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.

Management by instinct didn't seem enough anymore. Every YPO class he went to repeated the same lessons. Today's company founder needs structures and systems to grow, a "professional" manager to channel the entrepreneur's energy. Diversify. Delegate. Leverage. He soaked it all up, every last MBO and M.B.A. of it. "I took it all as gospel," he admits. "These were educated people -- people I respected. My education had all been on the street."

There were the children to think about, too. Michael, the heir apparent, had been in the business since 1976; his brother John Jr. was likely to sign on soon as well. Hiring a professional manager as president would be like hiring a driving instructor for them rather than teaching his sons himself, one consultant told him. They wouldn't pick up any of their father's bad habits.

James D. Dodson, who signed a five-year contract with Koss in 1979, seemed the perfect choice as the new president, chief operating officer, and mentor. Koss knew Dodson through YPO, and knew that he "ate nails for breakfast." A Big Eight accountant by training, Dodson had run divisions for a couple of large corporations and -- by all accounts -- run them well.

Even more than the resume, however, Koss liked what Dodson had to say about repositioning the company. The stereophone business was mature, Dodson said, so Koss should use it as a cash cow to finance a move into loudspeakers and electronics. Koss already had an image with the audiophile -- it was time to transfer the name to a broader market. "After 22 years I was ready to have somebody say the brand image was good enough to move," Koss remembers thinking.

Even with Dodson on board, Koss kept the title of CEO. He continued to attend the big electronics shows in Las Vegas and Chicago, but kept his hand out of day-to-day operations. "If I decide someone is credible, I give them a total free rein," he explained. "Dodson's style was autocratic, which was directly opposite to mine, and he wanted to make all the decisions. But it was hard for me to keep disagreeing. I thought, 'After all, he's done it before."

Dodson moved swiftly. During the first two years, he switched from independent sales reps to an in-house sales staff, and added executive staffs to oversee training and sales management. On the production lines, he decreed that there would be no more temporary employees: a full-time production force, he reasoned, would be easier to control on the push to $50 million and beyond. To challenge Sony's new Walkman, the board charged Dodson with bringing out a portable radio cum headphone, to be known as the Koss Music Box, which he arranged to be produced in Taiwan. And to better leverage the company's access to distributors and customers, the company moved to acquire a small Florida business that was renamed Calibron Corp., a manufacturer of record- and tape-care products that would be marketed under the Koss name.

Vertical integration, off-shore production -- to the part-time CEO, it all sounded like a sound strategy for growth, but his other employees had a different view. They were unhappy with the new boss's autocratic style, and frustrated that Koss was not around to see it for himself. "When Mr. Koss was running things he made an effort for us to know what was going on, but under Dodson that was cut off," remembers assistant supervisor JoAnn Kimble, a 14-year veteran. "Mr. Koss had always been around, but we never saw Dodson. If you treat people like you don't care, then they won't care either."

Even Michael Koss, newly installed as product manager, had some skepticism about his mentor's style. He complained to his father of "enough memos and systems to run General Motors." But his father was less concerned. After Dodson's first two years, sales were at a record $25 million, with $2.3 million in net profits and a return on equity of 23.5%. "Look at the results," Koss told his son, "and do what you're told."

John Koss was not the first CEO to fall to earth from a dream of riches. Nor was he the first manufacturer to get burned by going offshore, although he was one of the few to make the same mistake twice.

By the fall of 1981, while Koss was shaving strokes off his golf score, market changes were shaving millions from audio industry sales. During the early '80s, the audio market would shrink 50% as consumers shifted their spending to such new products as video games, videocassette recorders, and home computers. Sales of Koss stereophones were down 25%. But Koss dismissed the warning signs, dazzled by the $5 million in Music Box orders that the company wrote at the Chicago Consumer Electronics Show in the summer of 1981.

Indeed, if Koss's Taiwanese supplier had delivered the Music Box in time to get it on retailers' shelves by Christmas, the product might have taken off, even at $90 a unit. Instead, delivery was delayed until February, and by that time all of Asia seemed to be in the music-box market. Prices tumbled. People didn't want a $90 Koss Music Box if they could get a $60 Sony or a $29 knockoff from Hong Kong. Koss Corp. found itself with a warehouse of inventory that would have to be sold at a loss if it could be sold at all.

John Jr., then working in San Francisco as area sales manager, went to his father, urging him to cut his Music Box losses and drop the price. But Koss wouldn't interfere with Dodson's ambitious program to dominate the high-end market. Quite the opposite. With his blessing, the company moved ahead with plans to add a tape recorder to its line, and continued with a $2-million research-and-development effort aimed at producing a new digital radio that would finally make Koss a player in that market.

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.

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.

It was hardest on Nancy. "All she'd ever wanted was to have all her chicks in a row, and now they were all in trouble," John Jr. says. Her husband and the boys could throw themselves into work, but she had only worry, prayer, and needlework. Then, six months into the bankruptcy, at 7:30 on a spring morning, long after John and the boys had gone to work, the phone rang while Nancy was in the kitchen. The voice on the other end asked, "Is it true that the bank foreclosed on your house?"

"Who is this?" she stammered. Foreclosure to her meant that a man with a black cape and a mustache threw you out on the street. She felt sick, as if somebody had kicked her in the stomach.

The canner was an enterprising reporter from The Milwaukee Journal: First Chicago had called the $900,000 left on Joh Koss's note on his house. The foreclosure eventually would be thrown out of court and fail as a pressure tactic. But to this day, Nancy cannot speak of Richard Peterson by name, or forgive him for what he put her family through -- "although as a Christian," she adds, "I know that I should."

The family remained unsinkable. The day after the foreclosure attempt, Koss threw a thank-you party for 100 of its customers and suppliers in the factory lunch-room. A local jazz band played as the guests enjoyed cocktails and hors d'oeuvres. Then the elder Koss stepped to the podium and told the crowd that their support and patience had given them "a reasonably good start toward a turnaround."

Koss had plenty of reason to be thankful toward his guests. Customer faith in the Koss brand had only grown stronger since the bankruptcy filing. Radio Shack had increased its order, while Sears had switched from selling "Sears Audio . . . by Koss," to the Koss brand name alone. "We had nothing but his reputation to go on, but that was enough," says Michael Malone, a divisional manager for Service Merchandise Co. "The Koss name has always meant quality." Many of the suppliers, promised 30-day payment on all new orders, had shipped on open account after Koss received the cash collateral back. "We've known the Koss family for a long time," says Craig Adelman, of Adelman Travel Systems Inc. "They're good people, and we wanted to help them out." Circulating among the guests, John Jr. also found a deep reservoir of sympathy among his accounts: "Everybody hates banks -- they said 'go get 'em," he remembers.

Koss, as usual, was the life of the party. For door prizes he gave his guests digital radios. "Enjoy them," he joked. "Each one cost me $10,000."

There were new reasons to celebrate over the summer. The repackaged family of Koss high-end stereophones, now pitched as "Born in the U.S.A.," was riding the Springsteen wave, while a new line of low-priced, replacement phones was opening up shelf space with such mass retailers as Caldor and Target stores. And there was new product in the development pipeline, calculated to make a big splash when the company finally emerged from Chapter 11 protection.

Operational back to basics was also paying off. An accounting staff cut in half now closed the books each month in half the time it used to take. Shipping moved faster, too, no longer required to circulate five different copies of each order. Under Dodson each new product line had had its own sizable staff of engineers and marketers. Now, Koss did it with three people, twice as fast, for one-quarter of the cost.

On the shop floor, the remaining employees still talked about Black Monday, and chafed under the 30% pay cut. But the loyalty of 17-year veteran Marionette Dawson, a supervisor, was typical: "I felt scared, but I knew this was Mr. Koss's life, and he would do everything he could. Mr. Koss could have closed the doors and kept his house, but he sold the house to save our jobs."

Sold the house. The cars. The antiques. He and Nancy were still broke. But the company was at last coming out of its financial hole. By the summer of 1985, Koss Corp. had paid off $1.5 million of the bank debt and had accumulated $3 million in certificates of deposit to handle short-term cash demands. And by the end of September, Koss could report that, for the three quarters since the bankruptcy court filing, operations had been profitable.

Yet the better the company performance, the more snarled became the relations between Koss and Peterson. Koss was still trying to negotiate an agreement based on a five-year payback of the $14-million in bank debt. And Peterson was still sticking with his demands for market-rate interest, a speedier payback, and a tangle of controls that Koss found too inflexible -- "a book of can't dos as thick as the Yellow Pages," he complained. By the fall of 1985, the two men couldn't meet in the same room, and they were forced to negotiate through lawyers shuttling back and forth between them.

After four reorganization plans were rejected, Koss finally had had enough. Suspecting his bankers had had enough, too, he offered them $9 million in cash as full settlement -- about 60? on the dollar. The bankers agreed, with this condition: he'd have to pay by the end of the year of consent to their reorganization plan, which seemed certain to include liquidation.

Koss was surprised at how fast they'd jumped -- he had been ready to go to $10 million. "Obviously, there was just no good faith left," he says. Although Koss didn't have the full $9 million in hand, the company had managed to squirrel away $3.5 million from the sale of inventory, $2 million from the sale of Calibron, and another $1.5 million from the sale/lease back of the Milwaukee plant. The rest Koss borrowed, on the strength of the turnaround, from First Bank of Milwaukee and five local investors he knew through YPO.

On December 17, 1985, Koss Corp. emerged from the protection of the bankruptcy court, three days short of a year from the original filing.

At 57, John Koss is too old now for YPO, but he has become a popular speaker on the management group circuit. A master storyteller, he recounts the saga of his descent into the purgatory of Chapter 11 cheerfully, with as many cliffhangers as The Perils of Pauline and as many trials as Job. "People ask me how it felt," Koss jokes, "and I tell them about getting an enema from my palsied Aunt Tilly."

Two years after emerging from court protection, Koss Corp. is hot again, just as its founder had promised. In June 1986, Koss introduced a cordless headphone, followed in early 1987 by four new models of stereophones and, six months later, a cordless/infrared speaker that reestablished Koss as the darling of the electronics and music press. The high-end audio industry, driven by sales of compact disc players and stereo TVs, was on the move again, and Koss was in the lead. There was even a new Koss billboard to remind Milwaukee that Koss was back, same as ever. "Phone your mother," read the caption below a picture of Whistler's famous mom with stereophones over her ears.

Financially, the company has never been more stable. During the fiscal year that ended in June 1987, Koss boosted its net worth to $4.8 million, as sales climbed back above $20 million. Net income totaled $1.8 million -- a record. And once again, Koss is sharing: last year the company contributed the equivalent of one month's wages for all employees to the profit-sharing plan, and $300,000 to the employee stock ownership trust for the purchase of Koss Corp. stock.

Except for a few more gray hairs, friends and employees don't see that many changes in Koss personally since the bankruptcy court filing. He's still the cheerleader on the shop floor, the master promoter on the street, and the jokester at the country club. But he knows he's been lucky. He's gotten back everything he lost and then some. He'd hoped to leave the children a stable company -- Koss Corp. has never been leaner, stronger, or more profitable. He'd hoped to train his children to keep it growing -- now, the next generation has taken over the day-to-day, educated by five years of turmoil.

"The bankruptcy was the best thing that ever happened to us as a family," Nancy says now as her husband nods in agreement. His faith is stronger in God and in himself -- and in the boys who he has watched blossom during the past five years.

Michael, now 33, was recently named president and chief operating officer, freeing his father "for the fun stuff." Michael says he's adopted his father's management style -- results oriented with a minimum of control -- but the bankruptcy also got him in the habit of making a daily check of cash, orders, shipments, and production on his desktop PC. Michael credits Im Dodson with much of what he has learned about business -- "he taught me what not to do." He continues: "People were so scared to make mistakes, and so tired of filling out forms. It was boring and demeaning. I know now what it takes to make this a bigger company -- it takes a handful of dedicated people."

John Jr., 30, the new vice-president of sales, also feels the positive effects of the turnaround in very personal ways. "In college I was always afraid that if I joined the family business I'd feel I hadn't really earned my position," he remembers. The past few years have laid that fear to rest. Working under the demanding stare of the bankruptcy court has honed his business instincts too. I'm so sensitive to it now, I'll always be able to tell when things are going wrong."

Michael Moore, 30, now Koss's general counsel and credit manager, may be the most changed of the three. He'd never expected to work for his father-in-law or his company. But having been thrust into the breach, he was able to enjoy a level of trust and responsibility most sons-in-law could never achieve.

In the process, Moore also saw the wisdom of John Koss's open manner and egalitarian values, and when business finally picked up, he took the opportunity to translate those into personnel and compensation policies that have helped to preserve Koss Corp.'s reputation as a progressive, innovative employer.

Moore has extended regular performance reviews and merit raises to hourly workers, and twice a year sits down one-on-one with each of them. He holds regular meetings in the lunchroom to explain what employee stock ownership means, and to make sure the numbers are clear, he's added an explanation of the company's financial statements to the employee newsletter. "This is your company," Moore tells them. "You own it and make it grow -- and you earn the reward."

For his reward, John Koss likes to pick up a McDonald's double cheeseburger and a diet Coke on a crisp fall day and eat lunch, alfresco, on the site where contractors have staked out the floor plan of his new house. It will be a modest place by his old standards -- only a third the size -- built of wood and stone with a view of the river. He and Nancy set out the broad designs of the new place together, modeling it on the North Carolina home of their friends Ruth and Billy Graham.

After lunch, Koss threads his way along the paths through the woods up to his old house, to stand at the edge of the lawn and muse a bit. To this day Nancy still can't bear to visit the place, but he likes to come back now and then. The house reminds him of the man he used to be and the painful mistakes that threatened his family's future and brought his company to the edge of bankruptcy.

"I've learned there is no escaping -- if you're going to be CEO you've got to take the responsibility," he says. "I'm more cautious now, too. I had always bet everything because I didn't realize how much I had to lose."