UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-6664
K-TEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0946588
(State or other jurisdiction of (I.RS. Employer
incorporation or organization) Identification No.)
2605 FERNBROOK LANE NORTH, MINNEAPOLIS, MINNESOTA 55447-4736
(Address of principal executive offices) (Zip Code)
(612) 559-6888
(Registrant's telephone number, including area code)
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:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the most recent practical date. As of March 31,
1998, there were 3,819,934 shares of the registrant's common stock, par value
$0.01 per share, outstanding.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PART I. Financial Information: Page
Item 1. Consolidated Balance Sheets as of March 31, 1998 and
And June 30, 1997 1
Consolidated Statements of Operations for the three and nine
Month periods ended March 31, 1998 2
Consolidated Statements of Cash Flows for the nine month
Period Ended March 31, 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 10
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND JUNE 30, 1997
(IN THOUSANDS)
March 31, June 30,
1998 1997
---------- ----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,732 $ 3,341
Accounts receivable, net 12,952 16,667
Inventories 5,721 4,287
Royalty and other advances 2,231 1,552
Prepaid expenses and other 5,525 2,587
---------- ----------
Total Current Assets $ 29,161 $ 28,434
---------- ----------
Property and Equipment 3,561 3,154
Less Accumulated Depreciation and Amortization (2,514) (2,172)
---------- ----------
Property and Equipment, Net 1,047 982
Other Assets 3,704 1,076
---------- ----------
$ 33,912 $ 30,492
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 2,655 $ 836
Note payable to affiliate -- 1,500
Accounts payable 4,730 3,708
Accrued royalties 8,689 11,296
Reserve for returns 4,251 4,930
Other current liabilities 4,604 3,572
Income taxes payable 34 70
---------- ----------
Total Current Liabilities 24,963 25,912
---------- ----------
Long Term Debt 4,000 --
Shareholders' Equity:
Preferred Stock -- --
Common stock 37 37
Additional Paid In Capital 8,041 7,969
Deficit (1,769) (2,462)
Unrealized loss on Investment (295) --
Cumulative translation adjustment (1,065) (964)
---------- ----------
Total Shareholders' Equity 4,949 4,580
---------- ----------
$ 33,912 $ 30,492
========== ==========
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(IN THOUSANDS - EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
NET SALES $ 16,427 $ 18,477 $ 64,777 $ 51,230
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of goods sold 8,635 9,612 35,941 25,520
Advertising 3,646 2,816 11,823 8,534
Selling, general & administrative 5,221 5,411 16,117 13,772
---------- ---------- ---------- ----------
Total Costs and Expenses 17,502 17,839 63,881 47,826
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) $ (1,075) $ 638 $ 896 $ 3,404
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 15 35 41 65
Interest expense (130) (5) (305) (26)
Foreign currency transaction gain (loss) 17 (176) (27) (125)
---------- ---------- ---------- ----------
Total Other Income (Expense) (98) (146) (291) (86)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE (PROVISION)
BENEFIT FOR INCOME TAXES (1,173) 492 605 3,318
(PROVISION) BENEFIT FOR INCOME TAXES 221 18 88 (204)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (952) $ 510 $ 693 $ 3,114
========== ========== ========== ==========
INCOME (LOSS) PER SHARE;
BASIC $ (.12) $ .07 $ .09 $ .42
DILUTED $ (.12) $ .06 $ .09 $ .40
SHARES USED IN THE CALCULATION OF
INCOME (LOSS) PER SHARE;
BASIC 7,632 7,526 7,625 7,503
DILUTED 7,632 8,154 8,138 7,811
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
Nine Months Ended
March 31,
1998 1997
---------- ----------
Cash Flows From Operating Activities:
Net income $ 693 $ 3,114
Adjustments to reconcile net income to cash provided by (used for)
Operating activities:
Depreciation and amortization 621 465
Changes in current operating items:
Accounts receivable 3,868 496
Inventories (1,303) (10)
Royalty and other advances (679) (160)
Prepaid expenses and other (3,195) (725)
Current liabilities (4,167) (193)
---------- ----------
Cash provided by (used for) operating activities (4,162) 2,987
---------- ----------
Cash flows from investing activities:
Property and equipment purchases (371) (540)
Proceeds from sale of property and equipment 3 30
Music catalog additions (559) (188)
Other 547 (104)
Acquisition of Regal (Note 6) (350) --
---------- ----------
Cash used for investing activities (730) (802)
---------- ----------
Cash flows from financing activities:
Issuance of Long Term Debt 4,000 --
Borrowings on line of credit, Foothill Capital 16,104 --
Repayments on line of credit, Foothill Capital (13,449) --
Repayments on line of credit (836) (1,864)
Proceeds (repayments) on note payable to affiliate, net (1,500) 1,000
Proceeds from exercise of stock options 73 78
---------- ----------
Cash provided by (used for) financing activities 4,392 (786)
---------- ----------
Effect of exchange rates on cash (109) (119)
---------- ----------
Net increase (loss) in cash and cash equivalents (609) 1,280
Cash and cash equivalents at beginning of year 3,341 3,255
---------- ----------
Cash and cash equivalents at period end $ 2,732 $ 4,535
========== ==========
Supplemental Schedule of Non-cash Activities:
Debt assumed in conjunction with acquisition $ 2,900 $ --
========== ==========
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine month
periods ended March 31, 1998, 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 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.
During June 1997, the Financial Accounting Standards Board released
SFAS No. 130, "Reporting Comprehensive Income", effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display in the financial statements of
total net income and the components of all other non-owner changes
in equity, referred to as comprehensive income. The Company will
adopt SFAS 130 in Fiscal 1999 and is currently analyzing the impact
it will have on the disclosures in its financial statements.
3. COMPUTATION OF NET INCOME (LOSS) PER SHARE
During the second quarter of fiscal 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." As a result, all previously reported earnings (loss) per
share have been restated. Basic earnings (loss) per share have been
computed by dividing net income (loss) by the weighted average
number of shares outstanding during the period. Diluted earnings
(loss) per share have been computed assuming the exercise of stock
options and their related income tax effect. For all periods
presented, common stock equivalents that were anti-dilutive were
excluded from the per share calculation.
For the three-month periods ended March 31, 1997, weighted average
shares outstanding included common stock equivalents of
approximately 628,000 shares related to stock options. For the
nine-month periods ended March 31, 1998, and 1997, weighted average
shares outstanding included common stock equivalents of
approximately 513,000 shares and 308,000 shares, respectively,
related to stock options.
On April 21, 1998, the Board of Directors declared a two-for-one
stock split of the Company's Common Stock in the form of a stock
dividend payable to shareholders of record on May 1, 1998. All
disclosures and applicable per share data have been retroactively
restated to reflect this split.
4. LOAN AND SECURITY AGREEMENT
On November 19, 1997, certain of the Company's subsidiaries entered
into a four-year $10 million credit facility with a lending
institution. The credit facility consists of a $4 million term loan
due November 19, 2001, and a $6 million revolving line of credit
facility. Borrowings under the facility bear interest at the prime
rate and are secured by the assets of certain of the Company's U.S.
subsidiaries, including accounts receivable, inventories, equipment,
music library and general intangibles. The loan agreement contains
certain financial and other covenants or restrictions, including the
maintenance of a minimum tangible net worth by the Company,
limitations on capital expenditures, restrictions on music library
acquisitions, limitations on the incurrence of indebtedness, and
restrictions on dividends to the Company. The Company has guaranteed
the obligations of its subsidiaries under the credit facility and
has pledged the stock of those subsidiaries and its assets to secure
the Company's obligations under its guaranty. The proceeds of the
credit facility were used to repay in full, and terminate, the
previously existing bank revolving credit agreement and the
$1,500,000 note payable to affiliate. As of March 31, 1998, the
amount outstanding under the line of credit was $2,655,000, and the
Company was either in compliance of, or had obtained waiver thereof,
of all covenants, limitations and restrictions.
5. CAPTITAL STOCK
On May 1, 1998, in connection with the two-for-one stock split, the
Company amended its articles of incorporation to increase the number
of authorized shares of Common Stock to 15,000,000 shares.
6. ACQUSITION OF CERTAIN ASSETS OF REGAL SHOP INTERNATIONAL LTD.
On March 4, 1998, the Company acquired certain media and other
assets of United Kingdom based Regal Shop International Ltd., for
purchase consideration of $350,000 cash and the assumption of
$2,900,000 of debt. The Company may also be liable for additional
purchase consideration of up to $300,000 based upon defined cash
flow of the assets. The Company has accounted for the acquisition as
a purchase, and the purchase price in excess of the fair value of
the net assets acquired has been allocated to goodwill.
7. RECLASSIFICATIONS
Certain June 30, 1997 amounts in the financial statements have been
reclassified to conform to the current period presentation. The
reclassifications had no effect on the Company's shareholders'
equity or results of operations.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL - K-tel International, Inc. is an international marketer and
distributor of entertainment and consumer products and is a leader
in the market niche for pre-recorded music compilations. With more
than thirty-five years of marketing experience in the United States
("U.S."), Canada and Europe, the Company has developed the
resources, knowledgeable personnel, information systems, and
distribution capabilities to launch music, video, and consumer
products quickly in the North American and European markets through
traditional retail and direct-response marketing channels. On May 1,
1998, the Company launched its new Internet service, "K-tel Express"
(www.ktel.com), featuring a wide spectrum of music products for
purchase by the public around the globe. Scheduled to be open for
commerce 24 hours a day, 365 days a year, "K-tel Express" features
more than 250,000 music titles at value prices through this on-line
shopping service.
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 (distributors which stock and manage
inventory within certain music and video departments for certain
retail stores), wholesalers and retailers in the U.S. and through
subsidiaries and licensees in the United Kingdom and elsewhere in
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 an U.S. media- buying and
infomercial-marketing subsidiary, which performed media buying
services for third parties and also marketed products through
infomercials produced by third parties. As of March 31, 1988, due to
accumulated losses to date of $1,300,000 the Company has curtailed
most of these media buying operations and will now focus on its
existing primary businesses - music distribution and direct response
marketing, and its newly launched Internet retailing business.
A. RESULTS OF OPERATIONS
Consolidated net sales for the nine months ended March 31, 1998,
were $64,777,000 with operating income of $896,000 and net income of
$693,000, or $.09 per diluted share. Consolidated net sales for the
same period in the prior year were $51,230,000 with operating income
of $3,404,000 and net income of $3,114,000, or $.40 per diluted
share. The following tables set forth, for the periods indicated,
results of operations by geographic region as a percentage of net
sales. All amounts are in thousands of dollars.
Nine Months Ended March 31, 1998
----------------------------------------------------------------------
North America Europe Total
-------------------- -------------------- --------------------
Net Sales $ 44,279 100% $ 20,498 100% $ 64,777 100%
Costs and expenses
Cost of goods sold 26,612 60% 9,329 46% 35,941 55%
Advertising 7,736 17% 4,087 20% 11,823 18%
Selling, general & administrative 9,205 21% 5,393 26% 14,598 23%
-------- -------- -------- -------- -------- --------
Operating Income $ 727 2% $ 1,689 8% $ 2,415 4%
======== ======== ======== ======== ======== ========
Nine Months Ended March 31, 1997
----------------------------------------------------------------------
North America Europe Total
-------------------- -------------------- --------------------
Net Sales $ 30,484 100% $ 20,746 100% $ 51,230 100%
Costs and expenses
Cost of goods sold 16,177 53% 9,343 45% 25,520 50%
Advertising 4,270 14% 4,264 21% 8,534 17%
Selling, general & administrative 7,194 24% 5,402 26% 12,596 24%
-------- -------- -------- -------- -------- --------
Operating Income $ 2,843 9% $ 1,737 8% $ 4,580 9%
======== ======== ======== ======== ======== ========
In addition to the operating amounts shown above for the nine months
ended March 31, 1998 and 1997, the parent holding company incurred
expenses of $1,519,000 and $1,176,000, respectively.
Consolidated net sales for the three months ended March 31, 1998,
were $16,427,000 with an operating loss of $1,075,000 and a net loss
of $952,000, or $.12 per share. Consolidated net sales for the same
period in the prior year were $18,477,000 with operating income of
$638,000 and net income of $510,000 or $.06 per diluted share. The
following tables set forth, for the periods indicated results of
operations by geographic region as a percentage of net sales.
All amounts are in thousands of dollars.
Quarter Ended March 31, 1998
-------------------------------------------------------------------------
North America Europe Total
--------------------- -------------------- ---------------------
Net Sales $ 10,919 100% $ 5,508 100% $ 16,427 100%
Costs and expenses
Cost of goods sold 6,031 55% 2,604 47% 8,635 53%
Advertising 2,538 23% 1,108 20% 3,646 22%
Selling, general & administration 3,031 28% 1,792 33% 4,823 29%
-------- -------- -------- -------- -------- --------
Operating Income(Loss) $ (681) (6)% $ 4 0% $ (677) (4)%
======== ======== ======== ======== ======== ========
Quarter Ended March 31, 1997
-------------------------------------------------------------------------
North America Europe Total
--------------------- -------------------- ---------------------
Net Sales $ 11,857 100% $ 6,620 100% $ 18,477 100%
Costs and expenses
Cost of goods sold 6,796 57% 2,816 43% 9,612 52%
Advertising 1,427 12% 1,389 21% 2,816 15%
Selling, general & administration 3,160 27% 1,787 27% 4,947 27%
-------- -------- -------- -------- -------- --------
Operating Income $ 474 4% $ 628 9% $ 1,102 6%
======== ======== ======== ======== ======== ========
In addition to the operating amounts shown above for the quarters
ended March 31, 1998 and 1997, the parent holding company incurred
expenses of $398,000 and $464,000, respectively.
CONSOLIDATED NET SALES for the nine months ended March 31, 1998
increased $13,547,000, or 26%, from the comparable period in 1997.
North American sales for the nine months ended March 31, 1998
increased $13,795,000, or 45%, from the comparable period in 1997.
This increase was mainly due to a $13,000,000 increase in sales
derived from the Company's media buying and infomercial subsidiary
which was not in existence for most of the comparable period in
1997, and an increase in approximately $800,000 of music and
consumer product sales from the comparable period in 1997.
For the quarter ended March 31, 1998 consolidated net sales
decreased $2,050,000, or 11%, from the comparable period in 1997.
North American sales for the three months ended March 31, 1998
decreased $938,000, or 8%, from the comparable period in 1997. This
decrease was mainly due to a $3,000,000 decrease of music and
consumer product sales from the comparable period in 1997. This
decrease was offset by an increase of approximately $2,100,000 of
sales from the Company's media buying and infomercial subsidiary
from the comparable period in 1997. European sales for the three
months ended March 31, 1998 decreased $1,112,000, or 17%, from the
comparable period in 1997. This decrease was due to the Company's
German operation where foreign currency translation adjustments
caused a variance of approximately $550,000 in sales from 1997. The
remainder of the difference relates to an overall decrease in sales
in 1998 as compared to 1997, which in part was caused by the
existence of $535,000 of sales on backorder as of March 31, 1998
that the Company was not able to ship. The
backorders related to a new product that was launched in March 1998
for which inventory ordered had not yet arrived in Germany for
shipment. These sales will be reflected as fourth quarter sales.
CONSOLIDATED COST OF GOODS SOLD AS A PERCENTAGE OF NET SALES for the
nine months ended March 31, 1998 were 55% as compared to 50% in the
comparable period in 1997. Costs of goods sold as a percentage of
net sales for North America for the nine months ended March 31, 1998
were 60% as compared to 53% in the comparable period in 1997. The
increase is mainly due to the higher costs of goods associated with
the Company's media buying and infomercial subsidiary, which
approximated 61%, which was not in existence for most of the
comparable period of fiscal 1997. Additionally, the Company
experienced a slightly higher cost of goods sold in its U.S. retail
music and consumer product business which was caused by a high level
of returns of consumer products, the majority of which are no longer
being distributed by the Company. European costs of goods sold were
46% as compared to 45% in the comparable period in 1997 as the gross
margins were slightly lower on merchandise sold via direct response
as compared to the merchandise sold in the prior period.
For the quarter ended March 31, 1998, cost of goods sold were 53% as
compared to 52% in the comparable period in 1997. Cost of goods sold
as a percentage of net sales for North America for the three months
ended March 31, 1998, were 55% as compared to 57% in the comparable
period in 1997. The decrease was due to the lower cost of music
product sold in 1998 as compared to the music product cost sold in
the comparable period in 1997. The lower gross margin experienced by
the Company's third-party media-buying operation year to date did
not significantly effect this quarter due to the lower level of
sales activity. European costs of goods sold were 47% as compared to
43% in the comparable period in 1997, as the costs of the products
and merchandise sold via direct response in 1998 were slightly lower
as compared to the merchandise sold in the comparable period in
1997.
CONSOLIDATED ADVERTISING COSTS for the nine months ended March 31,
1998, increased $3,289,000, or 39%, from the comparable period in
1997. North American advertising costs for the nine months ended
March 31, 1998, increased $3,466,000, or 81%, from the comparable
period in 1997. This increase was mainly due to a $4,500,000
increase in the advertising and media costs incurred by the
Company's media-buying and infomercial subsidiary that was not in
existence for most of the comparable period of 1997. This increase
was offset by a decrease of $1,100,000 in advertising by the
Company's U.S. music operations that directly related to a decrease
in television promotion for its product. European advertising costs
for the nine months ended March 31, 1998, remained fairly consistent
with the comparable period in 1997.
For the quarter ended March 31, 1998, advertising costs increased
$830,000, or 29%, from the comparable period in 1997. North American
advertising costs for the three months ended March 31, 1998,
increased $1,111,000, or 78% from the comparable period in 1997.
This increase was mainly due to an increase of $1,200,000 in
advertising and media costs of incurred by the Company's
media-buying and infomercial subsidiary from the comparable period
in 1997. The increase in European advertising costs for the three
months ended March 31, 1998, related mostly to additional media
expenditures incurred in Germany.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the
nine months ended March 31, 1998, increased $2,002,000, or 16%, from
the comparable period in 1997. North American selling, general and
administrative expenses for the nine months ended March 31, 1998,
increased $2,011,000, or 28%, from the comparable period in 1997.
The difference in part relates to a reduction of $850,000 in 1997 of
general and administrative costs that resulted from the recovery of
certain legal and other costs related to a dispute with a third
party over certain music licensing rights. Excluding the settlement
amount, general and administration expenses for the nine-month
period ending March 31, 1998, as compared to same period in 1997
increased by $1,152,000, or 9%. This remaining increase specifically
relates to costs incurred by the Company's media-buying and
infomercial subsidiary that was not in existence for most of the
comparable period in 1997. European selling, general and
administrative expenses for the nine months ended March 31, 1998,
remained consistent with costs incurred in the comparable period in
1997. Additionally, the parent holding company incurred operating
costs of $1,519,000 compared to such expenses of $1,176,000 in the
comparable period in 1997. The increase of $343,00 is mainly
attributable to the startup costs incurred with the launch on May 1,
1998 of "K-tel Express," the Company's Internet music business.
For the quarter ended March 31, 1998, selling, general and
administrative expenses decreased $124,000, or 3%, from the
comparable period in 1997. Both North American and European selling,
general and administrative expenses for the three months ended March
31, 1998 remained fairly consistent with the comparable period in
1997. Additionally
the parent holding company incurred operating costs of $398,000
compared to $464,000 in the comparable period in 1997.
OPERATING INCOME for the nine months ended March 31, 1998 decreased
$2,165,000, or 47%, from the comparable period in 1997. North
American operating income decreased $2,116,000, or 74%, from the
comparable period in 1997. The decrease in part relates to a
reduction of $850,000 in 1997 of general and administrative costs
that resulted from the recovery of certain legal and other costs
related to a dispute with a third party over certain music licensing
rights. Excluding the settlement amount, operating income for the
nine-month period ending March 31, 1998, as compared to same period
in 1997, decreased by $1,315,000, or 35%. The decrease in part
relates to an additional $1,000,000 of losses, as compared to the
prior period in 1997, incurred by the Company's third-party media
buying subsidiary as the Company was unable to obtain profitable
operations, and to a $600,000 difference in operations from the
Company's U.S. music and consumer product divisions. This difference
resulted mainly from a increase in the costs of goods of the music
and consumer products sold in 1998 as compared to 1997, and a high
level of returns of consumer products, the majority of which are no
longer being distributed by the Company. European operating income
remained fairly consistent with the comparable period in 1997.
For the quarter ended March 31, 1998, the Company experienced an
operating loss of $677,000, as compared to operating income of
$1,102,000 in the comparable period in 1997, a change of $1,779,000.
North American operations decreased $1,155,000 to an operating loss
of $681,000, as compared to operating income of $474,000 in the
comparable period in 1997. The decrease in part relates to an
additional $625,000 of losses, as compared to the prior period in
1997, incurred by the Company's third-party media buying subsidiary
as the Company was unable to obtain profitable operations, and to a
$500,000 difference in operations from the Company's U.S. music and
consumer product divisions that resulted mainly from a decrease in
music and consumer product sales from the comparable period in 1997.
European operating income decreased $624,000, or 99%, from the
comparable period in 1997. This decrease was due to an overall
decrease in sales in 1998 from the Company's German operation as
compared to 1997, which in part was caused by the existence of
$535,000 of sales on backorder as of March 31, 1998, that the
Company was not able to ship. The backorders related to a new
product that was launched in March 1998 for which inventory ordered
had not yet arrived in Germany for shipment. These sales will be
reflected as fourth quarter sales.
INTEREST EXPENSE for the nine months ended March 31, 1998, increased
$279,000 to $305,000, as compared to $26,000 in the same period in
1997. For the three months ended March 31, 1998, interest expense
increased $125,000 to $130,000, as compared to $5,000 for the same
period in 1997. The increase in interest expense corresponds with
the increased borrowings made by the Company during these periods
under its existing credit facilities. During the nine months ended
March 31, 1998, the Company experienced a foreign currency
transaction loss of $27,000, compared to a loss of $125,000
experienced during the comparable period in the prior year. For the
three months ended March 31, 1998, the Company experienced a foreign
currency gain of $17,000 compared to a loss of $176,000 in the prior
year. 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 translation losses for the nine-month
and three-month periods ended March 31, 1998 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 nine months ended March 31, 1998, were a
benefit of $88,000 compared to a provision of $204,000 in the prior
year comparable period. For the three months ended March 31, 1998,
the tax benefit was $221,000 as compared to a benefit of $18,000 in
the prior year period. Variations in the Company's tax provision are
a factor of the country of origin of profits and the availability of
net operating loss carryforwards.
Operating results for the three and nine month periods are not
necessarily indicative of the results that may be expected for the
full year.
B. LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 1998, the Company experienced
negative cash flow from operations of $4,162,000, and utilized
another $730,000 for investing activities. These funds were used for
royalties and other advances for music product, the acquisition of
certain media and other assets acquired from Regal Shops
International in March 1998, the expansion of the Company's European
direct response operations, and for the purchase of certain media by
the Company's third-party media buying subsidiary.
Until November 20, 1997, the Company had a revolving credit
agreement with a U.S. bank that provided borrowing up to $2,500,000
based upon a monthly borrowing base derived from certain of the
Company's U.S. Subsidiaries' accounts receivable. The loan was
secured by assets of the Company's U.S. Subsidiaries, including
accounts receivable, inventories, equipment and owned music master
recordings and was guaranteed by the Company.
On November 20, 1997, certain of the Company's U.S. Subsidiaries
entered into a new four-year $10 million credit facility with
another lending institution. The credit facility consists of a $4
million term loan due November 19, 2001, and a $6 million revolving
line of credit. Borrowings under the facility bear interest at the
prime rate and are secured by the assets of certain U.S.
Subsidiaries, including accounts receivable, inventories, equipment,
music library and general intangibles. The loan agreement contains
certain financial and other covenants or restrictions, including the
maintenance of a minimum tangible net worth by the Company,
limitations on capital expenditures, restrictions on music library
acquisitions, limitations on the incurrence of indebtedness, and
restrictions on dividends to the Company. The Company has guaranteed
the obligations of its subsidiaries under the credit facility and
has pledged the stock of those subsidiaries and its assets to secure
the company's obligations under its guaranty. On November 20, 1997,
a portion of the proceeds from the funding of the credit facility
were used to repay in full the bank revolving credit agreement
discussed in the preceding paragraph and such agreement was
terminated. As of March 31, 1998, the amount outstanding under the
line of credit was $2,655,000, and the Company was either in
compliance of, or had obtained waiver thereof, of all covenants,
limitations and restrictions
As of November 20, 1997, K-5 Leisure Products, Inc., an affiliate
controlled by the Company's Chairman of the Board and Chief
Executive Officer, had provided $1,500,000 in financing to the
Company to fund the Company's U.S. operations. The Company paid
interest on this advance, which is due on demand, at the same rate
as the Company paid on its bank revolving credit agreement. The debt
was repaid in full on November 20, 1997 from a portion of the
borrowings under the new credit facility discussed above. Subsequent
to March 31, 1998, the Company has borrowed $1,000,000 from this
affiliate of the Chairman of the Board and Chief Executive Officer.
The Company has primarily funded its operations to date through
internally generated capital, bank financing or advances made by an
affiliate of the Chairman of the Board and Chief Executive Officer.
However, the Company anticipates that it will require additional
cash in order to fully develop and promote its Internet retail music
site, "K-tel Express." Although the Company has made no material
commitments for capital expenditures, it anticipates a substantial
increase in funding requirements for development and acquisition of
technology, marketing and promotion, and for capital expenditures to
develop the infrastructure necessary for the anticipated growth in
operations. To date the Company has no commitments for any
additional financing, and there can be no assurance that such
commitments can be obtained on favorable terms, if at all. The
Company has available to it funding from a company owned by the
Company's Chairman of the Board and Chief Executive Officer.
Although management does not have access to the financial statements
of the Chairman's other companies, he has assured the Company that
he will fund its operations on an as needed basis consistent with
his past practices which have mainly been by way of giving the
Company open ended payment terms on product purchased from his
affiliate companies.
During the first nine months of fiscal 1998, the Company purchased
approximately $324,000 of consumer convenience product from an
affiliate controlled by the Company's Chairman of the Board and
Chief Executive Officer. The Company owed approximately $67,000 to
the affiliate at March 31, 1998. This same affiliate purchased
approximately $35,000 of consumer convenience products from the
Company during the nine months ended March 31, 1998, and owed the
Company $23,000 at March 31, 1998. No interest will be charged on
the related outstanding balances during fiscal 1998.
Important Factors Relating to Forward Looking Statements.
-Information in this form 10Q may contain forward-looking statements
relating to future results of the Company (including certain
projections and business trends) that are "forward-looking
statements" as defined in the Private Securities Litigation Reform
Act of 1995. Actual results may differ materially from those
projections as a result of certain risks and uncertainties,
including but not limited to, changes in political and economic
conditions, demand for and market acceptance of new and existing
products, the impact from competition for Internet content,
merchandise and recorded music, dependence on strategic alliance
partners, suppliers and distributors, market acceptance of the
Internet for commerce and as a medium for advertising, technological
changes and difficulties, and availability of financing..
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
3.1 Amendment to Articles of Incorporation
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 March
31, 1998.
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)