SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
Of the Securities Exchange Act of 1934
For Quarter Ended September 30, 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
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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No__
APPLICABLE ONLY TO CORPORATE ISSUERS:
At November 7, 1997 there were outstanding 3,815,609 shares of common stock,
$.01 par value per share, of K-tel International, Inc.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(IN THOUSANDS)
September 30, June 30,
1997 1997
---------- --------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,839 $ 3,341
Accounts receivable, net 17,950 16,667
Inventories 5,016 4,287
Royalty and other advances 2,847 1,552
Prepaid expenses and other 2,912 2,587
-------- --------
Total Current Assets 31,564 28,434
-------- --------
Property and Equipment 3,239 3,154
Less-Accumulated Depreciation and Amortization (2,275) (2,172)
-------- --------
Property and Equipment, Net 964 982
Other Assets 1,066 1,076
-------- --------
$ 33,594 $ 30,492
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 49 $ 836
Note payable to affiliate 1,500 1,500
Accounts payable 5,456 3,708
Accrued royalties 11,200 11,296
Reserve for returns 6,237 4,930
Other current liabilities 3,194 3,572
Income taxes payable 112 70
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Total Current Liabilities 27,748 25,912
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Shareholders' Equity:
Common stock 38 37
Additional Paid In Capital 8,015 7,969
Deficit (1,255) (2,462)
Cumulative translation adjustment (952) (964)
-------- --------
Total Shareholders' Equity 5,846 4,580
-------- --------
$ 33,594 $ 30,492
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K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(IN THOUSANDS - EXCEPT PER SHARE DATA)
Three Months Ended
September 30,
1997 1996
-------- --------
NET SALES $ 25,135 $ 15,622
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COSTS AND EXPENSES:
Cost of goods sold 14,804 7,478
Advertising 3,726 2,784
Selling, general & administrative 5,212 4,391
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Total Costs and Expenses 23,742 14,653
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OPERATING INCOME 1,393 969
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OTHER INCOME (EXPENSE):
Interest income 16 17
Interest expense (70) (18)
Foreign currency transaction loss (30) (19)
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Total Other Income (Expense) (84) (20)
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INCOME BEFORE PROVISION
FOR INCOME TAXES 1,309 949
PROVISION FOR INCOME TAXES (102) (97)
-------- --------
NET INCOME $ 1,207 $ 852
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NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .30 $ .22
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 4,051 3,804
======== ========
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
Three Months Ended
September 30,
1997 1996
------- -------
Cash Flows From Operating Activities:
Net income $ 1,207 $ 852
Adjustments to reconcile net income to cash provided
by (used for) operating activities:
Depreciation and amortization 187 114
Changes in current operating items:
Accounts receivable (1,323) (1,215)
Inventories (748) (571)
Royalty and other advances (1,303) 1
Prepaid expenses and other (329) (711)
Current liabilities 2,705 2,265
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Cash provided by (used for) operating activities 396 735
------- -------
Cash flows from investing activities:
Property and equipment purchases (106) (79)
Proceeds from sale of property and equipment -- 41
Music catalog additions (13) (91)
Other (49) (9)
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Cash used for investing activities (168) (138)
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Cash flows from financing activities:
Repayments on line of credit (787) (1,821)
Proceeds from exercise of stock options 46 2
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Cash used for financing activities (741) (1,819)
Effect of exchange rates on cash 11 3
------- -------
Net decrease in cash and cash equivalents (502) (1,219)
Cash and cash equivalents at beginning of year 3,341 3,255
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Cash and cash equivalents at period end $ 2,839 $ 2,036
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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. n the opinion
of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three month period ended September
30, 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, 1997.
2. RECENTLY ISSUED ACCOUNTING STANDARD
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 during the fiscal year ending 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. COMPUTATION OF NET INCOME PER SHARE
Net income per share for the three-month periods ended September 30,
1997 and 1996 have been computed based on the weighted average number
of common shares outstanding during the period, adjusted for the
dilutive effect of common stock equivalents. For the three-month
periods ended September 30, 1997 and 1996, weighted average shares
outstanding included common stock equivalents of approximately 248,000
shares and 61,000 shares, respectively, related to stock options.
4. RECLASSIFICATIONS
Certain June 30, 1997 amounts have been reclassified to conform with
the current period presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General - K-tel International, Inc., through its subsidiaries, is an
international marketing and distribution company of packaged consumer
entertainment and consumer products and is a leader in the market niche
for pre-recorded music compilations. With 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 and direct response.
The Company markets and sells 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
are made to rackjobbers, wholesalers and retailers in the U.S. and
through subsidiaries and licensees in the U.K. and Europe. Television
direct response marketing of pre-recorded music and consumer
convenience product is a significant source of revenue for the Company,
specifically in Europe. In 1997, the Company formed a U.S. media buying
and infomercial-marketing subsidiary, which performs media buying
services for third parties and also markets products through
infomercials produced by third parties.
A. RESULTS OF OPERATIONS
Consolidated net sales for the first quarter ended September 30, 1997,
were $25,135,000 with operating income of $1,393,000 and net income of
$1,207,000, or $.30 per share. Consolidated net sales for the same
period in the prior year were $15,622,000 with operating income of
$969,000 and net income of $852,000, or $.22 per share. The following
tables set forth, for the periods indicated, results of operations by
geographic region as a percentage of net sales.
Quarter Ended September 30, 1997
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North America Europe Total
----------------- ----------------- -----------------
Net Sales $17,818 100% $ 7,317 100% $25,135 100%
Costs and expenses
Cost of goods sold 11,472 64% 3,332 46% 14,804 59%
Advertising 2,258 13% 1,468 20% 3,726 15%
Selling, general & administrative 2,943 17% 1,720 24% 4,663 19%
------- ------- ------- ------- ------- -------
Operating Income $ 1,145 6% $ 797 10% $ 1,942 7%
======= ======= ======= ======= ======= =======
Quarter Ended September 30, 1996
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North America Europe Total
----------------- ----------------- -----------------
Net Sales $ 9,648 100% $ 5,974 100% $15,622 100%
Costs and expenses
Cost of goods sold 4,801 50% 2,677 45% 7,478 48%
Advertising 1,588 16% 1,196 20% 2,784 18%
Selling, general & administrative 2,387 25% 1,800 30% 4,187 27%
------- ------- ------- ------- ------- -------
Operating Income $ 872 9% $ 301 5% $ 1,173 7%
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In addition to the operating amounts above for the quarters ended
September 30, 1997 and 1996, the parent holding company recorded
expenses of $549,000 and $204,000, respectively.
CONSOLIDATED NET SALES for the three months ended September 30, 1997
increased $9,513,000, or 61%, from the comparable period in 1996. North
American sales for the three months ended September 30, 1997 increased
$8,170,000, or 85%, from the comparable period in 1996. This increase
was mainly due to $5,845,000 in sales derived from the Company's media
buying and infomercial company which was not in existence in 1996, and
an increase in approximately $2,300,000 of music and consumer product
sales from the comparable period in 1996. European sales for the three
months ended September 30, 1997 increased $1,343,000, or 23%, from the
comparable period in 1996 due mainly to an increase in direct response
sales made in Germany.
CONSOLIDATED COST OF GOODS SOLD AS A PERCENTAGE OF NET SALES for the
three months ended September 30, 1997 were 59% as compared to 48% in
the comparable period in 1996. Costs of goods sold as a percentage of
net sales for North America for the three months ended September 30,
1997 were 64% as compared to 50% in the comparable period in 1996. The
increase is mainly due to the higher costs of goods associated with the
Company's media buying and infomercial company, which was not in
existence in 1996 and whose cost of goods for the period approximated
70% of sales, and a slightly higher cost of goods sold in the U.S.
retail music business. European costs of goods sold were 46% as
compared to 45% in the comparable period in 1996 due mainly to a
slightly lower gross margin on merchandise sold via direct response as
compared to the merchandise sold in the prior period.
CONSOLIDATED ADVERTISING COSTS for the three months ended September 30,
1997 increased $942,000, or 34%, from the comparable period in 1996.
North American advertising costs for the three months ended September
30, 1997 increased $670,000, or 42%, from the comparable period in
1996. This increase was mainly due to advertising costs incurred by the
Company's media buying and infomercial company that was not in
existence in 1996. European advertising costs for the three months
ended September 30, 1997 increased $272,000, or 22%, from the
comparable period in 1996 due mainly to an increase in advertising made
in Germany that resulted in increased direct response sales.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the three
months ended September 30, 1997 increased $476,000, or 11%, from the
comparable period in 1996. North American selling, general and
administrative expenses for the three months ended September 30, 1997
increased $556,000, or 23%, from the comparable period in 1996. This
increase was mainly due to overhead costs incurred by the Company's
media buying and infomercial company that was not in existence in 1996.
European selling, general and administrative expenses for the three
months ended September 30, 1997 remained consistent with costs incurred
in the comparable period in 1996. Additionally, the parent holding
company incurred operating costs of $549,000 compared to such expenses
of $204,000 in the comparable period in 1996. The increase of $345,000
was mainly due to legal and professional fees associated with the
proposed sale of certain of the Company's music business assets (the
sale was terminated in September 1997).
OPERATING INCOME for the quarter ended September 30, 1997 increased to
$1,393,000 from $969,000 from the comparable period in 1996. North
American operating income increased $273,000, or 31%, from the
comparable period in 1996. The increase was primarily due to gross
profit earned on the increased sales of retail music and consumer
goods. European operating income increased $496,000, or 164% from the
comparable period in 1996. The operating income improvement was due
mainly to current year profit in the Company's German operations versus
a minor profit in the comparable period in 1996.
INTEREST EXPENSE for the quarter ended September 30, 1997 increased
$52,000 to $70,000 as compared to the same period in 1996. The increase
in interest expense was due to the increased usage of the Company's
line of credit and the short term financing from the affiliate
controlled by the Chairman of the Board (as discussed below).
During the quarter ended September 30, 1997, the Company experienced a
foreign currency transaction loss of $30,000 compared to a loss of
$19,000 experienced during the comparable period in the prior year. In
the first quarter of fiscal 1997, foreign exchange rate fluctuations
have been slightly less favorable to the Company than in the previous
year comparable period. Most of the Company's foreign currency
transaction exposure is due to its European subsidiaries' liabilities,
which are payable to the Company's U.S. parent or U.S. Subsidiaries. In
accordance with generally accepted accounting principles the payable
balances are adjusted quarterly to the local currency equivalent of the
U.S. dollar. The majority of the fiscal 1997 first quarter translation
losses were the result of these intercompany liabilities. Gains or
losses resulting from these intercompany liabilities remain unrealized
until such time as the underlying liabilities are settled.
INCOME TAXES for the quarter ended September 30, 1997 was $102,000
compared to a provision of $97,000 in the prior year comparable period.
Variations in the Company's tax provision are a factor of the country
of origin of profits and the availability of net operating loss
carryforwards.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE for the quarter ended
September 30, 1997 was $.30 per share as compared to $.22 per share for
the same period in 1996. Net income per share for the periods ended
September 30, 1997 and 1996 included common stock equivalents of
approximately 248,000 shares and 61,000 shares, respectively, related
to stock options. Operating results and net income per share for the
quarter ended September 30, 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 first quarter ended September 30, 1997, the Company
experienced positive cash flow from operations of $396,000 despite an
investment of approximately $1,300,000 in royalty and other advances
for product the majority of which will not be released or distributed
until later in fiscal 1998. The Company's overall cash and cash
equivalents decreased approximately $502,000 to $3,353,000 from June
30, 1997 due primarily to a net pay down of $787,000 on the Company's
bank line of credit, which offset the cash generated from operations.
The Company currently has a revolving credit agreement with a U.S. bank
that provides borrowing up to $2,500,000 based upon on a monthly
borrowing base derived from certain of the Company's U.S. Subsidiary's
accounts receivable. The loan, which bears interest at the prime rate
plus 2% per annum and expires December 31,1997, is secured by assets of
the Company's U.S. Subsidiaries, including accounts receivable,
inventories, equipment and owned music master recordings, and is
guaranteed by the Company. The loan agreement has certain minimum
levels of tangible net worth and certain other financial ratios, which
as of September 30, 1997 the Subsidiaries were in compliance or have
obtained waivers for these covenants. The amount outstanding under this
line of credit was $49,000 at September 30, 1997. As of September 30,
1997, an affiliate controlled by the Chairman of the Board had provided
$1,500,000 in financing to the Company to fund the Company's U.S.
operations. The Company pays interest on this advance, which is due on
demand, at the same rate as the Company pays on its revolving credit
agreement. The Company is currently in negotiations with a major lender
to provide a long-term credit facility that will replace its existing
lending facilities at more favorable rates and provide additional
borrowing availability to the Company.
Management considers its cash needs for the current fiscal year to be
adequately covered by its operations, available borrowings under the
current bank line of credit agreement or from borrowings from the a new
financing agreement that the Company expects to complete during the
second quarter of fiscal 1998. Additionally, the Company has available
to it funding from a company owned by Mr. Philip Kives, the Chairman of
the Board of Directors of the Company. Although management is not privy
to the financial statements of the Chairman's other companies, he has
assured K-tel International, Inc. that he will fund its operations on
an as needed basis consistent with his past practices which have mainly
been by way of giving the Company open ended payment terms on product
purchased from his affiliate companies.
During the first quarter of fiscal 1997, the Company purchased
approximately $66,000 of consumer convenience product from an affiliate
controlled by Mr. Philip Kives, the Company's Chairman of the Board and
Chief Executive Officer. The Company owed approximately $265,000 to the
affiliate at September 30, 1997. This same affiliate purchased
approximately $3,000 of consumer convenience products from the Company
during the first quarter ended September 30, 1997 and owed the Company
$88,000 at September 30, 1997. No interest will be charged on the
related outstanding balances during fiscal 1998.
Important Factors Relating to Forward Looking Statements. - Information
contained in this Form 10-Q 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
27 Financial Data Schedule (SEC use)
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1997.
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.
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REGISTRANT
/S/ PHILIP KIVES
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PHILIP KIVES
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/S/ DAVID WEINER
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DAVID WEINER
PRESIDENT
/S/ COREY FISCHER
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COREY FISCHER
CHIEF FINANCIAL OFFICER
(principal accounting officer)