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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, 1995 Commission File Number 0-6664
K-TEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0946588
(State or other jurisdiction of (I.R.S. Employer 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 (879,000 shares) at September 28, 1995 was $3,516,000 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 required to be filed by Sections 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, 1995 there were approximately 3,713,797 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Report on Form 8-K filed with the Securities and
Exchange Commission on August 16, 1995, are incorporated into Part IV of this
Form.
PART I
ITEM 1: BUSINESS
K-tel International, Inc. is an international marketing and distribution company
for packaged consumer entertainment (music and video) and consumer convenience
products (lower priced housewares, automotive accessories, exercise devices,
etc.) and is a leader in the market niche for pre-recorded music compilations.
With its more than twenty 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 markets 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) in the U.S. and through foreign
subsidiaries and licensees in the United Kingdom ("U.K."), Europe and the
Pacific region.
The Company was incorporated in 1968 with its current corporate offices located
at 2605 Fernbrook Lane North, Minneapolis, Minnesota, 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 recorded music into
Germany through direct to consumer advertising, utilizing terrestrial (local,
within country) TV 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 some occasional new product
tests.
During fiscal 1990 the Company completed separate sales of both its consumer
convenience products and sell-through video businesses in Australia due to the
subsidiary's inability to generate sufficient sales and profits. From 1990
through 1994, the Company maintained a limited presence in Australia by
licensing the K-tel name and trademarks along with its owned music master
catalog to a third party. The Company has continued to monitor the potential for
profit in that region and, in fiscal 1993, re-established a legal entity in
Australia. The company has not yet determined when it will commence operations
in that market.
Throughout fiscal 1989 and 1990 the Company's subsidiary in the U.K. provided
distribution services for a major rackjobber of sell-through videos (videos sold
to consumers at retail, not rental). Providing these services substantially
utilized the U.K. subsidiary's existing distribution assets and systems. The
agreement expired in June 1990 as a result of the rackjobber developing its own
distribution system. During the period of the agreement the Company evaluated
the future distribution business potential and found that it was unable to
attract sufficient third party distribution clients to sustain this low margin,
high overhead business. At the end of fiscal 1990, the Company decided to
discontinue the distribution business and sold all of its distribution assets
and systems in the U.K. The result of this sale was reported by the Company
during fiscal 1991. As a result of the sale, the Company formed a new U.K.
subsidiary to market sell-through videos, music products and consumer
convenience products which are distributed by third parties, to license the
Company's owned music master catalog, and to assist in the development of direct
response business in European markets.
In the early 1990's the Company increased its level of marketing consumer
convenience product in the U.S., U.K. and Europe primarily by expanding direct
to consumer marketing. By the end of fiscal 1993, consumer convenience product
sales, generated from direct to consumer marketing and retail sales, comprised
over 40% of the Company's consolidated net sales. In fiscal 1994, consumer
convenience product marketing generated approximately 34% of the Company's
consolidated net sales. At the end of fiscal 1994, the Company decided to cease
consumer convenience product marketing in the United Kingdom due to unprofitable
results in this area and a reliance on expensive television advertising to
support sales levels. In fiscal 1995, consumer convenience product marketing
generated approximately 39% of the Company's consolidated net sales with the
percentage increasing from fiscal 1994 due to strong U.S. consumer convenience
product retail sales growth. In the fourth quarter of fiscal 1995, due to
continuing unprofitable operations, the Company decided to close its operations
in Spain which relied almost entirely on consumer convenience product, and to
restructure/downsize its operations in Germany by eliminating short form (30,
60, 90 second spot television commercials) direct response consumer convenience
product marketing. The impact of these decisions should reduce the Company's
overall percentage of consumer convenience product sales to total consolidated
net sales in the future.
In fiscal 1992 the Company incorporated new subsidiaries in Spain and France.
The Spanish subsidiary sold consumer convenience product direct to consumers and
expanded into retail outlets in fiscal 1993. The Spanish subsidiary also
expanded its direct to consumer marketing of consumer convenience product into
the Portuguese marketplace in fiscal 1993. The French subsidiary marketed and
sold sell-through videos to retail outlets and expanded into retail and mail
order markets with consumer convenience product in fiscal 1993. At the end of
fiscal 1994, the Company decided to close its operations in France due to
continued losses in direct to consumer marketing programs resulting partly from
restrictive government regulations on television advertising. The costs of
closing the Company's French operations were recorded by the Company in the
fourth quarter of fiscal 1994. In the fourth quarter of fiscal 1995, the Company
decided to close its operations in Spain due to continued losses in that
territory. The expected costs of closing the Spanish operations were recorded by
the Company in the fourth quarter of fiscal 1995.
The Company operated in the New Zealand marketplace for over twenty years and
received marketing and product development support from the Company's Australian
subsidiary for many of those years due to the close geographic locations of the
companies. As previously described, the Company sold its Australian businesses
in fiscal 1990. As a result, the Company's New Zealand product origination and
operating costs increased to the point where it was unable to remain profitable.
As a result, at the end of fiscal 1994, the Company decided to close operations
in New Zealand. The costs of closing the Company's New Zealand operations were
recorded by the Company in the fourth quarter of fiscal 1994.
Description of Current Business
During fiscal 1995 the Company continued to market and sell pre-recorded music
both from the Company's owned music master catalog and licensed 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., Europe and Pacific Region. 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 part of the Company's U.K. subsidiary's business is the marketing and sale of
sell-through video product. A small amount of video product is also sold in the
Company's other foreign subsidiaries. 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 is the case with music, advances against royalties are often required
in order to obtain these video rights.
One of the Company's major assets is its music master catalog consisting of
original recordings and re-recordings of music from the 1950s through the 1980s
("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 recorded music, sell-through video and
consumer convenience product is a major source of revenue for the Company,
specifically in Europe. The Company initiated its direct response business in
Germany and expanded into most of Europe. The Company continues to perform
direct response marketing activities throughout Europe, mostly 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. One of the Company's primary goals in
its direct response campaigns is not only to generate revenues and profits from
such sales themselves, but also to generate subsequent retail demand which
should help to enhance profitability.
During fiscal 1995, consumer convenience product sales remained a significant
portion (approximately 39%) of the Company's overall consolidated net sales
compared to 34% in 1994. The increase was largely the result of strong increases
in fiscal 1995 U.S. consumer convenience product retail sales due to increased
human resources and marketing efforts. Sales growth in this area is expected to
continue in fiscal 1996 as the Company dedicates more resources to this
expansion. In the fourth quarter of fiscal 1995, due to continuing unprofitable
operations, the Company decided to close its operations in Spain which relied
almost entirely on consumer convenience product, and to restructure/downsize its
operations in Germany by eliminating short form (30, 60, 90 second spot
television commercials) direct response consumer convenience product marketing.
The impact of these decisions should reduce the Company's overall percentage of
consumer convenience product sales to total consolidated net sales in the
future. Consumer convenience products were sold to wholesalers and retailers as
well as direct to consumers, usually supported by television advertising.
Television direct response marketing was mainly focused in Europe; however; the
Company continued its development in the U.S. of television direct response
marketing of consumer convenience and music products in fiscal 1995 with
numerous tests and some smaller roll out promotions. The United States operation
intends to continue developing direct response marketing in the upcoming fiscal
year. The Company has also initiated print direct response campaigns for
consumer convenience and music products. These print campaigns have been and
will probably remain a fairly small part of the Company's overall direct
response business. Consumer convenience products are developed centrally for
potential distribution in all of the Company's subsidiaries. The consumer
convenience product market is highly competitive. The Company has operated in
this competitive market by selling lower priced (usually under $100 retail
price) goods since its inception and relies on its experience in consumer
convenience product selection, commercial production and television marketing to
be competitive in this business.
Public awareness of the Company's products is created through television and
print advertising campaigns, in-store displays and eyecatching 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 to Handleman Company represented 11%, 14% and 12% of the Company's
consolidated net sales for the years ended June 30, 1995, 1994 and 1993. 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, 1995 the Company employed 186 full time people worldwide.
Prospective Information
On July 24, 1995, the Board of Directors of K-tel International, Inc. (the
Company) approved the sale of its consumer entertainment business to a
corporation controlled by the Company's President and Chief Executive Officer
(the Purchaser). The Company proposes to sell its consumer entertainment
business to the Purchaser by selling to the Purchaser three domestic
subsidiaries and ten foreign subsidiaries (the "Entertainment Subsidiaries")
which own the master recording catalog rights to music recordings and through
which the Company operates its consumer entertainment products business at a
purchase price of $25,000,000 plus certain adjustments estimated at June 30,
1995 to increase the total purchase price to approximately $32,000,000. The
Company will retain and continue to operate its non-entertainment consumer
product business, including two domestic subsidiaries (the "Remaining
Subsidiaries") operating the retained business. As part of the transactions, the
Company and the Remaining Subsidiaries will repay the net intercompany debt owed
by them to the Entertainment Subsidiaries estimated to be approximately
$8,700,000 at June 30, 1995 and will repay bank indebtedness estimated at June
30, 1995 to be approximately $1,500,000.
For financial information about the Company's foreign and domestic operations
for each of the last three fiscal years ended June 30, 1995, see Note 3 to the
consolidated financial statements.
ITEM 2: PROPERTIES
K-tel's corporate offices and U.S. operations are located in leased facilities
in a suburb of Minneapolis, Minnesota. The property consists of 115,859 square
feet of office and warehouse facilities.
K-tel's foreign subsidiaries lease a total of 34,359 square feet of office and
warehouse facilities.
Due to recent growth, the Company's U.S. operations have expanded the amount of
leased warehouse distribution space used in the past two years. In the fourth
quarter of fiscal 1995, the Company's U.S. operations leased and sub-leased new,
larger office and warehouse facilities to properly accommodate recent growth.
These facilities carry lease payment obligations through the year 2000. The
facilities leased are part of multi-tenant facilities. See Note 7 to the
consolidated financial statements.
ITEM 3: LEGAL PROCEEDINGS
As of the date hereof, the Company was not involved in any material legal
proceedings.
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 1995.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
On September 28, 1995 there were 1,782 record owners of the Company's common
stock and approximately 3,724,172 shares outstanding. On July 19, 1993, K-tel
International, Inc. common stock commenced trading on the NASDAQ National Market
System under the symbol "KTEL". Previously, trading of shares of the Company's
common stock was limited and sporadic in the local over-the-counter market.
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:
1994 1995
High Low High Low
First Quarter 9 3/8 7 1/2 5 1/8 3
Second Quarter 10 3/4 6 1/2 5 3/4 3
Third Quarter 7 1/4 6 1/4 6 1/8 3 3/4
Fourth Quarter 7 4 3/4 4 3
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, 1995. This summary should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this report. 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.
Year Ended June 30,
1995 1994 1993 1992 1991
Net Sales $ 65,917 $54,270 $55,714 $ 48,234 $ 35,252
Operating Income (Loss) $ (2,188) $ 223 $ 3,623 $ 2,488 $ 727
Net Income (Loss) $ (2,483) $ 376 $ 2,701 $ 1,875 $ 558
Net Income (Loss) Per Common
and Common Equivalent Share $ (.67) $ .10 $ .72 $ .50 $ .15
Total Assets $ 28,637 $26,874 $21,922 $ 22,292 $ 15,942
Long-Term Debt $ -- $ -- $ 2 $ 66 $ 116
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 percentage of
net sales. All amounts are in thousands of dollars.
Year Ended June 30, 1994
North America Europe and Pacific Total
Net Sales $36,579 100% $ 29,338 100% $ 65,917 100%
Costs and expenses
Cost of goods sold 22,131 61% 13,607 46% 35,738 54%
Advertising 3,490 9% 8,111 28% 11,601 17%
Selling, general & administrative 9,155 25% 9,641 33% 18,796 29%
Restructuring/closedown charges -- -- 652 2% 652 1%
Operating Income (Loss) 1,803 5% (2,673) (9)% (870) (1)%
(ABOVE TABLE CONTINUED)
Year Ended June 30, 1995
North America Europe and Pacific Total
Net Sales $28,606 100% $ 25,664 100% $54,270 100%
Costs and expenses
Cost of goods sold 16,003 56% 11,268 44% 27,271 50%
Advertising 2,787 10% 7,676 30% 10,463 19%
Selling, general & administrative 6,225 22% 8,374 33% 14,599 28%
Restructuring/closedown charges -- -- 624 2% 624 1%
Operating Income (Loss) 3,591 12% (2,278) (9)% 1,313 2%
For the year ended June 30, 1995, the parent company recorded $1,318,000 in
expenses. For the year ended June 30, 1994, the parent company recorded
$1,090,000 in expenses. The increase in costs was due to additions in personnel
and the establishment of a corporate satellite office in Los Angeles.
Year Ended June 30, 1994
North America Europe and Pacific Total
Net Sales $28,606 100% $ 25,664 100% $54,270 100%
Costs and expenses
Cost of goods sold 16,003 56% 11,268 44% 27,271 50%
Advertising 2,787 10% 7,676 30% 10,463 19%
Selling, general & administrative 6,225 22% 8,374 33% 14,599 28%
Restructuring/closedown charges -- -- 624 2% 624 1%
Operating Income (Loss) 3,591 12% (2,278) (9)% 1,313 2%
(ABOVE TABLE CONTINUED)
Year Ended June 30, 1993
North America Europe and Pacific Total
Net Sales $18,976 100% $36,738 100% $55,714 100%
Costs and expenses
Cost of goods sold 10,551 56% 13,400 37% 23,951 43%
Advertising 1,251 6% 10,405 28% 11,656 20%
Selling, general & administrative 5,063 27% 10,279 28% 15,342 28%
Restructuring/closedown charges -- -- -- -- -- --
Operating Income (Loss) 2,111 11% 2,654 7% 4,765 9%
In addition to the operating amounts above, the parent company recorded
$1,090,000 in expenses for the year ended June 30, 1994 and $1,142,000 for the
year ended June 30, 1993.
Fiscal 1995 in Comparison with Fiscal 1994
Consolidated net sales for the fiscal year ended June 30, 1995 were $65,917,000
with an operating loss of $2,188,000 and a net loss of $2,483,000 or $(.67) per
share. Consolidated net sales for the fiscal year ended June 30, 1994 were
$54,270,000 with operating income of $223,000 and net income of $376,000 or $.10
per share.
Consolidated net sales increased $11,647,000 or 21% for the fiscal year ended
June 30, 1995. The increase was primarily due to sales volume growth in the
Company's United States (U.S.) consumer convenience product lines from new and
higher priced products and some European sales growth resulting from more
television direct response promotions than in the prior year. Foreign currency
conditions were more favorable than in the fiscal year ended June 30, 1994 and
caused sales to be $2,932,000 higher for the year ended June 30, 1995 than they
would have been had exchange rates remained consistent with the prior year.
Consolidated cost of goods sold for the year fiscal ended June 30, 1995
increased to 54% of sales compared to 50% for the fiscal year ended June 30,
1994. In Europe, the increase was the result of the change in product lines in
the United Kingdom to a predominance of budget priced entertainment products
(mainly music products) compared to mainly consumer convenience products sold in
the prior year. Also in Europe, the Company incurred inventory write downs to
realizable value indirectly related to the overall restructuring/downsizing
effort in Germany and the closing of the Spanish entity (as discussed in more
detail below). In North America, cost of goods sold increased due mainly to the
sale of some higher priced, lower margin consumer convenience product items and
a product mix of slightly higher cost music product.
Advertising costs as a percentage of net sales for the fiscal year ended June
30, 1995 were 18% compared to 19% for the previous year. The slight decrease
from previous fiscal year was mainly the result of the changing of product lines
in the United Kingdom to predominantly budget priced entertainment product
(mainly music products) from primarily consumer convenience product sold in the
fiscal year ended June 30, 1994. Entertainment products typically require less
advertising than consumer convenience product. North American advertising costs
as a percentage of net sales were flat for the year ended June 30, 1995 compared
to the previous year.
Selling, general and administrative expenses for the fiscal year ended June 30,
1995 were $20,192,000 or 31% of net sales compared to $16,086,000 or 30% of net
sales in the prior fiscal year. Selling, general and administrative expenses for
the year ended June 30, 1995 were higher than the previous year due to North
American overhead additions necessary to support recent 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, 1995 are higher in absolute dollars but comparable
as a percentage of net sales to the previous fiscal year due primarily to more
television direct response promotions in the current year which produced higher
sales revenues but also resulted in more variable selling and shipping expenses.
Restructure/closedown charges of $652,000 in 1995 resulted from the fourth
quarter decision to close loss operations in Spain and to restructure/downsize
loss operations in Germany. Throughout fiscal year 1995, the Company evaluated
various alternatives to improve operating performance or eliminate future
potential negative results from the German and Spanish operations. Investment
banking assistance was retained to identify strategic partners or buyers for
each company but no suitable agreements were reached resulting in the
restructuring and closing down of the entities. In the fourth quarter of fiscal
1995, management made firm commitments and developed and began implementation of
a formal plan to wind down the operations in Spain and restructure/downsize the
operations in Germany by eliminating short form (30, 60, 90 second spot
television commercials) direct response consumer convenience product marketing
(which was previously a significant part of the German operations) and
downsizing the current distribution facility to approximately one third of the
current size and cost. The resulting smaller German operation will focus on
short and long form (infomercials, generally 30 minute commercials) direct
response marketing of music products.
The Company provided closedown charges of $624,000 in 1994 relating to the
Company's closing of loss operations in France and New Zealand and consumer
convenience product operations in the United Kingdom. The closedowns were
completed in the fiscal year ended June 30, 1995 and the accrued charge at June
30, 1994 approximated the actual costs incurred to complete the closedowns
resulting in no material additional benefit or expense in fiscal 1995.
The Company experienced an operating loss of $2,188,000 for the year ended June
30, 1995, compared to operating income of $223,000 for the fiscal year ended
June 30, 1994. Operating income declined in North America for the year ended
June 30, 1995 compared to the prior year as a result of increases in overhead
and product cost discussed above and some unsuccessful advertising promotions in
the second quarter of fiscal 1995. Operating losses in Europe for the year ended
June 30, 1995 increased in comparison to the prior fiscal year despite very
successful entertainment product operations in Finland and the closedown of
operations in a French subsidiary at the end of fiscal 1994 (that had
significant prior year operating losses) and the discontinuance of unprofitable
consumer convenience product lines in the United Kingdom at the end of fiscal
1994. This overall increase in European operating losses was due to continued
losses from the Company's German and Spanish operations and the aforementioned
fourth quarter restructure/closedown charges associated with those entities.
During the year ended June 30, 1995, the Company experienced a foreign currency
transaction gain of $180,000 compared to a gain of $28,000 in the previous year.
For the year ended June 30, 1995, foreign exchange rate fluctuations have been
more favorable to the Company than in the previous fiscal year. The Company has
a policy to reduce its foreign currency exchange exposure by hedging its
exposure through the use of forward contracts. Most of the Company's foreign
currency transaction exposure is due to certain European subsidiary's
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 $375,000 for the year ended June 30, 1995
compared to an income tax benefit of $35,000 for the fiscal year ended June 30,
1994. The prior year tax benefits were the result of loss carrybacks available
in certain foreign subsidiaries. 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 1994 in Comparison with Fiscal 1993
Consolidated net sales for the year ended June 30, 1994 were $54,270,000 with
operating income of $223,000 and net income of $376,000 or $.10 per share.
Consolidated net sales for the fiscal year ended June 30, 1993 were $55,714,000
with operating income of $3,623,000 and net income of $2,701,000 or $.72 per
share.
Net sales decreased $1,444,000 or 3% from the prior year period. The sales
decrease primarily occurred in the Company's European operations due principally
to recessionary economic conditions in Europe, specifically in Germany, which
resulted in less direct response advertising, promotions and sales as compared
to the prior year. European sales declines were partially offset by sustained
growth in music and consumer convenience product retail sales in the U.S. Music
sales increased over fiscal year 1993 as a result of the U.S. operations which
experienced success in most of its widely diverse, product offerings covering
nearly all genres of music. Consumer convenience product sales in the U.S. also
increased from fiscal year 1993 levels as the Company continued to apply its
resources to the development and marketing of these product lines. Foreign
currency conditions discussed below caused sales stated in U.S. dollars for the
year ended June 30, 1994 to be approximately $2,181,000 less than they would
have been had exchange rates remained consistent with fiscal 1993.
Cost of goods sold for the year ended June 30, 1994 was 50% of net sales
compared to 43% for the year ended June 30, 1993. The increase was mainly the
result of the reduction in European direct response sales in fiscal 1994 as a
result of the recessionary conditions described above. Direct response sales
typically carry higher gross margins before advertising costs.
For the year ended June 30, 1994, advertising costs were 19% of net sales
compared to 21% for the year ended June 30, 1993. The decrease was attributable
to retail sales representing a greater percentage of the total sales mix in
fiscal 1994. Retail sales generally require less advertising expenditures than
direct response sales. European advertising costs as a percentage of net sales
increased slightly over fiscal year 1993 due in part to the planned expansion of
the Company's European direct response efforts utilizing infomercial marketing.
Infomercials are information programs of usually 15 to 30 minutes in length with
commercial advertisements for consumer products related to the program. The
Company commenced its European infomercial marketing activities in January 1994.
The Company's U.S. operation experienced an increase in advertising costs over
the fiscal year 1993 comparable period due to an increase in direct response
advertising as the Company continued its U.S. expansion in this area. Even with
this increase, overall Company advertising as a percentage of sales declined due
to U.S. sales (mainly retail sales which carry lower advertising costs than
European sales) representing a greater percentage of consolidated sales than in
fiscal 1993.
Closedown charges of $624,000 resulted from the fiscal year 1994 fourth quarter
decision to close loss operations in France and New Zealand and to closedown
certain unprofitable consumer convenience product lines in the United Kingdom.
The charges included provisions for the write-down of assets (inventories,
accounts receivable and fixed assets) to estimated realizable values, the cost
of certain lease obligations, employee severance costs, committed marketing
costs and professional fees and other expenses associated with the closedowns.
The closedown of the French and New Zealand operations were completed in the
second quarter of fiscal 1995. The Company's United Kingdom operation ceased
consumer convenience product marketing in the first quarter of fiscal 1995 due
to unprofitable results in this area and a reliance on expensive television
advertising to support sales levels.
Selling, general and administrative expenses for the year ended June 30, 1994
were $16,086,000 or 30% of net sales compared to $16,539,000 or 30% of net sales
in the fiscal year ended June 30, 1993. The small decrease of $453,000 was due
to less European sales resulting in less variable sales and distribution
expense, specifically for direct to consumer sales.
Operating income decreased to $223,000 for the year ended June 30, 1994 compared
to $3,623,000 in the fiscal year ended June 30, 1993. The decrease in operating
income was mostly attributable to the European sales declines. The closedown
charges for France and New Zealand also contributed to the decline. The U.S.
operations experienced strong income gains over the previous year; however,
these increases only partially offset the European decline.
During the year ended June 30, 1994, the Company experienced a $28,000 foreign
currency transaction gain compared to a $498,000 loss in the fiscal year ended
June 30, 1993. In fiscal 1994, foreign exchange rate fluctuations were more
favorable to the Company than in the previous year. Also, in fiscal 1994, the
Company initiated a policy to reduce its foreign currency exchange exposure by
hedging its exposure through the use of forward contracts. Most of the Company's
foreign currency transaction exposure is due to its European subsidiaries
liabilities which are payable to the Company's U.S. parent or U.S. Subsidiaries.
In accordance with generally accepted accounting principles the payable balances
are adjusted quarterly to the local currency equivalent of the U.S. dollar. The
majority of the fiscal 1993 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.
The Company experienced an income tax benefit of $35,000 for the fiscal year
ended June 30, 1994 compared to a provision for income taxes of $527,000 in the
previous year. The benefit resulted from loss carrybacks available in certain
foreign subsidiaries. Also, the effective tax rate before these loss carrybacks
was significantly lower than the previous year due to higher pre-tax income from
the U.S. operations compared to previous year which results in more utilization
of net operating loss carryforwards available to the Company.
Liquidity and Capital Resources
During the fiscal year ended June 30, 1995, cash and cash equivalents decreased
approximately $2,017,000 to $2,154,000. The overall decrease in cash was
primarily due to the net loss for the period and increases in nearly all current
operating items (accounts receivable, inventories, royalty advances and prepaid
expenses) which continued to be driven by strong sales growth through the fourth
quarter. The related collections and payments will occur in the first and second
quarter of fiscal 1996. Part of the cash decrease was offset by a net increase
in borrowings.
During fiscal year ended June 30, 1995 the Company purchased approximately
$354,000 of consumer convenience product from an affiliate controlled by the
Chairman of The Board of Directors. The Company owed approximately $175,000 to
the affiliate at June 30, 1995. Also, this same affiliate purchased
approximately $228,000 of consumer convenience product from the Company during
the fiscal year ended June 30, 1995 and owed the Company $208,000 at June 30,
1995. Outstanding balances are settled on a timely basis. No interest was
charged on the related outstanding balances during fiscal 1995.
Three of the Company's United States subsidiaries, K-tel International (USA),
Inc., Dominion Entertainment, Inc. and K-tel, Inc. (the "Subsidiaries") have
revolving credit agreements maturing November 30, 1995. The agreements provide
for an asset based line of credit not to exceed $5,500,000 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. K-tel
International, Inc. has also guaranteed all borrowings of the Subsidiaries.
Interest on borrowings is accrued and due monthly at a rate of prime plus one
and one half percent (10.5%) at June 30, 1995. The amounts outstanding under
these lines of credit were $2,516,000 at June 30, 1995. During 1995, average
borrowings under the lines of credit were approximately $2,500,000, and the
weighted average interest rate was 10.2%. The maximum amount outstanding under
the lines of credit was $4,334,000 during fiscal 1995.
The Subsidiaries are required to maintain minimum levels of tangible net worth
and certain other financial ratios. As of June 30, 1995 the Subsidiaries were in
compliance or have obtained waivers for these covenants.
Management considers its cash needs for the current fiscal year to be adequately
covered by its operations, borrowings under the TCF lines of credit or by
funding from another company controlled by 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. It is the Company's intention to renew its
lines of credit for at least an additional year when they mature on November 30,
1995. The Company has initiated discussions with the bank and believes the lines
of credit will be renewed.
Prospective Information
On July 24, 1995, the Board of Directors of K-tel International, Inc. (the
Company) approved the sale of its consumer entertainment business to a
corporation controlled by the Company's President and Chief Executive Officer
(the Purchaser). The Company proposes to sell its consumer entertainment
business to the Purchaser by selling to the Purchaser three domestic
subsidiaries and ten foreign subsidiaries (the "Entertainment Subsidiaries")
which own the master recording catalog rights to music recordings and through
which the Company operates its consumer entertainment products business at a
purchase price of $25,000,000 plus certain adjustments estimated at June 30,
1995 to increase the total purchase price to approximately $32,000,000. The
Company will retain and continue to operate its non-entertainment consumer
products business, including two domestic subsidiaries (the "Remaining
Subsidiaries") operating the retained business. As part of the transactions, the
Company and the Remaining Subsidiaries will repay the net intercompany debt owed
by them to the Entertainment Subsidiaries estimated to be approximately
$8,700,000 at June 30, 1995 and will repay bank indebtedness estimated at June
30, 1995 to be approximately $1,500,000.
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 25.
ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following are the Directors and executive officers of the Company, their
respective ages, the year in which each was elected a director and where
applicable, the office of the Company held by the director. Each elected
director will hold office until the next annual meeting of shareholders or until
his respective successor has been duly elected and qualified.
Principal Occupation
during the past five Director
Name and Age years Since
Philip Kives Founder of the Company; 1968
(66) Chairman of the Board
of the Company
Mickey Elfenbein Chief Executive Officer, 1973
(48) President and Secretary
of the Company
Mark Dixon Vice President - Finance, 1993
(36) Chief Financial Officer/Treasurer
of the Company
Seymour Leslie Chairman of the Leslie Group, 1993
(72) Inc. and Co-Chairman of
Leslie/Linton Entertainment, Inc.
Sanford Sigoloff Chairman, President and 1993
(65) CEO of Sigoloff & Associates, Inc.
Jeffrey Koblick Senior Vice President, Purchasing Not Applicable
(48) and Operations
David Weiner Senior Vice President Not Applicable
(38)
Mickey Elfenbein is a nephew of Philip Kives.
Philip Kives is the founder and Chairman of the Board of Directors of K-tel
International, Inc.
Mickey Elfenbein has served K-tel International, Inc. in various capacities
since 1969. He was appointed Chief Executive Officer in 1993.
Mark J. Dixon is Vice President Finance - Chief Financial Officer/Treasurer of
K-tel International, Inc. Mr. Dixon joined the Company in 1983 and became a
corporate officer in 1989. Prior to joining the Company, Mr. Dixon was with KPMG
Peat Marwick, St. Paul, MN, earning his CPA in 1981. Mr. Dixon is a member of
the Minnesota Society of CPA's and the AICPA.
Seymour Leslie has served as Chairman of the Leslie Group, Inc., a
privately-held diversified investment company, since 1987 and as Co-Chairman of
Leslie/Linton Entertainment, Inc., a privately-held diversified investment
company, since June 1989. Mr. Leslie has been active in the recorded music
industry since 1953 when he founded Pickwick International, Inc. Mr. Leslie
served as Chairman of the Board of Pickwick until 1977. During his tenure,
Pickwick became a dominant force in the industry and developed the Musicland
chain into the largest record retailer in the world. He was named President of
CBS Video Enterprises in 1980. In 1982, he left CBS to form the MGM/UA Home
Entertainment Group, Inc., a company engaged in the home video and pay
television industry, where he served as Chairman until 1987, when he founded the
Leslie Group. Mr. Leslie also serves as a director for Shorewood Packaging Corp.
(a printing/packaging company), HMG Digital (a tape, video and compact disc
manufacturer), Pacific Rim, Inc. (an animation company) and Gametek, Inc. (a
video/CD-Rom game company).
Sanford C. Sigoloff is Chairman, President and Chief Executive Officer of
Sigoloff & Associates, Inc., a crisis management and consulting firm
specializing in corporate reorganizations, restructurings and turnarounds. For
more than thirty years, Mr. Sigoloff has worked closely with numerous diverse
conglomerates composed of worldwide businesses covering virtually every product
and service sector. In the position of Chief Executive Officer, Mr. Sigoloff has
led the reorganization, recovery and expansion of companies with collective
assets in excess of $5 billion dollars. Among the companies for whom Mr.
Sigoloff has served in senior executive capacities are L.J. Hooker Corporation,
Wickes Companies, Kaufman & Broad, Daylin, Inc. Corporation, Republic
Corporation, and Xerox Corporation. Mr. Sigoloff is an adjunct professor at
UCLA, his alma mater; and frequently lectures at Pepperdine University, Los
Angeles and Carnegie Mellon University in Pittsburgh. Mr. Sigoloff also serves
as a director for SunAmerica, Inc. (a financial services company), Kaufman and
Broad Home Corporation (a home-building company), Movie Gallery, Inc. (a video
distribution company) and Wickes PLC (a lumber company).
Jeffrey Koblick has served K-tel International, Inc. in various capacities since
1970 and has been a corporate officer since 1978.
David Weiner joined K-tel on December 16,1993 and held various managerial
positions within the firm of Deloite & Touche Management Consulting for the five
prior years.
DIRECTOR'S FEES
Board members who are not also officers or employees of the Company receive a
fee of $1,000 for each regular meeting attended and an annual directors fee of
$12,000 to be paid on a quarterly basis at the end of each quarter. The Company
paid director fees of $40,000 during fiscal 1995.
During fiscal 1995, the Company's Board of Director's took action by way of
Unanimous Actions in writing and held four formal meetings.
BOARD COMMITTEES
The Audit Committee consists of Messrs. Leslie and Sigoloff. The principal
functions of the Audit Committee are to (i) recommend to the Board of Directors
the independent public accountants to act as the Company's independent auditors;
(ii) discuss with representatives of management and the independent auditors the
scope and procedures used in auditing the records of the Company; and (iii)
review the financial statements of the Company. The Audit Committee held two
meetings in fiscal 1995.
The Compensation Committee consists of Messrs. Sigoloff and Leslie. The
principal functions of the Compensation Committee are to review and recommend
compensation for executive personnel and to administer the Company's stock
option and other compensation plans. The Compensation Committee held two
meetings in fiscal 1995.
ITEM 11: EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth the cash and noncash
compensation for each of the last three fiscal years awarded to or earned by the
Chief Executive Officer and each of the other highest paid executive officers of
the Company for services in all capacities to the Company and its subsidiaries
during the fiscal year ended June 30, 1995.
Long Term
Annual Compensation Compensation
Other Annual Awards
Name and Principal Position[s] Year Salary Bonus Compensation Options
Mickey Elfenbein 1995 $ 228,250 $ ---- $ 2,022 ----
Chief Executive Officer 1994 $ 220,000 $ ---- $ 866 75,000
President and Secretary 1993 $ 200,000 $ 227,775 (1) $ ---- ----
Jeffrey M. Koblick 1995 $ 177,482 $ ---- $ 2,022 ----
Senior Vice President - 1994 $ 167,500 $ 58,353 $ 1,275 5,000
Purchasing and Operations 1993 $ 156,750 $ 89,376 (1) $ ---- 10,000
Mark Dixon 1995 $ 97,500 $ ---- $ 1,221 ----
Chief Financial Officer, 1994 $ 88,750 $ ---- $ 681 7,500
Vice President - Finance and Treasurer 1993 $ 80,813 $ 45,198 (1) $ ---- 7,500
David Weiner 1995 $ 117,500 $ ---- $ 1,366 ----
Vice President - Corporate Development 1994 $ 59,583 $ ---- $ 275 10,000
1993 $ ---- $ ---- $ ---- ----
Philip Kives, Chairman of the Board, did not receive any compensation in fiscal
1995 for his services to the Company. Messrs. Elfenbein, Koblick and Dixon
received salary increases in fiscal 1995 based upon their individual
performances and contributions to the Company.
(1) Includes bonuses earned under the management incentive plan in fiscal 1992
and paid in fiscal 1993 and bonuses earned in fiscal 1993 but paid in
fiscal 1994, which were $103,075 to Mr. Elfenbein, $50,989 to Mr. Koblick
and $27,441 to Mr. Dixon.
OPTION GRANTS IN LAST FISCAL YEAR
There were no new executive officer stock options granted during the fiscal year
ended June 30, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, as to each executive officer named in the
Summary Compensation Table, certain information with respect to stock options
exercised during the last fiscal year and unexercised options held as of the end
of the fiscal year.
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Year-End (#) Fiscal Year-End (1)
Shares Acquired Value
Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
Mickey Elfenbein ---- ---- 37,500 37,500 $ ---- $ ----
Jeffrey M. Koblick ---- ---- 47,500 5,000 $ 71,250 $ 1,875
Mark Dixon ---- ---- 18,375 5,625 $ 19,968 $ 1,406
David Weiner ---- ---- 5,000 5,000 $ ---- $ ----
(1) Market value of underlying securities at year-end minus the exercise price.
COMPANY STOCK PRICE PERFORMANCE
Performance Graph
The following Stock Price Performance Graph compares the cumulative total return
* of the Company, the S&P 500 Stock Index and peer groups for a five year
period:
[GRAPHIC]
1990 1991 1992 1993 1994 1995
K-TEL INTERNATIONAL $100.00 $ 57.00 $225.00 $825.00 $475.00 $362.50
S&P 500 100.00 107.40 121.80 138.40 140.35 176.94
PEER GROUP 100.00 57.89 6.84 5.06 6.54 5.76
* Cumulative total return assumes quarterly reinvestment of dividends.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee establishes the general compensation policies of the
Company and specific compensation for each executive officer of the Company, and
it administers the stock option and other compensation plans. The Compensation
Committee attempts to make the compensation packages of the executive officers
of the Company sufficient to attract and retain persons of exceptional quality
while at the same time including effective incentives to motivate Company
executives to perform as necessary to continue the success and growth of the
Company.
MANAGEMENT INCENTIVE PLAN
The Company has a management incentive plan under which management and other key
employees may be awarded annual bonuses based upon the achievement of financial
goals and objectives and an assessment of personal performance during the year.
Approximately 35 employees are current participants in the plan. Payments made
to the Executive Officers under the management incentive plan are included in
the Cash Compensation Table. Bonuses earned under the plan in fiscal 1993 but
paid at the beginning of fiscal 1994 were $103,075 to Mr. Elfenbein, $50,989 to
Mr. Koblick and $27,441 to Mr. Dixon. Pursuant to the plan, no bonuses were
earned by Messrs. Elfenbein, Dixon and Weiner for fiscal 1994 or fiscal 1995.
Mr. Koblick earned a bonus of $58,353 for fiscal 1994 which relates primarily to
the performance by the Company's business in the U.S. Pursuant to the plan, no
bonus was earned by Mr. Koblick for fiscal 1995.
RETIREMENT PLAN
Retirement benefits for full-time U.S. based employees of the Company are
provided under a retirement savings plan qualified under Section 401(k) of the
Internal Revenue Code. Participants may elect to contribute, through salary
reductions, up to 20% of their salary to the retirement plan up to a maximum of
$9,240 per year, and the Company may make matching contributions up to 20% of
the first 6% of the participants contributions. Employee contributions vest
immediately; employer contributions vest 50% after one year of service and 100%
after two years. Distributions upon death or termination of employment are
subject to certain restrictions in order that federal income tax regulations be
complied with and the amounts vested remain on a tax deferred basis until
retirement. Amounts contributed by Executive Officers through salary reductions
are included in the Cash Compensation Table. The Company made matching
contributions of $25,334 in fiscal 1995.
STOCK OPTIONS
On July 15, 1987 the Board of Directors adopted the K-tel International, Inc.
Stock Incentive Plan for officers and other key employees of the Company. The
shareholders approved the plan on December 8, 1987. The stock incentives may
take the form of incentive stock options, nonqualified stock options, stock
appreciation rights and/or restricted stock. A total of 350,000 shares of the
Company's common stock were reserved for issuance upon exercise of the options.
The Board of Directors has sole authority to determine the employees to whom
options and awards are granted, the duration of the exercise period and any
other matters arising under the plan. The Compensation Committee expects to
review option grants on an annual basis.
During fiscal 1995, there were no new executive stock options granted.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mickey Elfenbein has served K-tel International, Inc. in various capacities
since 1969. He was appointed Chief Executive Officer in 1993. In recognition of
Mr. Elfenbein's importance to the Company as well as his knowledge of the
operations and business of the Company, the Compensation Committee approved an
increase in Mr. Elfenbein's base salary from $220,000 to $231,000 for fiscal
1995. In addition Mr. Elfenbein was eligible to receive a bonus of up to 100% of
his base salary if the Company achieved specific operating income figures. No
bonus was earned in fiscal 1995.
Seymour Leslie Sanford Sigoloff
Compensation Committee Compensation Committee
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of the record date by (i)
all persons known to the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each executive officer and director of the Company,
and (iii) all executive officers and directors as a group.
Number of Common Shares Percentage of
Name and Address Position Owned Beneficially Outstanding Shares
Philip Kives Chairman 2,465,470 66.4%
220 Saulteaux Crescent
Winnipeg, Manitoba R3J 3W3
Canada
Mickey Elfenbein President, Chief 400,111 (1) 10.7%
2605 Fernbrook Lane North Executive Officer and
Minneapolis, Minnesota 55447 Director
Mark Dixon Vice President - Finance, 20,251 (1) (2)
2605 Fernbrook Lane North Chief Financial Officer,
Minneapolis, MN 55447 Treasurer and Director
Seymour Leslie Chairman of the Leslie Group, 12,500 (1) (2)
1370 Avenue of the Americas Inc. and Co-Chairman of
26th Floor Leslie/Linton Entertainment, Inc.
New York, NY 10019
Sanford Sigoloff Chairman, President and 12,500 (1) (2)
3340 Ocean Park Blvd. CEO of Sigoloff & Associates, Inc.
Suite 3050
Santa Monica, CA 90405
Jeffrey Koblick Senior Vice President, Purchasing 63,300 (1) (2)
2605 Fernbrook Lane North and Operations
Minneapolis, MN 55447
David Weiner Senior Vice President 9,000 (1) (2)
2605 Fernbrook Lane North
Minneapolis, MN 55447
All Officers and directors 2,983,132 (1) (2)
as a group (7 persons)
(1) Includes shares pursuant to options of which Mr. Elfenbein has 37,500, Mr.
Dixon has 20,250, Mr. Leslie has 12,500, Mr. Sigoloff has 12,500, Mr.
Weiner has 5,000, Mr. Koblick has 50,000 and all officers and directors as
a group have 137,750. No options are held by Mr. Kives.
(2) Represents less than 2%.
COMPLIANCE WITH SECTION 16(A)
The Company's directors, executive officers and any persons holding more than
10% of the outstanding Common Stock are required to file reports concerning
their initial ownership of the securities of the Company and any subsequent
changes in that ownership. The Company believes that all filing requirements
were met during fiscal 1995.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
During fiscal 1995, the Company purchased $354,000 of consumer convenience
product from another company controlled by the Chairman of the Board. The
purchase prices for these products were at prices comparable to transactions
with a third party. However, the payment terms are open-ended as a method of
financing the Company's consumer convenience product expansion in Europe and the
U.S. The Company reimbursed such other company $3,000 during fiscal 1995 for
warehousing and shipping services provided in Canada and travel, telephone and
legal fees incurred on behalf of the Company.
The Company sold approximately $228,000 of consumer convenience product in
fiscal 1995 to an affiliate controlled by the Company's Chairman of the Board.
During April 1994, the company controlled by the Company's Chairman of the Board
provided $1,000,000 in short-term financing to the Company to fund consumer
convenience product purchases. The Company repaid the loan principal plus
interest at the rate of prime plus one and one half percent in October 1994.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The consolidated financial 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
On August 16, 1995 the Company filed a Form 8-K, with the Securities and
Exchange Commission regarding the July 24, 1995 Board of Directors approval
of the sale of the Company's entertainment business. The information
required under this item is incorporated herein by reference to the Form
8-K.
(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 Articles and Restated incorporated herein by reference
By-Laws to Exhibit (3) of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1985
10.1 Employment Agreement - incorporated herein by reference
David Weiner to Exhibit 10.1 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.2 Employment Agreement - incorporated herein by reference
Mickey Elfenbein to Exhibit (10)v of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1985
10.3 Revolving Credit Agreement dated incorporated herein by reference
July 22,1994 with TCF Bank Minnesota, to Exhibit 10.3 of the Registrant's
K-tel International(USA),Inc. and Annual Report on Form 10-K for the
Dominion Entertainment, Inc. year ended June 30, 1994
10.4 Promissory Note for up to $5,000,000 incorporated herein by reference
by K-tel International(USA),Inc. and to Exhibit 10.4 of the Registrant's
Dominion Entertainment, Inc. Annual Report on Form 10-K for the
year ended June 30, 1994
10.5 K-tel USA Security Agreement incorporated herein by reference
to Exhibit 10.5 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.6 Dominion 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 USA Copyright Security incorporated herein by reference to
Agreement Exhibit 10.7 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.8 Dominion Copyright Security incorporated herein by reference to
Agreement Exhibit 10.8 of 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
10.10 Guaranty of K-tel International, Inc. incorporated herein by reference
to Exhibit 10.10 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.11 Guarantor's Pledge Agreement incorporated herein by reference
to Exhibit 10.11 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.12 Guarantor's Security Agreement incorporated herein by reference
to Exhibit 10.12 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
10.14 Revolving Credit Agreement dated incorporated herein by reference to
January 30, 1995 with TCF Bank Exhibit 10.14 of the Registrant's
Minnesota FSB and K-tel, Inc. Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.15 Revolving Note for up to $3,000,000 incorporated herein by reference to
by K-tel, Inc. Exhibit 10.15 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
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 incorporated herein by reference to
Agreement of K-tel USA Exhibit 10.17 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.18 Amended and Restated Security incorporated herein by reference to
Agreement of Dominion Exhibit 10.18 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.19 Amendment to K-tel USA's Copyright incorporated herein by reference to
Security Agreement Exhibit 10.19 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.20 Amendment to Dominion's Copyright incorporated herein by reference to
Security Agreement Exhibit 10.20 of 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 USA 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 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 incorporated herein by reference to
Agreement of K-tel International, Inc. Exhibit 10.25 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.26 Amended and Restated Security incorporated herein by reference to
Agreement of K-tel International, Inc. Exhibit 10.26 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.27 First Amendment to Revolving Credit incorporated herein by reference to
Agreement with K-tel USA, Dominion Exhibit 10.27 of the Registrant's
and TCF Bank Minnesota FSB Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.28 Replacement Revolving Note for up to incorporated herein by reference to
$2,000,000 with K-tel USA and Exhibit 10.28 of the Registrant's
Dominion 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
10.30 First Amendment to Revolving Credit
Agreement and to Revolving Note attached to this report as Exhibit 10.30
10.31 Second Amendment to Revolving Credit
Agreement and to Revolving Note attached to this report as Exhibit 10.31
10.32 Debt Subordination Agreement attached to this report as Exhibit 10.32
10.33 Second Amendment to Revolving Credit
Agreement-K-tel, Inc. attached to this report as Exhibit 10.33
10.34 Third Amendment to Revolving Credit
Agreement-K-tel USA and Dominion attached to this report as Exhibit 10.34
10.35 Replacement Revolving Note for up to
$3,500,000 with K-tel USA and
Dominion attached to this report as Exhibit 10.35
11 Statement Regarding Computation
of Earnings Per Share attached to this report as Exhibit 11
21 Subsidiaries of the Registrant attached to this report as Exhibit 21
23 Consent of Independent Public attached to this report as Exhibit 23
Accountants
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 11,1995 by the undersigned, thereunto duly authorized.
K-TEL INTERNATIONAL, INC.
By /S/ Philip Kives
(Philip Kives - Chairman of the Board)
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 Director October 12, 1995
Philip Kives
/S/ Mickey Elfenbein Principal Executive Officer,
Mickey Elfenbein President, and Director October 12, 1995
/S/ Mark Dixon Vice President - Finance, Director
Mark Dixon Chief Financial Officer and Treasurer October 12, 1995
(Principal Accounting Officer)
/S/ Seymour Leslie Director
Seymour Leslie October 12, 1995
/S/ Sanford Sigoloff Director
Sanford Sigoloff October 12, 1995
(ITEM 14(A))
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Public Accountants............................ 26
Consolidated Statements of Operations for each of the three
years in the period ended June 30, 1995............................. 27
Consolidated Balance Sheets as of June 30, 1995 and 1994............ 28
Consolidated Statements of Shareholders' Investment
for each of the three years in the period ended June 30, 1995....... 29
Consolidated Statements of Cash Flows for
each of the three years in the period ended June 30, 1995........... 30
Notes to Consolidated Financial Statements.......................... 31-39
Supplemental Schedule to Consolidated Financial Statements:
Schedule II - Valuation and Qualifying Accounts................. 40
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,
1995 and 1994, and the related consolidated statements of operations,
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1995. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1995 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 Commission's 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,
September 15, 1995
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
(in thousands - except per share data)
1995 1994 1993
NET SALES $ 65,917 $ 54,270 $ 55,714
COSTS AND EXPENSES:
Cost of goods sold 35,660 26,842 23,896
Advertising 11,601 10,495 11,656
Selling, general & administrative 20,192 16,086 16,539
Restructuring/closedown charges (Note 8) 652 624 --
Total Costs and Expenses 68,105 54,047 52,091
OPERATING INCOME (LOSS) (2,188) 223 3,623
NON-OPERATING INCOME (EXPENSE):
Interest income 120 117 146
Interest expense (220) (27) (43)
Foreign currency transaction gain (loss) 180 28 (498)
Total Non-operating Income (Expense) 80 118 (395)
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (2,108) 341 3,228
PROVISION (BENEFIT) FOR INCOME TAXES (Note 5) 375 (35) 527
NET INCOME (LOSS) $ (2,483) $ 376 $ 2,701
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.67) $ .10 $ .72
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 3,711 3,822 3,733
The accompanying notes to consolidated financial statements are an integral part
of these statements.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30
(in thousands - except share data)
ASSETS 1995 1994
Current Assets:
Cash and cash equivalents $ 2,154 $ 4,171
Restricted cash 536 2,148
Accounts receivable, less allowances of $771 and $489 11,971 11,600
Inventories 7,382 5,143
Royalty advances 2,176 887
Prepaid expenses 2,108 1,162
Income tax refund receivable 540 458
Total Current Assets 26,867 25,569
Property and Equipment 2,820 2,216
Less-Accumulated depreciation and amortization (1,797) (1,465)
Property and Equipment, net 1,023 751
Other Assets 747 554
$ 28,637 $ 26,874
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Line of credit (Note 4) $ 2,516 $ --
Note payable to affiliate (Note 10) -- 1,000
Accounts payable 4,929 4,973
Accrued royalties 9,047 7,864
Reserve for returns 6,802 6,412
Other current liabilities 2,517 1,929
Income taxes payable 373 150
Total Current Liabilities 26,184 22,328
Commitments and Contingencies (Note 7)
Shareholders' Investment (Note 6):
Preferred stock - 4,000,000 shares authorized;
none issued -- --
Common stock - 7,500,000 shares authorized; 37 37
par value $.01; 3,713,797 and 3,706,797
issued and outstanding
Contributed capital 7,816 7,801
Accumulated deficit (4,921) (2,438)
Cumulative translation adjustment (479) (854)
Total Shareholders' Investment 2,453 4,546
$ 28,637 $ 26,874
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)
Cumulative
Common Stock Contributed Accumulated Translation
Shares Amount Capital Deficit Adjustment
Balance, June 30, 1992 3,600 $ 36 $ 7,622 $ (5,515) $ (115)
Net income ---- ---- ---- 2,701 ----
Proceeds from exercise of stock options 61 1 90 ---- ----
Translation adjustment ---- ---- ---- ---- (670)
Balance, June 30, 1993 3,661 37 7,712 (2,814) (785)
Net income ---- ---- ---- 376 ----
Proceeds from exercise of stock options 46 ---- 89 ---- ----
Translation adjustment ---- ---- ---- ---- (69)
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)
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)
1995 1994 1993
Operating Activities:
Net income (loss) $(2,483) $ 376 $ 2,701
Adjustments to reconcile net income (loss)
to cash provided by (used for)
operating activities:
Depreciation and amortization 567 618 330
Restructuring/closedown charges 652 624 --
Changes in current operating items:
Restricted cash 1,612 (2,148) --
Accounts receivable (309) (1,712) (1,317)
Inventories (1,915) (1,228) (262)
Royalty advances (1,250) (10) 106
Prepaid expenses (835) 66 (675)
Accounts payable and accrued liabilities 1,250 4,050 27
Income tax refund receivable (101) (340) (1,049)
Income taxes payable 288 (138) --
Cash Provided By (Used For) Operating Activities (2,524) 158 (139)
Investing Activities:
Property and equipment purchases, net (523) (254) (600)
Music catalog additions (444) (298) --
Other (22) (232) (170)
Cash Used For Investing Activities (989) (784) (770)
Financing Activities:
Borrowings on line of credit, net 2,516 -- --
Repayments on note payable to affiliate (1,000) (62) (54)
Proceeds from exercise of stock options 15 89 91
Cash Provided By Financing Activities 1,531 27 37
Effect of Exchange Rate Changes on Cash and Cash Equivalents (35) (28) (386)
Net Decrease in Cash and Cash Equivalents (2,017) (627) (1,258)
Cash and Cash Equivalents at Beginning of Year 4,171 4,798 6,056
Cash and Cash Equivalents at End of Year $ 2,154 $ 4,171 $ 4,798
Supplemental Cash Flow Information
Cash paid for -
Interest $ 174 $ 44 $ 28
Income Taxes $ 425 $ 310 $ 1,486
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, 1995, 1994 AND 1993
1. BUSINESS DESCRIPTION
K-tel International, Inc. (the Company) is an international marketing and
distribution company for packaged consumer entertainment and convenience
products. 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
the Company 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 (U.S.) customer represented 11%, 14% and 12% of the
Company's consolidated net sales for the years ended June 30, 1995, 1994
and 1993, respectively.
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 mature in one to
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.
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. 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. An agent for various
licensors has conducted an audit related to amounts owed to the agent on
behalf of the licensors but has not yet submitted the results of that audit
to the Company. Management believes the ultimate results of the audit will
not have a material adverse effect on the consolidated financial position
or results of operations of the Company.
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 are
included in other assets in the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment are stated at cost 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, adjusted for the dilutive effect of common stock equivalents.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("Statement 121"), issued in March 1995 and effective for fiscal years
beginning after December 15, 1995, establishes accounting standards for the
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill either to be held or disposed of.
Management believes the adoption of Statement 121 will not have a material
impact on the Company's financial position or results of operations.
Derivatives
The Company enters into forward exchange contracts to hedge specific
intercompany balances denominated in foreign currency. The terms of the
forward exchange contracts are primarily less than three months. The
purpose of the Company's foreign currency hedging activities is to protect
the Company from the risk that the extended dollar net cash inflows will
not be adversely affected by changes in exchange rates.
The Company records any gains or losses on its hedging activities related
to current intercompany balances as a component of foreign currency
transaction gain or loss. Hedging gains and losses related to long term
intercompany balances are included as a component of the cumulative
translation adjustment. The Company incurred a $199,000 loss on hedging
activities for 1995, of which $164,000 is included as a foreign currency
transaction loss and $35,000 as a reduction of the cumulative translation
adjustment.
As of June 30,1995, the Company has approximately $650,000 in foreign
exchange currency forward exchange contracts, the cost of which
approximated market value at that date.
Use of Estimates
The preparation of 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. As better information becomes available (or
actual amounts determinable), the recorded estimates are revised.
Consequently, operating results can be affected by revisions to prior
accounting estimates.
Reclassifications
Certain reclassifications have been made in the 1994 financial statements
to conform to the 1995 presentation. Such reclassifications had no affect
on net income or shareholders' investment as previously reported.
3. SALE OF CONSUMER ENTERTAINMENT BUSINESS
On July 24, 1995, the Board of Directors of the Company approved the sale
of its consumer entertainment business to a corporation controlled by the
Company's President and Chief Executive Officer (the Purchaser). The
Company proposes to sell its consumer entertainment business to the
Purchaser by selling to the Purchaser three domestic subsidiaries and ten
foreign subsidiaries (the "Entertainment Subsidiaries") which own the
master recording catalog rights to music recordings and through which the
Company operates its consumer entertainment products business at a purchase
price of $25,000,000 plus certain adjustments estimated at June 30, 1995 to
increase the total purchase price to approximately $32,000,000. The Company
will retain and continue to operate its non-entertainment consumer products
business, including two domestic subsidiaries (the "Remaining
Subsidiaries") operating the retained business. As part of the
transactions, the Company and the Remaining Subsidiaries will repay the net
intercompany debt owed by them to the Entertainment Subsidiaries estimated
to be approximately $8,700,000 at June 30, 1995 and will repay bank
indebtedness estimated at June 30, 1995 to be approximately $1,500,000. The
proposed transaction is subject to the Purchaser obtaining financing and
various other conditions, including approval of the transaction by the
Company's shareholders and the receipt of an opinion of a financial advisor
that the proposed transaction is fair from a financial point of view to the
shareholders of the Company.
The following unaudited pro-forma financial data for the Company has been
prepared on a pro-forma basis to give effect to the divestiture of the
Entertainment Subsidiaries. The increases and decreases summarized below
include the effect of net cash inflows to the Company and the removal of
the assets, liabilities, revenues and expenses of the Entertainment
Subsidiaries.
Pro forma
June 30, June 30,
1995 Increase 1995
as reported (decrease) (unaudited)
Total current assets $ 26,867 $ 1,260 $ 28,127
Other assets 1,770 (1,725) 45
Total assets $ 28,637 $ (465) $ 28,172
Total current liabilities $ 26,184 $(23,320) $ 2,864
Shareholders' Investment 2,453 22,855 25,308
Total liabilities and
shareholders' investment $ 28,637 $ (465) $ 28,172
Net sales $ 65,917 $ 51,721 $ 14,196
Operating loss $ (2,188) $ (1,134) $ (1,054)
Net loss $ (2,483) $ (1,468) $ (1,015)
Net loss per share $ (.67) $ (.27)
4. LINE OF CREDIT
Three of the Company's United States subsidiaries, K-tel International
(USA), Inc., Dominion Entertainment, Inc. and K-tel, Inc. (the
"Subsidiaries") have revolving credit agreements maturing November 30, 1995
with a bank. The agreements provide for an asset based line of credit not
to exceed $5,500,000 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. K-tel International,
Inc. has guaranteed all borrowings of the Subsidiaries. Interest on
borrowings is accrued and due monthly at a rate of prime plus one and one
half percent (10.5% at June 30, 1995). The amounts outstanding under these
lines of credit were $2,516,000 at June 30, 1995. During 1995, average
borrowings under the lines of credit were approximately $2,200,000, and the
weighted average interest rate was 10.2%. The maximum amount outstanding
under the lines of credit was $4,334,000 during 1995.
The Subsidiaries are required to maintain minimum levels of tangible net
worth and certain other financial ratios. As of June 30, 1995 the
Subsidiaries were in compliance or have obtained waivers for those
covenants. The Company has initiated discussions with the bank and believes
the lines of credit will be renewed.
5. INCOME TAXES
The Company operates in several countries and is subject to various tax
regulations and tax rates. The provision 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):
1995 1994 1993
Income (loss) before provision
(benefit) for income taxes:
United States $ 1,564 $ 3,705 $ 2,557
Foreign (3,672) (3,364) 671
Total $(2,108) $ 341 $ 3,228
Provision (benefit) for income taxes:
Currently payable
United States $ 226 $ 315 $ 167
Foreign 149 (350) 360
Total currently payable (receivable) and
total provision (benefit) for income taxes $ 375 $ (35) $ 527
A reconciliation of the U.S. federal statutory rate to the effective tax
rate for the years ended June 30 are as follows:
1995 1994 1993
Federal statutory rate (34%) 34% 34%
State taxes 5% 33% 2%
Change in valuation allowance 50% (136%) (26%)
Effect of different tax rates
on foreign earnings (3%) 59% 6%
18% (10%) 16%
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 comprise all deferred tax assets
are as follows:
June 30, June 30,
1995 1994
Net operating loss carryforwards $ 8,360 $ 7,797
Alternative minimum tax credits 431 367
Reserve for returns 2,241 2,071
Depreciation 92 39
Royalty reserves 467 405
Inventory reserves 790 614
Nondeductible accruals 44 161
Allowance for bad debts 200 99
Valuation allowance (12,625) (11,553)
$ --- $ ---
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 $18,264,000 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's carryforwards are subject to review
and possible adjustment by taxing authorities. In addition, the Company has
approximately $431,000 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 $4,765,000
as of June 30, 1995.
6. STOCK OPTIONS
Stock Incentive Plan
The Company's Stock Incentive Plan for officers and other key employees of
the Company covers a maximum of 350,000 shares of common stock. Under 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.
Stock Incentive Plan information is summarized below.
Incentive Non-qualified
Stock Options Stock Options
Outstanding June 30, 1992 151,500 55,000
Granted 53,000 38,000
Exercised - at prices ranging
from $1.50 to $4.00 per share (59,625) (1,000)
Forfeited (5,000) (9,500)
Outstanding June 30, 1993 139,875 82,500
Granted 23,000 19,500
Exercised - at prices ranging
from $1.50 to $4.00 per share (14,975) (31,375)
Forfeited (10,000) (500)
Outstanding June 30, 1994 137,900 70,125
Granted 15,000 5,000
Exercised - at prices ranging
from $1.50 to $2.50 per share (1,125) (5,875)
Forfeited (2,000) (16,375)
Outstanding June 30, 1995 149,775 52,875
Options Exercisable 104,525 27,750
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.
During 1994, 152,500 restricted options were granted with exercise prices
ranging from $6.75 to $9.25. During 1995, 20,000 restricted options were
granted with an exercise price of $3.75. As of June 30, 1995 172,500
restricted options were outstanding with 81,250 being execrable at that
date.
7. 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.
Leases
The Company has entered into several office and warehouse leases which
expire through 2000. Commitments under these leases are $521,000 in 1996,
$456,000 in 1997, $458,000 in 1998, $312,000 in 1999 and $190,000 in 2000.
Rental expense was $855,000 in 1995, $592,000 in 1994 and $602,000 in 1993.
8. 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 will focus on short
and long form direct response marketing of music products. The expected
future effect of the restructure/closedown is 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.
During the fourth quarter of fiscal 1994, the Company recorded closedown
charges of $624,000 for costs associated with the closing of loss
operations in France and New Zealand, and the closedown of the consumer
convenience product operation in the United Kingdom. Management decided to
close these operations due to recurring losses and limited future market
potential. The expected future effect of the closedowns was to improve the
Company's consolidated operating results from probable future operating
losses in France, New Zealand, and the United Kingdom based on past
experiences and expectations on the markets for the near term future. The
combined fiscal 1994 France and New Zealand revenues and operating losses
before closedown charges were approximately $4,000,000 and $900,000.
The components of the 1995 and 1994 restructuring/closedown charges are as
follows:
(In thousands)
1995 1994
Inventory write down costs $ 79 $ 363
Employee termination costs 264 120
Lease termination costs ---- 46
Property write downs 8 39
Cumulative translation adjustment 251 (62)
Other 50 118
Total $ 652 $ 624
Sixteen employees consisting primarily of sales, administrative, and
distribution employees were terminated during fiscal 1995, while ten
employees consisting primarily of sales and other administrative managers
were terminated during fiscal 1994.
The fiscal 1994 closedown was completed in the second quarter of fiscal
1995, and the accrued charge at June 30, 1994 approximated the actual costs
incurred to complete the closedowns. The implementation of the fiscal 1995
restructuring/ closedown is expected to occur in the first two quarters of
fiscal 1996.
9. 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):
1995 1994 1993
Net Sales:
North America $ 38,228 $ 27,816 $ 20,799
Europe 29,338 25,088 36,122
Pacific ---- 576 616
Transfers between geographic areas (1,649) 790 (1,823)
Net Sales $ 65,917 $ 54,270 $ 55,714
Operating Income (Loss):
North America $ 1,803 $ 3,591 $ 2,111
Europe (2,673) (2,023) 2,617
Pacific ---- (255) 37
Operating Income before General
Corporate Expenses, net (870) 1,313 4,765
General Corporate Expenses, net (1,318) (1,090) (1,142)
Operating Income $ (2,188) $ 223 $ 3,623
Identifiable Assets:
North America $ 18,816 $ 15,711 $ 10,629
Europe 9,821 10,918 10,845
Pacific ---- 245 448
Identifiable Assets $ 28,637 $ 26,874 $ 21,922
10. RELATED PARTY TRANSACTIONS
The Company sold approximately $228,000 in fiscal 1995, $693,000 in fiscal
1994 and $895,000 in fiscal 1993 of consumer convenience product to an
affiliate controlled by the Company's Chairman of The Board. This affiliate
owed the Company approximately $208,000 at June 30, 1995 and $4,000 at June
30, 1994.
The Company purchased $354,000 in fiscal 1995, $425,000 in fiscal 1994 and
$586,000 in fiscal 1993 of consumer convenience product from another
affiliate controlled by the Company's Chairman of The Board. The 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 reimbursed that 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 $3,000
during 1995, $43,000 during 1994, and $150,000 during 1993. The amount owed
to this affiliate was $175,000 at June 30, 1995 and the amount owed at June
30, 1994 was not material.
During April 1994, an affiliate controlled by the Company's Chairman of the
Board provided $1,000,000 in short-term financing to the Company to fund
consumer convenience product purchases. The Company repaid the $1,000,000
plus interest at a rate of prime plus one and one half percent in October
1994.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The consolidated results of operations for the four quarters of 1995 and
1994 were as follows (in thousands, except for per share date):
First Second Third Fourth
Quarter Quarter Quarter Quarter
1995
Net Sales $ 13,761 $ 19,719 $ 16,425 $ 16,012
Costs and Expenses $ 13,709 $ 19,424 $ 16,943 $ 18,029
Operating Income (Loss) $ 52 $ 295 $ (518) $ (2,017)
Net Income (Loss) $ 66 $ 77 $ (330) $ (2,296)
Net Income (Loss) per Common and
Common Equivalent Share $ .02 $ .02 $ (.09) $ (.62)
During the fourth quarter of fiscal 1995, the Company recorded
restructuring/closedown charges of $652,000 as described in Note 8. In
addition, the Company also recorded other one time charges of $740,000
related to various asset write downs in Germany and Spain not directly
related to the restructuring/closedown.
First Second Third Fourth
Quarter Quarter Quarter Quarter
1994
Net Sales $ 11,858 $ 13,814 $ 13,501 $ 15,097
Costs and Expenses $ 11,441 $ 13,077 $ 13,280 $ 16,249
Operating Income (Loss) $ 417 $ 737 $ 221 $ (1,152)
Net Income (Loss) $ 241 $ 680 $ 371 $ (916)
Net Income (Loss) per Common and
Common Equivalent Share $ .06 $ .18 $ .10 $ (.24)
During the fourth quarter of fiscal 1994, the Company recorded closedown
charges of $624,000 as described in Note 8.
SCHEDULE II
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 1995, 1994 and 1993
(in thousands)
Charged to
Balance at Costs and Charged to Balance
Beginning of Expenses or Other at End
Period Net Sales Accounts Deductions of Period
Allowance for
Doubtful
Accounts
1995 $ 489 $ 370 $ 18 (1) $ (106) (2) $ 771
1994 $ 336 $ 338 $ 12 (1) $ (197) (2) $ 489
1993 $ 260 $ 208 $ (17)(1) $ (115) (2) $ 336
Reserve for
Returns
1995 $ 6,412 $ 9,480 $ 42 (1) $ (9,132) $ 6,802
1994 $ 5,738 $ 6,703 $ 29 (1) $ (6,058) $ 6,412
1993 $ 4,529 $ 7,036 $ (125)(1) $ (5,702) $ 5,738
(1) Exchange rate change
(2) Uncollectible accounts written off, net of recoveries
INDEX TO EXHIBITS
Exhibit Item Page
3 Restated Articles and Restated incorporated herein by reference
By-Laws to Exhibit (3) of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1985
10.1 Employment Agreement - incorporated herein by reference
David Weiner to Exhibit 10.1 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.2 Employment Agreement - incorporated herein by reference
Mickey Elfenbein to Exhibit (10)v of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1985
10.3 Revolving Credit Agreement dated incorporated herein by reference
July 22,1994 with TCF Bank Minnesota, to Exhibit 10.3 of the Registrant's
K-tel International(USA),Inc. and Annual Report on Form 10-K for the
Dominion Entertainment, Inc. year ended June 30, 1994
10.4 Promissory Note for up to $5,000,000 incorporated herein by reference
by K-tel International(USA),Inc. and to Exhibit 10.4 of the Registrant's
Dominion Entertainment, Inc. Annual Report on Form 10-K for the
year ended June 30, 1994
10.5 K-tel USA Security Agreement incorporated herein by reference
to Exhibit 10.5 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.6 Dominion 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 USA Copyright Security incorporated herein by reference to
Agreement Exhibit 10.7 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.8 Dominion Copyright Security incorporated herein by reference to
Agreement Exhibit 10.8 of 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
10.10 Guaranty of K-tel International, Inc. incorporated herein by reference
to Exhibit 10.10 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.11 Guarantor's Pledge Agreement incorporated herein by reference
to Exhibit 10.11 of the Registrant's
Annual Report on Form 10-K for the
year ended June 30, 1994
10.12 Guarantor's Security Agreement incorporated herein by reference
to Exhibit 10.12 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
10.14 Revolving Credit Agreement dated incorporated herein by reference to
January 30, 1995 with TCF Bank Exhibit 10.14 of the Registrant's
Minnesota FSB and K-tel, Inc. Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.15 Revolving Note for up to $3,000,000 incorporated herein by reference to
by K-tel, Inc. Exhibit 10.15 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
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 incorporated herein by reference to
Agreement of K-tel USA Exhibit 10.17 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.18 Amended and Restated Security incorporated herein by reference to
Agreement of Dominion Exhibit 10.18 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.19 Amendment to K-tel USA's Copyright incorporated herein by reference to
Security Agreement Exhibit 10.19 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.20 Amendment to Dominion's Copyright incorporated herein by reference to
Security Agreement Exhibit 10.20 of 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 USA 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 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 incorporated herein by reference to
Agreement of K-tel International, Inc. Exhibit 10.25 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.26 Amended and Restated Security incorporated herein by reference to
Agreement of K-tel International, Inc. Exhibit 10.26 of the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.27 First Amendment to Revolving Credit incorporated herein by reference to
Agreement with K-tel USA, Dominion Exhibit 10.27 of the Registrant's
and TCF Bank Minnesota FSB Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.28 Replacement Revolving Note for up to incorporated herein by reference to
$2,000,000 with K-tel USA and Exhibit 10.28 of the Registrant's
Dominion 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
10.30 First Amendment to Revolving Credit
Agreement and to Revolving Note attached to this report as Exhibit 10.30
10.31 Second Amendment to Revolving Credit
Agreement and to Revolving Note attached to this report as Exhibit 10.31
10.32 Debt Subordination Agreement attached to this report as Exhibit 10.32
10.33 Second Amendment to Revolving Credit
Agreement-K-tel, Inc. attached to this report as Exhibit 10.33
10.34 Third Amendment to Revolving Credit
Agreement-K-tel USA and Dominion attached to this report as Exhibit 10.34
10.35 Replacement Revolving Note for up to
$3,500,000 with K-tel USA and
Dominion attached to this report as Exhibit 10.35
11 Statement Regarding Computation
of Earnings Per Share attached to this report as Exhibit 11
21 Subsidiaries of the Registrant attached to this report as Exhibit 21
23 Consent of Independent Public attached to this report as Exhibit 23
Accountants
27 Financial Data Schedule (SEC use)