Koss Corp. faces steep challenges

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From this office, it’s always been difficult to watch good Milwaukee people and companies endure hard times.

That was true when the Koss Corp. and the Koss family suffered through a court case in which a former company executive pled guilty to six counts of felony fraud and was ordered to pay $34 million in restitution in 2010.

Make no mistake. The company and the Koss family were victims in that embezzlement case.

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I have always found my limited interactions with members of the Koss family to be pleasant. They strike me as hardworking, honest Milwaukee people with unquestioned integrity. The fact that the family patriarch, John C. Koss, invented the stereophone in 1958 is one of the coolest milestones in Wisconsin’s entrepreneurial history.

Koss continues as the company’s chairman, but the day-to-day operations of the firm are handled by his sons, Michael J. Koss, president and chief executive officer, and John Koss Jr., vice president of sales. Add a third generation, as Michael Koss Jr. is the director of marketing.

The CEO recently informed employees about the latest daunting challenges facing the company.

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“The company had extremely disappointing results in the past fiscal year and in the quarter ended June 30, 2014,” Michael J. Koss said in one of the bluntest CEO quarterly report statements I have read in a long time. “We experienced major setbacks in export sales, particularly in Europe. That drop in sales was significant enough for us to suspend operations in Mexico until sales volumes support enough demand for the products being produced there. In addition, with the changes that need to be made to the Striva Wi-Fi headphone technology, we wrote off the capitalized software costs as well as the related tooling and inventory. These three factors resulted in a significant loss in fiscal year 2014.”

The company’s 12-month net loss was $5.6 million, compared with net income of $5.4 million a year earlier. The company’s quarterly sales dipped to $6.2 million from $9.9 million a year earlier.

“Increased competition in our industry has played a role in the setback, but we believe the severe reduction in 2014 export sales was also driven by certain economic challenges, struggling economies, and available credit for retailers and distributors. In addition, one of our largest European distributors reported overstocked inventory levels on a broad range of items on hand, including Koss products,” Koss said.

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Bottom line: the company is losing money, has halted production at its plant in Mexico, is pulling back on research and development of new products and is suspending any payment of dividends to shareholders. The latter is the least of the family’s worries, quite frankly, because the family owns three-quarters of the company’s stock, which is traded on the NASDAQ Exchange and has dropped to a nearly 52-week low.

You can see a major problem for Koss Corp. by walking into any pharmacy or department store. You will find cheap, knock-off brands of headphones and earbuds. The devices have been commoditized in the global economy. How many consumers would be willing to pay extra for Koss brand earbuds?

Here’s hoping the Koss boys can find a way forward. One suggestion I would make is that they give a call to Kay Plantes, author, consultant and business model expert. Let me know if you would like me to hook you up, fellas.

Steve Jagler is executive editor of BizTimes Milwaukee.

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