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 December 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.)
2605 Fernbrook Lane North, Minneapolis, Minnesota 55447-4736
(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 February 7, 1996 there were approximately 3,755,072 common shares
outstanding. K-tel International, Inc. shares are listed on the NASDAQ exchange.
For the quarter ended December 31, 1995, K-tel shares traded within the high and
low bid range of $3.50 to $5.00 compared to a range of $3.50 to $4.25 for the
comparable period in the prior year.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the quarter ended December 31, 1995
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
- Three and six months periods ended December 31, 1995 and 1994 3
Consolidated Balance Sheets
- December 31, 1995 and June 30, 1995 4
Consolidated Statements of Cash Flows - Six month periods ended
December 31, 1995 and 1994 5
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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands - except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------- ------------- ------------- -------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
NET SALES $ 18,792 $ 19,719 $ 35,416 $ 33,480
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of goods sold 10,320 10,695 18,832 17,722
Advertising 3,113 3,590 5,848 5,909
Selling, general & administrative 5,138 5,139 10,127 9,502
------------- ------------- ------------- -------------
Total Costs and Expenses 18,571 19,424 34,807 33,133
------------- ------------- ------------- -------------
OPERATING INCOME 221 295 609 347
------------- ------------- ------------- -------------
NON-OPERATING INCOME (EXPENSE):
Interest income (31) 135 75 163
Interest expense (117) (131) (192) (146)
Foreign currency transaction gain (loss) (11) (61) (1) 15
------------- ------------- ------------- -------------
Total Non-operating Income (Expense) (159) (57) (118) 32
------------- ------------- ------------- -------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 62 238 491 379
PROVISION FOR INCOME TAXES (144) (161) (268) (236)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (82) $ 77 $ 223 $ 143
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.02) $ .02 $ .06 $ .04
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 3,717 3,797 3,792 3,803
============= ============= ============= =============
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1995
(in thousands)
December 31, June 30,
1995 1995
-------------------- ------------------
(UNAUDITED)
ASSETS
- -------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,917 $ 2,154
Restricted cash 191 536
Accounts receivable, net 16,766 11,971
Inventories 8,349 7,382
Royalty advances 1,896 2,176
Prepaid expenses 1,697 2,108
Income tax refund receivable 435 540
-------------------- ------------------
Total Current Assets 31,251 26,867
-------------------- ------------------
Property and Equipment 3,000 2,820
Less-Accumulated depreciation and amortization (1,967) (1,797)
------- -------
Property and Equipment, net 1,033 1,023
Other Assets 880 747
-------------------- ------------------
$ 33,164 $ 28,637
==================== ==================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- -------------------------------------------------------------------------
Current Liabilities:
Line of credit $ 4,759 $ 2,516
Accounts payable 5,113 4,929
Accrued royalties 10,506 9,047
Reserve for returns 7,538 6,802
Other current liabilities 2,392 2,517
Income taxes payable 230 373
-------------------- ------------------
Total Current Liabilities 30,538 26,184
-------------------- ------------------
Common stock 37 37
Contributed capital 7,854 7,816
Accumulated deficit (4,698) (4,921)
Cumulative translation adjustment (567) (479)
-------------------- ------------------
Total Shareholders' Investment 2,626 2,453
-------------------- ------------------
$ 33,164 $ 28,637
==================== ==================
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(in thousands)
December 31,
1995 1994
---------------- ----------------
Cash Flows From Operating Activities:
Net income $ 223 $ 143
Adjustments to reconcile net income to cash used for operating activities:
Depreciation and amortization 300 277
Changes in current operating items:
Restricted Cash 345 (39)
Accounts receivable (4,889) (3,176)
Inventories (1,024) (2,658)
Royalty advances 257 (760)
Prepaid expenses 375 (738)
Current liabilities 2,382 3,365
---------------- ----------------
Cash used for operating activities (2,031) (3,586)
---------------- ----------------
Cash flows from investing activities:
Property and equipment purchases (268) (185)
Proceeds from sale of property and equipment 58 46
Music catalog additions (217) (225)
Other (31) (12)
---------------- ----------------
Cash used for investing activities (458) (376)
---------------- ----------------
Cash flows from financing activities:
Proceeds from line of credit, net 2,243 3,464
Payment of note payable to Affiliate ---- (1,000)
Proceeds from exercise of stock options 38 14
---------------- ----------------
Cash provided by financing activities 2,281 2,478
Effect of exchange rates on cash and cash equivalents (29) 16
---------------- ----------------
Net decrease in cash and cash equivalents (237) (1,468)
Cash and cash equivalents at beginning of year 2,154 4,171
---------------- ----------------
Cash and cash equivalents at period end $ 1,917 $ 2,703
================ ================
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 six month period ended December 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/A for the year ended June 30,
1995.
2. RECENTLY ISSUED ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("Statement 121"), issued in March 1995 and effective for
fiscal years beginning after December 15, 1995, establishes accounting
standards for the recognition and measurement of impairment of
long-lived assets, and goodwill either to be held or disposed of.
Management believes the adoption of Statement 121 will not have a
material impact on the Company's financial position or results of
operations.
3. SALE OF CONSUMER ENTERTAINMENT BUSINESS
On July 24, 1995, the Board of Directors of the Company approved the
sale of its consumer entertainment business to a corporation controlled
by, Mickey Elfenbein, the Company's President (the Purchaser). The
Company proposed to sell its consumer entertainment business to the
Purchaser by selling to the Purchaser three domestic subsidiaries and
ten foreign subsidiaries (the "Entertainment Subsidiaries") which own
the master recording catalog rights to music recordings and through
which the Company operates its consumer entertainment products business
at a purchase price of $25,000,000, subject to certain adjustments. The
transaction was subject to shareholder approval, Purchaser obtaining
financing and the closing of a related transaction among K-5 Leisure
Products, Inc., a company owned by Philip Kives who is the Chairman of
the Company and owns approximately 66% of the Company's outstanding
shares. Pursuant to the terms of the sale transaction and the related
transaction, any party had the right to terminate if closing did not
occur by November 30, 1995. Subsequent to that date, the parties
continued their efforts to complete the transactions. However, on
January 11, 1996, the Company received written notice from K-5 Leisure
Products that it terminated the related transaction and therefore, the
sale transaction was also terminated.
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 December 31, 1995
------------------------------------------------------------------------
North America Europe Total
------------------- -------------------- ---------------------
Net Sales $ 11,621 100% $ 7,171 100% $ 18,792 100%
Costs and expenses
Cost of goods sold 6,861 59% 3,459 48% 10,320 55%
Advertising 1,611 14% 1,502 21% 3,113 17%
Selling, general &
administrative 2,900 25% 1,890 26% 4,790 25%
---------- ------- ---------- ------- ---------- --------
Operating Income $ 249 2% $ 320 5% $ 569 3%
========== ======= ========== ======= ========== ========
(TABLE CONTINUED)
Quarter Ended December 31, 1994
------------------------------------------------------------------------
North America Europe Total
------------------------------------------------------------------------
$ 10,053 100% $ 9,666 100% $ 19,719 100%
6,258 62% 4,437 46% 10,695 54%
1,144 11% 2,446 25% 3,590 18%
2,290 23% 2,512 26% 4,802 25%
---------- -------- ---------- -------- ---------- --------
$ 361 4% $ 271 3% $ 632 3%
========== ======== ========== ======== ========== ========
In addition to the operating amounts above the quarter ended December 31, 1995,
the parent holding company recorded $348,000 in expenses. For the quarter ended
December 31, 1994 the parent holding company recorded $337,000 in expenses. The
increase in costs was mainly due to increased legal and professional fees
associated with the proposed sale of the consumer entertainment business. (see
Note 3 to consolidated financial statements)
K-TEL INTERNATIONAL, INC.
RESULTS OF OPERATIONS BY GEOGRAPHIC REGION
(IN 000'S)
Six Months Ended December 31, 1995
------------------------------------------------------------------------
North America Europe Total
------------------- -------------------- ---------------------
Net Sales $ 23,247 100% $ 12,169 100% $ 35,416 100%
Costs and expenses
Cost of goods sold 12,946 55% 5,886 48% 18,832 53%
Advertising 3,411 15% 2,437 20% 5,848 17%
Selling, general &
administrative 5,807 25% 3,537 29% 9,344 26%
---------- ------- ---------- ------- ---------- --------
Operating Income (Loss) $ 1,083 5% $ 309 3% $ 1,392 4%
========== ======= ========== ======= ========== ========
(TABLE CONTINUED)
Six Months Ended December 31, 1994
------------------------------------------------------------------------
North America Europe Total
------------------------------------------------------------------------
$ 17,094 100% $ 16,386 100% $ 33,480 100%
10,275 60% 7,447 46% 17,722 53%
1,494 9% 4,415 27% 5,909 17%
4,133 24% 4,827 29% 8,960 27%
---------- -------- ---------- -------- ---------- --------
$ 1,192 7% $ (303) (2)% $ 889 3%
========== ======== ========== ======== ========== ========
In addition to the operating amounts above for the six months ended December 31,
1995, the parent holding company recorded $783,000 in expenses. For the six
months ended December 31, 1994 the parent holding company recorded $542,000 in
expenses. The increase in costs was mainly due to increased legal and
professional fees associated with the proposed sale of the consumer
entertainment business. (see Note 3 to consolidated financial statements)
A. Results of Operations
For the six months ended December 31, 1995 consolidated net sales were
$35,416,000 with operating income of $609,000 and net income of
$223,000 or $.06 per share. Consolidated net sales for the same period
last year were $33,480,000 with operating income of $347,000 and net
income of $143,000 or $.04 per share.
For the quarter ended December 31, 1995 consolidated net sales were
$18,792,000 with operating income of $221,000 and net loss of $82,000
or $.02 per share. For the same period last year, sales were
$19,719,000 with operating income of $295,000 and net income of $77,000
or $.02 per share.
Consolidated net sales increased $1,936,000 or 6% for the six months
ended December 31, 1995 over the previous year comparable period. North
American net sales were up 36% over the prior year comparable period
due primarily to U.S. music sales success in most of its widely diverse
and expanding product offerings covering nearly all genres of music, as
well as a currently successful direct response television music
infomercial. European sales were down from the prior year comparable
period due mainly to the closure of the Spanish entity at the end of
fiscal 1995. The North American sales increase more than offset the
European sales decrease for the six month period.
Consolidated net sales decreased $927,000 for the quarter ended
December 31, 1995 from the previous year comparable period. North
American sales increased and European sales decreased over the prior
year comparable period for the same reasons as described above. However
for the quarter ended December 31, 1995, the European sales decrease
more than offset the North American sales increase.
Cost of goods sold for the six months ended December 31, 1995 were 53%
of sales compared to 53% for the same period last year, and increased
to 55% for the quarter ended December 31, 1995 compared to 54% for the
previous year comparable period. For the six months and quarter ended
December 31, 1995, North American cost of goods sold, as a percentage
of sales, were less than the prior year comparable periods due mainly
to a successful music television direct response infomercial. Direct
response sales typically carry higher gross margins before advertising
than normal retail sales. European cost of goods sold for the six
months and quarter ended December 31, 1995 increased over prior year
due mainly to a change in business in the United Kingdom, to mostly
lower margin budget music product from a combination of music and
consumer convenience product in the prior year.
Consolidated advertising costs as a percent of sales were 17% for the
six months and quarter ended December 31, 1995. North American
advertising costs as a percent of sales for the six months and quarter
ended December 31, 1995 were greater than the previous year due mainly
to a successful direct response television music infomercial in the
current year (direct response television sales require higher levels of
advertising than retail sales) and a first quarter Canadian television
promotion supporting certain new music product releases. European
advertising costs as a percentage of sales for the six months and
quarter ended December 31, 1995 were less than the previous year due
primarily to the closure of the Spanish entity at the end of fiscal
1995. The Spanish entity sales were mainly direct response television
sales which require higher levels of advertising than retail sales.
Also contributing to the reduction in European advertising costs was
Germany which has had more success in direct response television
promotions in the current year than in the previous year.
Selling, general and administrative expenses for the six month period
ended December 31, 1995 were $10,127,000 or 29% of sales compared to
$9,502,000 or 28% of sales in the prior year comparable period. For the
quarter ended December 31, 1995, selling, general and administrative
expenses were $5,138,000 or 27% of sales compared to $5,139,000 or 26%
of sales in the prior year comparable period. North American selling,
general and administrative expenses were up $1,674,000 and $611,000 for
the six months and quarter ended December 31, 1995, respectively, in
support of sales growth. European selling, general and administrative
expenses were down $1,290,000 and $622,000 for the six months and
quarter ended December 31, 1995, respectively, due mainly to the
closure of the Spanish entity and the restructuring of the German
entity in the fourth quarter ended June 30, 1995. Also contributing to
the current year increase in selling, general and administrative
expenses from the previous year were increased parent holding company
legal and professional expenses associated with the proposed sale of
the consumer entertainment businesses (see Note 3 to the consolidated
financial statements).
Operating income increased to $609,000, for the six months ended
December 31, 1995, from $347,000 for the same period last year.
Operating income decreased to $221,000 from $295,000 for the quarter
ended December 31, 1995 as compared to the same period last year. For
the six months and quarter ended December 31, 1995, North American
operating income is down slightly from the prior year comparable
periods mainly due to selling, general and administrative expense
increases in support of sales growth. European operating income
increased for the six months and quarter ended December 31, 1995 from
the previous year comparable periods due mainly to restructuring of the
German operation and closedown of the Spanish subsidiary in the fourth
quarter ended June 30, 1995 resulting in significant operating
improvement in the current year. Consolidated operating income was also
impacted in the current year by increased parent holding company legal
and professional expenses associated with the proposed sale of the
consumer entertainment businesses (see Note 3 to the consolidated
financial statements).
The Company provided restructuring/closedown charges of $652,000 in
1995 relating to the Company's restructuring/closedown of its Spanish
and German operations. The restructuring/closedown was nearly completed
in the first two quarters of fiscal 1996 and the accrued charge should
accurately reflect the actual costs incurred to complete the
restructuring/closedown.
During the six month period ended December 31, 1995, the Company
experienced a foreign currency transaction loss of $1,000 compared to a
gain of $15,000 experienced in the comparable period in the prior year.
For the quarter ended December 31, 1995, the Company experienced a
foreign currency translation loss of $11,000 compared to a previous
year second quarter loss of $61,000. 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. 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 the
underlying liabilities are settled.
The provision for income taxes was $268,000 and $144,000 for the six
months and quarter ended December 31, 1995, respectively, compared to
$236,000 and $161,000 for the comparable periods last year. 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 six month period ended December 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 six months ended December 31, 1995, cash and cash
equivalents decreased approximately $237,000 to $1,917,000. The overall
decrease in cash was primarily due to net increases in nearly all
current operating items which continued to be driven by sales growth
continuing through the second quarter of fiscal 1996. The related
collections and payments are expected to occur in the third and fourth
quarter of this fiscal year. Part of the cash decrease was offset by
proceeds received under the Company's working capital line of credit.
During the first six months of fiscal 1996 the Company purchased
approximately $711,000 of consumer convenience product from K-tel
International Ltd., a company owned by Mr. Philip Kives, the Chairman
of the Board. The Company owed approximately $381,000 to K-tel
International Ltd. at December 31, 1995. Also, K-tel International Ltd.
purchased approximately $132,000 from the Company during the first six
months ended December 31, 1995 and owed the Company $358,000 at
December 31, 1995. Outstanding balances are settled on a timely basis.
No interest will be charged on the related outstanding balances during
fiscal 1995.
Three of the Company's United States subsidiaries, K-tel International
(USA), Inc., Dominion Entertainment, Inc. and K-tel, Inc. (the
"Subsidiaries") have revolving credit agreements maturing November 30,
1996. The agreements provide for an asset based line of credit not to
exceed $5,500,000 in total, with availability based on a monthly
borrowing base derived from the Subsidiaries' accounts receivable and
inventory. Borrowings are collateralized by the assets of the
Subsidiaries, including accounts receivable, inventories, equipment and
Dominion Entertainment, Inc.'s owned music master recordings. The
Company has also guaranteed all borrowings of the Subsidiaries. The
amounts outstanding under these lines of credit were $4,759,000 at
December 31, 1995. The Subsidiaries are required to maintain minimum
levels of tangible net worth and certain other financial ratios. As of
December 31, 1995 the Subsidiaries were in compliance or have obtained
waivers for these covenants.
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 a company owned by Mr. Kives, the Chairman of
the Board of Directors of the Company. 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 which have mainly
been by way of giving the Company open ended payment terms on product
purchased from his affiliate companies. On December 31, 1995, the
Company renewed its lines of credit with TCF through November 30, 1996.
On July 24, 1995, the Board of Directors of the Company approved the
sale of its consumer entertainment business to a corporation controlled
by the Company's President and Chief Executive Officer (the Purchaser).
The Company proposed to sell its consumer entertainment business to the
Purchaser by selling to the Purchaser three domestic subsidiaries and
ten foreign subsidiaries (the "Entertainment Subsidiaries") which own
the master recording catalog rights to music recordings and through
which the Company operates its consumer entertainment products business
at a purchase price of $25,000,000. The transaction was subject to
shareholder approval, Purchaser obtaining financing and the closing of
a related transaction among K-5 Leisure Products, Inc., a company owned
by Philip Kives who is the Chairman of the Company and owns
approximately 66% of the Company's outstanding shares. Pursuant to the
terms of the sale transaction and the related transaction, any party
had the right to terminate if closing did not occur by November 30,
1995. Subsequent to that date, the parties continued their efforts to
complete the transactions. However, on January 11, 1996, the Company
received written notice from K-5 Leisure Products that it terminated
the related transaction and therefore, the sale transaction was also
terminated.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
10.36 Fourth Amendment to Revolving Credit
Agreement - K-tel USA and Dominion attached to this report as Exhibit 10.36
10.37 Third Amendment of Revolving Credit
Agreement - K-tel, Inc. attached to this report as Exhibit 10.37
10.38 Fifth Amendment to Revolving Credit
Agreement - K-tel USA and Dominion attached to this report as Exhibit 10.38
10.39 Fourth Amendment to Revolving Credit
Agreement - K-tel, Inc. attached to this report as Exhibit 10.39
11 Statement Regarding Computation of Earnings Per Share
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
December 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/ PHILIP KIVES
PHILIP KIVES
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/S/ MICKEY ELFENBEIN
MICKEY ELFENBEIN
PRESIDENT
/S/ MARK DIXON
MARK DIXON
CHIEF FINANCIAL OFFICER
(principal accounting officer)