All The Right Moves

EXCEPT FOR HIS WIFE, NO ONE EVER saw John Koss's confidence fade, no matter how ugly the name-calling with the banks became. But the bankruptcy court was a humbling experience. It had taken 27 years to build a company and a legacy for his family, but only 3 to let them nearly slip away. Now, he spent his days taking a hatchet to his life's work, selling off divisions, firing employees, sitting on the hard wooden bench inside a federal courtroom in Milwaukee, from nearly $11 million in net worth and no short-term debt to a negative net worth and $15 million in debt. Over the three years, sales had fallen from $25 million to $18 million and were still falling. Earnings, which reached $2 million in 1981, were gone by 1984, replaced by a net loss of $6 million.

Koss was bleeding. He had kept almost all his money in the business, living off his salary and dividends. When Koss Corp. shares had traded over the counter at 7 1/4 per share, he had lived well. But now it was $1 per share, and he'd gone from riches to rags. After the banks ordered his $200,000 salary cut in half, Koss could just barely cover the interest payments on the house. They eventually sold the house and moved into an apartment overlooking a freeway.

Milwaukee is a small town, a close burgher community where success is the sign of sanctification and bankruptcy ranks with social disease. Koss's whole family felt the stigma. Old friends avoided Nancy at the grocery store, not knowing what to say.

What hurt Koss most, however, was knowing that he had no one to blame but himself. Investment analysts could talk of "changing buying trends in the electronics industry" or the brutal competition from Asia, but he knew better. He'd become so intoxicated with the dream of building a $100-million business that he found himself ignoring his own best instincts.

Most companies file for Chapter 11 protection because the cash dries up, and creditors decide to shut them down. But this was not the typical bankruptcy. Koss the company was still the leading name in its industry, with large reserves of loyalty from both customers and suppliers built up over a generation. And Koss the chief executive officer never doubted that the company would emerge relatively intact from the bankruptcy process. In fact, he would never have filed for protection if the bank hadn't held his personal stock as collateral for the note on his house.

Strictly speaking, it was a family decision. He gathered Nancy, the five kids, and the in-laws around a blackboard in the basement to explain what it would all mean. Once under protection of the bankruptcy court, every decision they made would be subject to court approval. They would have to prove to a judge that they could keep the company alive. And they'd have to project the kind of positive attitude that would keep customers and suppliers from wavering and employees from giving up.

Only 5% of the companies that file for Chapter 11 eventually emerge from protection, he warned them, but they were determined to try it anyway. None of them could imagine the business without the family -- or the family without the business.

John Koss had never been much for schooling -- "couldn't sit still long enough for it," he says. As a kid he had earned money buying old bicycles to fix up and sell, and taught himself to play the trumpet. After graduating from Riverside High School in 1948, he'd started his own swing band, gigging at high-school dances. He didn't start to settle down until he married Nancy in 1952.

A year later, Nancy was pregnant when John got the idea of renting televisions to Milwaukee hospitals. They drove into Chicago together to buy them, starting with a $200 check, a wedding gift that had been earmarked for their first sofa. Two boys and three girls were born over the next six years, while the business struggled and changed. After TV rentals Koss had developed a gadget to test TV tubes in local drugstores. Next, he'd tried making audio components, but he had never sold many, until he and a friend, Martin Lange Jr., got the idea of splitting a signal into a pair of upgraded World War II surplus headphones and plugging it into their component package at a 1958 audio show. Koss still couldn't sell the components, but the phones went like hotcakes. The "Father of Stereophones" had found his niche.

His timing was perfect. By the 1960s, a generation of postwar babies was creating a musical revolution, and spending what money it had to listen to it on stereo systems that included Koss headphones. Koss was hot, rated number one not just by Consumer Reports magazine but also endorsed -- by way of Beatle Phones -- by John, Paul, George, and Ringo. Koss tickled all of Milwaukee with his billboard high above the highway near his plant that depicted Abe Lincoln or Mona Lisa in headphones. "Ever wonder why she's smiling . . ." read the tag line.

In those heady days, Koss presided over his business with energy and ebullience, a combination ringleader and cheerleader who delighted in the new and different. At work, it was management by instinct -- no structure, no big corporate staff, no hierarchy. Planning consisted of goals sketched on a single sheet of paper: he aimed for 15% to 20% growth with 10% aftertax profit, and most years came close. In 1968, he started sharing 6% of pretax profits. In 1975, he began giving employees Koss stock. In 1979, he guaranteed all factory employees a lifetime job. There was no theory behind it, he admits -- "I just wanted a company where everyone felt the same, where people could grow and share the success."

By 1979, however, Koss was getting restless. Tired of the day-to-day, he felt frustrated by a business that seemed to have peaked. He measured himself against his friends in the local chapter of the Young Presidents Organization, with their $50-million companies and their 100% growth spurts, and felt he came up short. It had taken him 14 years to reach $1 million in sales, and another 12 years before he'd bumped his head at $20 million.