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, 1997 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 May 7, 1997 there were outstanding 3,769,934 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 March 31, 1997
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
- Three and nine month periods ended March 31, 1997 and 1996 3
Consolidated Balance Sheets
- March 31, 1997 and June 30, 1996 4
Consolidated Statements of Cash Flows
- Nine month periods ended March 31, 1997 and 1996 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 Nine Months Ended
March 31, March 31,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
NET SALES $ 18,477 $ 18,422 $ 51,230 $ 53,838
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold 9,612 8,683 25,520 27,515
Advertising 2,816 3,628 8,534 9,476
Selling, general & administrative 5,411 5,456 13,772 15,583
-------- -------- -------- --------
Total Costs and Expenses 17,839 17,767 47,826 52,574
-------- -------- -------- --------
OPERATING INCOME 638 655 3,404 1,264
-------- -------- -------- --------
NON-OPERATING INCOME (EXPENSE):
Interest income 35 34 65 109
Interest expense (5) (108) (26) (300)
Foreign currency transaction gain (loss) (176) (33) (125) (34)
-------- -------- -------- --------
Total Non-operating Income (Expense) (146) (107) (86) (225)
-------- -------- -------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES 492 548 3,318 1,039
PROVISION (BENEFIT) FOR INCOME TAXES (18) 92 204 360
-------- -------- -------- --------
NET INCOME $ 510 $ 456 $ 3,114 $ 679
======== ======== ======== ========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .13 $ .12 $ .80 $ .18
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 4,075 3,796 3,895 3,804
======== ======== ======== ========
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND JUNE 30, 1996
(IN THOUSANDS)
March 31, June 30,
1997 1996
-------- --------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,535 $ 3,255
Accounts receivable, net 14,436 15,028
Inventories 5,714 5,808
Royalty advances 1,358 1,188
Prepaid expenses 1,368 645
Income tax refund receivable 18 89
-------- --------
Total Current Assets $ 27,429 26,013
-------- --------
Property and Equipment 3,121 2,759
Less-Accumulated depreciation and amortization (2,123) (1,966)
-------- --------
Property and Equipment, net 998 793
Other Assets 1,121 989
-------- --------
$ 29,548 $ 27,795
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Line of credit $ -- $ 1,864
Note payable to affiliate 1,000 --
Accounts payable 3,251 4,112
Accrued royalties 11,507 10,866
Reserve for returns 5,356 6,817
Other current liabilities 3,792 2,328
Income taxes payable 87 244
-------- --------
Total Current Liabilities $ 24,993 $ 26,231
-------- --------
Common Stock 37 37
Contributed capital 7,947 7,870
Accumulated deficit (2,551) (5,666)
Cumulative translation adjustment (878) (677)
-------- --------
Total Shareholders' Investment 4,555 1,564
-------- --------
$ 29,548 $ 27,795
======== ========
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
March 31,
1997 1996
------- -------
Cash Flows From Operating Activities:
Net income $ 3,114 $ 679
Adjustments to reconcile net income to cash provided by
(used for) operating activities:
Depreciation and amortization 465 714
Changes in current operating items:
Restricted Cash --- 535
Accounts receivable 496 (4,267)
Inventories (10) (215)
Royalty advances (160) 356
Prepaid expenses and other (725) 658
Current liabilities (193) 1,386
------- -------
Cash provided by (used for) operating activities 2,987 (154)
------- -------
Cash flows from investing activities:
Property and equipment purchases (540) (197)
Proceeds from sale of property and equipment 30 27
Music catalog additions (188) (651)
Other (104) (43)
------- -------
Cash used for investing activities (802) (864)
------- -------
Cash flows from financing activities:
Repayments on line of credit (1,864) 1,480
Proceeds from note payable to Affiliate 1,000 ---
Proceeds from exercise of stock options 78 38
------- -------
Cash provided by (used for) financing activities (786) 1,518
Effect of exchange rates on cash (119) (37)
------- -------
Net increase (decrease) in cash and cash equivalents 1,280 463
Cash and cash equivalents at beginning of year 3,255 2,154
------- -------
Cash and cash equivalents at period end $ 4,535 $ 2,617
======= =======
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 nine month period ended March 31,
1997 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. LAWSUIT SETTLEMENT
In 1993, Dominion Entertainment, Inc. and K-tel Entertainment (U.K.),
Ltd. filed a lawsuit against a United Kingdom entertainment company
regarding infringement on a number of the Company's owned music master
copyrights. During December, 1996, the Company settled the lawsuit for
$950,000, consisting of a reimbursement of legal costs which produced
an $850,000 net income benefit to the company and is recorded as a
reduction of selling, general and administrative expenses in the
accompanying statement of operations for the period ended March 31,
1997. The Company also entered into a license agreement with the United
Kingdom company which included an advance of future royalties of
approximately $650,000 which has been recorded as a liability for
deferred income on the accompanying balance sheet as of March 31, 1997.
3. 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.
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share", which requires the disclosure of basic earnings
per share and diluted earnings per share. The Company expects to adopt
SFAS 128 in fiscal 1998 and anticipates it will not have a material
impact on previously reported earnings per share.
4. SALE OF MUSIC BUSINESS
On March 1, 1997 the Board of Directors of the Company approved the
sale of the Company's worldwide music business, except for the
Company's music business in Europe and direct response (including
retail sales) business, to Platinum Entertainment, Inc. for
$35,000,000, subject to certain adjustments. The transaction is subject
to shareholder approval and other conditions. If the closing conditions
are not satisfied by August 30, 1997, either party may terminate this
agreement. There can be no assurance that the sale will be consummated.
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, 1997 Quarter Ended March 31, 1996
------------------------------------------------ --------------------------------------------------
North America Europe Total North America Europe Total
-------------- -------------- -------------- ------------- --------------- --------------
Net Sales $11,857 100% $ 6,620 100% $18,477 100% $12,973 100% $ 5,449 100% $18,422 100%
Costs and expenses
Cost of goods sold 6,796 57% 2,816 43% 9,612 52% 6,339 49% 2,344 43% 8,683 47%
Advertising 1,427 12% 1,389 21% 2,816 15% 2,338 18% 1,290 24% 3,628 20%
Selling, general &
administrative 3,160 27% 1,787 27% 4,947 27% 3,025 23% 1,893 35% 4,918 27%
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Operating Income (Loss) $ 474 4% $ 628 9% $ 1,102 6% $ 1,271 10% $ (78) (2)% $ 1,193 6%
======= === ======= === ======= === ======= === ======= === ======= ===
In addition to the operating amounts above for the quarter ended March 31, 1997,
the parent holding company recorded $464,000 in expenses. For the quarter ended
March 31, 1996 the parent holding company recorded $538,000 in expenses.
K-TEL INTERNATIONAL, INC.
RESULTS OF OPERATIONS BY GEOGRAPHIC REGION
(IN 000'S)
Nine Months Ended March 31, 1997 Nine Months Ended March 31, 1996
------------------------------------------------ ------------------------------------------------
North America Europe Total North America Europe Total
-------------- -------------- -------------- ------------- --------------- --------------
Net Sales $30,484 100% $20,746 100% $51,230 100% $36,220 100% $17,618 100% $53,838 100%
Costs and expenses
Cost of goods sold 16,177 53% 9,343 45% 25,520 50% 19,285 53% 8,230 47% 27,515 51%
Advertising 4,270 14% 4,264 21% 8,534 17% 5,749 16% 3,727 21% 9,476 18%
Selling, general &
administrative 7,194 24% 5,402 26% 12,596 24% 8,832 24% 5,430 31% 14,262 26%
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Operating Income (Loss) $ 2,843 9% $ 1,737 8% $ 4,580 9% $ 2,354 7% $ 231 1% $ 2,585 5%
======= === ======= === ======= === ======= === ======= === ======= ===
In addition to the operating amounts above for the nine months ended March 31,
1997, the parent holding company recorded $1,176,000 in expenses. For the nine
months ended March 31, 1996 the parent holding company recorded $1,321,000 in
expenses.
For the nine months ended March 31, 1997 consolidated net sales were
$51,230,000 with operating income of $3,404,000 and net income of
$3,114,000 or $.80 per share. Consolidated net sales for the same
period last year were $53,838,000 with operating income of $1,264,000
and net income of $679,000 or $.18 per share.
For the quarter ended March 31, 1997 consolidated net sales were
$18,477,000 with operating income of $638,000 and net income of
$510,000 or $.13 per share. For the same period last year, sales were
$18,422,000 with operating income of $655,000 and net income of
$456,000 or $.12 per share.
Consolidated net sales decreased $2,608,000 or 5% for the nine months
ended March 31, 1997 from the previous year comparable period. North
American net sales were down 16% from the prior year comparable period
due primarily to prior year fourth quarter divestitures of unprofitable
businesses/divisions, lower U.S. consumer convenience product retail
sales resulting from less new product promotions and lower U.S. direct
response television sales resulting from fewer promotions. These North
American sales decreases were partially offset by a European 18% sales
increase resulting from stronger German and United Kingdom sales in the
current period. Foreign currency conditions were less favorable than in
the comparable prior year period and caused sales to be $967,000 lower
for the nine months ended March 31, 1997, than they would have been had
exchange rates remained consistent with the prior year.
Consolidated net sales increased $55,000 for the quarter ended March
31, 1997 from the previous year comparable period. North American sales
decreased and European sales increased over the prior year comparable
period for the same reasons as described above.
Cost of goods sold for the nine months ended March 31, 1997 were 50% of
sales compared to 51% for the same period last year. North American
cost of goods sold, as a percentage of sales, were approximately the
same for the prior year comparable period. European cost of goods sold
as a percentage of net sales decreased slightly from the prior year
comparable period due mainly to overall higher music and consumer
product margins resulting from a stronger margin product mix in the
current period.
Cost of goods sold as a percent of sales for the quarter ended March
31, 1997 were 52% compared to 47% for the previous year comparable
period. North American cost of goods sold were 57% of sales compared to
49% of sales in the prior year comparable period due mainly to an
overall higher cost product mix for it's music products. European cost
of goods sold as a percent of sales for the quarter ended March 31,
1997 were approximately the same for the prior year comparable period.
Consolidated advertising costs as a percent of sales were 17% for the
nine months ended March 31, 1997 as compared to 18% in the prior year
comparable period. North American advertising costs as a percent of net
sales were 14% compared to 16% for the comparable nine month period in
the prior year due to higher prior year levels of direct response
television advertising in the U.S.. Direct response sales typically
carry higher gross margins to cover higher advertising requirements
than normal retail sales. European advertising costs as a percent of
sales for the nine month period ended March 31, 1997 were approximately
the same for the prior year period.
Consolidated advertising costs as a percent of sales were 15% for the
quarter ended March 31, 1997 compared to 20% in the prior year period.
North American advertising costs as a percent of net sales were 12%
compared to 18% in the prior year comparable period due to fewer direct
response television promotions. European advertising cost as percent of
sales were 21% compared to 24% in the prior year due to less promotions
in the Finland and the United Kingdom subsidiaries.
Selling, general and administrative expenses for the nine month period
ended March 31, 1997 were $13,772,000 or 27% of net sales compared to
$15,583,000 or 29% of net sales in the prior year comparable period.
North American selling, general and administrative expenses were down
$1,638,000 for the nine months ended March 31, 1997 due to the second
quarter settlement of a long outstanding legal dispute with a United
Kingdom entertainment company regarding infringement of a number of the
Company's owned music master recordings. The settlement resulted in a
second quarter net benefit (recovery of legal expenses) to the Company
of $850,000 (See Note 2). European selling, general and administrative
expenses for the nine months ended March 31, 1997 were lower as a
percent of sales compared to the prior year due mainly to better
overall European sales performance in the current fiscal year.
For the quarter ended March 31, 1997, selling, general and
administrative expenses were $5,411,000 or 29% of net sales compared to
$5,456,000 or 30% of net sales in the prior year comparable period.
North American selling, general and administrative expenses increased
for the three months ended March 31, 1997 due mainly to the start-up of
a new video division and a television infomercial/media buying
subsidiary. These increased selling, general and administrative
expenses were partially off-set by the divestitures of small under
performing businesses at the end of the previous fiscal year and less
new consumer convenience product promotions and related overhead.
European selling, general and administrative expenses were lower as a
percent of sales for the quarter ended March 31, 1997, compared to the
prior year comparable period, due mainly to better overall European
sales performance in the current period.
Operating income increased to $3,404,000 for the nine months ended
March 31, 1997, from operating income of $1,264,000 for the same period
last year. North American operating income was $2,843,000 compared to
$2,354,000 for the prior year comparable period. The increase for the
nine months ended March 31, 1997, was due mainly to the positive profit
impact from the above mentioned settlement with a U.K. entertainment
company regarding infringement of a number of the Company's owned music
master recordings. European operating income was $1,737,000 compared to
$231,000 for the prior year comparable period due mainly to current
year profit in the Company's German operation and current profit from
the Company's United Kingdom operation compared to a prior year
comparable period loss as a result of restructuring those operations.
Operating income decreased to $638,000 for the quarter ended March 31,
1997 from operating income of $655,000 for the same period last year.
North American operating income was $474,000 compared to $1,271,000 in
the prior year comparable period. The decrease in operating income for
the quarter ended March 31, 1997 was due mainly to the increased
selling, general and administrative expense related to the
aforementioned new video and infomercial/media buying businesses and to
less consumer product promotions in the current period as compared to
the previous year comparable period (in which a successful and
profitable new product promotion was marketed). European operating
income was $628,000 compared to a loss of $78,000 for the prior year
comparable period due mainly to stronger current period profit from the
Company's German and United Kingdom operations as mentioned above.
Interest expense decreased to $26,000 for the nine month and $5,000 for
the three month periods ended March 31, 1997 as compared to $300,000
and $108,000 for the prior year comparable periods. The decrease in
interest expense is due to the reduced usage of the Company's asset
based line of credit in the current fiscal year.
During the nine month period ended March 31, 1997, the Company
experienced a foreign currency transaction loss of $125,000 compared to
a loss of $34,000 experienced in the comparable period in the prior
year. For the quarter ended March 31, 1997, the Company experienced a
foreign currency translation loss of $176,000 compared to the prior
year third quarter loss of $33,000. 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 $204,000 and a benefit of $18,000
for the nine months and quarter ended March 31, 1997, respectively,
compared to an income tax provision in the prior year comparable
periods of $360,000 and $92,000 . 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, 1997 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, 1997, cash and cash equivalents
increased approximately $1,280,000 to $4,535,000. The overall increase
in cash was due mainly to net income for the period and the proceeds
from a loan from an affiliate owned and operated by the Chairman of the
Board (as discussed below). Offsetting some of this cash increase were
increases in prepaid expenses driven mainly by the purchase of video
production rights for the Company's new U.S. video division, by
purchases of property and equipment (mainly fixed asset increases of
information systems in support of old and new businesses) and repayment
of the line of credit.
During the first nine months of fiscal 1997 the Company purchased
approximately $361,000 of consumer convenience product from K-tel
International Ltd., a company owned and operated in Canada by Mr.
Philip Kives, the Chairman of the Board. The Company owed approximately
$32,000 to K-tel International Ltd. at March 31, 1997. Also, K-tel
International Ltd. purchased approximately $202,000 from the Company
during the first nine months ended March 31, 1997 and owed the Company
$88,000 at March 31, 1997. No interest will be charged on the related
outstanding balances during fiscal 1997. During March 1997, the
affiliate controlled by the Chairman of the Board provided $1,000,000
in short-term working capital financing to the Company to fund the
Company's U.S. operations. The Company pays interest on the unpaid
principal amount of financing, at the same rate as the Company pays on
it's revolving credit agreement, until repayment of the loan which is
due on demand.
The Company's United States subsidiaries, K-tel International (USA),
Inc., Dominion Entertainment, Inc., K-tel Productions, Inc., K-tel
Video, Inc., K-tel Direct, Inc., K-tel TV, Inc., and K-tel Consumer
Products, Inc. (the "Subsidiaries") have a revolving credit agreement
maturing July 31, 1997. The agreement provides for an asset based line
of credit not to exceed $1,000,000 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. There was no amount outstanding under the line of credit
at March 31, 1997. The Subsidiaries are required to maintain minimum
levels of tangible net worth and certain other financial ratios. As of
March 31, 1997 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 line 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 the Company 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
10.46 Restated Revolving Credit Agreement -
K-tel USA and Dominion attached to this report as Exhibit 10.46
10.47 Non-Qualified Stock Option Agreement - Philip Kives attached to this report as Exhibit 10.47
11 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule (SEC use)
(b) REPORTS ON FORM 8-K
On March 12, 1997 the Company filed a Form 8-K, with the Securities and Exchange
Commission regarding the March 1, 1997 Board of Directors approval of the sale
of the Company's K-tel International (USA), Inc. and Dominion Entertainment,
Inc. businesses. The information required under this item is incorporated herein
by reference to the Form 8-K.
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)