SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1997 Commission File Number 0-6664
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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 Identification No.)
incorporation or organization)
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock-par value $.01
---------------------------
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____
The aggregate market value of the voting stock held by non-affiliates of the
registrant (942,000 shares) at September 25, 1997 was $5,828,000 based on the
closing price of the stock as of that date on the NASDAQ National Market System.
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 to be filed by Section 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 June 30, 1997 there were 3,783,784 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Notice of Meeting of Shareholders and Proxy Statement
for the Annual Shareholders Meeting, which are expected to be filed with the
Security and Exchange Commission in the next 30 days, are incorporated into Part
III of this Form by amendment.
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy information statements
incorporated by reference in part III of this form 10-K on any amendment to this
Form 10-K [ ].
PART I
ITEM 1: BUSINESS
K-tel International, Inc., through its subsidiaries, is an international
marketing and distribution company for packaged consumer entertainment (music
and video) and consumer convenience (lower priced housewares, automotive
accessories, exercise devices, and other merchandise) products and is a leader
in the market niche for pre-recorded music compilations. With its more than
twenty-five years of marketing experience in the United States ("U.S."), Canada
and Europe, the Company has developed the resources, including knowledgeable
personnel, information systems, distribution capabilities and media buying
ability, to launch music, consumer convenience and video products quickly in the
North American and European market through both retail (direct to retailers or
through rackjobbers who are distributors which stock and manage inventory within
certain music and video departments for some retail stores) and direct response
(direct to consumer).
The Company was incorporated in 1968 with its current corporate offices located
at 2605 Fernbrook Lane North, Minneapolis, MN 55447-4736.
As used in this report, the terms "Registrant", "K-tel" and the "Company" refer
to K-tel International, Inc. and its Subsidiaries, unless the context otherwise
requires.
Development of Business
The Company's core business for many years has been the marketing and selling of
pre-recorded music, mainly in compilation format including various artists under
a similar theme. The Company's source for music is either its owned music master
catalog or songs licensed from third party record companies.
Videos with a special theme concept provide the Company with a product line
compatible with music and have been marketed and distributed throughout the
Company's foreign subsidiaries, mainly in the United Kingdom.
In the late 1980's, the Company initiated its marketing of pre-recorded music
into Germany through direct to consumer advertising, utilizing terrestrial
(local, within country) television stations. Shortly thereafter, the Company
expanded its direct response marketing in Europe through Pan European satellite
television which enabled the Company to market its products in various countries
and languages simultaneously. The Company is currently not actively involved in
Pan European satellite television marketing with the exception of occasional new
product tests.
In the early 1990's, the Company increased marketing consumer convenience
products in the U.S., United Kingdom ("U.K.") and Europe primarily by expanding
direct to consumer marketing. In fiscal 1997, consumer convenience product
represented approximately 25% of the Company's consolidated net sales, with most
of those sales resulting from U.S. consumer convenience product retail sales and
Germany direct response product sales. In fiscal 1995 and fiscal 1994, the
Company closed down unprofitable operations in New Zealand, France and Spain
which relied almost entirely on consumer convenience products. Also during this
period, the Company restructured unprofitable operations in the U.K. eliminating
most consumer convenience product marketing and sales.
Description of Current Business
During fiscal 1997, as in the past, the Company continued to market and sell
pre-recorded music both from the Company's owned music master catalog and under
licenses from third party record companies. Sales of albums, cassettes and
compact discs were made to rackjobbers, wholesalers and retailers in the U.S.
and through subsidiaries and licensees in the U.K. and Europe. The pre-recorded
music business is highly competitive and dominated by six major record
companies. The Company primarily operates in a niche market and is largely
dependent on its continued ability to utilize its owned music master catalog in
addition to obtaining licenses which enable the Company to create compilation
packages. The Company obtains master and mechanical rights ("Rights") through
licensing arrangements with many record companies and publishers. The Rights are
generally
limited to a specific use and require payment of royalties based on the number
of units sold. In most instances, advances against royalties are required in
order to obtain the Rights.
A small part of the Company's U.K. business is the marketing and sale of
sell-through video product. The Company licenses or buys this product from third
party video production companies. The Rights obtained to market video product
generally require payment of royalties based on the number of units sold. As in
the case with music, advances against royalties are often required in order to
obtain these video rights.
One of the Company's principal assets is its music master catalog consisting of
original recordings and re-recordings of music from the 1950s through current
times ("Master Recordings"). The Master Recordings, in addition to internal use,
are licensed to third parties world wide for either a flat fee or a royalty
based on the number of units sold.
Television direct response marketing of pre-recorded music and consumer
convenience product is a significant source of revenue for the Company,
specifically in Europe. The Company engages in direct response marketing
activities in Germany through terrestrial (local, within country) television
advertising campaigns. Product awareness created through direct response
advertising contributes to customer demand at the retail store level. In fiscal
1997 and 1996, the U.S. operation had certain significant direct response
marketing campaigns which produced revenues and profits from both the campaigns
themselves and from subsequent retail sales. One of the Company's primary goals
in its U.S. direct response campaigns is not only to generate revenues and
profits from such sales but also to generate subsequent retail demand, which is
expected help to enhance profitability. The U.S. operation intends to continue
developing direct response marketing in the upcoming fiscal years mainly in the
form of infomercials (typically 15 or 30 minute programs/commercials).
In the second half of fiscal 1997, the Company formed a new U.S. media buying
and infomercial marketing subsidiary. This company performs media buying
services for third parties for a fee and also markets products through
infomercials produced by third parties whereby K-tel provides media placement
and financial strength to third parties for a share in infomercial revenues and
profits. Marketing infomercials in this way minimizes the Company's up front
risk of product development and production.
Public awareness of the Company's products is created through television and
print advertising campaigns, in-store displays and eye-catching packaging.
The Company's products are manufactured by third party suppliers with components
supplied by independent vendors. Management believes that alternative sources of
supply are available for all of its product needs.
Sales of pre-recorded music products to Handleman Company represented 8%, 12%
and 11% of the Company's consolidated net sales for the years ended June 30,
1997, 1996 and 1995. Loss of business with the Handleman Company would have a
material adverse effect on the Company's operating results.
Most music product sales are made with the right of the Company's customer to
return unsold product for full credit. The Company does not carry extensive
inventories and returns are generally resold.
At June 30, 1997, the Company employed 195 full time people worldwide.
For financial information about the Company's foreign and domestic operations
for each of the last three fiscal years ended June 30, 1997, see Note 8 to the
consolidated financial statements.
INFORMATION CONTAINED IN THIS ITEM CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE," "ESTIMATE," OR
"CONTINUE," OR NEGATIVE VARIATIONS THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. MANY FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS, INCLUDING OVERALL
ECONOMIC CONDITIONS, CONSUMER PURCHASING, CUSTOMER ACCEPTANCE OF PRODUCTS,
MARKETING AND PROMOTION EFFORTS, FOREIGN CURRENCY VARIATIONS AND CHANGES IN
INTEREST RATES.
ITEM 2: PROPERTIES
K-tel's corporate offices and U.S. operations are located in leased facilities
in a suburb of Minneapolis, Minnesota, consisting of approximately 21,985 square
feet of office space and approximately 83,991 square feet of warehouse. In
September 1997, the Company's California operations relocated to a new leased
facility in Calabasas, California, which consists of approximately 6,758 square
feet of office space.
K-tel's foreign subsidiaries lease a total of 45,176 square feet of office and
warehouse facilities.
See Note 6 to the consolidated financial statements.
ITEM 3: LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its business.
Although the outcomes of any such legal actions cannot be predicted, in the
opinion of management there is no legal proceeding pending or asserted against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the consolidated financial position or results of operations
of the Company.
On March 3, 1997, the Company entered into the Purchase and Sale Agreement (the
"Sale Agreement") with Platinum Entertainment, Inc. ("Platinum"). Pursuant to
the Sale Agreement and subject to certain conditions, including Platinum's
receipt of sufficient financing to close the transaction under the Sale
Agreement, Platinum agreed to purchase two domestic subsidiaries of the Company
which operated its music business outside of Europe for $35 million subject to
certain adjustments. On March 3, 1997, the Company and Platinum also entered
into an earnest money escrow agreement (the "Escrow Agreement") with a third
party bank and Platinum deposited $1.75 million in escrow. The Sale Agreement
provided that the $1.75 million escrow deposit is paid to the Company in the
event the transaction contemplated by the Sale Agreement is not consummated,
subject to certain conditions.
Under the Sale Agreement, the Company had the right to terminate the Sale
Agreement if the sale was not consummated by August 30, 1997. On September 10,
1997, the Company's Board of Directors concluded that it would be in the best
interests of the Company to terminate the Sale Agreement and the Company gave
notice of termination to Platinum. On September 10, 1997, Platinum also gave the
Company notice of termination claiming that the Company was in breach of its
representations and covenants under the Sale Agreement. The Company disputes
these allegations by Platinum.
On September 12, 1997, the Company initiated legal action in Minnesota state
court seeking an order directing the escrow bank to disburse the funds held
under the Escrow Agreement to the Company. On October 2, 1997, the Company
amended its complaint to assert additional claims against Platinum, including
breaches by Platinum of its confidentiality covenant and employee
non-solicitation agreement as well as detrimental reliance damages. Platinum has
not yet answered the Company's complaint, but Platinum has removed the action to
federal court in Minnesota and initiated a declaratory judgment action in
Illinois federal court on October 3, 1997. In the Illinois action, Platinum
asserted that it terminated the Sale Agreement due to the Company's breach of
representations and covenants and claimed that Platinum is entitled to the
escrow funds and damages of $1.75 million from the Company. The Company intends
to vigorously pursue recovery of the escrow deposit and contest any claims which
Platinum may assert.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of fiscal 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the executive
officers of the Company at June 30, 1997.
Name of Officer Age Positions and Offices Held
- --------------- --- -------------------------------------------------
Philip Kives 68 Chairman of the Board and Chief Executive Officer
David Weiner 40 President and Secretary
Jeffrey Koblick 50 Senior Vice President, Purchasing and Operations
Mark Dixon 38 Vice President-Finance, Chief Financial Officer,
Treasurer
Business Experience
Messrs. Kives, Koblick, and Dixon have held various offices and/or managerial
positions with the Company for more than the past five years.
Mr. Weiner joined K-tel in December 1993 and held the position of Sr. Vice
President of Corporate Development and became President of K-tel International,
Inc. in September 1996. Prior to joining K-tel, Mr. Weiner held various
managerial positions within the firm of Deloite & Touche Management Consulting.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
On September 25, 1997 there were 1,701 record owners of the Company's common
stock and approximately 3,808,109 shares outstanding. The Company's common stock
trades on the NASDAQ National Market System under the symbol "KTEL".
The following table shows the range of high and low closing sales prices per
share of the Company's Common Stock as reported by the NASDAQ Stock Market for
the fiscal year periods indicated:
1996 1997
------------------- --------------------
High Low High Low
---- --- ---- ---
First Quarter 5 1/8 3 1/4 3 15/16 3 1/2
Second Quarter 5 3 1/2 7 5/8 3 1/2
Third Quarter 4 3/8 3 1/4 9 3/4 6 3/4
Fourth Quarter 4 1/8 3 1/4 8 1/4 7 1/2
No dividends have been declared on the Company's common stock during the past
two fiscal years and the Company does not expect to pay cash dividends in the
foreseeable future. Management plans to use cash generated from operations for
expansion of its business.
ITEM 6: SELECTED FINANCIAL DATA
The following summary of consolidated operations and certain balance sheet
information includes the consolidated results of operations of K-tel
International, Inc. and its subsidiaries as of and for the five years ended June
30, 1997. This summary should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this filing. All
share and per share amounts are based on the weighted average shares issued. All
amounts are in thousands of dollars, except per share data.
1997 1996 1995 1994 1993
----------- ---------- ---------- ------------ -------
Net Sales $ 75,501 $ 71,987 $ 65,917 $ 54,270 $55,714
=========== ========== ========== ============ =======
Operating Income (loss) $ 3,582 $ 4 $ (2,188) $ 223 $ 3,623
=========== ========== ========== ============ =======
Net Income (loss) $ 3,204 $ (745) $ (2,483) $ 376 $ 2,701
=========== ========== ========== ============ =======
Net Income (Loss) Per Common
and Common Equivalent Share $ .81 $ (.20) $ (.67) $ .10 $ .72
=========== ========== ========== ============ =======
Total Assets $ 30,492 $ 27,795 $ 28,637 $ 26,874 $21,922
=========== ========== ========== ============ =======
Long-Term Debt $ -- $ -- $ -- $ -- $ 2
=========== ========== ========== ============ =======
Cash Dividends Declared and Paid $ -- $ -- $ -- $ -- $ --
=========== ========== ========== ============ =======
ITEM 7: 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 dollar amount
and as a percentage of net sales. All amounts are in thousands of dollars.
Year Ended June 30, 1997 Year Ended June 30, 1996
------------------------------------------------ --------------------------------------------------
North America Europe Total North America Europe Total
-------------- -------------- -------------- -------------- ---------------- --------------
Net Sales $47,786 100% $27,715 100% $75,501 100% $48,605 100% $ 23,382 100% $71,987 100%
Costs and expenses
Cost of goods sold 28,985 61% 12,402 45% 41,387 55% 27,690 57% 10,975 47% 38,665 54%
Advertising 5,820 12% 5,700 21% 11,520 15% 7,495 15% 5,025 21% 12,520 17%
Selling, general &
administrative 10,309 21% 7,270 26% 17,579 23% 11,423 24% 7,420 32% 18,843 26%
------- --- ------- --- ------- --- ------- --- -------- --- ------- ---
Operating Income (Loss) $ 2,672 6% $ 2,343 8% $ 5,015 7% $ 1,997 4% $ (38) 0% $ 1,959 3%
======= === ======= === ======= === ======= === ======== === ======= ===
In addition to the operating amounts above for the year ended June 30, 1997, the
parent holding company incurred $1,433,000 in expenses. For the year ended June
30, 1996, the parent holding company incurred $1,955,000 in expenses.
Year Ended June 30, 1996 Year Ended June 30, 1995
-------------------------------------------------- -------------------------------------------------------
North America Europe Total North America Europe and Pacific Total
-------------- ---------------- -------------- -------------- ------------------ -----------------
Net Sales $48,605 100% $ 23,382 100% $71,987 100% $36,579 100% $ 29,338 100% $ 65,917 100%
Costs and expenses
Cost of goods sold 27,690 57% 10,975 47% 38,665 54% 22,053 61% 13,607 46% 35,660 54%
Advertising 7,495 15% 5,025 21% 12,520 17% 3,490 9% 8,111 28% 11,601 17%
Selling, general &
administrative 11,423 24% 7,420 32% 18,843 26% 9,233 25% 9,641 33% 18,874 29%
Restructuring/
closedown
charges -- -- -- -- -- -- -- -- 652 2% 652 1%
------- --- -------- --- ------- --- ------- --- -------- ---- -------- ----
Operating Income
(Loss) $ 1,997 4% $ (38) 0% $ 1,959 3% $ 1,803 5% $ (2,673) (9)% $ (870) (1)%
======= === ======== === ======= === ======= === ======== ==== ======== ====
In addition to the operating amounts above, the parent company incurred
$1,955,000 in expenses for the year ended June 30, 1996 and $1,318,000 for the
year ended June 30, 1995.
Fiscal 1997 in Comparison with Fiscal 1996
Consolidated net sales for the fiscal year ended June 30, 1997 were $75,501,000
with operating income of $3,582,000 and net income of $3,204,000 or $.81 per
share. Consolidated net sales for the fiscal year ended June 30, 1996 were
$71,987,000 with an operating income of $4,000 and net loss of $745,000 or $.20
per share.
Consolidated net sales increased $3,514,000 or 5% for the fiscal year ended June
30, 1997. North American net sales decreased 2% from the prior fiscal year 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. This decrease in U.S. sales
more than offset a current year increase in sales derived from the Company's new
U.S. media buying and infomercial company. European sales increased from the
prior fiscal year due mainly to stronger German and United Kingdom sales in the
current year. Foreign currency conditions were less favorable than in the
comparable prior year period and caused sales to be $1,250,000 lower for the
year ended June 30, 1997, than they would have been had exchange rates remained
consistent with the prior year.
Consolidated cost of goods sold for the year ended June 30, 1997 were 55% of
sales compared to 54% for the prior year ended. North American cost of goods
sold, as a percentage of sales, were 61% compared to 57% for the prior year
comparable period due primarily to the start up of a U.S. media buying and
infomercial business which generated mainly media buying revenue in fiscal 1997
(media buying revenues carry small margins consisting only of media buying fees
charged to third parties), and to slightly higher cost of goods sold in the U.S.
retail music business. European cost of goods sold as a percent of net sales
were 45% compared to 47% in the prior year period due mainly to overall higher
music and consumer product margins resulting from a stronger margin product mix
in the current period.
Advertising costs as a percentage of net sales for the fiscal year ended June
30, 1997, were 15% compared to 17% for the previous year. North American
advertising costs as a percent of net sales were 12% compared to 15% for the
prior year comparable period due to higher prior year levels of direct response
television advertising in the U.S.. This decrease more than offset an increase
in U.S. retail music current year advertising expenditures. Direct response
sales carry higher advertising requirements than normal retail sales. European
advertising costs as a percentage of net sales for the year ended June 30, 1997,
were the same as the prior year.
Selling, general and administrative expenses for the fiscal year ended June 30,
1997, were $19,012,000 or 25% of net sales compared to $20,798,000 or 29% of net
sales in the prior fiscal year. North American selling, general and
administrative expenses were down $1,114,000 for the year ended June 30, 1997,
due mainly 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. European selling, general and administrative expenses for the year
ended June 30, 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.
The Company generated operating income of $3,582,000 for the year ended June 30,
1997, compared to operating income of $4,000 for the fiscal year ended June 30,
1996. North American operating income increased from the prior year mainly due
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, stronger profit from third party licensing of the
Company's owned music master catalog and lower current year losses from the U.S.
consumer convenience product business. These increases more than offset
decreases in operating income in the Company's U.S. retail music business
resulting mainly from slightly higher cost of goods sold, higher current year
advertising expenditures and increased selling, general and administrative
expenses from the prior year in anticipation of future sales growth. European
operating income improved over fiscal 1996 due mainly to strong current year
profit in the Company's German operation versus a minor prior year profit and
current profit from the Company's United Kingdom operation compared to prior
year comparable period loss as a result of restructuring those operations.
Interest expense decreased to $122,000 for the fiscal year ended June 30, 1997,
compared to $409,000 for the fiscal year ended June 30, 1996. The decrease in
interest expense is due to less current year usage of the Company's asset based
line of credit.
During the year ended June 30, 1997, the Company experienced a foreign currency
transaction loss of $162,000 compared to a loss of $119,000 in the previous
year. For the year ended June 30, 1997, foreign exchange rate fluctuations have
been less favorable to the Company than in the previous fiscal year. The Company
has in the past, reduced its foreign currency exchange exposure by hedging some
of that exposure through the use of forward contracts. Most of the Company's
foreign currency transaction exposure is due to certain European subsidiary
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 $218,000 for the year ended June 30, 1997,
compared to $351,000 for the fiscal year ended June 30, 1996. 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.
Fiscal 1996 in Comparison with Fiscal 1995
Consolidated net sales for the fiscal year ended June 30, 1996 were $71,987,000
with operating income of $4,000 and net loss of $745,000 or $.20 per share.
Consolidated net sales for the fiscal year ended June 30, 1995 were $65,917,000
with an operating loss of $2,188,000 and net loss of $2,483,000 or $.67 per
share.
Consolidated net sales increased $6,070,000 or 9% for the fiscal year ended June
30, 1996. North American net sales were up 33% over the fiscal year ended June
30, 1995, due primarily to U.S. music sales success in most of its widely
diverse and expanding product offerings covering nearly all genres of music,
with specific success in a line of new Club/Dance music releases, as well as a
successful direct response television infomercial. North American consumer
convenience product sales had also shown an increase over the prior year due
mainly to a successful third and fourth quarter promotion of a new microwave
cooking product. European sales were down from the prior fiscal year due mainly
to the discontinuance of operations in the Spanish entity at the end of fiscal
1995. The North American sales increase more than offset the European sales
decrease for fiscal 1996.
Consolidated cost of goods sold were 54% of sales in both 1996 and 1995. North
American cost of goods sold, as a percentage of sales, were less than the prior
year due mainly to strong sales from a successful new line of higher margin
Club/Dance music product, sales of a new, higher margin microwave cooking
product, and a successful music television direct response infomercial. Direct
response sales typically carry higher gross margins before advertising than
retail sales. Those positive margin trends more than offset the negative effect
on cost of goods sold caused by some North American consumer convenience product
inventory writedowns to net realizable value and a fourth quarter $400,000
charge for a defective product replacement program (undertaken in coordination
with the United States Consumer Products Safety Commission). European cost of
goods sold as a percentage of net sales were up slightly over the previous year
due mainly to prior year sales from the Spanish operation which sold mainly high
margin (before advertising), direct response product.
Advertising costs as a percentage of net sales for the fiscal year ended June
30, 1996 were 17% compared to 18% for the fiscal year ended June 30, 1995. North
American advertising costs as a percent of net sales were greater than the
previous year due mainly to a successful direct response television music
infomercial, a successful consumer convenience product direct response promotion
(direct response television sales require higher levels of advertising than
retail sales), and a Canadian television promotion which supported certain music
product releases. European advertising costs as a percentage of net sales were
less than the previous year due primarily to the discontinuance of operations by
the Spanish entity at the end of fiscal 1995. The Spanish entity sales were
mainly direct response television sales which required higher levels of
advertising than retail sales. Also contributing to the reduction in European
advertising costs as a percentage of net sales was the German operations which
had more success in direct response television promotions in the fiscal year
ended June 30, 1996 than in the prior year.
Selling, general and administrative expenses for the fiscal year ended June 30,
1996 were $20,798,000 or 29% of net sales compared to $20,192,000 or 31% of net
sales in the fiscal year ended June 30, 1995. Selling, general and
administrative expenses for the year ended June 30, 1996 were higher than the
previous year due to North American overhead additions necessary to support
sales growth and planned future sales growth of retail sales in both
entertainment and consumer convenience product lines. European selling, general
and administrative
expenses for the year ended June 30, 1996 were lower due mainly to the
discontinuance of operations in the Spanish entity and the restructuring of the
German entity at the end of fiscal 1995. Also contributing to the increase in
selling, general and administrative expenses from the prior year were increased
parent holding company legal and professional expenses associated with the
proposed sale of the consumer entertainment businesses which was not completed
and was terminated in January 1996.
The Company generated operating income of $4,000 for the year ended June 30,
1996, compared to an operating loss of $2,188,000 for the fiscal year ended June
30, 1995. North American operating income increased from the prior year mainly
due to improved overall music sales which were led by successful Club/Dance
music product releases. Although the company experienced strong fiscal 1996
sales success for a new, higher margin North American consumer convenience
microwave cooking product, this success was more than offset by some North
American consumer convenience product inventory carrying cost writedowns to net
realizable value and a $400,000 charge related to a consumer convenience
defective product replacement program. European operating income improved over
fiscal 1995 due mainly to the restructuring of the German operation, which
incurred significant losses in the second half of the prior fiscal year, and the
discontinuance of operations in the Spanish subsidiary in the fourth quarter of
fiscal 1995, which also contributed to losses in the prior year. Consolidated
operating income was also impacted in the fiscal year ended June 30, 1996 by
increased parent holding company legal and professional expenses associated with
the proposed sale of the consumer entertainment businesses, which was terminated
in January 1996.
Interest expense was $409,000 for the fiscal year ended June 30, 1996 compared
to $220,000 for the fiscal year ended June 30, 1995. The increase in interest
expense was due to the Company's usage of the asset based line of credit in the
fiscal year ended June 30, 1996.
During the year ended June 30, 1996, the Company experienced a foreign currency
transaction loss of $119,000 compared to a gain of $180,000 in the prior year.
For the year ended June 30, 1996, foreign exchange rate fluctuations were less
favorable to the Company than in the prior fiscal year. The Company had 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 subsidiary 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 $351,000 for the year ended June 30, 1996
compared to $375,000 for the fiscal year ended June 30, 1995. 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.
Liquidity and Capital Resources
During the fiscal year ended June 30, 1997, cash and cash equivalents increased
approximately $600,000 to $3,855,000. The overall increase in cash was primarily
due to net income for the period, the proceeds from a loan from an affiliate
owned and operated by the Chairman of the Board (as discussed below) and
decreases in inventory due to a reduction of inventory in the consumer
convenience products company. Offsetting some of the cash increase were
increases in accounts receivable driven by strong fourth quarter sales (mainly
due to the strong sales growth in the new U.S. media buying and infomercial
company), 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 for information systems in
support of old and new businesses) and repayment of the line of credit.
During fiscal year ended June 30, 1997, the Company purchased approximately
$381,000 of consumer convenience product from an affiliate controlled by Philip
Kives, the Company's Chairman and Chief Executive Officer. The Company had an
outstanding payable to the affiliate at June 30, 1997, of $255,000. This same
affiliate purchased approximately $229,000 of consumer convenience product from
the Company during the fiscal year ended June 30, 1997 and had an outstanding
payable to the Company at June 30, 1997, of $83,000. Outstanding balances are
settled on a timely basis. No interest was charged on the related outstanding
balances during fiscal 1997.
At June 30, 1997, the affiliate controlled by the Chairman of the Board had
provided $1,500,000 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 its
revolving credit agreement, until repayment of the loan, which is due on demand.
The Company's United States subsidiaries, K-tel International (USA), Inc., and
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") had a revolving credit agreement maturing August 31, 1997. The
agreement provided 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 guaranteed all borrowings of the Subsidiaries. Interest on
borrowings is accrued and due monthly at a rate of prime plus two percent (10.5%
at June 30, 1997). The amount outstanding under these lines of credit was
$836,000 at June 30, 1997 and the maximum additional available under the
borrowing base limitations at June 30, 1996 was $100,855. During 1997 and 1996,
average borrowings under the lines of credit were approximately $167,000 and
$3,478,000, and the weighted average interest rate was 10.25% and 10.1%. The
maximum amount outstanding under the lines of credit was $836,000 during fiscal
1997 and $4,995,000 during fiscal 1996.
The Subsidiaries are required to maintain minimum levels of tangible net worth
and certain other financial ratios. As of June 30, 1997, the Subsidiaries were
in compliance or have obtained waivers for these covenants.
Subsequent to August 31, 1997, the lines of credit were renegotiated to extend
the maturity date to December 31, 1997, and increase the borrowing capacity to
$2,500,000 in total, subject to 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 guaranteed all borrowings of the Subsidiaries.
Interest on borrowings is accrued and due monthly at a rate of prime plus two
percent.
Management considers its cash needs for fiscal year 1998 to be adequately
covered by its operations, borrowings under the lines of credit or by funding
from another company controlled by the Chairman and Chief Executive Officer.
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. There can be no assurance
of either extension of the lines of credit or availability of additional funds.
INFORMATION CONTAINED IN THIS ITEM CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE," "ESTIMATE," OR
"CONTINUE," OR NEGATIVE VARIATIONS THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. MANY FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS, INCLUDING OVERALL
ECONOMIC CONDITIONS, CONSUMER PURCHASING, CUSTOMER ACCEPTANCE OF PRODUCTS,
MARKETING AND PROMOTION EFFORTS, FOREIGN CURRENCY VARIATIONS AND CHANGES IN
INTEREST RATES.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes and schedules required
by this Item are set forth in Part IV, Item 14, and identified in the index on
page 18.
ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information concerning Directors required under this Item will be included
in the Company's Notice of Meeting of Shareholders and Proxy Statement to be
filed with the Securities and Exchange Commission and is incorporated herein by
reference. The information concerning Executive Officers of the Registrant is
furnished as an unnumbered item in Part I following Item 4.
ITEM 11: MANAGEMENT REMUNERATION
The information required under this Item will be included in the Company's
Notice of Meeting of Shareholders and Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item will be included in the Company's
Notice of Meeting of Shareholders and Proxy Statement to be filed with the
Securities and Exchange Commission and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item will be included in the Company's
Notice of Meeting of Shareholders and Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities Exchange Commission and is
incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The consolidated statements and schedules listed in the accompanying Index
to Consolidated Financial Statements and Schedules on Page 25 hereof are
filed as part of this report.
(b) Reports on 8-K
No reports on Form 8-K were filed during the fourth quarter ended June 30,
1997.
(c) Exhibits
The Exhibits listed below, which are numbered corresponding to Item 601 of
Regulation S-K, are filed as a part of this report.
Exhibit Item
- ------- ----
3 Restated Article and Restated By-Laws incorporated herein by reference to Exhibit (3) of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1985
10.5 K-tel International (USA), Inc. Security incorporated herein by reference to Exhibit 10.5 of
Agreement the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.6 Dominion Entertainment, Inc. Security Agreement incorporated herein by reference to Exhibit 10.6 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.7 K-tel International (USA), Inc. Copyright incorporated herein by reference to Exhibit 10.7 of
Security Agreement the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.8 Dominion Entertainment, Inc. Copyright Security incorporated herein by reference to Exhibit 10.8 of
Agreement the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.9 Collateral Bank Account Agreements incorporated herein by reference to Exhibit 10.9 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.13 1987 Stock Incentive Plan incorporated herein by reference to Exhibit (10)iv of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1987
10.16 Security Agreement of K-tel, Inc. incorporated herein by reference to Exhibit 10.16 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.17 Amended and Restated Security Agreement of incorporated herein by reference to Exhibit 10.17 of
K-tel International (USA), Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.18 Amended and Restated Security Agreement of incorporated herein by reference to Exhibit 10.18 of
Dominion Entertainment, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
Exhibit Item
- ------- ----
10.19 Amended to K-tel International (USA), Inc. incorporated herein by reference to Exhibit 10.19 of
Copyright Security Agreement the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.20 Amendment to Dominion Entertainment, Inc. incorporated herein by reference to Exhibit 10.20 of
Copyright Security Agreement the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.21 Collateral Bank Account Agreement incorporated herein by reference to Exhibit 10.21 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.22 Guaranty of K-tel International, Inc. incorporated herein by reference to Exhibit 10.22 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.23 Guaranty of K-tel International (USA), Inc. incorporated herein by reference to Exhibit 10.23 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.24 Guaranty of Dominion Entertainment, Inc. incorporated herein by reference to Exhibit 10.24 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.25 Amended and Restated Pledge Agreement of K-tel incorporated herein by reference to Exhibit 10.25 of
International, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.26 Amended and Restated Security Agreement of incorporated herein by reference to Exhibit 10.26 of
K-tel International, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.29 Guaranty of K-tel, Inc. incorporated herein by reference to Exhibit 10.29 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.32 Debt Subordination Agreement incorporated herein by reference to Exhibit 10.32 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.44 Employment Agreement - David Weiner incorporated herein by reference to Exhibit 10.44 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996
10.45 Non-Qualified Stock Option Agreement - incorporated herein by reference to Exhibit 10.45 of
David Weiner the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997
10.46 Restated Revolving Credit Agreement dated April incorporated herein by reference to Exhibit 10.46 of
10, 1997 - K-tel International (USA), Inc., the Registrant's Quarterly Report on Form 10-Q for
Dominion Entertainment, Inc. and TCF National the quarter ended March 31, 1997
Bank Minnesota
10.47 Non-Qualified Stock Option Agreement - incorporated herein by reference to Exhibit 10.47 of
Philip Kives the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997
Exhibit Item
- ------- ----
10.48 First Amendment to Amended and Restated attached to this report as Exhibit 10.48
Revolving Credit Agreement and to Revolving
Note - K-tel International (USA), Inc.,
Dominion Entertainment, Inc. and TCF National
Bank Minnesota
10.49 Second Amendment to Amended and Restated attached to this report as Exhibit 10.49
Revolving Credit Agreement and to Revolving
Note - K-tel International (USA), Inc.,
Dominion Entertainment, Inc. and TCF National
Bank Minnesota
10.50 First Replacement Revolving Note - K-tel attached to this report as Exhibit 10.50
International (USA), Inc., Dominion
Entertainment, Inc. and TCF National Bank
Minnesota
10.51 First Amendment to Guaranty - K-tel attached to this report as Exhibit 10.51
International, Inc.
10.52 1997 Stock Option Plan attached to this report as Exhibit 10.52
11 Statement Regarding Computation of Earnings Per attached to this report as Exhibit 11
Share
21 Subsidiaries of the Registrant attached to this report as Exhibit 21
23 Consent of Independent Public Accountants attached to this report as Exhibit 23
27 Financial Data Schedule (SEC use)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
on October 10, 1997 by the undersigned, there unto duly authorized.
K-TEL INTERNATIONAL, INC.
By /S/ Philip Kives
---------------------------------------
(Philip Kives - Chairman of the Board
and Chief Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/S/ Philip Kives Chairman, Chief Executive Officer October 10, 1997
- ----------------------------------------- (Principal Executive Officer) and Director
Philip Kives
/S/ David Weiner President, Secretary and Director October 10, 1997
- -----------------------------------------
David Weiner
/S/ Mark Dixon Vice President-Finance, Director, October 10, 1997
- ----------------------------------------- Chief Financial Officer and Treasurer
Mark Dixon (Principal Accounting Officer)
/S/ Jeffrey Koblick Senior Vice President, Purchasing and October 10, 1997
- ----------------------------------------- Operations and Director
Jeffrey Koblick
/S/ Garry Kieves Director October 10, 1997
- -----------------------------------------
Garry Kieves
/S/ Louis Scheimer Director October 10, 1997
- -----------------------------------------
Louis Scheimer
(ITEM 14(A))
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Public Accountants.................................. 19
Consolidated Statements of Operations for each of the
three years ended June 30, 1997.......................................... 20
Consolidated Balance Sheets as of June 30, 1997 and 1996.................. 21
Consolidated Statements of Shareholders' Investment
for each of the three years ended June 30, 1997........................... 22
Consolidated Statements of Cash Flows for each of the
three years ended June 30, 1997........................................... 23
Notes to Consolidated Financial Statements................................ 24-32
Supplemental Schedule to Consolidated Financial Statements:
Schedule II - Valuation and Qualifying Accounts for each of the
three years ended June 30, 1997....................................... 33
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted as not
required, not applicable or the information required has been included elsewhere
in the consolidated financial statements and notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To K-tel International, Inc.:
We have audited the accompanying consolidated balance sheets of K-tel
International, Inc. (a Minnesota corporation) and subsidiaries as of June 30,
1997 and 1996, and the related consolidated statements of operations,
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1997. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of K-tel International, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to consolidated
financial statements and schedule is presented for purposes of complying with
the Securities and Exchange Commissions rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 8, 1997
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS - EXCEPT SHARE AND PER SHARE DATA)
1997 1996 1995
-------- -------- --------
NET SALES $ 75,501 $ 71,987 $ 65,917
-------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold 41,387 38,665 35,660
Advertising 11,520 12,520 11,601
Selling, general & administrative 19,012 20,798 20,192
Restructuring/closedown charges (Note 7) -- -- 652
-------- -------- --------
Total Costs and Expenses 71,919 71,983 68,105
-------- -------- --------
OPERATING INCOME (LOSS) 3,582 4 (2,188)
-------- -------- --------
NON-OPERATING INCOME (EXPENSE):
Interest income 124 130 120
Interest expense (122) (409) (220)
Foreign currency transaction gain (loss) (162) (119) 180
-------- -------- --------
Total Non-operating Income (Expense) (160) (398) 80
-------- -------- --------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 3,422 (394) (2,108)
PROVISION FOR INCOME TAXES (Note 4) 218 351 375
-------- -------- --------
NET INCOME (LOSS) $ 3,204 $ (745) $ (2,483)
======== ======== ========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.81 $ (.20) $ (.67)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 3,962 3,729 3,711
======== ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
(IN THOUSANDS - EXCEPT SHARE DATA)
ASSETS 1997 1996
- --------------------------------------------------------- -------- --------
Current Assets:
Cash and cash equivalents $ 3,855 $ 3,255
Accounts receivable, less allowances of $952 and $1,035 16,667 15,028
Inventories 4,287 5,808
Royalty advances 1,552 1,188
Prepaid expenses and other 2,073 734
-------- --------
Total Current Assets 28,434 26,013
-------- --------
Property and Equipment 3,154 2,759
Less-Accumulated Depreciation and Amortization (2,172) (1,966)
-------- --------
Property and Equipment, Net 982 793
Other Assets 1,076 989
-------- --------
$ 30,492 $ 27,795
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ---------------------------------------------------------
Current Liabilities:
Line of credit $ 836 $ 1,864
Note payable to affiliate 1,500 --
Accounts payable 3,708 4,112
Accrued royalties 11,296 10,866
Reserve for returns 4,930 6,817
Other current liabilities 3,572 2,328
Income taxes payable 70 244
-------- --------
Total Current Liabilities 25,912 26,231
-------- --------
Commitments and Contingencies (Note 2 and 6)
Shareholders' Investment:
Common stock - 7,500,000 shares authorized;
par value $.01; 3,783,784 and 3,742,072
issued and outstanding 37 37
Additional Paid In Capital 7,969 7,870
Accumulated Deficit (2,462) (5,666)
Cumulative translation adjustment (964) (677)
-------- --------
Total Shareholders' Investment 4,580 1,564
-------- --------
$ 30,492 $ 27,795
======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS)
Common Stock Cumulative
-------------------------- Contributed Accumulated Translation
Shares Amount Capital Deficit Adjustment
----------- ---------- ------------- ----------- ------------
Balance, June 30, 1994 3,707 37 7,801 (2,438) (854)
Net loss -- -- -- (2,483) --
Proceeds from exercise of stock options 7 -- 15 -- --
Translation adjustment -- -- -- -- 375
----------- ---------- ------------- ----------- ------------
Balance, June 30, 1995 3,714 37 7,816 (4,921) (479)
Net loss -- -- -- (745) --
Proceeds from exercise of stock options 28 -- 54 -- --
Translation adjustment -- -- -- -- (198)
----------- ---------- ------------- ----------- ------------
Balance, June 30, 1996 3,742 $ 37 $ 7,870 $ (5,666) $ (677)
Net income -- -- -- 3,204 --
Proceeds from exercise of stock options 42 -- 99 -- --
Translation adjustment -- -- -- -- (287)
----------- ---------- ------------- ----------- ------------
Balance, June 30, 1997 3,784 $ 37 $ 7,969 $ (2,462) $ (964)
=========== ========== ============= =========== ============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS)
1997 1996 1995
------- -------- --------
Operating Activities:
Net income (loss) $ 3,204 $ (745) $ (2,483)
Adjustments to reconcile net income to cash
used for operating activities:
Depreciation and amortization 630 805 567
Restructuring/closedown charges -- -- 652
Changes in current operating items:
Restricted cash -- 536 1,612
Accounts receivable (1,927) (3,216) (309)
Inventories 1,461 1,458 (1,915)
Royalty advances (347) 966 (1,250)
Prepaid expenses (1,441) 1,395 (835)
Accounts payable and other liabilities (411) 1,110 1,250
Income tax refund receivable 86 437 (101)
Income taxes payable (176) (125) 288
------- -------- --------
Cash provided by (used for) operating activities 1,079 2,621 (2,524)
------- -------- --------
Investing Activities:
Property and equipment purchases (740) (240) (639)
Proceeds from sale of property and equipment 141 215 116
Music catalog additions (200) (781) (444)
Other (114) (42) (22)
------- -------- --------
Cash used for investing activities (913) (848) (989)
------- -------- --------
Financing Activities:
Borrowings on line of credit 5,533 33,493 30,265
Repayments on line of credit (6,561) (34,145) (27,749)
Borrowings(repayment)on note payable to affiliate 1,500 -- (1,000)
Proceeds from exercise of stock options 99 54 15
------- -------- --------
Cash provided by (used for) financing activities 571 (598) 1,531
Effect of Exchange Rate Changes on Cash and Cash Equivalents (137) (74) (35)
------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 600 1,101 (2,017)
Cash and Cash Equivalents at Beginning of Year 3,255 2,154 4,171
------- -------- --------
Cash and Cash Equivalents at End of Year $ 3,855 $ 3,255 $ 2,154
======= ======== ========
Supplemental Cash Flow Information
Cash Paid For -
Interest $ 67 $ 220 $ 174
======= ======== ========
Income Taxes $ 268 $ 494 $ 425
======= ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
1. BUSINESS DESCRIPTION
K-tel International, Inc. and its subsidiaries (the "Company") is an
international marketing and distribution company for packaged consumer
entertainment and convenience products and during fiscal 1997, the Company
formed a new U.S. media buying and infomercial subsidiary. This company
performs media buying services for third parties for a fee and also markets
products through infomercials. The Company has operations in North America
and Europe. The Company primarily sells its products through retail stores
and by direct response marketing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
K-tel International, Inc. and its domestic and foreign subsidiaries, all of
which are wholly owned. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Revenue is generally recognized upon shipment to the customer. Most music
sales are made with the right of return of unsold units. Estimated reserves
for returns are established by management based on historical experience and
product mix and are subject to the ongoing review and adjustment by the
Company. The Company grants credit to customers and generally does not
require collateral or any other security to support amounts due.
One United States customer represented 12% and 11% of the Company's
consolidated net sales for the years ended June 30, 1996 and 1995,
respectively. No customer represented greater than 10% of net sales for the
year ended June 30, 1997.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist principally of cash, certificates of
deposits and commercial paper which are highly liquid and have original
maturities of less than ninety days. Restricted cash serves as collateral
pledged for letters of credit for product purchases. This cash becomes
unrestricted simultaneously with the payments on the letters of credit.
There was no restricted cash balances at June 30, 1997 and June 30, 1996.
Inventories
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, or net realizable value. The cost of finished goods
includes all direct product costs.
Rights to Use Music Product
Certain of the Company's compilation products are master recordings under
license from record companies and publishers. In most instances, minimum
guarantees or non-returnable advances are required to obtain the licenses
and are realized through future sales of the product. The amounts paid for
minimum guarantees or non-returnable advances are charged to expense as
sales are made. When anticipated sales appear to be insufficient to fully
recover the minimum guarantees or non-returnable advances, a provision
against current operations is made for anticipated losses. The unrealized
portion of guarantees and advances is included in royalty advances in the
accompanying consolidated balance sheets. Licenses are subject to audit by
licensors.
During the fourth quarter of 1996, an agent for various licensors submitted
a royalty audit claim of approximately $3.2 million plus interest based on
the results of an audit for the period from 1986 to 1994. Management
estimates the ultimate payment will be significantly lower than the claim
because a preliminary review of the claim has identified errors in the data
and the use of multiple and extensive extrapolations based on
non-representative samples used to derive the claim amount. A settlement
amount has not been determined as of June 30, 1997. A reserve is recorded
for management's estimate of the ultimate resolution of this matter. The
amount the Company will ultimately pay could differ materially from the
amounts currently recorded.
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 which is recorded as a reduction of selling,
general and administrative expenses in the accompanying statement of
operations for the period ended June 30, 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 deferred income in the accompanying balance sheet as of June 30,
1997.
The Company also owns a catalog of master recordings which were purchased
and are recorded at cost and amortized over the anticipated useful life of
the master, which range from four to ten years. During 1995, the Company
changed the amortization period to seven years on all newly acquired owned
masters. The effect of this change reduced amortization expense in 1995 by
approximately $216,000. The unamoritized cost of the master recordings is
included in other assets of the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
include expenditures which increase the useful lives of existing property
and equipment. Maintenance, repairs and minor renewals are charged to
operations as incurred. Depreciation and amortization is provided using
straight line or declining balance methods over the estimated useful lives
of the assets which range from three to nine years.
Royalties
The Company has entered into license agreements with various record
companies and publishers under which it pays royalties on units sold. The
Company accrues royalties using contractual rates and certain estimated
rates on applicable units sold. On a quarterly basis, the contractual
royalty liability is computed and the accrued royalty balance is adjusted
accordingly.
Translation
The operations of all foreign entities are measured in local currencies.
Assets and liabilities are translated into U.S. dollars at year end exchange
rates. Revenues and expenses are translated at the average exchange rates
prevailing during the year. Adjustments resulting from translating the
financial statements of foreign entities into U.S. dollars are recorded as a
separate component of shareholders' investment.
Income Taxes
Deferred income taxes are provided for temporary differences between the
financial reporting basis and tax basis of the Company's assets and
liabilities at currently enacted tax rates.
Net Income (Loss) Per Share
Net income (loss) per common and common equivalent share is based on the
weighted average number of shares of common stock outstanding during the
year, and adjusted for the dilutive effect of common stock equivalents.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Principal estimates include allowances
for bad debts, return reserves, royalty obligations and product replacement
costs. Ultimate results could differ materially from those estimates.
Recently Issued Accounting Standards
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 No. 128 in
fiscal 1998 and anticipates it will not have a material impact on previously
reported earnings per share.
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information", which
requires a disclosure of business segments in the financial statements of
the Company. The Company expects to adopt SFAS No. 131 in fiscal 1999 and
anticipates a change in segment disclosure at the time of adoption.
3. LINE OF CREDIT
The Company's United States subsidiaries, K-tel International (USA), Inc.,
and 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") had a revolving credit agreement maturing August 31,
1997. The agreement provided 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
were collateralized by the assets of the Subsidiaries, including accounts
receivable, inventories, equipment and Dominion Entertainment, Inc.'s owned
music master recordings. The Company had guaranteed all borrowings of the
Subsidiaries. Interest on borrowings was accrued and due monthly at a rate
of prime plus two percent (10.5% at June 30, 1997). The amount outstanding
under this line of credit was $835,900 at June 30, 1997 and the maximum
additional available under the borrowing base limitations at June 30, 1997
was $100,800. During 1997 and 1996, average borrowing under the line of
credit was approximately $167,000 and $3,478,000, and the weighted average
interest rate was 10.25% and 10.1%. The maximum amount outstanding under the
line of credit was $835,900 during fiscal 1997 and $4,995,000 during fiscal
1996.
The Subsidiaries are required to maintain minimum levels of tangible net
worth and certain other financial ratios. As of June 30, 1997, the
Subsidiaries were in compliance with or had obtained waivers for these
covenants.
Subsequent to August 31, 1997, the lines of credit were renegotiated to
extend the maturity date to December 31, 1997 and increase the borrowing
capacity to $2,500,000 in total, subject to availability based on a monthly
borrowing base derived from the Subsidiaries' accounts receivable and
inventory.
4. INCOME TAXES
The Company operates in several countries and is subject to various tax
regulations and tax rates. The provisions for income taxes is computed based
on income reported for financial statement purposes in accordance with the
tax rules and regulations of the taxing authorities where the income is
earned.
The provision (benefit) for income taxes consists of the following for the
years ended June 30 (in thousands):
1997 1996 1995
------ ----- -------
Income (loss) before provision (benefit) for income taxes:
United States $1,694 $ 141 $ 1,564
Foreign 1,728 (535) (3,672)
------ ----- -------
Total $3,422 $(394) $(2,108)
====== ===== =======
Provision (benefit) for income taxes:
Currently payable
United States $ 111 $ 210 $ 226
Foreign 107 141 149
------ ----- -------
Total currently payable (receivable) and
total provision (benefit) for income taxes $ 218 $ 351 $ 375
====== ===== =======
A reconciliation of the U.S. federal statutory rate to the effective tax rate
for the years ended June 30 are as follows:
1997 1996 1995
-------- -------- --------
Federal statutory rate 34% (34)% (34)%
State Taxes, net of federal benefit 1% 26% 5%
Change in valuation allowance (29)% 99% 50%
Effect of different tax rates on foreign earnings -- (2)% (3)%
-------- -------- --------
6% 89% 18%
======== ======== ========
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. Temporary differences, which are all deferred tax assets, are as
follows (in thousands):
June 30, June 30,
1997 1996
----------- -----------
Net operating loss carryforwards $ 1,116 $ 7,595
Alternative minimum tax credits 411 465
Reserve for returns 1,419 2,065
Depreciation and amortization 136 79
Royalty reserves 964 573
Inventory reserves 943 1,204
Nondeductible accruals 647 357
Allowance for bad debts 284 310
Valuation allowance (5,920) (12,648)
----------- -----------
$ -- $ --
=========== ===========
A valuation allowance equal to the aggregate amount of deferred tax assets has
been established until such time as realizability is assured.
For U.S. tax reporting purposes, the Company has net operating loss
carryforwards ("NOL") of approximately $15,994,000 available through 2001. The
tax NOL carryforward may be reduced in future years, without financial statement
benefit, to the extent of intercompany dividends received from foreign
subsidiaries. Also, the NOL carryforwards are subject to review and possible
adjustment by taxing authorities. In addition, the Company has approximately
$465,000 in U.S. federal alternative minimum tax credits which may be utilized
in the future to offset any regular corporate income tax liability. NOL's
available in foreign countries approximated $3,100,000 as of June 30, 1997.
5. STOCK OPTIONS
Stock Incentive Plan
The Company's 1987 Stock Incentive Plan for officers and other key employees
of the Company covers a maximum of 350,000 shares of common stock. Under the
terms of this plan, the Board of Directors has the sole authority to
determine the employees to whom options and awards are granted, the type,
size and terms of the awards, timing of the grants, the duration of the
exercise period and any other matters arising under the plan. The common
stock incentives may take the form of incentive stock options, nonqualified
stock options, stock appreciation rights and/or restricted stock.
In February 1997, the Company's Board of Directors approved a new stock
option plan covering a maximum of 300,000 shares of common stock. There had
been no shares granted as of June 30, 1997.
The Stock Incentive Plan share information is summarized below:
Incentive Non-qualified
Stock Options Stock Options
------------- -------------
Outstanding June 30, 1994 137,900 70,125
Granted 15,000 5,000
Exercised - at prices ranging from
$1.50 - $2.50 per share (1,125) (5,875)
Forfeited (2,000) (16,375)
------------- -------------
Outstanding June 30, 1995 149,775 52,875
Granted -- --
Exercised - at prices ranging from
$1.50 - $3.00 per share (28,275) (2,125)
Forfeited (12,750) (7,625)
------------- -------------
Outstanding June 30, 1996 108,750 43,125
Granted 41,500 --
Exercised - at prices ranging from
$1.50 - $6.75 per share (23,587) (18,125)
Forfeited (6,025) (3,000)
------------- -------------
Outstanding June 30, 1997 120,638 22,000
============= =============
Options Exercisable 92,738 22,000
Exercise Price $1.50 - $8.50 $1.50 - $6.75
Restricted Stock Options
In addition to stock options granted under the terms of the Stock Incentive
Plan, the Board of Directors has the sole authority to grant employees,
officers and directors restricted stock options outside the Stock Incentive
Plan. The Board of Directors determines the type, size and terms of the
grants, timing of the grants, the duration of the exercise period and any
other matters pertaining to options or awards granted outside of the Stock
Incentive Plan.
Restricted Stock Plan share information is summarized below:
Outstanding June 30, 1994 152,500
Granted 20,000
Exercised - at prices ranging from
$3.75 - $9.25 per share --
Forfeited --
--------------
Outstanding June 30, 1995 172,500
Granted --
Exercised - at prices ranging from
$3.75 - $9.25 per share --
Forfeited (145,000)
--------------
Outstanding June 30, 1996 27,500
Granted 430,000
Exercised - at prices ranging from --
$3.75 - $9.25 per share
Forfeited (15,000)
--------------
Outstanding June 30, 1997 442,500
==============
Options Exercisable 320,000
Exercise Price $3.75 - $9.25
Pro forma Option Information
Effective June 30, 1997, the Company adopted SFAS No. 123. "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the Company has
elected to continue to account for its stock option plans under the
provisions of APB Opinion No. 25, under which no compensation costs have
been recognized. Had compensation costs for these plans been recorded at
fair value consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been as follows:
1997 1996
-------- --------
Net income (in thousands):
As reported $ 3,204 $ (745)
Pro forma $ 2,757 $ (745)
Primary EPS:
As reported $ .81 $ (.20)
Pro forma $ .70 $ (.20)
Fully Diluted EPS:
As reported $ .81 $ (.20)
Pro forma $ .70 $ (.20)
The weighted average fair values of options granted in fiscal 1997 was $2.20
and no options were granted in fiscal 1996.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used to
estimate the fair value of options:
1997
-------
Risk-free interest rate 6.3%
Expected life 5 years
Expected volatility 50%-57%
Expected dividend yield None
Because the measurement provisions of SFAS No. 123 have not been applied to
options granted prior to June 30, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
6. COMMITMENTS AND CONTINGENCIES
Litigation and Disputes
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be
predicted, in the opinion of management, there is no legal proceeding
pending or asserted against or involving the Company for which the outcome
is likely to have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
On March 3, 1997, the Company entered into the Purchase and Sale Agreement
(the "Sale Agreement") with Platinum Entertainment, Inc. ("Platinum").
Pursuant to the Sale Agreement and subject to certain conditions, including
Platinum's receipt of sufficient financing to close the transaction under
the Sale Agreement, Platinum agreed to purchase two domestic subsidiaries of
the Company which operated its music business outside of Europe for $35
million subject to certain adjustments. On March 3, 1997, the Company and
Platinum also entered into an earnest money escrow agreement (the "Escrow
Agreement") with a third party bank and Platinum deposited $1.75 million in
escrow. The Sale Agreement provided that the $1.75 million escrow deposit is
paid to the Company in the event the transaction contemplated by the Sale
Agreement is not consummated, subject to certain conditions.
Under the Sale Agreement, the Company had the right to terminate the Sale
Agreement if the sale was not consummated by August 30, 1997. On September
10, 1997, the Company's Board of Directors concluded that it would be in the
best interests of the Company to terminate the Sale Agreement and the
Company gave notice of termination to Platinum. On September 10, 1997,
Platinum also gave the Company notice of termination claiming that the
Company was in breach of its representations and covenants under the Sale
Agreement. The Company disputes these allegations by Platinum.
On September 12, 1997, the Company initiated legal action in Minnesota state
court seeking an order directing the escrow bank to disburse the funds held
under the Escrow Agreement to the Company. On October 2, 1997, the Company
amended its complaint to assert additional claims against Platinum,
including breaches by Platinum of its confidentiality covenant and employee
non-solicitation agreement as well as detrimental reliance damages. Platinum
has not yet answered the Company's complaint, but Platinum has removed the
action to federal court in Minnesota and initiated a declaratory judgment
action in Illinois federal court on October 3, 1997. In the Illinois action,
Platinum asserted that it terminated the Sale Agreement due to the Company's
breach of representations and covenants and claimed that Platinum is
entitled to the escrow funds and damages of $1.75 million from the Company.
The Company intends to vigorously pursue recovery of the escrow deposit and
contest any claims which Platinum may assert.
Leases
The Company has entered into several office and warehouse leases which
expire through 2002. Commitments under these leases are $568,000 in 1998,
$400,000 in 1999, $258,000 in 2000, $206,000 in 2001 and $163,000 in 2002.
Rental expense was $938,000 in 1997, $974,000 in 1996 and $855,000 in 1995.
7. RESTRUCTURING/CLOSEDOWN CHARGES
In the fourth quarter of fiscal 1995, the Company recorded a
restructuring/closedown charge of $652,000 related to the decision, planning
and implementation of a formal plan to close down the operations in Spain
and restructure the operations in Germany by eliminating short form direct
response consumer convenience product marketing and downsizing the current
distribution facility to approximately one third of the current size and
cost. The resulting smaller German operation is focused on short and long
form direct response marketing of music products. The expected future effect
of the restructure/closedown was to improve the Company's consolidated
operating results by eliminating probable future operating losses in Germany
and Spain based on past experiences and expectations of the markets in the
near term future. The combined fiscal 1995 Germany and Spain revenues and
operating losses before restructuring/closedown charges were $18,992,000 and
$2,381,000, respectively.
The components of the 1995 restructuring/closedown charges were as follow
(in thousands):
1995
------------
Inventory write down costs $ 79
Employee termination costs 264
Property write downs 8
Cumulative translation adjustment 251
Other 50
------------
Total $ 652
============
Sixteen employees consisting primarily of sales, administrative, and
distribution employees were terminated during fiscal 1995.
The fiscal 1995 restructuring closedown was completed in fiscal 1996 and the
accrued charge at June 30, 1995 approximated the actual costs incurred to
complete the restructure/closedown.
8. OPERATIONS BY GEOGRAPHIC AREA
The following table sets forth the Company's operations by geographic area
as of and for the fiscal years ended June 30 (in thousands):
1997 1996 1995
-------- -------- --------
Net Sales:
North America $ 48,952 $ 48,953 $ 38,228
Europe 27,715 23,382 29,338
Transfers between geographic areas (1,166) (348) (1,649)
-------- -------- --------
Net Sales $ 75,501 $ 71,987 $ 65,917
======== ======== ========
Operating Income (Loss):
North America $ 2,672 $ 1,997 $ 1,803
Europe 2,343 (38) (2,673)
Operating Income before General
Corporate Expenses, net 5,015 1,959 (870)
General Corporate Expenses, net (1,433) (1,955) (1,318)
-------- -------- --------
Operating Income (Loss) $ 3,582 $ 4 $ (2,188)
======== ======== ========
Identifiable Assets:
North America $ 22,781 $ 20,282 $ 18,816
Europe 7,711 7,513 9,821
-------- -------- --------
Identifiable Assets $ 30,492 $ 27,795 $ 28,637
======== ======== ========
9. RELATED PARTY TRANSACTIONS
The Company sold approximately $229,000 in fiscal 1997, $217,000 in fiscal
1996 and $228,000 in fiscal 1995, of consumer convenience product to an
affiliate controlled by the Company's Chairman of the Board. There was a
balance receivable from the affiliate at June 30, 1997 of $83,000, while
there was no receivable balance owed to the Company at June 30, 1996.
The Company purchased $381,000 in fiscal 1997, $1,050,000 in fiscal 1996 and
$354,000 in fiscal 1995 of consumer convenience product from another
affiliate controlled by the Company's Chairman of the Board. Management
believes purchase prices for these products were at prices comparable to
transactions with a third party. However, the payment terms have been open
ended as a method of financing the Company's consumer convenience product
expansion in Europe and the U.S.. The Company also reimbursed the affiliate
for warehousing and shipping services provided in Canada and travel,
telephone, and legal fees directly incurred on behalf of the Company. These
amounts were $1,000 during 1997, $4,000 during 1996 and $3,000 during 1995.
There was a payable balance at June 30, 1997 of $255,000, no balance payable
at June 30, 1996 and the amount owed at June 30, 1995, was $175,000.
At June 30, 1997, the affiliate controlled by the Chairman of the Board had
provided $1,500,000 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 its revolving credit agreement, until repayment of the loan which is due
on demand.
SCHEDULE II
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 1997, 1996 and 1995
(In thousands)
Charged to
Balance at Costs and Charged to Balance at
Beginning of Expenses or Net Other End of
Period Sales Accounts Deductions Period
------------ --------------- ------------- ------------- -----------
Allowance for
Doubtful
Accounts
- ------------------
1997 $ 1,035 $ 533 $ (29) (1) $ (587) (2) $ 952
1996 $ 771 $ 694 $ (15) (1) $ (415) (2) $ 1,035
1995 $ 489 $ 370 $ 18 (1) $ (106) (2) $ 771
Reserve for
Returns
- ------------------
1997 $ 6,817 $ 10,096 $ (24) (1) $ (11,959) $ 4,930
1996 $ 6,802 $ 10,485 $ (18) (1) $ (10,452) $ 6,817
1995 $ 6,412 $ 9,480 $ 42 (1) $ (9,132) $ 6,802
(1) Exchange rate change
(2) Uncollectible accounts written off, net of recoveries