UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-6664
K-TEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0946588
(State or other jurisdiction of (I.RS. Employer
incorporation or organization) Identification No.)
5555 PIONEER CREEK DRIVE MAPLE PLAIN, MINNESOTA 55359
(Address of principal executive offices) (Zip Code)
(763) 479-8170
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the most recent practical date. As of May 10, 2001, there
were 13,653,738 shares of the registrant's common stock, par value $0.01 per
share, outstanding.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Page
----
PART I. Financial Information:
Item 1. Condensed Consolidated Balance Sheets as of March 31, 2001 and June
30, 2000 3
Condensed Consolidated Statements of Operations for the Three and
Nine Month Periods Ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the Nine
Month Periods Ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. Other Information:
Item 1. Legal Proceedings 17
Item 3. Default Upon Senior Securities 18
Item 6. Exhibits and Reports on Form 8-K 19
2
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITIED
MARCH 31, 2001 AND JUNE 30, 2000
(IN THOUSANDS)
March 31, June 30,
2001 2000
---------- ---------
ASSETS
Current Assets:
Cash and equivalents $ 37 $ 798
Accounts receivable, net 1,066 8,659
Inventories 370 2,585
Royalty and other advances 218 349
Prepaid expenses and other 576 266
Net assets of discontinued operations -- 2,527
-------- --------
Total Current Assets
2,267 15,184
-------- --------
Property and Equipment, net of accumulated depreciation
and amortization of $1,143 and $3,290 214 771
Owned catalog masters, net of accumulated amortization of
$2,573 and $2,377 1,473 1,657
Other Assets 184 329
-------- --------
$ 4,138 $ 17,941
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ -- $ 1,924
Loans payable to affiliate 7,882 1,945
Accounts payable 936 4,499
Accrued royalties 2,688 11,016
Reserve for returns 28 4,623
Other current liabilities 184 2,531
Net liabilities of discontinued operations 1,383 --
-------- --------
Total Current Liabilities 13,101 26,538
-------- --------
Long Term Debt -- 4,000
Shareholders' Equity:
Common stock 136 103
Additional Paid-In Capital 20,680 20,213
Accumulated Deficit (29,348) (32,154)
Cumulative translation adjustment (431) (759)
-------- --------
Total Shareholders' Equity (8,963) (12,597)
-------- --------
$ 4,138 $ 17,941
======== ========
See accompanying notes to condensed consolidated financial statements.
3
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(IN THOUSANDS - EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------------- ----------------------------------
2001 2000 2001 2000
--------------- --------------- -------------- ---------------
NET SALES $ 5,174 $ 5,412 $ 16,225 $ 24,522
--------------- --------------- -------------- ---------------
COSTS AND EXPENSES:
Cost of goods sold 7,657 5,316 15,225 17,453
Advertising 246 665 530 1,878
Selling, general & administrative 2,674 3,518 8,815 10,126
--------------- --------------- -------------- ---------------
Total Costs and Expenses 10,577 9,499 24,570 29,457
--------------- --------------- -------------- ---------------
OPERATING LOSS (5,403) (4,087) (8,345) (4,935)
OTHER INCOME (EXPENSE):
Interest income --- 3 --- 7
Interest expense (214) (176) (574) (541)
Foreign currency transaction gain (loss) 54 (183) (48) (254)
Other expense --- (5) --- (652)
Gain on sale of subsidiary --- --- --- 4,341
--------------- --------------- -------------- ---------------
Total Other Income (Expense) (160) (361) (622) 2,901
--------------- --------------- -------------- ---------------
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (5,563) (4,448) (8,967) (2,034)
INCOME TAXES 1 42 (10) (177)
--------------- --------------- -------------- ---------------
LOSS FROM CONTINUING OPERATIONS (5,562) (4,406) (8,977) (2,211)
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS (131) (1,167) (4,077) (2,432)
--------------- --------------- -------------- ---------------
LOSS BEFORE EXTRAORDINARY ITEM (5,693) (5,573) (13,054) (4,643)
EXTRAORDINARY ITEM:
GAIN ON CHAPTER 7 LIQUIDATION 15,860 --- 15,860 ---
--------------- --------------- -------------- ---------------
NET INCOME (LOSS) $ 10,167 $ (5,573) $ 2,806 $ (4,643)
=============== =============== ============== ===============
INCOME (LOSS) PER SHARE
BASIC AND DILUTED
CONTINUING OPERATIONS $ (.41) $ (.44) $ (.66) $ (.22)
DISCONTINUED OPERATIONS (.01) (.12) (.30) (.25)
EXTRAORDINARY ITEM 1.16 --- 1.16 ---
--------------- --------------- -------------- ---------------
NET INCOME (LOSS) .74 (.56) .20 (.47)
=============== =============== ============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND
DILUTED 13,654 9,914 13,654 9,822
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 10,167 $ (5,573) $ 2,806 $ (4,643)
Foreign currency gain (loss) 46 12 328 (3)
--------------- --------------- -------------- ---------------
COMPREHENSIVE INCOME (LOSS) $ 10,213 $ (5,561) $ 3,134 $ (4,646)
=============== =============== ============== ===============
See accompanying notes to condensed consolidated financial statements.
4
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
Nine Months Ended
March 31,
-------------------------------
2001 2000
---------- ----------
Cash Flows From Operating Activities:
Net income (loss) $ 2,806 $ (4,643)
Adjustments to reconcile net income (loss) to cash used in
operating activities:
Depreciation and amortization 464 861
Write down of long lived asset 240 --
Gain on sale of subsidiary -- (4,341)
Gain on Chapter 7 liquidation (15,860) --
Discontinued operations 4,006 1,223
Changes in operating assets and liabilities:
Accounts receivable 2,951 498
Inventories 2,200 692
Royalty and other advances (117) (371)
Prepaid expenses and other (231) 191
Accounts payable and other (228) (1,773)
Accrued royalties 520 699
Reserve for returns 1,776 375
Income taxes, net (14) 167
-------- --------
Cash used in operating activities (1,487) (6,422)
-------- --------
Investing Activities:
Proceeds from sale of subsidiary -- 6,350
Property and equipment purchases (10) (148)
Music catalog additions (41) --
Discontinued operations -- (60)
Other -- (473)
-------- --------
Cash provided by (used in) investing activities (51) 5,669
-------- --------
Cash flows from financing activities:
Borrowings on note payable 513 20,203
Payments on note payable -- (20,849)
Repurchase of shares issued in private placement -- (4,000)
Proceeds from exercise of stock options -- 3,106
-------- --------
Cash provided by (used in) financing activities 513 (1,540)
-------- --------
Effect of exchange rates on cash 264 75
-------- --------
Net decrease in cash and equivalents (761) (2,218)
Cash and equivalents at beginning of period 798 4,139
-------- --------
Cash and equivalents at end of period $ 37 $ 1,921
======== ========
See accompanying notes to condensed consolidated financial statements.
5
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND LIQUIDITY
K-tel International, Inc. (the "Company", "K-tel", or the "Registrant"),
through its operating subsidiaries, licenses its music catalog
internationally and markets entertainment products mainly derived from its
catalog in the United States and Europe through retail and direct response
marketing channels as well as through an internet e-commerce site,
K-tel.com (www.ktel.com).
The Company experienced negative cash flow of $1,487,000 from operations in
the nine months ended March 31, 2001, and had a working capital deficit of
approximately $10,834,000. The Company's cash requirements were satisfied
principally from borrowings under its credit facilities. As discussed in
notes 4 and 5 below, the Company has two outstanding revolving credit
agreements with K-5 Leisure Products, Inc. ("K-5"). As of March 31, 2001,
the Company had approximately $5,000,000 of unused availability under its
K-5 facility (see Note 4). The Company's ability to continue operations in
the short and long term is dependent on its continued ability to borrow
under its credit facilities and the sufficiency of such borrowing capacity
to meet its requirements.
In March 2001, the Company's music distribution subsidiary in the United
States, K-tel International (USA), Inc., ceased operations and filed for
protection under Chapter 7 of the United States bankruptcy code. In
connection with this filing, the assets and liabilities of this subsidiary
have been removed from the books of the Company and the remaining net
liability has been shown as a gain on Chapter 7 liquidation. During the
past three fiscal years ended June 30, 2000, 1999, and 1998, this
subsidiary had net sales of $23,426,000, $29,336,000 and $30,815,000 and
sustained net losses of $10,242,000, $3,564,000 and $834,000, respectively.
For the nine months ended March 31, 2001, it had sales of $11,948,000 and a
net loss of $5,702,000. Management believes the Company will have no
ongoing liability related to this subsidiary as a result of the filing and
the outcome of the bankruptcy proceeding.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying condensed consolidated unaudited
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("US GAAP")
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by US GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods
ended March 31, 2001, are not necessarily indicative of the results that
may be expected for the year as a whole. The unaudited condensed
consolidated balance sheet for June 30, 2000 has been derived from audited
consolidated financial statements as of that date. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
June 30, 2000.
PRINCIPLES OF CONSOLIDATION - The accompanying condensed consolidated
unaudited financial statements include the accounts of K-tel International,
Inc. and its domestic and foreign subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been
eliminated.
REVENUE RECOGNITION - The Company derives its revenue from several
different sources: the sale of music compilations (predominately compact
discs) either produced by the Company or distributed on behalf of other
record labels and license revenue from the licensing of Company owned
masters. Revenue from the music sales is recognized at the time of the sale
to the customer, while license revenue is recognized when payment is
received from customers, because prior to that date collection is not
considered probable. Most music sales are made with a right of return of
unsold goods. Estimated reserves for returns are established by management
based upon historical experience and product mix and are subject to ongoing
review and adjustment by the Company. These reserves are recorded at the
time of the sales and are reflected as a reduction in revenues.
6
COST OF GOODS SOLD - The Company expenses all product manufacturing,
distribution and royalty costs associated with the music sales as cost of
goods sold. The Company also expenses royalties, commissions and
amortization of its owned masters associated with its license revenue as
cost of goods sold.
SHIPPING AND HANDLING COSTS - The Company expenses all shipping and
handling costs incurred in the shipment of goods within cost of goods sold.
The Company records any charges billed to customers as a reduction in
shipping costs charged to cost of goods sold. The implementation of EITF
00-10 "Accounting for Shipping and Handling Fees and Costs", which will
become effective April 1, 2001 for the Company, is not expected to have a
material effect on the Company's financial statements but will result in a
small reclassification of billed shipping costs to revenue.
CASH AND EQUIVALENTS - Cash and equivalents consist principally of cash,
and short-term, highly liquid investments with original maturities of less
than ninety days.
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.
OWNED CATALOG MASTERS - The Company capitalizes the costs to purchase owned
masters at the time of acquisition. These costs are amortized over the
estimated useful life of these masters, which is generally seven years and
represents managements best estimate of the average period of value.
RIGHTS TO USE MUSIC PRODUCT- Certain of the Company's compilation products
are master recordings under license from record companies and publishers.
In most instances, minimum guarantees or non-returnable advances are
required to obtain the licenses and are realized through future sales of
the product. The amounts paid for minimum guarantees or non-returnable
advances are capitalized and charged to expense as sales are made. When
anticipated sales appear to be insufficient to fully recover the minimum
guarantees or non-returnable advances, a provision against current
operations is made for anticipated losses. The unrealized portion of
guarantees and advances is included in royalty advances in the accompanying
consolidated balance sheets. Licenses are subject to audit by licensors.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
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.
SOFTWARE DEVELOPMENT COSTS - During the application and development stage
of the software for K-tel On-line, payroll and other direct costs of
materials and services incurred were capitalized. Such costs were being
amortized on the straight-line basis over three years. However, the
remaining costs were written down during the period.
LONG LIVED-ASSETS - The Company evaluates its long-lived assets quarterly,
or earlier if a triggering event occurs, to determine potential impairment
of comparing the carrying value of those asset to the undiscounted future
cash flows of the related assets. If an asset is determined to be impaired,
it is written down to its estimated net realizable value. During the
quarter ended March 31, 2001, the Company temporarily suspended its online
business to relocate to the Company's offices in Minnesota and update the
website to reflect the Company's continuing operations. The Company wrote
down the assets of that business to reflect their estimated realizable
value, resulting in a charge during the quarter of approximately $240,000.
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. The contractual royalty liability
is computed quarterly and the accrued royalty balance is adjusted
accordingly. The royalty agreements are subject to audit by licensors.
ADVERTISING - The Company expenses the costs of advertising when the
advertising takes place, except for direct response advertising, which is
capitalized and amortized over its expected period of future benefits
(usually the period remaining under a related contract, which is generally
less than one year). Direct response advertising consists primarily of
television advertising whereby customers respond specifically to the
advertising and where the Company can identify the advertising that
elicited the response.
7
DISCONTINUED OPERATIONS - The Company's consumer products business, which
was concentrated in Europe, consisted primarily of housewares, consumer
convenience items and exercise equipment. The Company discontinued its
consumer products operations in Germany, the United Kingdom and the United
States in June 2000, November 2000 and January 2001, respectively.
Accordingly, these activities have been presented in the accompanying
financial statements as discontinued operations. Net sales for the three
months ended March 31, 2001 and 2000 were $19,000 and $7,473,000. Net sales
for discontinued operations for the nine months ended March 31, 2001 and
2000 were $3,630,000 and $22,864,000.
COMPUTATION OF EARNINGS PER SHARE - The earnings (loss) per share
calculation for the nine month and three month periods ended March 31, 2001
and 2000 do not give effect to common stock equivalents as they would be
anti-dilutive. Options to purchase 2,661,091 and 1,502,162 shares of common
stock, with weighted average exercise prices of $6.13 and $7.75 for the
nine month periods and options to purchase 2,429,898 and 1,855,430 with
weighted average exercise prices of $5.81 and $7.31 for the three month
periods ended March 31, 2001 and 2000 were excluded from the computation of
common share equivalents for the respective periods as they were
anti-dilutive.
3. SALE OF SUBSIDIARY
On September 10, 1999, the Company sold its subsidiary, K-tel International
(Finland) OY to Edel Music AG of Hamburg, Germany, for $6,350,000 in cash.
In connection with the sale, the Company sold its entire investment in the
subsidiary, which had a net book value of $611,000, and paid commissions
and fees related to the deal of $1,398,000, which resulted in recognition a
gain of $4,341,000 on the sale. During fiscal 1999 and 1998, the subsidiary
had net sales of $6,225,000 and $5,988,000 and income from operations of
$169,000 and $428,000.
4. LOANS PAYABLE TO AFFILIATE
On September 27, 1999, K-tel entered into a written Line of Credit
Agreement with K-5 Leisure Products, Inc. ("K-5"), an affiliate controlled
by Philip Kives, the Chairman of the Board and Chief Executive Officer of
K-tel. Under the terms of the agreement (the K-5 facility), K-5 agreed to
make available up to $8,000,000 on a revolving basis. The loan bears
interest at the same rate as K-tel's loan from Foothill Capital Corporation
("Foothill") and expires on November 20, 2001. The loan agreement between
K-tel and K-5 contains the same covenants as the Foothill loan agreement,
and K-5 agreed not to declare a default prior to July 1, 2001 in the event
that the Company did not comply with the shareholders' equity covenant. The
K-5 loan is subordinated to the Foothill loan. K-tel has pledged the stock
of its foreign subsidiaries as collateral for the loan. In addition, K-5
and Foothill agreed that, if Foothill were to give notice of its intention
to accelerate its loan, K-5 would had the right in its discretion to pay
Foothill and assume the secured creditor position of Foothill. As of March
31, 2001 and June 30, 2000, K-tel had an outstanding balance of $3,845,000
and $1,945,000 under the K-5 facility.
On February 27, 2001, K-tel International, Inc. entered into an Assignment
and Acceptance Agreement pursuant to which Foothill assigned to K-5 all of
Foothill's rights and obligations as the creditor under a Loan and Security
Agreement dated November 19, 1997, between Foothill, K-tel International
(USA), Inc., Dominion Entertainment, Inc., K-tel Consumer Products, Inc.,
K-tel TV, Inc. and K-tel Video, Inc. (the "Foothill Loan"). K-tel
International, Inc. is a guarantor of the Foothill Loan. K-5 paid to
Foothill an aggregate of $3,479,544.85 in consideration for assignment of
the Foothill Loan, the Forebearance Agreement and other ancillary
agreements, representing the principal amount of all outstanding
obligations to Foothill under the Foothill Loan together with an accrued
interest, fees and other payments owed to Foothill. Pursuant to the
Assignment and Acceptance Agreement, K-tel International, Inc. and K-5
released and discharged Foothill from any obligations as the lender under
the Foothill Loan. K-tel International, Inc. will continue to guarantee
payments to be made to K-5 pursuant to the Foothill Loan.
The assigned Foothill Loan provides for a $6,400,000 credit facility
consisting of a $3,405,000 term loan due in full on April 30, 2001, and a
$2,995,000 revolving facility under which borrowings are limited to a
percent of eligible receivables. Borrowings under the facility bear
interest at a variable rate based on a "base rate" announced by a banking
affiliate associated with Foothill (13.5% at March 31, 2001) and are
secured by the assets of certain Company subsidiaries in the United States,
including accounts receivable, inventories, equipment, music library and
general intangibles. The loan agreement contains certain financial
8
and other covenants or restrictions, including the maintenance of a minimum
shareholders' equity by K-tel, limitations on capital expenditures,
restrictions on music library acquisitions, limitations on other
indebtedness and restrictions on dividends paid by K-tel. K-tel has
guaranteed the obligations of its subsidiaries under the credit facility
and has pledged the stock of those subsidiaries and its assets to secure
K-tel's obligations under its guaranty. As of March 31, 2001, $3,405,000
was outstanding under the term loan, $632,000 was outstanding under the
revolving line of credit. K-tel was in default under the covenants,
limitations and restrictions of the credit agreement.
In a separate transaction pursuant to a voluntary Surrender Agreement
entered into on March 12, 2001, between K-tel USA and K-5 and amended on
March 17, 2001, K-tel USA voluntarily surrendered assets to K-5 which
served as collateral pursuant to a Loan and Security Agreement in
connection with the Foothill Loan. In consideration of the voluntary
surrender of such assts, K-5 agreed to apply funds realized from the
disposition of assets in accordance with the Uniform Commercial Code and to
reduce the amount of indebtedness owed by K-tel USA to K-5 under a Credit
Agreement entered into on September 27, 1999.
5. LONG TERM DEBT
Long term debt consists of the following:
March 31, June 30,
2001 2000
----------------- ---------------
Term Loan $ 3,405,000 $ 4,000,000
Revolving Line of Credit 4,477,000 1,924,000
--------------- ---------------
7,882,000 5,924,000
Less Current Portion 7,882,000 1,924,000
--------------- ---------------
Long Term Portion $ --- $ 4,000,000
=============== ===============
6. OTHER INCOME/EXPENSE
The Company had two significant components of non-operating income and
expense in the nine-month period ended March 31, 2000. The Company incurred
an expense of $600,000 in connection with the settlement of a private
equity placement that had been completed in August 1999. In September 1999,
the Company recognized a gain of $4,431,000 from the sale of K-tel
International (Finland) OY.
7. COMMITMENTS AND CONTINGENCIES
CLASS ACTION LAWSUIT
K-tel and certain of its current and former officers and directors are
defendants in IN RE K-TEL INTERNATIONAL, INC. SECURITIES LITIGATION, No.
98-CV-2480. This action consolidates twenty-three purported class actions
that were initially filed in various United States District Courts in
November 1998, and were subsequently transferred to, and consolidated in
the United States District Court for the District of Minnesota. On July 19,
1999, the plaintiffs filed an amended consolidated class action complaint
that challenges the accuracy of certain public disclosures made by K-tel
regarding its financial condition during the period May 1998 through
November 1998. The plaintiffs assert claims under the federal securities
laws and seek damages in an unspecified amount as well as costs, including
attorneys' fees and any other relief the Court deems just and proper. K-tel
moved to dismiss the Complaint, and, on July 31, 2000, the U.S. District
Court granted the Company's motion to dismiss. The Court also barred
further actions by the plaintiffs and denied plaintiffs' request to amend
the complaint in order to refile the complaint in the future. An appeal of
the decision by the plaintiffs is pending. K-tel has two insurance policies
providing coverage of up to $20,000,000, which is subject to the insurers'
reservations of legal rights under the applicable policies. Under their
reservations of rights, the insurers could contest their obligations to
indemnify the Company and its directors and officers.
9
EARLY V. K-TEL INTERNATIONAL, INC.
On January 11, 1999, the Company was named in a lawsuit entitled
CHRISTOPHER EARLY VS. K-TEL INTERNATIONAL, INC., ET AL, brought in the
Circuit Court of Cook County, Illinois, against the Company and certain of
its subsidiaries by Christopher Early. The suit also names as defendants
certain other manufacturers, distributors and a number of nationwide
retailers. The plaintiff seeks damages on behalf of himself and a purported
class of purchasers of cassette tapes and compact discs produced,
distributed and/or sold by the defendants. The claim alleges that
defendants engaged in deceptive and misleading packaging of cassette tapes
and compact discs by failing to give proper notice to consumers that the
songs contained therein are not the original recordings by the original
artists. The complaint also alleges consumer fraud, deceptive and unfair
practices, and fraud in connection with website advertising and marketing.
Similar litigation against the Company, brought against the Company by Mr.
Early in 1997 was dismissed by a U.S. Federal Court in 1999 on
jurisdictional grounds. The Company denies that it mislabeled cassette
tapes and compact discs or engaged in fraudulent or deceptive conduct and
intends to vigorously defend the purported action, which seeks an
undetermined amount of compensatory damages and punitive damages in the
amount of $10 million, an injunction and costs incurred in the litigation,
including attorneys fees.
The Company filed a motion to dismiss the complaint on June 8, 2000. On
February 16, 2001, the court ruled that the complaint was dismissed against
the other manufacturers, distributors and nationwide retailers. While
discovery has not yet begun and no assurance can be given that the Company
will be successful in defending this action, the Company believes it has
meritorious defenses to the plaintiff's claims.
MIX CONNECTION MUTIMEDIA, INC. V. K-TEL INTERNATIONAL (USA), INC.
On January 25, 2001, K-tel International (USA), Inc. was named in a lawsuit
in Hennepin County, Minnesota district court which was brought by Mix
Connection Multimedia, Inc. Mix Connection alleges that it sold product to
K-tel (USA) and that K-tel (USA) failed to pay for the product. Mix
Connection asserts claims of breach of contract and replevin and seeks
damages in the amount of approximately $566,000. The action has been stayed
as a result of K-tel (USA)'s Chapter 7 bankruptcy filing.
RTL SHOPPING S. A.
The Company has been named in a lawsuit filed in France brought by RTL9, a
French cable TV station. Initially, RTL9 was named as a defendant in a suit
brought by a competitor of K-tel Marketing, Ltd., alleging that RTL9 ran a
commercial for K-tel Marketing that translated language indicating that the
product was "just like" or "as good as others" in English script to "better
than" competing products in French, contrary to French law. RTL9 then sued
K-tel Marketing on October 4, 2000, pursuant to an indemnification
provision the parties had entered into. Subsequently, K-tel Marketing went
into liquidation and RTL filed a suit in December 2000, against K-tel
International, Inc. under its agreement to guaranty payment for the
commercial time. The action seeks the approximate amount of 20 million
French Francs, or approximately $2.8 million U. S. The Company believes
that RTL9 has no basis for a complaint against the Company and has filed a
motion to dismiss the complaint.
OTHER LITIGATION AND DISPUTES
K-tel is involved in several 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 K-tel for which the outcome is
likely to have a material adverse effect upon the consolidated financial
position or results of operations of K-tel.
8. SEGMENT INFORMATION
The Company markets and distributes entertainment products internationally.
K-tel's businesses are organized, managed and internally reported as three
segments: retail music sales, music licensing, and other, which consist
primarily of e-commerce. These segments are based on differences in
products, customer type and sales and distribution methods. The Company's
consumer product operations have been discontinued and are presented in the
accompanying financial statements as discontinued operations and are
therefore not included in the segment information.
10
The retail music segment consists primarily of the sales of pre-recorded
music both from the Company's music master catalog and under licenses
obtained from other record companies, as well as pre-recorded music
developed by other companies who desire to use K-tel for sales and
distribution of their music products. The Company sells compact discs and
cassettes directly to retailers, wholesalers and rack service distributors'
which stock and manage inventory within music departments for retail
stores.
The Company licenses the rights to its master music catalog, consisting of
original recordings and re-recordings of music from the 1950's through
today, to third parties world-wide for use in albums, films, television
programs, and commercials, for either a flat fee or a royalty based on the
number of units sold.
Operating profits or losses of these segments include an allocation of
general corporate expenses.
Certain financial information on the Company's continuing operating segments is
as follows:
BUSINESS SEGMENT INFORMATION
Corporate/ Total
Music Licensing Other Elimination Company
------------------------------------------------------------------------------------------------------------------
(in thousands)
NINE MONTHS ENDED MARCH 31,
Net Sales 2001 $ 13,628 $ 2,561 $ 365 $ (329) $ 16,225
2000 21,504 2,982 966 (930) 24,522
Operating 2001 $ (7,084) $ 666 $ (1,927) $ -- $ (8,345)
Income (Loss) 2000 (4,238) 884 (1,581) -- (4,935)
Assets 2001 $ 2,062 $ 1,400 $ 44 $ 632 $ 4,138
2000 16,688 1,941 1,234 1,884 21,747
THREE MONTHS ENDED MARCH 31,
--------
Net Sales 2001 $ 4,259 $ 973 $ 22 $ (80) $ 5,174
2000 4,181 1,360 272 (401) 5,412
Operating 2001 $ (4,750) $ 342 $ (995) -- $ (5,403)
Income (Loss) 2000 (3,849) 385 (623) -- (4,087)
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
K-tel International, Inc. (the "Company", "K-tel", or the "Registrant"), through
its operating subsidiaries, licenses its music catalog internationally and
markets entertainment products mainly derived from its catalog in the United
States and Europe through retail and direct response marketing channels as well
as through an internet e-commerce site, K-tel.com (www.ktel.com).
THE NINE MONTHS ENDED MARCH 31, 2001 VERSUS THE NINE MONTHS ENDED MARCH 31, 2000
The following sections discuss the results of continuing operations by business
segment. General corporate expenses of $1,850,000 and $1,152,000 for the nine
months ended March 31, 2001 and 2000 have been allocated to the segments.
BUSINESS SEGMENT RESULTS
MUSIC
Sales in the music segment were $13,628,000 in the nine months ended March 31,
2001 compared to $21,504,000 in the nine months ended March 31, 2000, a decline
of 36.6%. Domestic music sales decreased $7,376,000 and European music sales
declined $500,000. The domestic music business, comprised primarily of sales of
music compilations produced by K-tel and the sales and distribution of other
record labels through K-tel Distribution ("KTD") declined as the Company
experienced a higher rate of product returns from the distributors. K-tel has
ceased the operations of its domestic music distribution subsidiary.
Cost of goods sold in the music segment increased to 107.1% of sales in the nine
months ended March 31, 2001 compared to 79.3% of sales in the nine months ended
March 31, 2000. The cost of goods sold in excess of net sales reflects the
disposal of slow moving and obsolete stock at prices less than cost during the
third quarter of the fiscal year. The KTD business represented about 19.9% of
sales in the nine months ended March 31, 2001 compared to 31.8% of sales in the
nine months ended March 31, 2000. KTD generally has a cost of goods sold of
about 80%, resulting in a higher cost of goods sold for the music segment.
Offsetting the high cost of goods sold in the KTD business is the fact that the
record labels pay for all of the advertising and promotion, so K-tel does not
bear these expenses. Advertising expense, within the segment, which consists
primarily of co-operative advertising payments, trade advertising and
promotions, decreased $1,178,000 to $420,000 and was approximately 3.1% of sales
in the nine months ended March 31, 2001, compared to 7.4% for the nine months
ended March 31, 2000. This spending decrease was the result of eliminating most
TV advertising, which was deemed ineffective and better utilization of
promotional spending. Selling, general and administrative expenses decreased
$1,400,000 or 19.7% to $5,703,000 in the nine months ended March 31, 2001
compared to $7,103,000 in the nine months ended March 31, 2000. The primary
reasons for the decrease is related to general overall spending level
reductions. As a result, the music segment incurred an operating loss of
$7,084,000 in the nine months ended March 31, 2001 compared to an operating loss
of $4,238,000 in the nine months ended March 31, 2000.
In March 2001, the Company's music distribution subsidiary in the United States,
K-tel International (USA), Inc., ceased operations and filed for protection
under Chapter 7 of the United States bankruptcy code. In connection with this
filing, the assets and liabilities of the subsidiary have been removed from the
books of the Company and the remaining net liability has been shown as a gain on
Chapter 7 liquidation. During the past three fiscal years ended June 30, 2000,
1999, and 1998, this subsidiary had net sales of $23,426,000, $29,336,000 and
$30,815,000 and sustained net losses of $10,242,000, $3,564,000 and $834,000,
respectively. For the nine months ended March 31, 2001, it had sales of
$11,948,000 and a net loss of $5,702,000. Management believes the Company will
have no ongoing liability related to this subsidiary as a result of the filing
and the outcome of the bankruptcy proceeding.
12
LICENSING
Licensing sales were $2,561,000 in the nine months ended March 31, 2001 compared
to $2,982,000 in the nine months ended March 31, 2000. Included in the segment
sales for the nine months ended March 31, 2001 and the nine months ended March
31, 2000 were approximately $329,000 and $930,000 of inter-company sales,
respectively, which are eliminated in the accompanying consolidated financial
statements. Operating income in the licensing segment was $666,000 in the nine
months ended March 31, 2001 versus $884,000 in the nine months ended March 31,
2000.
OTHER
K-tel operates its Internet service, K-tel.com (WWW.KTEL.COM), featuring K-tel's
own music and related products available for online purchase by retail
consumers. Sales for the nine months ended March 31, 2001 were $353,000 compared
to $892,000 for the nine months ended March 31, 2000. The cost of goods sold in
the nine months ended March 31, 2001 and 2000 was $235,000 and $430,000. In the
nine months ended March 31, 2001, selling general and administrative expenses
were $613,000 compared to $1,269,000 resulting in operating losses of $605,000
and $1,079,000 for the nine months ended March 31, 2001 and 2000, respectively.
The decrease is due to a lower allocation of general corporate overhead.
DISCONTINUED OPERATIONS
The Company's consumer products business, which was concentrated in Europe,
consisted primarily of housewares, consumer convenience items and exercise
equipment. The Company discontinued its consumer products operations in Germany,
the United Kingdom and the United States in June 2000, November 2000 and January
2001, respectively. Accordingly, these activities have been presented in the
accompanying financial statements as discontinued operations. Net sales for the
three months ended March 31, 2001 and 2000 were $19,000 and $7,473,000. Net
sales for discontinued operations for the nine months ended March 31, 2001 and
2000 were $3,630,000 and $22,864,000.
THE THREE MONTHS ENDED MARCH 31, 2001 VERSUS THE THREE MONTHS ENDED MARCH 31,
2000
The following sections discuss the results of continuing operations by business
segment.
BUSINESS SEGMENT RESULTS
MUSIC
Sales in the music segment were $4,259,000 in the three months ended March 31,
2001 compared to $4,181,000 in the three months ended March 31, 2000 an increase
of 1.9%. Domestic and European music sales were relatively flat between periods.
Domestic sales in the three months ended March 31, 2001 include extensive sales
of slow moving and obsolete inventory.
Cost of goods sold in the music segment increased to 172.8% of sales in the
three months ended March 31, 2001 compared to 122.6% of sales in the three
months ended March 31, 2000. The cost of goods sold in excess of net sales
reflects the disposal of slow moving and obsolete stock at prices less than cost
during the quarter. Advertising expense, which consists primarily of
co-operative advertising payments, trade advertising and promotions, decreased
$336,000 and was approximately 5.8% of sales in the three months ended March 31,
2001 compared to 13.9% for the three months ended March 31, 2000. This spending
decrease was the result of reduced shipments to domestic music customers and a
corresponding reduction in promotional spending. Selling, general and
administrative expenses were $1,403,000 or 33.0% in the three months ended March
31, 2001 compared to $2,323,000 or 55.6% in the three months ended March 31,
2000. The primary reason for the decrease in selling, general and administrative
expense is the significant reduction in staffing and other overhead costs
implemented in the domestic music business to bring these costs more in line
with reduced sales experienced over the previous year. As a result of the
significant increase in cost of goods sold the music segment incurred an
operating loss of $4,750,000 in the three months ended March 31, 2001 compared
to an operating loss of $3,849,000 in the three months ended March 31, 2000.
13
LICENSING
Licensing sales were $973,000 in the three months ended March 31, 2001 compared
to $1,360,000 in the three months ended March 31, 2000. Included in the segment
sales for the three months ended March 31, 2001 and 2000 were approximately
$80,000 and $401,000 of inter-company sales, respectively, which are eliminated
in the accompanying consolidated financial statements. Operating income in the
licensing segment was $342,000 in the three months ended March 31, 2001 versus
$385,000 in the three months ended March 31, 2000.
OTHER
Sales for the e-commerce segment for the three months ended March 31, 2001 were
$17,000 compared to $255,000 for the three months ended March 31, 2000. The cost
of goods sold in the three months ended March 31, 2001 was approximately 47.1%
of sales compared to 45.1% in 2000. In the three months ended March 31, 2001,
selling general and administrative expenses were $383,000 compared to $443,000
resulting in operating losses of $374,000 and $384,000 for the three months
ended March 31, 2001 and 2000, respectively. The Company temporarily suspended
its e-commerce operations during the quarter in order to relocated to the
Company's offices in Minnesota and update the website to reflect the ongoing
operations after the bankruptcy filing of K-tel International (USA), Inc.
CHAPTER 7 LIQUIDATION
In March 2001, the Company's music distribution subsidiary in the United States,
K-tel International (USA), Inc., ceased operations and filed for protection
under Chapter 7 of the United States bankruptcy code. In connection with this
filing, the assets and liabilities of the subsidiary have been removed from the
books of the Company and the remaining net liability has been shown as a gain on
Chapter 7 liquidation. During the past three fiscal years ended June 30, 2000,
1999, and 1998, this subsidiary had net sales of $23,426,000, $29,336,000 and
$30,815,000 and sustained net losses of $10,242,000, $3,564,000 and $834,000,
respectively. For the nine months ended March 31, 2001, it had sales of
$11,948,000 and a net loss of $5,702,000. This subsidiary has not been presented
as a discontinued operation as the Company continues to operate a music
distribution business through it's subsidiary, K-tel Entertainment (UK), Ltd.,
in the United Kingdom.
Management believes the Company will have no ongoing liability related to this
subsidiary as a result of the filing. However, based upon the outcome of the
bankruptcy proceeding, the results of this estimate may change within the near
term and could have a significant impact on the Company's future financial
statements and results of operations.
DISCONTINUED OPERATIONS
The Company's consumer products business, which was concentrated in Europe,
consisted primarily of housewares, consumer convenience items and exercise
equipment. The Company discontinued its consumer products operations in Germany,
the United Kingdom and the United States in June 2000, November 2000 and January
2001, respectively. Accordingly, these activities have been presented in the
accompanying financial statements as discontinued operations. For the three
months ended March 31, 2001 and 2000 sales were $19,000 and $7,471,000. There
was an operating gain of $10,000 for the three months ended March 31, 2001 and
an operating loss of $1,046,000 for the three month period ending March 31,
2000. The Company believes that it has adequately accrued all foreseeable
expenses for the closing of the discontinued operations.
14
B. LIQUIDITY AND CAPITAL RESOURCES
On September 27, 1999, K-tel entered into a written Line of Credit Agreement
with K-5 Leisure Products, Inc. ("K-5"), an affiliate controlled by Philip
Kives, the Chairman of the Board and Chief Executive Officer of K-tel. Under the
terms of the agreement (the K-5 facility), K-5 agreed to make available up to
$8,000,000 on a revolving basis. The loan bears interest at the same rate as
K-tel's loan from Foothill Capital Corporation ("Foothill") and expires on
November 20, 2001. The loan agreement between K-tel and K-5 contains the same
covenants as the Foothill loan agreement, and K-5 agreed not to declare a
default prior to July 1, 2001 in the event that the Company did not comply with
the shareholders' equity covenant. The K-5 loan is subordinated to the Foothill
loan. K-tel has pledged the stock of its foreign subsidiaries as collateral for
the loan. In addition, K-5 and Foothill agreed that, if Foothill were to give
notice of its intention to accelerate its loan, K-5 would had the right in its
discretion to pay Foothill and assume the secured creditor position of Foothill.
As of March 31, 2001 and June 30, 2000, K-tel had an outstanding balance of
$3,845,000 and $1,945,000 under the K-5 facility.
On February 27, 2001, K-tel International, Inc. entered into an Assignment and
Acceptance Agreement pursuant to which Foothill assigned to K-5 all of
Foothill's rights and obligations as the creditor under a Loan and Security
Agreement dated November 19, 1997, between Foothill, K-tel International (USA),
Inc., Dominion Entertainment, Inc., K-tel Consumer Products, Inc., K-tel TV,
Inc. and K-tel Video, Inc. (the "Foothill Loan"). K-tel International, Inc. is a
guarantor of the Foothill Loan. K-5 paid to Foothill an aggregate of
$3,479,544.85 in consideration for assignment of the Foothill Loan, the
Forebearance Agreement and other ancillary agreements, representing the
principal amount of all outstanding obligations to Foothill under the Foothill
Loan together with an accrued interest, fees and other payments owed to
Foothill. Pursuant to the Assignment and Acceptance Agreement, K-tel
International, Inc. and K-5 released and discharged Foothill from any
obligations as the lender under the Foothill Loan. K-tel International, Inc.
will continue to guarantee payments to be made to K-5 pursuant to the Foothill
Loan.
The assigned Foothill Loan provides for a $6,400,000 credit facility consisting
of a $3,405,000 term loan due in full on April 30, 2001, and a $2,995,000
revolving facility under which borrowings are limited to a percent of eligible
receivables. Borrowings under the facility bear interest at a variable rate
based on a "base rate" announced by a banking affiliate associated with Foothill
(13.5% at March 31, 2001) and are secured by the assets of certain Company
subsidiaries in the United States, including accounts receivable, inventories,
equipment, music library and general intangibles. The loan agreement contains
certain financial and other covenants or restrictions, including the maintenance
of a minimum shareholders' equity by K-tel, limitations on capital expenditures,
restrictions on music library acquisitions, limitations on other indebtedness
and restrictions on dividends paid by K-tel. K-tel has guaranteed the
obligations of its subsidiaries under the credit facility and has pledged the
stock of those subsidiaries and its assets to secure K-tel's obligations under
its guaranty. As of March 31, 2001, $3,405,000 was outstanding under the term
loan, $632,000 was outstanding under the revolving line of credit. K-tel was in
default under the covenants, limitations and restrictions of the credit
agreement.
In a separate transaction pursuant to a voluntary Surrender Agreement entered
into on March 12, 2001, between K-tel USA and K-5 and amended on March 17, 2001,
K-tel USA voluntarily surrendered assets to K-5 which served as collateral
pursuant to a Loan and Security Agreement in connection with the Foothill Loan.
In consideration of the voluntary surrender of such assts, K-5 agreed to apply
funds realized from the disposition of assets in accordance with the Uniform
Commercial Code and to reduce the amount of indebtedness owed by K-tel USA to
K-5 under a Credit Agreement entered into on September 27, 1999.
IMPORTANT FACTORS RELATING TO FORWARD LOOKING STATEMENTS
Information in this Form 10-Q of a non-historical nature relates to future
events and results of the Company (including certain projections and business
trends) that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. The use of terminology such as
"believe," "may," "will," "expect," "anticipate," "estimate," "should,"
"continue," other variations thereof or comparable terminology may identify such
forward-looking statements. Actual results and performance may differ materially
from expressed forward looking statements because of certain risks and
uncertainties, including but not limited to, changes in political and economic
conditions; demand for and market acceptance of new and existing products; the
impact from competition for Internet content, merchandise and recorded music;
dependence on strategic alliance partners, suppliers and distributors; market
acceptance of the Internet for commerce and as a medium for advertising;
technological changes and difficulties; availability of financing and other
risks discussed in the Company's 10-K report for the fiscal year ended June 30,
2000 filed with the Securities and Exchange Commission. The Company undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements, except as required by law in the normal course of
its public disclosure practices.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the company's market risk during the nine
months ended March 31, 2001. For additional information, refer to page 13 of the
Company's annual report on Form 10-K for the fiscal year ended June 30, 2000.
16
PART II
ITEM 1. LEGAL PROCEEDINGS
CLASS ACTION LAWSUIT
K-tel and certain of its current and former officers and directors are
defendants in IN RE K-TEL INTERNATIONAL, INC. SECURITIES LITIGATION, No.
98-CV-2480. This action consolidates twenty-three purported class actions that
were initially filed in various United States District Courts in November 1998,
and were subsequently transferred to, and consolidated in the United States
District Court for the District of Minnesota. On July 19, 1999, the plaintiffs
filed an amended consolidated class action complaint that challenges the
accuracy of certain public disclosures made by K-tel regarding its financial
condition during the period May 1998 through November 1998. The plaintiffs
assert claims under the federal securities laws and seek damages in an
unspecified amount as well as costs, including attorneys' fees and any other
relief the Court deems just and proper. K-tel moved to dismiss the Complaint,
and, on July 31, 2000, the U.S. District Court granted the Company's motion to
dismiss. The Court also barred further actions by the plaintiffs and denied
plaintiffs' request to amend the complaint in order to refile the complaint in
the future. An appeal of the decision by the plaintiffs is pending. K-tel has
two insurance policies providing coverage of up to $20,000,000, which is subject
to the insurers' reservations of legal rights under the applicable policies.
Under their reservations of rights, the insurers could contest their obligations
to indemnify the Company and its directors and officers.
EARLY V. K-TEL INTERNATIONAL, INC.
On January 11, 1999, the Company was named in a lawsuit entitled CHRISTOPHER
EARLY VS. K-TEL INTERNATIONAL, INC., ET AL, brought in the Circuit Court of Cook
County, Illinois, against the Company and certain of its subsidiaries by
Christopher Early. The suit also names as defendants certain other
manufacturers, distributors and a number of nationwide retailers. The plaintiff
seeks damages on behalf of himself and a purported class of purchasers of
cassette tapes and compact discs produced, distributed and/or sold by the
defendants. The claim alleges that defendants engaged in deceptive and
misleading packaging of cassette tapes and compact discs by failing to give
proper notice to consumers that the songs contained therein are not the original
recordings by the original artists. The complaint also alleges consumer fraud,
deceptive and unfair practices, and fraud in connection with website advertising
and marketing. Similar litigation against the Company, brought against the
Company by Mr. Early in 1997 was dismissed by a U.S. Federal Court in 1999 on
jurisdictional grounds. The Company denies that it mislabeled cassette tapes and
compact discs or engaged in fraudulent or deceptive conduct and intends to
vigorously defend the purported action, which seeks an undetermined amount of
compensatory damages and punitive damages in the amount of $10 million, an
injunction and costs incurred in the litigation, including attorneys fees.
The Company filed a motion to dismiss the complaint on June 8, 2000. On February
16, 2001, the court ruled that the complaint was dismissed against the other
manufacturers, distributors and nationwide retailers. While discovery has not
yet begun and no assurance can be given that the Company will be successful in
defending this action, the Company believes it has meritorious defenses to the
plaintiff's claims.
MIX CONNECTION MUTIMEDIA, INC. V. K-TEL INTERNATIONAL (USA), INC.
On January 25, 2001, K-tel International (USA), Inc. was named in a lawsuit in
Hennepin County, Minnesota district court which was brought by Mix Connection
Multimedia, Inc. Mix Connection alleges that it sold product to K-tel (USA) and
that K-tel (USA) failed to pay for the product. Mix Connection asserts claims of
breach of contract and replevin and seeks damages in the amount of approximately
$566,000. The action has been stayed as a result of K-tel (USA)'s Chapter 7
bankruptcy filing.
RTL SHOPPING S. A.
The Company has been named in a lawsuit filed in France brought by RTL9, a
French cable TV station. Initially, RTL9 was named as a defendant in a suit
brought by a competitor of K-tel Marketing, Ltd., alleging that RTL9 ran a
commercial for K-tel Marketing that translated language indicating that the
product was "just like" or "as good as others" in English script to "better
than" competing products in French, contrary to French law. RTL9 then sued K-tel
Marketing on October 4, 2000, pursuant to an indemnification provision the
parties had entered into. Subsequently, K-tel Marketing went into liquidation
and RTL filed a suit in December 2000, against K-tel
17
International, Inc. under its agreement to guaranty payment for the commercial
time. The action seeks the approximate amount of 20 million French Francs, or
approximately $2.8 million U. S. The Company believes that RTL9 has no basis for
a complaint against the Company and has filed a motion to dismiss the complaint.
OTHER LITIGATION AND DISPUTES
K-tel is involved in several 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 K-tel for which the outcome is likely to have a material
adverse effect upon the consolidated financial position or results of operations
of K-tel.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has a $6,400,000 credit facility that K-5 Leisure Products, Inc.
purchased from Foothill Capital Corporation, consisting of a $3,405,000 term
loan due in full on April 30, 2001, and a $2,995,000 revolving facility, under
which borrowings are limited to a percent of eligible receivables, that expires
on April 30, 2001. Under the terms of the credit facility, the Company was
obligated to maintain a shareholders' equity of at least $4,000,000 as of the
fiscal quarter ended December 31, 2000. As of such date, the Company failed to
meet such shareholders' equity covenant, having a deficit shareholders' equity
of approximately $19,600,000. Such default was not cured as of the date of this
10-Q Report. The Company is in default of several other terms as of the date of
this Report.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
No exhibits
(b) REPORTS ON FORM 8-K
NUMBER DESCRIPTION
10.1 Stock Purchase Agreement dated February 28, 2001 between
reference to the Company's Form 8-K, File Number 001-07115,
filed March 29, 2001).
10.2 Assignment and Acceptance Agreement dated February 27, 2001,
between Registrant and Foothill Capital Corporation
(incorporated by reference to the Company's Form 8-K, File
Number 001-07115, filed March 29, 2001).
10.3 Voluntary Surrender Agreement dated March 12, 2001, between
K-tel International (USA), Inc. and K-5 Leisure Products, Inc.
(incorporated by reference to the Company's Form 8-K, File
Number 001-07115, filed March 29, 2001).
10.4 Amendment to Voluntary Surrender Agreement dated March 17, 2001,
between K-Tel International (USA), Inc. and K-5 Leisure
Products, Inc. (incorporated by reference to the Company's
Form 8-K, File Number 001-07115, filed March 29, 2001).
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K-TEL INTERNATIONAL, INC.
---------------------------------------
REGISTRANT
/S/ PHILIP KIVES
---------------------------------------
PHILP KIVES
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/S/ DENNIS WARD
---------------------------------------
DENNIS WARD
CHIEF FINANCIAL OFFICER
(principal accounting officer)
20