Richard Peterson, a "workout" specialist at First Chicago who took the lead in the negotiations, was rapidly losing patience with the flamboyant Mr. Koss. "We are not in the free waiver business," Peterson told him bluntly. There would have to be some sacrifices first: the company's funds, he said, would have to be put in a cash-collateral account under the banks' control. Koss was stunned.
Koss is convinced that it was Peterson's attitude that day that finally drove him into the arms of the bankruptcy court. Back in September, the banks had delayed so long before loaning him the $1.2 million that Koss was unable to produce all the headphones he could have sold for that Christmas season, forcing him to miss his sales projections. Later, in 1985, when he presented a plan to pay the bank debt in cash and stock, complete with 7% interest, Peterson had dismissed it out of hand, insisting on a return of 12%. "Look guys, I've gotta tell ya," Koss warned the bankers then, "this is the plan, or we're going to have to get the guy in black to referee."
Filing for Chapter 11 finally seemed his only way out. It not only gave him the chance to get bank control of the cash, it also offered some room to maneuver in the face of Peterson's tough talk about liquidation. And by filing within 90 days of the closing on the $1.2-million loan, the assets he had pledged to secure it were, in effect, unsecured: under federal bankruptcy law, the courts would presume that the company had been legally insolvent when it offered the assets as security.
"I felt awful," Koss remembers of the day of the filing -- five days before Christmas 1984, and only one day before the end of the 90-day deadline. "My board had agreed, my family had agreed, but I was the guy who had to sign the papers. I just walked around in a daze, angry at myself." By the end of the day, he would not be the only one feeling that way. First Chicago's Richard Peterson was rather angry as well.
He seemed to be everywhere the first few weeks after the Chapter 11 filing -- shoes shined, eyes bright, a "Try God" pin on his lapel. There was no time for feeling sorry for himself, what with less than a month to prepare for the cash-collateral hearings at bankruptcy court. By then he'd have to be able to show the judge that Koss Corp. had mended its ways, was living within its means, and had a convincing long-range plan to get out from under the court's protection.
It was a marathon of 18-hour days and seven-day weeks that first month, with Koss working side by side with his sons Michael and John Jr. and son-in-law Michael Moore, an attorney whose law career had been interrupted when he'd been pressed into service making collection calls. Everyone did everything, full out. There were suppliers and customers to call, demoralized employees to rally, expenses to be cut. No more executive secretaries -- they'd answer their own phones. No more cleaning crews -- they'd dump their own trash.
This time Koss cut to the bone, starting at the top. The number of executive officers fell from 10 to 6, supervisors from 4 to 2. Data processing went from 5 people to 1, accounting from 7 to 3, shipping and receiving from 8 to 3. Those who stayed took pay cuts: 30% for the hourly workers, 5% for clerks and officers. The sales staff laid on by Dodson was completely eliminated as Koss switched back to independent reps. Also gone were the training and market-research staffs.
"It was just gut wrenching," remembers Koss. Some of the employees had been with him for 15 or 20 years. "I tried to get through it by reminding myself it was a job-saving program -- that we had no choice," he says.
With the status of the security agreement tied up in court, the bankers had no intention of giving up their cash-collateral control without a fight. They kept him on a short leash, with their auditors visiting the plant regularly, swamping him with demands for reports and updates. When Koss added $700 in overtime to the company's $40,000 weekly payroll because sales were exceeding projections, the bank refused to honor the check until the company vice-president of finance made up the shortfall from his personal account. At the hearings in Milwaukee bankruptcy court, they railed against family control, demanding cuts in Koss's salary, questioning his travel expenses and his use of corporate funds.
But once on the stand at the first bankruptcy court hearing, Koss was an effective witness in his own defense. He convinced the judge that the bankers' excessive zeal made it difficult for him to operate. And by day's end, he had won back his cash by explaining, in great detail, how a one-product company with modest costs could expect to earn a profit on sales of $11 million during the current fiscal year.
Even with cash in hand, however, Koss was a long way from freedom. He'd been awarded use of the funds for only 90 days -- after that he'd have to come back to court again. Nor did the judge's ruling in any way ease the battle between Koss and Peterson -- in fact, over the succeeding months it would only intensify as each side escalated its charges.
The strain of that public dogfight brought an already close family closer still. "The family was an island -- it was us against the world," John Jr. remembers. Most weekends, without any formal plan, the five Koss kids would gather spouses and children and drop by the riverfront house to sit and talk while Mother and Dad played with their grandchildren. Sometimes there were strategy sessions by the blackboard in the basement, or rambling discussions in the solarium about the Koss company's credo. "We all knew that this was the only group we could confide in," recalls Michael.
