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 September 30, 1996 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 CORPORATE ISSUERS:
At November 7, 1996 there were outstanding 3,764,072 shares of common stock,
$.01 par value per share, of K-tel International, Inc.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the quarter ended September 30, 1996
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
- Three month periods ended September 30, 1996 and 1995 3
Consolidated Balance Sheets
- September 30, 1996 and June 30, 1996 4
Consolidated Statements of Cash Flows
- Three month periods ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBITS
Exhibit 10.43: Seventh Amendment to Revolving Credit Agreement - K-tel
International (USA), Inc. and Dominion Entertainment, Inc. -
attached to this report as Exhibit 10.43
Exhibit 10.44: Employment Agreement - David Weiner - attached to this report
as Exhibit 10.44
Exhibit 10.45: Non-Qualified Stock Option Agreement - David Weiner - attached
to this report as Exhibit 10.45
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
(IN THOUSANDS - EXCEPT PER SHARE DATA)
Three Months Ended
September 30,
1996 1995
-------- --------
NET SALES $ 15,622 $ 16,624
-------- --------
COSTS AND EXPENSES:
Cost of goods sold $ 7,478 $ 8,512
Advertising $ 2,784 $ 2,735
Selling, general & administrative $ 4,391 $ 4,989
-------- --------
Total Costs and Expenses 14,653 16,236
-------- --------
OPERATING INCOME 969 388
-------- --------
NON-OPERATING INCOME (EXPENSE):
Interest income 17 106
Interest expense (18) (75)
Foreign currency transaction gain (loss) (19) 10
-------- --------
Total Non-operating Income (Expense) (20) 41
-------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES 949 429
PROVISION FOR INCOME TAXES (97) (124)
-------- --------
NET INCOME $ 852 $ 305
======== ========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .22 $ .08
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 3,804 3,803
======== ========
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND JUNE 30, 1996
(IN THOUSANDS)
September 30, June 30,
1996 1996
-------- --------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,036 $ 3,255
Accounts receivable, net 16,258 15,028
Inventories 6,387 5,808
Royalty advances 1,191 1,188
Prepaid expenses 1,356 645
Income tax refund receivable 20 89
-------- --------
Total Current Assets $ 27,248 $ 26,013
-------- --------
Property and Equipment 2,697 2,759
Less-Accumulated depreciation and amortization (1,927) (1,966)
-------- --------
Property and Equipment, net 770 793
Other Assets 1,040 989
-------- --------
$ 29,058 $ 27,795
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Line of credit $ 43 $ 1,864
Accounts payable 4,419 4,112
Accrued royalties 11,118 10,866
Reserve for returns 8,021 6,817
Other current liabilities 2,782 2,328
Income taxes payable 259 244
-------- --------
Total Current Liabilities $ 26,642 $ 26,231
-------- --------
Preferred Stock -- --
Common stock 37 37
Contributed capital 7,872 7,870
Accumulated deficit (4,814) (5,666)
Cumulative translation adjustment (679) (677)
-------- --------
Total Shareholders' Investment 2,416 1,564
-------- --------
$ 29,058 $ 27,795
======== ========
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS)
September 30,
1996 1995
------- -------
Cash Flows From Operating Activities:
Net income $ 852 $ 305
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 114 491
Changes in current operating items:
Restricted Cash -- (194)
Accounts receivable (1,215) (2,464)
Inventories (571) (545)
Royalty advances 1 (207)
Prepaid expenses and other (711) 378
Current liabilities 2,265 1,121
------- -------
Cash used for operating activities 735 (1,115)
------- -------
Cash flows from investing activities:
Property and equipment purchases (79) (163)
Proceeds from sale of property and equipment 41 56
Music catalog additions (91) (493)
Other (9) (15)
------- -------
Cash used for investing activities (138) (615)
------- -------
Cash flows from financing activities:
Proceeds (Repayment) line of credit, net (1,821) 1,321
Proceeds from exercise of stock options 2 21
------- -------
Cash provided by financing activities (1,819) 1,342
Effect of exchange rates on cash and cash equivalents 3 (2)
------- -------
Net decrease in cash and cash equivalents (1,219) (400)
Cash and cash equivalents at beginning of year 3,255 2,154
------- -------
Cash and cash equivalents at period end $ 2,036 $ 1,754
======= =======
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 three month period ended September
30, 1996 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, 1996.
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.
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 September 30, 1996
--------------------------------------------------------------------------
North America Europe Total
--------------------- --------------------- ---------------------
Net Sales $ 9,648 100% $ 5,974 100% $ 15,622 100%
Costs and expenses
Cost of goods sold 4,801 50% 2,677 45% 7,478 48%
Advertising 1,588 16% 1,196 20% 2,784 18%
Selling, general & administrative 2,387 25% 1,800 30% 4,187 27%
---------- ------- ---------- ------- ---------- --------
Operating Income (Loss) $ 872 9% $ 301 5% $ 1,173 7%
========== ======= ========== ======= ========== ========
(WIDE TABLE CONTINUED FROM ABOVE)
Quarter Ended September 30, 1995
--------------------------------------------------------------------------
North America Europe Total
--------------------- --------------------- ---------------------
Net Sales $ 11,626 100% $ 4,998 100% $ 16,624 100%
Costs and expenses
Cost of goods sold 6,085 52% 2,427 48% 8,512 51%
Advertising 1,800 16% 935 19% 2,735 16%
Selling, general & administrative 2,907 25% 1,647 33% 4,554 27%
---------- -------- ---------- -------- ---------- --------
Operating Income (Loss) $ 834 7% $ (11) 0% $ 823 5%
========== ======== ========== ======== ========== ========
In addition to the operating amounts above for the quarter ended September 30,
1996, the parent holding company recorded $204,000 in expenses. For the quarter
ended September 30, 1995 the parent holding company recorded $435,000 in
expenses. The decrease in costs from the prior year comparable period was the
result of prior year legal and professional fees associated with the proposed
sale of the consumer entertainment business (which was terminated in January of
1996).
Consolidated net sales for the first quarter ended September 30, 1996,
were $15,622,000 with operating income of $969,000 and net income of
$852,000 or $.22 per share. Consolidated net sales for the same period
in the prior year were $16,624,000 with operating income of $388,000
and net income of $305,000 or $.08 per share.
Consolidated net sales decreased 1,002,000 or 5% for the three months
ended September 30, 1996 from the previous year comparable period.
North American sales were down 17% or $1,978,000 from the prior year
comparable period due to a $2,220,000 decrease in consumer convenience
product sales in the U.S. since there were less new North American
consumer convenience product releases in the current year which was
only partially offset by a $985,000 increase in consumer entertainment
product sales in the U.S.. European sales were up 23% or $976,000 from
the prior year comparable period due mainly to increased budget retail
music sales in the United Kingdom and increased direct response sales
in Germany due to more effective direct response promotions than in the
previous year. Foreign currency conditions were less favorable than in
the comparable prior year period and caused sales to be $188,000 lower
for the three months ended September 30, 1996 than they would have been
had exchange rates remained consistent with the prior year.
For the quarter ended September 30, 1996 cost of goods sold as a
percentage of net sales were 48% as compared to 51% in the prior year
comparable period. North American cost of goods sold were 50% compared
to 52% for the same period last year due mainly to overall higher music
margins driven mainly by a successful line of club dance music
releases. European cost of goods sold decreased from the prior year due
to higher margin direct response promotions than in the prior year.
Consolidated advertising costs as a percent of sales were 18% as
compared to 16% in the previous year comparable period. North American
advertising costs as a percent of sales were 16% compared to 15% in the
previous year. This increase was due to additional U.S. music retail
advertising in support of full price music releases. European
advertising cost as a percentage of sales were 20% compared to 19% in
the previous year. In all current European operations, advertising as a
percent of sales was comparable to prior year.
Selling, general and administrative expenses for the quarter ended
September 30, 1996 were $4,391,000 or 28% of net sales, as compared to
$4,989,000 or 30% of net sales in the previous year comparable period.
North American selling, general and administrative expenses were down
$520,000 from the previous year due mainly to overhead reductions.
European selling, general and administrative expenses were up $153,000
from the previous year due mainly to stronger German direct response
sales and associated variable selling expenses.
Operating income for the quarter ended September 30, 1996 increased to
$969,000 from $388,000 for the same period last year. North American
operating income was $872,000 compared to $834,000 for the prior year
comparable period, the increase was due to current year stronger retail
music sales. European operating income was $301,000 compared to a loss
of $11,000 in the prior year comparable period. The operating income
improvement was due mainly to the United Kingdom and Germany which had
operating income in the current year first quarter versus losses in the
previous year first quarter. The parent holding company had current
operating expenses of $204,000 compared to prior year operating
expenses of $435,000 which was mainly due to prior year legal and
professional fees associated with the proposed sale of the consumer
entertainment business (which was terminated in January 1996).
Interest expense for the quarter ended September 30, 1996 was $12,000
compared to $75,000 for the prior year comparable period. The decrease
in interest expense was due primarily to the reduced usage of the
Company's asset based line of credit.
During the quarter ended September 30, 1996, the Company experienced a
foreign currency transaction loss of $19,000 compared to a gain of
$10,000 experienced during the comparable period in the prior year. In
the first quarter of fiscal 1997, foreign exchange rate fluctuations
have been slightly less favorable to the Company than in the previous
year comparable period. Also, 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 its 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. The majority of the fiscal 1997 first quarter translation
gains were the result of these intercompany liabilities. Gains or
losses resulting from these intercompany liabilities remain unrealized
until such time as the underlying liabilities are settled.
The provision for income taxes for the quarter ended September 30, 1996
was $97,000 compared to a provision of $124,000 in the prior year
comparable period. 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 quarter ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year
as a whole.
B. Liquidity and Capital Resources
During the first quarter ended September 30, 1996, cash and cash
equivalents decreased approximately $1,219,000 to $2,036,000 due
primarily to the pay down of the Company's asset based line of credit.
This use of cash was partially offset by net income for the quarter
ended September 30, 1996.
Two of the Company's United States subsidiaries, K-tel International
(USA), Inc. and Dominion Entertainment, Inc. (the "Subsidiaries") have
a revolving credit agreement maturing November 30, 1996. The agreement
provides for an asset based line of credit not to exceed $5,000,000 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 amount outstanding under this line
of credit was $43,000 at September 30, 1996. The Subsidiaries are
required to maintain minimum levels of tangible net worth and certain
other financial ratios. As of September 30, 1996 the Subsidiaries were
in compliance or have obtained waivers for these covenants. The
revolving credit agreement expires November 30, 1996. The Company has
initiated discussions with the bank and believes that the line of
credit will be renewed.
During fiscal 1997 the Company plans a computer system upgrade of
approximately $500,000 which will be financed through leases over
multiple years.
During the first quarter of fiscal 1996, the Company purchased
approximately $243,000 of consumer convenience product from an
affiliate controlled by the Chairman of the Board. The Company owed
approximately $41,000 to the affiliate at September 30, 1996. The
Chairman's company purchased approximately $74,000 of products from the
Company during the first quarter ended September 30, 1996 and owed the
Company $25,000 at September 30, 1996. No interest will be charged on
the related outstanding balances during fiscal 1997.
Management considers its cash needs for the current fiscal year to be
adequately covered by its operations, borrowings under the bank line of
credit, assuming it is renewed November 30, 1996 when it expires, 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
10.43 Seventh Amendment to Revolving Credit
Agreement - K-tel USA and Dominion
attached to this report as Exhibit 10.43
10.44 Employment Agreement - David Weiner
attached to this report as Exhibit 10.44
10.45 Non-Qualified Stock Option Agreement - David Weiner
attached to this report as Exhibit 10.45
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
September 30, 1996.
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/ DAVID WEINER
DAVID WEINER
PRESIDENT
/S/ MARK DIXON
MARK DIXON
CHIEF FINANCIAL OFFICER
(principal accounting officer)