SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1995 Commission file number 0-6664
K-TEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0946588
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15525 Medina Road, Plymouth, Minnesota 55447-1480
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612)559-6888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
At May 4, 1995 there were approximately 3,713,797 common shares outstanding.
K-tel International, Inc. shares are listed on the NASDAQ exchange. For the
quarter ended March 31, 1995, K-tel shares traded within the high and low bid
range of $5.38 to $3.75 compared to a range of $7.25 to $4.50 for the comparable
period in the prior year.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the quarter ended March 31, 1995
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations 3
- Three and nine month periods ended March 31, 1995 and 1994
Consolidated Balance Sheets 4
- March 31, 1995 and June 30, 1994
Consolidated Statements of Cash Flows 5
- Nine month periods ended March 31, 1995 and 1994
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBITS
Exhibit 11: Statement Regarding Computation of Earnings Per Share
Exhibit 27: Financial Data Schedule (SEC use)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE PERIODS ENDED MARCH 31
(in thousands - except per share data)
Three Months Ended Nine Months Ended
March 31 March 31
1995 1994 1995 1994
NET SALES $ 16,425 $ 13,501 $ 49,905 $ 39,173
COSTS AND EXPENSES:
Cost of goods sold 8,514 6,892 26,236 19,081
Advertising 2,979 2,402 8,888 7,130
Selling, general & administrative 5,450 3,986 14,952 11,587
Total Costs and Expenses 16,943 13,280 50,076 37,798
OPERATING INCOME (LOSS) (518) 221 (171) 1,375
NON-OPERATING INCOME:
Interest income 3 (6) 166 59
Interest expense (33) 19 (179) (38)
Foreign currency transaction gain (loss) 288 25 303 (31)
Total Non-operating Income (Expense) 258 38 290 (10)
INCOME (LOSS) BEFORE BENEFIT
(PROVISION) FOR TAXES (260) 259 119 1,365
BENEFIT (PROVISION) FOR INCOME TAXES (70) 112 (306) (73)
NET INCOME (LOSS) $ (330) $ 371 $ (187) $ 1,292
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.09) $ .10 $ (.05) $ .34
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 3,806 3,806 3,804 3,829
K-TEL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND JUNE 30, 1994
(in thousands)
March 31, June 30,
1995 1994
(Unaudited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,699 $ 4,171
Restricted cash 1,174 2,148
Accounts receivable, net 12,254 11,600
Inventories 8,541 5,143
Royalty advances 1,961 887
Prepaid expenses 2,623 1,162
Income tax refund receivable 563 458
Total Current Assets 29,815 25,569
Property and Equipment, net 884 751
Other Assets 724 554
$ 31,423 $ 26,874
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Note payable to bank $ 2,312 --
Note payable to Affiliate -- 1,000
Accounts payable 5,895 4,973
Accrued royalties 8,725 7,864
Reserve for returns 7,265 6,412
Other current liabilities 2,444 1,929
Income taxes payable 204 150
Total Current Liabilities 26,845 22,328
Shareholders' Investment
Common stock 38 37
Contributed capital 7,814 7,801
Accumulated deficit (2,625) (2,438)
Cumulative translation adjustment (649) (854)
Total Shareholders' Investment 4,578 4,546
$ 31,423 $ 26,874
K-TEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE NINE MONTHS ENDED MARCH 31
(in thousands)
March 31,
1995 1994
Cash Flows From Operating Activities:
Net income (loss) $ (187) $ 1,292
Adjustments to reconcile net income (loss) to cash used for
operating activities:
Depreciation and amortization 434 356
Changes in current operating items:
Restricted Cash 974 (1,210)
Accounts receivable (292) (1,566)
Inventories (3,113) (1,254)
Royalty advances (1,026) (354)
Prepaid expenses (1,292) (403)
Current liabilities 2,457 2,249
Cash used for operating activities (2,045) (890)
Cash flows from investing activities:
Property and equipment purchases, net (316) (180)
Music catalog additions (350) (125)
Other (20) (91)
Cash used for investing activities (686) (396)
Cash flows from financing activities:
Proceeds from note payable to bank, net 2,312 --
Payment of note payable to Affiliate (1,000) --
Proceeds from exercise of stock options 14 54
Cash provided by financing activities 1,326 53
Effect of exchange rates on cash and cash equivalents (67) 18
Net decrease in cash and cash equivalents (1,472) (1,215)
Cash and cash equivalents at beginning of year 4,171 4,798
Cash and cash equivalents at period end $ 2,699 $ 3,583
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the quarter or nine
month period ended March 31, 1995 are not necessarily indicative of the
results that may be expected for the year as a whole. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended June 30, 1994.
2. DIVESTITURE OF SUBSIDIARIES
The Company has evaluated various alternatives to improve operating
performance in Germany and Spain, two unprofitable European operations. In
December 1994 the Company retained investment banking assistance and
commenced an effort to identify strategic partners or buyers for its German
and Spanish subsidiaries. To date, no agreement with a strategic partner or
buyer has been reached. The Company is continuing its efforts in this area,
specifically strategic partnering, and anticipates downsizing/re-structuring
the operations in order to limit future losses if no agreement can be
reached by its fiscal year end, June 30, 1995. For the nine months ended
March 31, 1995, the German and Spanish subsidiaries represented
approximately 22% and 11% of consolidated net sales, respectively. No
amounts have been recorded in the March 31, 1995 financial statements to
reflect the ultimate disposition of these subsidiaries.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A. Results of Operations
The following tables set forth, for the periods indicated, certain
items from the Company's consolidated statements of operations
expressed as a percentage of net sales.
K-TEL INTERNATIONAL, INC.
RESULTS OF OPERATIONS BY GEOGRAPHIC REGION
(IN 000'S)
Quarter Ended March 31, 1995
North America Europe Total
Net Sales $ 8,508 100% $ 7,917 100% $ 16,425 100%
Costs and expenses
Cost of goods sold 5,355 63% 3,168 40% 8,523 52%
Advertising 791 9% 2,188 28% 2,979 18%
Selling, general & administrative 2,310 27% 2,782 35% 5,092 31%
Operating Income (Loss) 52 1% (221) (3)% (169) (1)%
Non-operating income (expense) 9 -- 249 3% 258 2%
Benefit (provision) for income taxes (40) (1)% (30) -- (70) (1)%
Net Income (Loss) $ 21 -- $ (2) -- $ 19 --
K-TEL INTERNATIONAL, INC.
RESULTS OF OPERATIONS BY GEOGRAPHIC REGION (continued)
(IN 000'S)
Quarter Ended March 31, 1994
North America Europe Total
Net Sales $7,240 100% $ 6,261 100% $13,501 100%
Costs and expenses
Cost of goods sold 4,192 58% 2,768 44% 6,960 51%
Advertising 823 11% 1,579 25% 2,402 18%
Selling, general & administrative 1,533 21% 2,124 34% 3,657 27%
Operating Income (Loss) 692 10% (210) (3)% 482 4%
Non-operating income (expense) 121 2% (83) % 38 --
Benefit (provision) for income taxes 112 1% -- % 112 1%
Net Income (Loss) $ 925 13% $ (293) (5)% $ 632 5%
In addition to the operating amounts above for the quarter ended March 31, 1995,
the parent holding company recorded $349,000 in expenses. For the quarter ended
March 31, 1994, the parent holding company recorded $261,000 in expenses. The
increase in costs was due to additions in personnel and the establishment of a
corporate satellite office in Los Angeles.
K-TEL INTERNATIONAL, INC.
RESULTS OF OPERATIONS BY GEOGRAPHIC REGION
(IN 000'S)
Nine Months Ended March 31, 1995
North America Europe Total
Net Sales $ 25,582 100% $ 24,304 100% $ 49,886 100%
Costs and expenses
Cost of goods sold 15,650 61% 10,615 44% 26,265 53%
Advertising 2,286 9% 6,602 27% 8,888 18%
Selling, general & administrative 6,442 25% 7,610 31% 14,052 28%
Operating Income 1,204 05% (523) (2%) 681 1%
Non-operating income (expense) 282 1% 8 -- 290 0%
Benefit (provision) for income taxes (179) (1)% (127) (1)% (306) (1)%
Net Income (Loss) $ 1,307 5% $ (642) 3% $ 665 --
K-TEL INTERNATIONAL, INC.
RESULTS OF OPERATIONS BY GEOGRAPHIC REGION (continued)
(IN 000'S)
Nine Months Ended March 31, 1994
North America Europe Total
Net Sales $ 20,789 100% $ 18,372 100% $ 39,161 100%
Costs and expenses
Cost of goods sold 11,410 55% 7,802 42% 19,212 49%
Advertising 1,837 9% 5,293 29% 7,130 18%
Selling, general & administrative 4,433 21% 6,381 35% 10,814 28%
Operating Income 3,109 15% (1,104) (6%) 2,005 5%
Non-operating income (expense) 309 1% (319) (2)% (10) --
Benefit (provision) for income taxes (70) 0% (3) -- (73) --
Net Income (Loss) $ 3,348 16% $ (1,426) (8%) $ 1,922 5%
In addition to the operating amounts above for the nine months ended March 31,
1995, the parent holding company recorded $19,000 in revenue and $871,000 in
expenses. For the nine months ended March 31, 1994 the parent holding company
recorded $12,000 in revenue and $642,000 in expenses. The increase in costs was
due to additions in personnel and the establishment of a corporate satellite
office in Los Angeles.
For the nine months ended March 31, 1995 consolidated net sales were
$49,905,000 with an operating loss of $171,000 and a net loss of
$187,000 or $.05 per share. Consolidated net sales for the same period
last year were $39,173,000 with operating income of $1,375,000 and net
income of $1,292,000 or $.34 per share.
For the quarter ended March 31, 1995 consolidated net sales were
$16,425,000 with an operating loss of $518,000 and a net loss of
$330,000 or $.09 per share. For the same period last year, net sales
were $13,501,000 with operating income of $221,000 and net income of
$371,000 or $.10 per share.
Consolidated net sales increased $10,732,000 or 27% for the first nine
months of fiscal 1995 and $2,924,000 or 22% for the quarter ended March
31, 1995. The increase was primarily due to sales volume growth in the
Company's United States (U.S.) consumer convenience product business
from new and higher priced products and some European sales growth
resulting from more television direct response promotions than in the
prior year comparable period. Foreign currency conditions were more
favorable than in the comparable prior year period and caused sales to
be $2,416,000 higher for the nine months ended March 31, 1995 than they
would have been had exchange rates remained consistent with the prior
year.
Consolidated cost of goods sold for the nine months ended March 31, 1995
increased to 53% of sales compared to 49% for the same period last year.
In Europe, the increase was primarily the result of the change in
product lines in the United Kingdom to a predominance of budget priced
entertainment products (music and video) compared to mainly consumer
convenience products sold in the prior year comparable period. In North
America, costs of goods sold increased due mainly to the sale of some
higher priced, lower margin consumer convenience product items and a
product mix of slightly higher cost music product. Consolidated cost of
goods sold for the quarter ended March 31, 1995 increased to 52% of
sales compared to 51% for the comparable period. While cost of goods
sold increased for the quarter in North America as indicated above, cost
of goods sold for the quarter in Europe declined due to a higher volume
of direct response sales in Spain and Germany than in the previous year
comparable period. Direct response sales carry a higher gross margin
before advertising than retail sales.
Advertising costs as a percentage of sales for the nine months and
quarter ended March 31, 1995 were flat, compared to the comparable
period in the prior year. As indicated above, stronger direct response
sales in Spain and Germany were supported by an increase in advertising
costs for the quarter ended March 31, 1995. The third quarter increase
in advertising costs in Europe was offset by tight third quarter control
of advertising costs (mostly print) in North America.
Selling, general and administrative expenses for the nine month period
ended March 31, 1995 were $14,952,000 or 30% of sales compared to
$11,587,000 also 30% of sales in the prior year comparable period. For
the quarter ended March 31, 1995 selling, general and administrative
expenses were $5,450,000 or 33% of sales compared to $3,986,000 or 30%
of sales in the prior year comparable period. Selling, general and
administrative expenses as a percentage of sales for the nine months and
quarter ended March 31, 1995 in North America increased due to the
addition of overhead necessary to support the planned growth of retail
sales in the entertainment and consumer convenience products businesses.
Offsetting increases in North America, selling, general and
administrative expenses as a percentage of sales in Europe for the nine
months ended March 31, 1995 decreased primarily due to the strengthening
of sales in Spain and Finland achieving significantly greater sales
volume in the current year period with comparable overhead to the prior
year period.
The Company experienced operating losses of $171,000 and $518,000 for
the nine months and quarter ended March 31, 1995 respectively compared
to operating income of $1,375,000 or 4% of sales and $221,000 or 2% of
sales respectively for the same periods last year. The operating income
declined in North America for the nine months ended March 31, 1995
compared to the prior year comparable period as a result of increases in
overhead and product cost discussed above and some unsuccessful
advertising promotions in the second quarter of fiscal 1995. Operating
losses in Europe for the nine months ended March 31, 1995 declined
compared to the prior year comparable period due to successful
entertainment product operations in Finland, closedown of operations in
a French subsidiary at the end of fiscal 1994 that had significant prior
year operating losses and discontinuance of unprofitable consumer
convenience products lines in the United Kingdom at the end of fiscal
1994. The decrease in operating income in North America for the quarter
ended March 31, 1995 was due to overhead and product cost increases
discussed above.
Closedown charges of $624,000 were provided for at the end of fiscal
1994 relating to closing loss operations in France and New Zealand and
consumer convenience product operations in the United Kingdom. The
closedowns are now complete and the June 30, 1994 accrued charge
accurately reflected the actual costs incurred to complete the processes
resulting in no material additional benefit or expense in fiscal 1995.
During the nine month period ended March 31, 1995, the Company
experienced a foreign currency transaction gain of $303,000 compared to
a loss of $31,000 in the comparable period in the prior year. For the
quarter ended March 31, 1995, the Company experienced a foreign currency
transaction gain of $288,000 compared to a prior year third quarter gain
of $25,000. The foreign currency transaction gain was considerably
larger for the third quarter of fiscal 1995 due to more favorable
foreign exchange rate fluctuations than in the previous year. The
Company has a policy to reduce its foreign currency exchange exposure by
hedging its exposure through the use of forward contracts. Most of the
Company's foreign currency transaction exposure is due to certain
European subsidiaries' liabilities which are payable to the Company's
U.S. parent or U.S. subsidiaries. The Company's use of forward contracts
has been strictly limited to hedging specific intercompany or third
party receivable balances denominated in foreign currency. In accordance
with generally accepted accounting principles, the payable balances are
adjusted quarterly to the local currency equivalent of the U.S. dollar.
Gains or losses resulting from these intercompany liabilities remain
unrealized until such time as the underlying liabilities are settled.
The provision for income taxes was $306,000 and a tax benefit of $70,000
was recorded for the nine months and quarter ended March 31, 1995
respectively compared to a tax provision of $73,000 and a tax benefit of
$112,000 in the prior year comparable periods. Variations in the
Company's tax provision are a factor of the country of origin of profits
and the availability of net operating loss carryforwards.
Operating results for the nine month period ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the year
as a whole.
B. Liquidity and Capital Resources
During the nine months ended March 31, 1995, cash and cash equivalents
decreased approximately $1,472,000 to $2,699,000. The overall decrease
in cash was primarily due to the net loss for the period and increases
in nearly all current operating items (accounts receivable, inventories,
royalty advances, prepaid expenses and current liabilities) which
continued to be driven by strong sales growth which continued through
the third quarter. The related collections and payments will occur in
the fourth quarter of this fiscal year and into the first quarter of
fiscal 1996. Part of the cash decrease was offset by proceeds received
under the Company's working capital line of credit.
During the first nine months of fiscal 1995 the Company purchased
approximately $86,000 of consumer convenience product from an affiliate
controlled by the Chairman of the Board. The Company owed approximately
$51,000 to the affiliate at March 31, 1995. Also, this same affiliate
purchased approximately $152,000 from the Company during the first nine
months ended March 31, 1995 and owed the Company $175,000 at March 31,
1995. Outstanding balances are settled on a timely basis. No interest
will be charged on the related outstanding balances during fiscal 1995.
On July 22, 1994, two of the Company's United States subsidiaries, K-tel
International (USA), Inc. and Dominion Entertainment, Inc. ("Borrowers")
entered into a revolving credit agreement with TCF Bank Minnesota. The
agreement provided for an asset based line of credit of up to $5,000,000
with availability based on a monthly borrowing base derived from the
Borrowers accounts receivable and inventory. Borrowings were
collateralized by the assets of the Borrowers including accounts
receivable, inventories, equipment, and Dominion Entertainment, Inc.'s
owned music master recordings. Interest on borrowings were accrued and
due monthly at a rate of prime plus one and one half percent. K-tel
International, Inc., guaranteed any borrowings. Maturity date of this
revolving credit agreement is July 22, 1995. Under the agreement, the
Borrowers were required to maintain minimum levels of tangible net worth
and certain other financial ratios.
The line of credit was amended January 31, 1995 to more properly define
financing requirements and costs to individual subsidiaries operations.
K-tel International (USA), Inc. and Dominion Entertainment, Inc. are
entertainment product (primarily music) marketing companies while K-tel,
Inc. is a consumer convenience product marketing company. The amendment
reduced the asset based line of credit of K-tel International (USA),
Inc. and Dominion Entertainment, Inc. from (up to) $5,000,000 to (up to)
$2,000,000 based on a monthly borrowing base as previously described.
The collateral, interest, guarantor, maturity date, and financial worth
and ratio covenants for the amended agreement are the same as described
above for the original, July 22, 1994 $5,000,000 revolving credit
agreement between K-tel International (USA), Dominion Entertainment,
Inc., and TCF Bank Minnesota. As of May 5, 1995, the balance drawn
against the line of credit was $1,762,000.
Also on January 31, 1995, K-tel, Inc., the Company's United States
consumer product marketing subsidiary, entered into a revolving credit
agreement with TCF Bank Minnesota. The agreement provides for an asset
based line of credit of up to $3,000,000 with availability based on a
monthly borrowing base derived from K-tel, Inc.'s accounts receivable
and inventory. Borrowings are collateralized by the assets of K-tel,
Inc. including accounts receivable and inventory. Interest on borrowings
will accrue and be due monthly at a rate of prime plus one and one half
percent. K-tel International, Inc., K-tel International (USA), Inc. and
Dominion Entertainment, Inc. are all guarantors for any borrowings.
Maturity date of this revolving credit agreement is July 22, 1995. Under
the agreement, K-tel, Inc. is required to maintain minimum levels of
tangible net worth and certain other financial ratios. As of May 5,
1995, the balance drawn against the line of credit was $2,043,000.
The combined loan balance outstanding for K-tel International (USA),
Inc., Dominion Entertainment, Inc. and K-tel, Inc. at March 31, 1995 was
$2,312,000.
Management considers its cash needs for the current fiscal year to be
adequately covered by its operations, borrowings under the TCF lines of
credit or by funding from another company controlled by the Chairman of
the Board. Although management is not privy to the financial statements
of the Chairman's other companies, he has assured K-tel International,
Inc. that he will fund its operations on an as needed basis consistent
with his past practices. It is the Company's intention to renew its
lines of credit with TCF for at least an additional year when they
mature on July 22, 1995. The Company has initiated discussions with TCF
and believes the lines of credit will be renewed.
C. European Operations
The Company has evaluated various alternatives to improve operating
performance in Germany and Spain, two unprofitable European operations.
In December 1994 the Company retained investment banking assistance and
commenced an effort to identify strategic partners or buyers for its
German and Spanish subsidiaries. To date, no agreement with a strategic
partner or buyer has been reached. The Company is continuing its efforts
in this area, specifically strategic partnering, and anticipates
downsizing/re-structuring the operations in order to limit future losses
if no agreement can be reached by its fiscal year end, June 30, 1995.
For the nine months ended March 31, 1995, the German and Spanish
subsidiaries represented approximately 22% and 11% of consolidated net
sales, respectively. No amounts have been recorded in the March 31, 1995
financial statements to reflect the ultimate disposition of these
subsidiaries.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
Exhibit 11 - Statement Regarding Computation of Earnings Per Share.
Exhibit 27 - Financial Data Schedule (SEC use)
(b) REPORTS ON FORM 8-K
The company did not file any reports on Form 8-K during the quarter
ended March 31, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K-TEL INTERNATIONAL, INC.
REGISTRANT
/S/ MICKEY ELFENBEIN
MICKEY ELFENBEIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ MARK DIXON
MARK DIXON
CHIEF FINANCIAL OFFICER
(principal accounting officer)