To manufacture the new digital radio, Dodson would again turn to Taiwan, where he ordered 100,000 units. But after delivering only 1,000 of the boxes, the Asian supplier decided to drop the line, scotching Koss's only hope for selling any of its new product for the upcoming Christmas season of 1983.
By the time the books were closed on the fiscal year in June 1983, the cumulative impact of Dodson's program was as evident as the red ink on Koss's ledger. For the second year in a row sales were off, this time down to $21.6 million, and the company showed the first net loss in its history. The company stock, which had traded as high as 7 1/4 (adjusted for splits), was dropping as low as 3. But John Koss continued to have faith in his professional manager. "Dodson told me the banks were getting a little nervous," Koss remembers. "But I looked at the balance sheets, and they didn't look too bad to me. Every finger that could have been placed in the dike was in place."
Over the next year all the dikes gave way. Music boxes from Taiwan kept pouring in, paid for with letters of credit that rolled into long-term debt, but no one would buy them, no matter how low Koss cut the prices. The company had turned its back on its core product, milking its old line of stereophones rather than developing new and less expensive models, and competitors were beginning to move in. Koss's share of the domestic market share dropped from a high of 50% to 25%. European sales, hurt by a rising dollar, were also off sharply, down from $6 million at their peak to $2 million by 1984. Overseas operations alone were running at an annual loss of $2 million.
The company's Florida acquisition was also floundering. Dodson had changed Calibron from a mass-volume manufacturer selling to the OEM market to a custom house for a new line of Koss-brand accessories. But the acquisition had never recovered from that rocky transition, and the parent company had never learned how to sell the 19 new products it had gained in the process. Worse, the $2.6-million transaction involving stock and cash had to be changed to an all-cash deal because of Koss's declining stock price -- a heavy drain on the company cash flow.
John Koss finally came back to work full-time in May 1984, agreeing after a long discussion with Michael and John Jr. at a Milwaukee Brewers game that the Music Box business had to go. As expected, Dodson left at the end of June, when his contract expired, but not before launching an illfated effort to dump the Music Box inventory through a network of freestanding kiosks set up in shopping malls.
The financial statements for 1984 would document how far the company had slid: $6 million in losses on sales of $20 million. Debt had gone from $7 million in 1982 to $14 million in 1984, all of it unsecured. Interest payments were up to nearly $150,000 a month. Only a huge inventory of overvalued electronics kept the company from insolvency, and the banks, as Koss remembers, "were looking for people to blame."
To many on the outside, the obvious choice was Jim Dodson. But even Dodson's harshest critic, John Koss, agrees that the ultimate responsibility belonged to Koss himself. Whatever his motives -- greed, boredom, frustration, concern for his sons' future -- he had entrusted the company to someone else and ignored his own business instincts. It was a bitter cup to swallow.
(Dodson, currently retired, refused to comment in any detail to INC. about his tenure at Koss Corp.)
Koss had no time to look for scapegoats once he came back, however. The company was in the midst of a critical cash crunch. The Christmas season was fast approaching, a chance -- maybe the last chance -- for the company to begin climbing out of its hole.
Looking back, Koss thinks he should have filed for Chapter 11 protection that summer rather than refinancing for another $1.2 million, this time secured against the company assets. "But I was the second greatest optimist in history," he says.
The first? "General George Custer."
Imagine yourself a banker, a workout artist sent in to salvage what you can from John Koss's mess during that fall of 1984.
Koss has to astonish you. Over the years, he had somehow convinced three august financial institutions -- Prudential Insurance Company of America, the M & I Marshall & Ilsley Bank, and the First National Bank of Chicago -- to loan the company $14 million, unsecured, on projections of $30 million in sales. Then, with sales plunging into the teens, he'd bargained for one last chance, pledging what remained of his dwindling assets for the use of another $1.2 million. Somebody must have been asleep at the switch.
Now he's back again, still with the glowing reports, the overly optimistic projections, the promises of better numbers if his lenders will just cut him some slack. You've seen his type before. Running the company for the good of the family. Living too well at stockholders' expense. Energized by life at the edge. Your job is to protect what you can of the bank's disappearing investment -- not to give him the freedom to lose it.
John Koss, of course, didn't see his situation in quite those terms. He'd expected his first meeting with the bankers to go smoothly. Everything was "great, just great," now that he was concentrating on the stereophone business again. He'd repackaged his old line, was hard at work on a new one, and customers had responded so well that he'd had to put on overtime help to meet the demand. He'd done the restructuring he'd promised, too, paring $1 million from payroll and another $1 million from operating expenses. Koss closed the European operation, replacing 120 employees with 2 sales reps, and was selling its manufacturing plant in Ireland.
There was only one problem, a technicality really. The company had to sell the Irish facility at a loss, forcing its net worth below the guarantee set out in the latest loan agreements. Now, Koss needed a waiver from his secured lenders before the auditor would sign off on the corporate statements.
