1 Dear Stockholders, We are proud to report that Koss Corporation has set a new sales record for Fiscal Year 1996. Sales for the fiscal year ending June 30, 1996 were $36,422,377 compared to $33,432,344 in 1995. Net income for the year was $2,360,963 compared to $2,087,994 one year ago. Earnings per share were $0.67 in 1996 compared to $0.58 in fiscal year 1995. We experienced a roller-coaster retail year, opening at a peak, rolling with trepidation through the holidays and climbing to a new sales record at the close of the fourth quarter. A surge in sales and orders during the first quarter was followed by a second quarter sales gain negatively impacted by a decline in gross margins. Requests for credit and sharper prices contributed to this margin decline which continued until the end of the third quarter. The company rebounded with record sales for it's fourth quarter increasing earnings more than three times for the same period last year. In Fiscal Year 1996, the successful licensing arrangement with Hagemeyer was extended to encompass Western Europe. Hagemeyer's line of Koss branded electronics products have received excellent distribution in retail outlets throughout North America. The new line of telecommunications headsets introduced in January positions the company to move into several new markets. The four models of tele-headsets include two "hands-free" products for use with standard telephones or cellular phones and two models for computer telephony. By expanding stereophone application outside of traditional markets, we believe that Koss' entry into these markets will play a key role in expanding the company's' current position as a market leader. The beginning of Fiscal Year 1997 marked Koss' entry onto the information superhighway with the opening of the Koss Web Site at http://www.koss.com. We are very excited about this new mode of communicating with our customers and have already seen an impressive number of "hits" to the site, many involving product inquiries and catalog requests as well as general feedback and questions from consumers. We anticipate that the Web site will move us closer to the individual consumer, opening a new path for us to sell direct and to provide greater consumer accessibility to products with limited retail placement. Within the next few months, we also expect to expand services offered at the site, including a dealer locator service to help consumers find a Koss retailer in their area. Currently, Koss' line of available credit is very good and our plan to repurchase the company's shares from the market will continue. We look forward to increased sales in FY 1997 through the introduction of a number of new models later this year. We expect these new introductions to expand our presence in existing markets as well as provide us entry to other non-traditional markets. As always, our primary focus continues to be on our base stereophone business and we will continue to concentrate on finding new applications for stereophone use. We would like to thank our customers, suppliers, stockholders, and the entire Koss team for their dedication and hard work over the past year to ensure the continued success of Koss Corporation. 2 Sincerely, John C. Koss Michael J. Koss Chairman President & CEO. CONSOLIDATED STATEMENTS OF INCOME KOSS CORPORATION
Year Ended June 30 1996 1995 1994 - ----------------------------------------------------------------------- Net sales $36,422,377 $33,432,344 $35,561,322 Cost of goods sold 25,241,623 22,810,037 23,686,971 - ----------------------------------------------------------------------- Gross profit 11,180,754 10,622,307 11,874,351 Selling, general and administrative expense 8,528,098 8,376,204 8,191,504 - ----------------------------------------------------------------------- Income from operations 2,652,656 2,246,103 3,682,847 Other income (expense) Interest income 116,503 98,090 56,461 Interest expense (156,698) (317,922) (246,911) Royalty income 1,303,502 1,412,723 1,108,458 - ----------------------------------------------------------------------- Income before income taxes 3,915,963 3,438,994 4,600,855 Provision for income taxes 1,555,000 1,351,000 1,800,000 - ----------------------------------------------------------------------- Net income $ 2,360,963 $ 2,087,994 $ 2,800,855 ======================================================================= Number of common and common equivalent shares used in - ----------------------------------------------------------------------- computing earnings per share 3,502,979 3,631,364 3,751,514 ======================================================================= Earnings per common and common - ----------------------------------------------------------------------- equivalent share: $ .67 $ .58 $ .75 ======================================================================= 3 CONSOLIDATED BALANCE SHEETS KOSS CORPORATION
As of June 30 1996 1995 - ------------------------------------------------------------------------------ ASSETS Current Assets: Cash $ 27,001 $ 49,227 Accounts receivable, less allowances of $685,107 and $289,217 respectively 8,965,213 7,242,862 Inventories 8,777,216 9,395,915 Prepaid expenses 382,137 676,874 Income taxes receivable -- 376,147 Prepaid income taxes 517,946 378,946 - ------------------------------------------------------------------------------ Total current assets 18,669,513 18,119,971 - ------------------------------------------------------------------------------ Equipment and Leasehold improvements, at cost: Leasehold improvements 673,382 585,952 Machinery, equipment, furniture and fixtures 4,442,411 4,299,822 Tools, dies, molds and patterns 7,561,969 7,309,609 - ------------------------------------------------------------------------------ 12,677,762 12,195,383 Less--accumulated depreciation 10,333,421 9,911,989 - ------------------------------------------------------------------------------ 2,344,341 2,283,394 Deferred Tax Asset 422,603 -- Intangible and Other Assets 568,800 569,558 - ------------------------------------------------------------------------------ $22,005,257 $20,972,923 ============================================================================== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Accounts payable $ 1,327,915 $ 1,726,711 Accrued liabilities 786,353 930,660 Income taxes payable 361,855 -- - ------------------------------------------------------------------------------ Total current liabilities 2,476,123 2,657,371 - ------------------------------------------------------------------------------ Long-Term Debt 470,000 570,000 Deferred Income Taxes -- 6,862 Deferred Compensation and Other Liabilities 1,022,344 907,264 Contigently Redeemable Common Stock 1,490,000 1,490,000 - ------------------------------------------------------------------------------ Stockholders' Investment: Common stock, $.01 par value, authorized 8,500,000 shares; issued and outstanding 3,317,920 and 3,486,080 shares, respectively 33,179 34,861 Paid in capital 2,224,628 3,336,431 Contingently redeemable common stock (1,490,000) (1,490,000) Cumulative translation adjustment (107,230) (65,116) Retained earnings 15,886,213 13,525,250 - ------------------------------------------------------------------------------ Total stockholders' investment 16,546,790 15,341,426 - ------------------------------------------------------------------------------ $22,005,257 $20,972,923 ============================================================================== 4 STOCKHOLDERS' INFORMATION KOSS CORPORATION Koss Corporation's 1996 Annual Report is presented in a simple readable and functional style. This Annual Report contains condensed financial statements only. The detailed financial statements including footnotes are included in the Form 10-K which has been provided to all stockholders along with the 1996 Annual Report. The Company believes this manner of presentation provides a concise summary for those who want to be kept informed while at the same time allowing those who feel it necessary the opportunity to investigate further. Koss Corporation common stock is traded on the Over the Counter market and quotations are available through the National Market System. The trading symbol is KOSS. For additional Annual Reports, Form 10-K's or Proxy materials write to: Investment Relations Koss Corporation 4129 N. Port Washington Ave. Milwaukee, WI 53212 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Koss Corporation We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Koss Corporation and its subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of income, of stockholders' investment and of cash flows for each of the three years in the period ended June 30, 1996 (not presented herein); and in our report dated July 19, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheets as of June 30, 1996 and 1995, and the related condensed consolidated statements of income for each of the three years in the period ended June 30, 1996, when read in conjunction with the consolidated financial statements from which it has been derived, is fairly stated in all material respects in relation thereto. PRICE WATERHOUSE LLP Milwaukee, Wisconsin July 19, 1996 5 MANAGEMENT INFORMATION KOSS CORPORATION OFFICERS AND DIRECTORS SENIOR MANAGEMENT John C. Koss John C. Koss Chairman of the Board Chairman of the Board Koss Corporation Michael J. Koss President Thomas L. Doerr Chief Executive Officer President Chief Operating Officer Doerr Corporation Chief Financial Officer Victor L. Hunter John C. Koss, Jr. President Vice President--Sales Hunter Business Direct Daniel Esposito Michael J. Koss Vice President--Corporate Systems President, C.E.O., C.O.O., C.F.O. Sujata Sachdeva Vice President--Finance Lawrence S. Mattson Retired President Richard W. Silverthorn Oster Company Secretary General Counsel Martin F. Stein Chairman Declan Hanley Eyecare One Inc. Vice President--International Sales John J. Stollenwerk President ANNUAL MEETING Allen-Edmonds Shoe Corporation October 24, 1996 Performance Center Koss Corporation 4129 N. Port Washington Avenue Milwaukee, WI 53212 TRANSFER AGENT INDEPENDENT ACCOUNTANTS Questions regarding change of address, Price Waterhouse LLP stock transfer, lost certificate, or Milwaukee, Wisconsin information on a particular account should be directed in writing to: LEGAL COUNSEL Firstar Trust Company Box 2077 Whyte Hirschboeck Dudek S.C. Milwaukee, WI 53201 Attn: Mr. Eugene R. Lee