Tableof Contents

 

 

 

**SECURITIESAND EXCHANGE COMMISSIONWashington, 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,  2008**                                              |
|       |                                                                                                    |
|       | **OR**                                                                                                  |
|       |                                                                                                    |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 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’stelephone 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 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  Noo

 

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

 

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

 

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

 

At February 2,2009, there were 3,691,353 shares outstanding of the registrant’s common stock,$0.005 par value per share.

 

 

 

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KOSSCORPORATION AND SUBSIDIARIES

FORM 10-Q

December 31, 2008

 

INDEX

 
|         |                  |                                                                                                                        | **Page**   |
|--------------|-----------------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
|         |                  |                                                                                                                        | ** ** |
| PART I  | FINANCIAL INFORMATION | 3                                                                                                                           |
|         |                  |                                                                                                                        |       |
|         | Item 1                | Financial Statements                                                                                                        | 3          |
|         |                  |                                                                                                                        |       |
|         |                  | Condensed Consolidated Balance Sheets  December 31, 2008 (Unaudited) and June 30, 2008                            | 3          |
|         |                  |                                                                                                                        |       |
|         |                  | Condensed Consolidated Statements of Income (Unaudited)   Three months and six months ended December 31, 2008 and 2007 | 4          |
|         |                  |                                                                                                                        |       |
|         |                  | Condensed Consolidated Statements of Cash Flows (Unaudited)  Six months ended December 31, 2008 and 2007               | 5          |
|         |                  |                                                                                                                        |       |
|         |                  | Notes to  Condensed Consolidated Financial Statements (Unaudited) December 31,  2008                                   | 6-8        |
|         |                  |                                                                                                                        |       |
|         | Item 2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 | 9-10       |
|         |                  |                                                                                                                        |       |
|         | Item 3                | Quantitative and Qualitative Disclosures  About Market Risk                                                                 | 11         |
|         |                  |                                                                                                                        |       |
|         | Item 4                | Controls and Procedures                                                                                                     | 11         |
|         |                  |                                                                                                                        |       |
| PART II | OTHER  INFORMATION    | 12                                                                                                                          |
|         |                  |                                                                                                                        |       |
|         | 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                                                                          | 12-13      |
|         |                  |                                                                                                                        |       |
|         | Item 6                | Exhibits                                                                                                                    | 13-14      |

 

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements.**

 

KOSS CORPORATION AND SUBSIDIARIES

 

##### CONDENSED CONSOLIDATED BALANCE SHEETS

 
| ** **                                              | ** ** | **(Unaudited)**                 | ** ** | ** **                  | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **December 31, 2008** | ** ** | **June 30, 2008** | ** ** |
| ASSETS                                                  | ** ** | ** **                      | ** ** | ** **                  | ** ** |
| Current assets:                                         |       |                            |       |                        |       |
| Cash                                                    |       | $                               | 3,890,135  |                        | $          | 3,322,873 |   |
| Accounts receivable                                     |       | 7,810,260                       |       | 10,148,646                  |       |
| Inventories                                             |       | 11,092,388                      |       | 9,374,344                   |       |
| Deferred income taxes                                   |       | 783,995                         |       | 783,995                     |       |
| Income tax receivable                                   |       | 76,163                          |       | —                      |       |
| Other current assets                                    |       | 1,096,585                       |       | 504,806                     |       |
| Total current assets                                    |       | 24,749,526                      |       | 24,134,664                  |       |
|                                                    |       |                            |       |                        |       |
| Property and equipment, net                             |       | 3,591,852                       |       | 2,746,367                   |       |
| Deferred income taxes                                   |       | 1,066,853                       |       | 1,066,853                   |       |
| Other assets                                            |       | 1,954,123                       |       | 2,029,123                   |       |
| Total Assets                                            |       | $                               | 31,362,354 |                        | $          | 29,977,007 |   |
|                                                    |       |                            |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ INVESTMENT           |       |                            |       |                        |       |
| Current liabilities:                                    |       |                            |       |                        |       |
| Accounts payable                                        |       | $                               | 4,584,882  |                        | $          | 2,950,721 |   |
| Accrued liabilities                                     |       | 1,473,949                       |       | 1,808,467                   |       |
| Dividends payable                                       |       | 479,920                         |       | 480,395                     |       |
| Income tax payable                                      |       | —                          |       | 347,507                     |       |
| Total current liabilities                               |       | 6,538,751                       |       | 5,587,090                   |       |
|                                                    |       |                            |       |                        |       |
| Deferred compensation                                   |       | 1,047,482                       |       | 1,047,482                   |       |
| Derivative liability                                    |       | 125,000                         |       | 125,000                     |       |
| Stockholders’ investment                           |       | 23,651,121                      |       | 23,217,435                  |       |
| Total Liabilities & Stockholders’  Investments |       | $                               | 31,362,354 |                        | $          | 29,977,007 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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KOSS CORPORATION AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 
| ** **                                  | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| **Period Ended December 31** | ** ** | **2008**              | ** ** | **2007**            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net Sales                                   |       | $                     | 10,287,595 |                | $          | 12,099,397 |   | $ | 21,773,629 |   | $ | 24,737,003 |   |
| Cost of goods sold                          |       | 6,804,711             |       | 7,775,022           |       | 13,890,285 |   | 15,620,648 |   |
| Gross Profit                                |       | 3,482,884             |       | 4,324,375           |       | 7,883,344 |   | 9,116,355 |   |
| Selling general and administrative expense  |       | 2,956,099             |       | 2,371,276           |       | 5,954,626 |   | 5,155,302 |   |
| Income from operations                      |       | 526,785               |       | 1,953,099           |       | 1,928,718 |   | 3,961,053 |   |
| Other income (expense)                      |       |                  |       |                |       |   |   |   |   |
| Royalty income                              |       | —                |       | 43,750              |       | 58,333 |   | 175,000 |   |
| Interest income                             |       | 1,446                 |       | 46,751              |       | 15,499 |   | 97,191 |   |
| Interest expense                            |       | —                |       | —              |       | — |   | — |   |
|                                        |       |                  |       |                |       |   |   |   |   |
| Income before income tax provision          |       | 528,231               |       | 2,043,600           |       | 2,002,550 |   | 4,233,244 |   |
| Provision for income taxes                  |       | 205,777               |       | 797,048             |       | 766,332 |   | 1,651,018 |   |
| Net Income                                  |       | $                     | 322,454    |                | $          | 1,246,552 |   | $ | 1,236,218 |   | $ | 2,582,226 |   |
| Earnings per common share:                  |       |                  |       |                |       |   |   |   |   |
| Basic                                       |       | $                     | 0.09       |                | $          | 0.34 |   | $ | 0.34 |   | $ | 0.70 |   |
| Diluted                                     |       | $                     | 0.09       |                | $          | 0.34 |   | $ | 0.34 |   | $ | 0.70 |   |
| Dividends per common share                  |       | $                     | 0.13       |                | $          | 1.13 |   | $ | 0.26 |   | $ | 1.26 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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KOSS CORPORATION AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| **Six Months Ended December 31,**                              | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                               |       |       |       |       |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |       |       |       |       |
| Net income                                                                         |       | $          | 1,236,218  |       | $          | 2,582,226 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |       |       |       |       |
| Depreciation and amortization                                                      |       | 475,847    |       | 562,192    |       |
| Stock compensation expense                                                         |       | 199,989    |       | 272,526    |       |
| Net changes in operating assets and liabilities                                    |       | 980,390    |       | 368,672    |       |
| Net cash provided by operating activities                                          |       | 2,892,444  |       | 3,785,616  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |       |       |       |       |
| Acquisition of equipment                                                           |       | (1,322,810 | )          | (363,302   | )          |
| Net cash used in investing activities                                              |       | (1,322,810 | )          | (363,302   | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |       |       |       |       |
| Dividends paid                                                                     |       | (960,315   | )          | (4,634,875 | )          |
| Purchase of common stock                                                           |       | (42,057    | )          | (1,268,786 | )          |
| Exercise of stock options                                                          |       | —     |       | 1,317,862  |       |
| Net cash used in financing Activities                                              |       | (1,002,372 | )          | (4,585,799 | )          |
| Net decrease in cash                                                               |       | 567,262    |       | (1,163,485 | )          |
| Cash at beginning of period                                                        |       | 3,322,873  |       | 4,187,682  |       |
| Cash at end of period                                                              |       | $          | 3,890,135  |       | $          | 3,024,197 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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KOSS CORPORATION AND SUBSIDIARIES

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008

(Unaudited)

 

1.                                       CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

 

The financial statements presented herein arebased on interim amounts.  In the opinionof management, all adjustments (consisting of normal recurring accruals)necessary to present fairly the financial position, results of operations andcash flows at December 31, 2008 and for all periods presented have beenmade. All significant intercompany transactions have been eliminated. Theincome from operations for the quarter and six months ended December 31,2008 is not necessarily indicative of the operating results for the full year.

 

Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted.  It issuggested that these condensed consolidated financial statements be read inconjunction with the financial statements and notes thereto included in theRegistrant’s June 30, 2008 Annual Report on Form 10-K.

 

2.                                       EARNINGSPER COMMON SHARE

 

Basic earnings per common share are computed based on the weightedaverage number of common shares outstanding. The weighted average number of common shares outstanding for thequarters ending December 31, 2008 and 2007 were 3,693,756 and 3,674,516,respectively.  For the six months ended December 31,2008 and 2007, weighted average number of common shares outstanding were3,694,553 and 3,672,664, respectively. When dilutive, stock options are included as share equivalents using thetreasury stock method.  For the quarterended December 31, 2008 there were no common stock equivalents related tostock option grants included in the computation of the average number of sharesoutstanding for diluted earning per common share as inclusion would have beenanti-dilutive.  For the quarter ended December 31,2007 there were 19,677 common stock equivalents.  For the six months ended December 31,2008 there were no common stock equivalents related to stock option grantsincluded in the computation of the average number of shares outstanding fordiluted earning per common share.  Forthe six months ended December 31, 2007 there were 22,293 common stockequivalents.

 

3.                                       INCOMETAXES

 

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

 

Weadopted the provisions for FASB Interpretation No. 48 (FIN 48), Accountingfor Uncertainty in Income Taxes, on July 1, 2007.  As a result of the implementation of FIN 48,we did not recognize a significant change in the liability for unrecognized taxbenefits.  The total liability forunrecognized tax benefits was approximately $267,000 as of December 31,2008.  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.

 

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Therewas no change in the amount of unrecognized tax benefits during the first sixmonths ended December 31, 2008.

 

4.                                       INVENTORIES

 

The classification of inventories is asfollows:

 
| ** **                        | ** ** | **December 31, 2008** | ** ** | **June 30, 2008** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| Raw materials and work in process |       | $                               | 3,443,122  |                        | $          | 4,212,089 |   |
| Finished goods                    |       | 8,868,132                       |       | 6,381,121                   |       |
|                              |       | 12,311,254                      |       | 10,593,210                  |       |
| LIFO reserve                      |       | (1,218,866                      | )          | (1,218,866                  | )          |
|                              |       | $                               | 11,092,388 |                        | $          | 9,374,344 |   |

 

5.                                       STOCKPURCHASE AGREEMENT

 

The Company has an agreement with itsChairman, John C. Koss, to, at the request of the executor of the estate,repurchase Company common stock from his estate in the event of his death.  The Company does not have the right torequire the estate to sell stock to the Company.  As such, this arrangement is accounted for asa written put option with the fair value of the put option recorded as aderivative liability.  The fair value ofthe option at December 31, 2008 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, 2008 and June 30,2008, $125,000 has been classified as a derivative liability on the Company’sfinancial statements.

 

6.             DIVIDENDSDECLARED

 

On December 16, 2008, the Company declared a quarterly cashdividend of $0.13 per share for the stockholders of record on December 31,2008 to be paid January 15, 2009. Such dividend payable has been recorded at December 31, 2008.

 

7.                                       STOCK-BASEDCOMPENSATION

 

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

 

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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 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, 2008 is as follows:

 
| ** **                            | ** ** | **Number of Shares  (in thousands)** | ** ** | **Range of Exercise Price  Per Share** | ** ** | **Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------|------------|
| Balance, July 30, 2008 |       | 561,654                                             |       | $15.51-$28.80                                              |       | $                                | 21.49      |   |
| Granted                               |       | —                                              |       | —                                                     |       | —                           |       |
| Exercised                             |       | —                                              |       | —                                                     |       | —                           |       |
| Forfeited                             |       | —                                              |       | —                                                     |       | —                           |       |
| Balance, December 31, 2008       |       | 561,654                                             |       | $15.51-$28.80                                              |       | $                                | 21.49      |   |

 

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

 
| ** **    | ** ** | **Number of Options  Outstanding/Exercisable** | ** ** | **Weighted Average Exercise  Price Outstanding/Exercisable** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** ** |
|---------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| $15.51-$19.47 |       | 219,654 / 76,904                                         |       | $17.37 / $17.57                                                             |       | 1.4                                                                      |       |
| $21.42-$24.11 |       | 262,000 / 201,000                                        |       | $22.92 / $23.32                                                             |       | 1.6                                                                      |       |
| $26.18-$28.80 |       | 80,000 / 38,000                                          |       | $28.15 / $28.25                                                             |       | 3.7                                                                      |       |
|          |       | 561,654 /  315,904                                       |       | $21.49 / $26.79                                                             |       |                                                                     |       |

 

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

 

FinancialCondition, Liquidity and Capital Resources

 

Cash provided by operating activities duringthe six months ended December 31, 2008 amounted to $2,892,444. This was aresult of net income for the period adjusted for changes in operating assetsand  ** **current liabilities, which aroseprimarily out of increases in other current assets, accrued liabilities, andaccounts payable.

 

Capital expenditures for new equipment (includingproduction tooling) were $1,322,810 for the six months ended December 31,2008.  Capital expenditures for fiscalyear 2009 are expected to be approximately $3.8 million.  The Company expects to generate sufficientfunds through operations to fund these expenditures.

 

Stockholders’ investment decreased to $23,651,121at December 31, 2008, from $23,217,435 at June 30, 2008.  The net decrease reflects net income andexercise of stock options offset by the effect of the purchase and retirementof common stock and dividends declared.

 

The Company amended its existing creditfacility in November 2008, extending the maturity date of the unsecuredline of credit to November 1, 2009. This credit facility provides for borrowings up to a maximum of$10,000,000.  The Company can use thiscredit facility for working capital purposes or for the purchase of its owncommon stock pursuant to the Company’s common stock repurchase program.  Borrowings under this credit facility bearinterest at the bank’s prime rate, or LIBOR plus 1.75%.  This credit facility includes financialcovenants that require the Company to maintain a minimum tangible net worth andspecified 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 31,2008 or June 30, 2008.  The Companydid not utilize the credit facility during the quarter or six months ended December 31,2008.

 

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.  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, 2008,the Company purchased 3,830 shares of its common stock at an average net priceof $10.98 per share, for a total net purchase price of $42,057. For the sixmonths ended December 31, 2008, the Company purchased 3,830 shares of itscommon stock at an average net price of $10.98 per share, for a total netpurchase price of $42,057.

 

From the commencement of the Company’s stockrepurchase program through December 31, 2008, the Company has purchased atotal of 5,473,934 shares for a total gross purchase price of $52,767,311(representing an average gross purchase price of $9.64 per share) and a totalnet purchase price of $41,943,568 (representing an average net purchase priceof $7.66 per share).  The differencebetween the total gross purchase price and the total net purchase price is theresult of the Company receiving from employees cash acquired from such employeespursuant to the Company’s stock option program. In determining the dollar amount available for additional purchasesunder the stock repurchase program, the Company uses the total net purchaseprice by the Company for all stock purchases, as authorized by the Board ofDirectors.

 

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The Company also has an Employee StockOwnership Plan and Trust (“ESOP”) pursuant to which shares of the Company’scommon stock are purchased by the ESOP for allocation to the accounts of ESOPparticipants.  On November 3, 2008,the Company contributed $30,000 to ESOP.

 

Results of Operations

 

Net sales for the second quarter ended December 31,2008 declined by 15% to $10,287,595 from $12,099,397 for the same period in2007.  Net sales for the six months endedDecember 31, 2008 declined by 12% to $21,773,629 from $24,797,003 for thesame period in 2007.  The decrease isprimarily the result of soft U.S. retail sales.

 

Gross profit as a percent of net sales was34% for the quarter ended December 31, 2008 compared to 36% for the sameperiod in the prior year.  For the sixmonths ended December 31, 2008 the gross profit percentage was 36%compared to 37% for the same period in the prior year. The decrease in grossprofit for the six months ended December 31, 2008 was primarily due to aless profitable model mix sold in that period.

 

Selling, general and administrative expensesfor the quarter ended December 31, 2008 were $2,956,099 or 29% of netsales, compared to $2,371,276 or 20% of net sales for the same period in2007.  For the six month period ended December 31,2008, these expenses were $5,954,626 or 27% of net sales, compared to$5,155,302 or 21% of net sales, for the same period in 2007.  This increase is due to extra costs incurredrelated to engineering, research development and marketing.

 

For the quarter ended December 31, 2008,income from operations was $526,785 compared to $1,953,099 for the same periodin the prior year.  Income fromoperations for the six months ended December 31, 2008 was $1,928,718compared to $3,961,053 for the same period in 2007, a 51% decrease.  Income from operations decreased primarily asa result of decreased net sales for the quarter and six months ended December 31,2008.

 

For the quarter ended December 31, 2008, net income decreased 74%to $322,454 from $1,246,552 for the same period in 2007.  Net income for the six months ended December 31,2008, decreased 52% from $2,582,226 in 2007 to $1,236,218 in 2008.  Net income decreased primarily as aresult of decreased net sales for the quarter and six months ended December 31,2008.

 

Royalty income forthe quarter ended December 31, 2008 was zero compared to $43,750 for thequarter ended December 31, 2007. For the six month period ended December 31, 2008, royalty incomewas $58,333  compared to $175,000 for theperiod ended December 31, 2007.

 

Interest income for the quarter was $1,446compared to $46,751 for the same quarter in 2007.  For the six month period ended December 31,2008, interest income was $15,499, compared to $97,191, 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, 2008, was $205,777compared to $797,048 for the same period last year.  For the six months ended December 31,2008, the provision for income taxes was $766,332 compared with $1,651,018 forthe same period last year.  The effectivetax rate was 39% for each of the quarters.

 

Off-Balance SheetArrangements

 

The Company has nooff-balance sheet arrangements.

 

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

 

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

 

###### **Item 4.    Controlsand Procedures.**

 

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

 

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

 

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**PART II**

**OTHERINFORMATION**

 

**Item 1A**                                                     RiskFactors

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the risk factors discussed in our Annual Report on Form 10-Kfor the year ended June 30, 2008, which could materially affect ourbusiness, financial condition or future results.  The risks described in our Annual Report on Form 10-Kare not the only risks facing our Company. Additional risk and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

 

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

 

The following table presentsinformation with respect to purchases of common stock of the Company madeduring the quarter ended December 31, 2008, by the Company.

 

**COMPANY REPURCHASES OF EQUITY SECURITIES**

** **
| **Period (2008)**                  | ** ** | **Total # of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Approximate Dollar Value of  Shares Available under  Repurchase Plan** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
|                                    |       |                                        |       |                                         |       |                                                                                                                   |       |                                                                                                   |       |
| October 1 — October 31   |       | 0                                           |       | $                                            | 0.00       |                                                                                                                   | 0          |                                                                                                   | $          | 2,169,506 |   |
|                                    |       |                                        |       |                                         |       |                                                                                                                   |       |                                                                                                   |       |
| November 1 — November 30 |       | 2,559                                       |       | $                                            | 11.35      |                                                                                                                   | 0          |                                                                                                   | $          | 2,140,451 |   |
|                                    |       |                                        |       |                                         |       |                                                                                                                   |       |                                                                                                   |       |
| December 1 — December 31 |       | 1,271                                       |       | $                                            | 10.23      |                                                                                                                   | 0          |                                                                                                   | $          | 2,127,449 |   |

** **

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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 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 $43,372,551 had been expended through December 31, 2008.

** **

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

** **

(a)                                  OnOctober 8, 2008 an Annual Meeting of Stockholders was held.

 

(b)                                 Proxiesfor the election of directors were solicited pursuant toRegulation 14A.  There was nosolicitation in opposition to management’s nominees, and all such nominees wereelected.

 

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(c)                                  Therewere 3,695,351 shares of common stock eligible to vote at the Annual Meeting,of which 3,554,191 shares were present at the Annual Meeting in person or byproxy, which constituted a quorum.  Thefollowing is a summary of the results of the voting:

 
| ** **                                | ** ** | **Number of Votes** | ** ** | **Broker**   | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|--------------|------------|
| ** **                                | ** ** | **For**                       | ** ** | **Withheld** | ** ** | **Non-Votes** | ** ** |
| Nominees for 1-year terms ending in 2009: |       |                          |       |         |       |   |   |
|                                      |       |                          |       |         |       |   |   |
| John C. Koss                              |       | 3,541,461                     |       | 12,730       |       | 0 |   |
| Thomas L. Doerr                           |       | 3,541,203                     |       | 12,988       |       | 0 |   |
| Michael J. Koss                           |       | 3,539,987                     |       | 14,204       |       | 0 |   |
| Lawrence S. Mattson                       |       | 3,540,081                     |       | 14,110       |       | 0 |   |
| Theodore H. Nixon                         |       | 3,541,206                     |       | 12,985       |       | 0 |   |
| John J. Stollenwerk                       |       | 3,539,381                     |       | 14,810       |       | 0 |   |

 
| ** **                                                                                        | ** ** | **Number of Votes** | ** ** | ** **  | ** ** | **Broker**  | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                        | ** ** | **For**                       | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| Appointment of Grant Thornton LLP as  independent auditors for the year ending June 30, 2009 |       | 3,550,587                     |       | 2,156       |       | 1,448       |       | 0 |   |

 
| **Item 6** | ** ** | **Exhibits**                            |
|------------|------------|-----------------------------------------|
|       |       |                                    |
|       |       | See Exhibit Index attached hereto. |

 

**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING STATEMENTS**

** **

This Form 10-Q contains forward-looking statements within themeaning of that term in the Private Securities Litigation Reform Act of 1995(the “Act”) (Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by theCompany from time to time in filings with the Securities Exchange Commission,press releases, or otherwise.  Statementscontained in this Form 10-Q that are not historical facts areforward-looking statements made pursuant to the safe harbor provisions of theAct.  Forward-looking statements mayinclude, but are not limited to, projections of revenue, income or loss andcapital expenditures, statements regarding future operations, 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, 

 

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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.

 

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Signatures

 

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

 

 
|                         | KOSS CORPORATION             |
|------------------------------|------------------------------|
|                         |                         |
|                         |                         |
| Date: February 12, 2009 | /s/ Michael J. Koss          |
|                         | Michael J. Koss              |
|                         | Vice Chairman, President,    |
|                         | Chief Executive Officer,     |
|                         | Chief Financial Officer      |
|                         |                         |
|                         |                         |
| Date: February 12, 2009 | /s/ Sue Sachdeva             |
|                         | Sue Sachdeva                 |
|                         | Vice President—Finance, |
|                         | Secretary                    |
|                              |                              |  |

 

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

 

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

 

 

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