                                                                        |       |       |       |       |       |
| Net income                                                                         |       | $          | 2,582,226  |       | $          | 2,977,438 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |       |       |       |       |
| Depreciation and amortization                                                      |       | 562,192    |       | 566,164    |       |
| Stock compensation expense                                                         |       | 272,526    |       | 281,340    |       |
| Net changes in operating assets and liabilities                                    |       | 368,672    |       | (2,204,036 | )          |
| Net cash provided by operating activities                                          |       | 3,785,616  |       | 1,620,906  |       |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                             |       |       |       |       |       |
| Acquisition of equipment                                                           |       | (363,302   | )          | (164,214   | )          |
| Net cash used in investing activities                                              |       | (363,302   | )          | (164,214   | )          |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                             |       |       |       |       |       |
| Dividends paid                                                                     |       | (4,634,875 | )          | (964,198   | )          |
| Purchase of common stock                                                           |       | (1,268,786 | )          | (1,490,322 | )          |
| Exercise of stock options                                                          |       | 1,317,862  |       | 500,566    |       |
| Net cash used in financing activities                                              |       | (4,585,799 | )          | (1,953,954 | )          |
| Net decrease in cash                                                               |       | (1,163,485 | )          | (497,262   | )          |
| Cash at beginning of  period                                                       |       | 4,187,682  |       | 4,839,303  |       |
| Cash at end of period                                                              |       | $          | 3,024,197  |       | $          | 4,342,041 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

 

5

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KOSS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

 

1.             CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

 

                                                The financialstatements presented herein are based on interim amounts.  In the opinion of management, all adjustments(consisting of normal recurring accruals) necessary to present fairly thefinancial position, results of operations and cash flows at December 31,2007 and for all periods presented have been made. All significant intercompanytransactions have been eliminated. The income from operations for the quarterand six months ended December 31, 2007 is not necessarily indicative ofthe operating results for the full year.

 

                                                Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited 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

 

Basicearnings per common share are computed based on the weighted average number ofcommon shares outstanding.  The weightedaverage number of common shares outstanding for the quarters ending December 31,2007 and 2006 were 3,674,516 and 3,690,760, respectively.  For the six months ended December 31,2007 and 2006, weighted average number of common shares outstanding were3,672,664 and 3,700,348, respectively. When dilutive, stock options are included as share equivalents using thetreasury stock method.  Common stockequivalents of 19,677 and 78,172related to stock option grants were included in the computation of the averagenumber of shares outstanding for diluted earnings per common share for thequarters ended December 31, 2007 and 2006, respectively.  Common stock equivalents of 22,293 and 71,332related to stock option grants were included in the computation of the averagenumber of shares outstanding for diluted earnings per common share for the sixmonths ended December 31, 2007 and 2006, respectively.

 

3.                                       INCOME TAXES

 

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. There was no material change in theamount of unrecognized tax benefits during the first six months ended December 31,2007.

 

 

6

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4.                                       INVENTORIES

 

                                                Theclassification of inventories is as follows:

 
| ** **                         | ** ** | **December 31, 2007** | ** ** | **June 30, 2007** | ** ** |
|------------------------------------|------------|----------------------------|------------|------------------------|------------|
| Raw materials and work in  process |       | $                          | 4,013,368  |                   | $          | 3,119,659 |   |
| Finished goods                     |       | 7,386,190                  |       | 8,062,839              |       |
|                               |       | 11,399,558                 |       | 11,182,498             |       |
| LIFO reserve                       |       | (1,258,954                 | )          | (1,258,954             | )          |
|                               |       | $                          | 10,140,604 |                   | $          | 9,923,544 |   |

 

4.                                       STOCK PURCHASEAGREEMENT

 

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 December 31, 2007 was $125,000.  The repurchase price is 95% of the fairmarket value of the common stock on the date that notice, if the estate elects,to repurchase is provided to the Company. Under the agreement, the total number of shares to be repurchased 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.  The Company maintains a $1,150,000 lifeinsurance policy to fund a substantial portion of this obligation.  At December 31, 2007 and June 30,2007, $125,000 has been classified as a derivative liability on the Company’sfinancial statements.

 

5.             DIVIDENDSDECLARED

 

OnNovember 6, 2007, the Company declared a special cash dividend of $1.00per share for the stockholders of record on November 16, 2007, paid on December 17,2007.

 

OnDecember 13, 2007, the Company declared a quarterly cash dividend of $0.13per share for the stockholders of record on December 31, 2007 to be paid January 15,2008.  Such dividend payable has beenrecorded at December 31, 2007.

 

6.                                       STOCK-BASED COMPENSATION

 

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 

 

 

7

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Directors authorized thereservation of an additional 300,000 shares for the 1990 Plan, which wasapproved by the stockholders.  In 1997,the Board of Directors authorized the reservation of an additional 300,000shares for the 1990 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 six****monthsended December 31, 2007 is as follows:

 
| ** **                       | ** ** | **Number of Shares  (in thousands)** | ** ** | **Range of Exercise Price  Per Share** | ** **  | **Average  Exercise Price** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|---------------------------------------------|-------------|-----------------------------|------------|
| Balance, June 30,  2007     |       | 585,662                              |       | $                                           | 5.38-$28.80 |                        | $          | 21.08 |   |
| Granted                          |       | —                               |       | —                                      |        | —                      |       |
| Exercised                        |       | (78,658                              | )          | $                                           | 5.38-$17.38 |                        | $          | 16.75 |   |
| Forfeited                        |       | —                               |       | —                                      |        | —                      |       |
| Balance, December 31,  2007 |       | 507,004                              |       | $                                           | 5.38-$28.80 |                        | $          | 21.75 |   |

 

Therange of options as of December 31, 2007 is as follows:

 
| ** ** | ** **   | **Number of Options Outstanding/Exercisable** | ** **         | **Weighted Average Exercise Price Outstanding/Exercisable** | ** **      | **Weighted Average   Remaining Contractual  Life (Years)** | ** ** |
|------------|--------------|-----------------------------------------------|--------------------|-------------------------------------------------------------|-----------------|------------------------------------------------------------|------------|
| $          | 5.38-$6.73   |                                          | 15,350  / 15,350   |                                                        | $               | 6.25  / $6.26                                              |       | 2.0 |   |
| $          | 15.75-$19.47 |                                          | 149,654  / 94,654  |                                                        | $               | 17.79  / $17.31                                            |       | 3.9 |   |
| $          | 21.42-$28.80 |                                          | 342,000  / 152,500 |                                                        | $               | 24.18  / $24.13                                            |       | 3.7 |   |
|       |         | 507,004  / 262,504                            |               | $                                                           | 21.75  / $20.62 |                                                       |       |   |

 

As of December 31, 2007, there was approximately $1,087,000 oftotal unrecognized compensation cost related to stock options granted under theplan.  The cost is expected to berecognized over a weighted average period of 2.3 years. Total unrecognizedcompensation cost will be adjusted for any future changes in estimated andactual forfeitures.

 

Total stock option compensation expense of approximately $272,000 and$281,000 was recognized in the six month periods ended December 31, 2007and 2006, respectively.

 

8

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

 

Financial Condition,Liquidity and Capital Resources

 

Cash provided by operating activities during the six months ended December 31,2007 amounted to $3,785,616. This was a result of net income for the periodadjusted for changes in operating assets and current liabilities, which aroseprimarily out of increases in other current assets, accrued liabilities, andaccounts payable.

 

Capital expenditures for new equipment (including production tooling)were $363,302 for the six months ended December 31, 2007.  Capital expenditures for fiscal year 2008 areexpected to be approximately $2.6 million. The Company expects to generate sufficient funds through operations tofund these expenditures.

 

Stockholders’ investment decreased to $22,198,577 at December 31,2007, from $23,929,624 at June 30, 2007. The net decrease reflects net income and exercise of stock optionsoffset by the effect of the purchase and retirement of common stock anddividends declared.

 

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 December 31,2007 or June 30, 2007.  The Companydid not utilize the credit facility during the quarter or six months ended December 31,2007.

 

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 December 31, 2007, the Company purchased12,020 shares of its common stock at an average net price of $19.10 per share,for a total net purchase price of $229,582. For the six months ended December 31,2007, the Company purchased 62,812 shares of its common stock at an average netprice of $20.20 per share, for a total net purchase price of $1,268,786.

 

From the commencement of the Company’s stock repurchase program throughDecember 31, 2007, the Company has purchased a total of 5,469,190 sharesfor a 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 ESOP purchases of the Company’scommon stock for the six months ended December 31, 2007.

 

Results of Operations

 

Net sales for the second quarter ended December 31, 2007 declinedby 1% to $12,099,397 from $12,222,584 for the same period in 2006.  Net sales for the six months ended December 31,2007 declined by 3% to $24,797,003 from $25,547,683 for the same period in2006.  The decrease was primarily due toa slow down in domestic mass market sales, a decline in sales to superstoresand a slow down in the automotive industry this year which reduced demand forthe Company’s rear seat entertainment products.

 

Gross profit as a percent of net sales was 36% for the quarter ended December 31,2007 compared to 36% for the same period in the prior year.  For the six months ended December 31,2007 the gross profit percentage was 37% compared to 39% for the same period inthe prior year. The decrease in gross profit for the six months ended December 31,2007 was primarily due to a less profitable model mix sold in that period andextra costs incurred related to engineering expenses.

 

Selling, general and administrative expenses for the quarter ended December 31,2007 were $2,371,276 or 20% of net sales, compared to $2,421,909 or 20% of netsales for the same period in 2006.  Forthe six month period ended December 31, 2007, these expenses were$5,155,302 or 21% of net sales, compared to $5,354,710 or 21% of net sales, forthe same period in 2006.

 

For the quarter ended December 31, 2007, income from operationswas $1,953,099 compared to $1,988,656 for the same period in the prioryear.  Income from operations for the sixmonths ended December 31, 2007 was $3,961,053 compared to $4,651,399 forthe same period in 2006, a 15% decrease. Income from operations decreased primarily as a result of decreased netsales for the quarter and six months ended December 31, 2007.

 

For the quarter ended December 31, 2007, net income decreased 2%to $1,246,552 from $1,283,758 for the same period in 2006.  Net income for the six months ended December 31,2007, decreased 13% from $2,977,438 in 2006 to $2,582,226 in 2007.  Net income decreased primarily as aresult of decreased net sales for the quarter and six months ended December 31,2007.

 

Royalty income forthe quarter ended December 31, 2007 was $43,750 compared to $81,249 forthe quarter ended December 31, 2006. For the six month period ended December 31, 2007, royalty incomewas $175,000 compared to $162,498 for the period ended December 31, 2006.

 

Interest income for the quarter was $46,751compared to $34,611 for the same quarter in 2006.  For the six month period ended December 31,2007, interest income was $97,191, compared to $67,149 for the same period inthe prior year.  Interest incomefluctuates in relation to cash balances on hand throughout the year andfluctuations in interest rates earned.

 

The provision forincome taxes for the quarter ended December 31, 2007, was $797,048compared to $820,758 for the same period last year.  For the six months ended December 31,2007, the provision for income taxes was $1,651,018 compared with $1,903,608for the same period last year.  Theeffective tax rate was 39% for each of the quarters.

 

Off-Balance SheetArrangements

 

The Company has nooff-balance sheet arrangements.

 

10

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Recently Issued FinancialAccounting Pronouncements

 

Effective July 1,2007, the Company adopted FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109”(“FASB Interpretation No. 48”). This interpretation clarifies the accounting for uncertainty in incometaxes recognized in an entity’s financial statements in accordance withStatement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes,” by prescribing the minimum recognition threshold and measurementattribute a tax position taken or expected to be taken on a tax return isrequired to meet before being recognized in the financial statements.  As a result of the implementation of FASBInterpretation No. 48, the Company was not required to record anyreduction in equity employed in the business at July 1, 2007 to recognizethe cumulative effect of the adoption of this standard.

 

**Item****3.****          ****Quantitative and Qualitative Disclosures About MarketRisk.**

 

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 the “Management’sDiscussion and Analysis of Financial Conditions and Results of Operations,”above.

 

**Item4.****          ****Controls and Procedures.**

 

(a)                                  *Evaluationof Disclosure Controls 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 15d-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 it filesor 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.

 

(b)                                 *Changesin Internal Controls*.  The Company’sinternal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) is designed to provide reasonable assurances regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. There were no changes in the Company’s internal control overfinancial 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 limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within theCompany have been detected.

 

 

11

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**PART II**

**OTHER INFORMATION**

 

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

** **

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

 

The following table presents information withrespect to purchases of common stock of the Company made during the quarterended December 31, 2007, by the Company.

 

**COMPANY REPURCHASES 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** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| October 1 —  October 31   |       | 12,020                          |       | $                                | 19.10      |                                                                              | 12,020     |                                                                       | $          | 2,184,133 |   |
|                                     |       |                            |       |                             |       |                                                                              |       |                                                                       |       |
| November 1 — November 30  |       | 0                               |       | $                                | 0.00       |                                                                              | 0          |                                                                       | $          | 2,184,133 |   |
|                                     |       |                            |       |                             |       |                                                                              |       |                                                                       |       |
| December 1 —  December 31 |       | 0                               |       | $                                | 0.00       |                                                                              | 0          |                                                                       | $          | 2,184,133 |   |

----

**(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 Directorsperiodically has approved increases in the stock repurchase program.  The most recent increase was for anadditional $2,000,000 in October 2006, for a maximum of $45,500,000 ofwhich $43,315,867 had been expended through December 31, 2007.

** **

** **

** **

**12**

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** **

**Item****4****             ****Submission of Matters to Vote ofSecurity-Holders**

** **

(a)                                  On October 10, 2007 an AnnualMeeting of Stockholders was held.

 

(b)                                 Proxies for the election of directorswere solicited pursuant to Regulation 14. There was no solicitation in opposition to management’s nominees, andall such nominees were elected.

 

(c)                                  There were 3,669,569 shares of commonstock eligible to vote at the Annual Meeting, of which 3,513,101 shares werepresent at the Annual Meeting in person or by proxy, which constituted aquorum.  The following is a summary ofthe results of the 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 |   |

 

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

** **

                See Exhibit Indexattached hereto.

 

** **

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**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 may include,but are not limited to, projections of revenue, income or loss and capitalexpenditures, statements regarding future operations, anticipated financingneeds, compliance with financial covenants in loan agreements, plans foracquisitions or sales of assets or businesses, plans relating to products orservices 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 concerns), borrowing costs, changes in tax rates, pendingor threatened litigation and investigations, and other risk factors which maybe detailed from time to time in the Company’s Securities and ExchangeCommission filings.

 

Readers are cautioned not to place undue reliance on any forward-lookingstatements contained herein, which speak only as of the date hereof.  The Company undertakes no obligation topublicly release the result of any revisions to these forward-lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unexpected events.

 

 

14

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Signatures

 

                                                Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly  authorized.

 
|   |   |                          |   | KOSS  CORPORATION |                 |
|--------|--------|-------------------------------|--------|-------------------|----------------------|
|   |   |                          |   |              |                 |   |   |
|   |   | Date:  February 14, 2008 |   |              | /s/  Michael J. Koss |   |
|   |   |                          |   |              |                 | Michael  J. Koss |   |
|   |   |                          |   |              |                 | Vice  Chairman, President, |   |
|   |   |                          |   |              |                 | Chief  Executive Officer, |   |
|   |   |                          |   |              |                 | Chief  Financial Officer |   |
|   |   |                          |   |              |                 |   |   |
|   |   |                          |   |              |                 |   |   |
|   |   |                          |   |              |                 |   |   |
|   |   |                          |   |              |                 |   |   |
|   |   |                          |   |              |                 |   |   |
|   |   | Date:  February 14, 2008 |   |              | /s/Sue  Sachdeva     |   |
|   |   |                          |   |              |                 | Sue  Sachdeva |   |
|   |   |                          |   |              |                 | Vice  President—Finance, |   |
|   |   |                          |   |              |                 | Secretary |   |
|   |   |                          |   |              |                 |   |   |
|   |   |                          |   |              |                 |   |   |
|   |   |                          |   |              |                 |   |   |
|   |   |                          |   |              |                 |   |   |

 

 

15

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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. |

 

 

16

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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 **                                                                                                                                                                                                                                                         |

----

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

 

 

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