SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 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
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 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 November 9, 1995 there were approximately 3,729,172 common shares
outstanding. K-tel International, Inc. shares are listed on the NASDAQ exchange.
For the quarter ended September 30, 1995, K-tel shares traded within the high
and low bid range of $3.25 to $5.13 compared to a range of $3.88 to $4.75 for
the comparable period in the prior year.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the quarter ended September 30, 1995
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations 3
- Three month periods ended September 30, 1995 and 1994
Consolidated Balance Sheets 4
- September 30, 1995 and June 30, 1995
Consolidated Statements of Cash Flows 5
- Three month periods ended September 30, 1995 and 1994
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBITS
Exhibit 11: Statement Regarding Computation of Earnings Per Share
Exhibit 27: Financial Data Schedule (SEC use)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(in thousands - except per share data)
1995 1994
NET SALES $ 16,624 $ 13,761
COSTS AND EXPENSES:
Cost of goods sold 8,512 7,027
Advertising 2,735 2,319
Selling, general & administrative 4,989 4,363
Total Costs and Expenses 16,236 13,709
OPERATING INCOME 388 52
NON-OPERATING INCOME:
Interest income 106 28
Interest expense (75) (15)
Foreign currency transaction gain 10 76
Total Non-operating Income 41 89
INCOME BEFORE BENEFIT
PROVISION FOR TAXES 429 141
PROVISION FOR INCOME TAXES (124) (75)
NET INCOME $ 305 $ 66
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .08 $ .02
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 3,803 3,805
K-TEL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
SEPTEMBER 30 AND JUNE 30, 1995
(in thousands)
September 30, June 30,
1995 1995
ASSETS
Current Assets:
Cash and cash equivalents $ 1,754 $ 2,154
Restricted cash 730 536
Accounts receivable, net 14,389 11,971
Inventories 7,896 7,382
Royalty advances 2,373 2,176
Prepaid expenses 1,707 2,108
Income tax refund receivable 428 540
Total Current Assets 29,277 26,867
Property and Equipment 2,910 2,820
Less-Accumulated depreciation and amortization (1,856) (1,797)
Property and Equipment, net 1,054 1,023
Other Assets 836 747
$ 31,167 $ 28,637
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Line of credit $ 3,837 $ 2,516
Accounts payable 4,919 4,929
Accrued royalties 9,663 9,047
Reserve for returns 7,572 6,802
Other current liabilities 1,845 2,517
Income taxes payable 608 373
Total Current Liabilities 28,443 26,184
Common stock 37 37
Contributed capital 7,837 7,816
Accumulated deficit (4,616) (4,921)
Cumulative translation adjustment (534) (479)
Total Shareholders' Investment 2,724 2,453
$ 31,167 $ 28,637
K-TEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(in thousands)
September 30,
1995 1994
Cash Flows From Operating Activities:
Net income $ 305 $ 66
Adjustments to reconcile net income to cash used for
operating activities:
Depreciation and amortization 491 129
Changes in current operating items:
Restricted Cash (194) (281)
Accounts receivable (2464) 90
Inventories (545) (1,107)
Royalty advances (207) (495)
Prepaid expenses 378 (267)
Current liabilities 1,121 552
Cash used for operating activities (1,115) (1,313)
Cash flows from investing activities:
Property and equipment purchases (163) (68)
Proceeds from sale of property and equipment 56 10
Music catalog additions (493) (75)
Other (15) (9)
Cash used for investing activities (615) (142)
Cash flows from financing activities:
Proceeds from note payable to bank, net 1,321 --
Proceeds from exercise of stock options 21 4
1,342 4
Cash provided by financing activities
Effect of exchange rates on cash and cash equivalents (2) (57)
Net decrease in cash and cash equivalents (400) (1,508)
Cash and cash equivalents at beginning of year 2,154 6,600
Cash and cash equivalents at period end $ 1,754 $ 5,092
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended September 30, 1995 are not necessarily
indicative of the results that may be expected for the year as a whole. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended June 30, 1995.
2. 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, 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.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("Statement No. 123"), issued in October 1995 and
effective for "fiscal years beginning after December 15, 1995, encourages,
but does not require, a fair value based method of accounting for employee
stock options or similar equity instruments. It also allows an entity to
elect to continue to measure compensation cost under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25"), but requires proforma disclosures of net income and earnings per
share as if the fair value based method of accounting has been applied. The
Company expects to adopt Statement No. 123 in 1996. While the Company is
still evaluating Statement No. 123, it currently expects to elect to
continue to measure compensation cost under APB No. 25 and comply with the
proforma disclosure requirements. If the Company makes this election, this
statement will have no impact on the Company's results of operations.
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 September 30,
1995 to increase the total purchase price to $33,503,000. 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 of
$9,730,000 at September 30, 1995 and will repay bank indebtedness which is
$1,934,000 at September 30, 1995. 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.
<TABLE>
<CAPTION>
Pro forma
Sept. 30, Sept. 30,
1995 Increase 1995
as reported (decrease) (unaudited)
<S> <C> <C> <C>
Total current assets $29,277 $ (1,796) $ 27,481
Other assets 1,890 (1,847) 43
Total assets $31,167 $ (3,643) $ 27,524
Total current liabilities $28,443 $(26,318) $ 2,125
Shareholders' Investment 2,724 22,675 25,399
Total liabilities and shareholders' investment $31,167 $ 3,643) $ 27,524
Net sales $16,624 $(12,258) $ 4,366
Operating income $ 388 $ $ (327)
(715)
Loss from continuning operations $ 305 $ $ (254)
(559)
Discontinued Operations
Income from operations of
Entertainment subsidiaries 0 559 559
Gain on sale of Entertainment
Subsidiaries 0 22,164 22,164
Net Income $ 305 $ 22,164 $ 22,469
</TABLE>
ITEM 2. 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.
K-TEL INTERNATIONAL, INC.
RESULTS OF OPERATIONS BY GEOGRAPHIC REGION
(IN 000'S)
<TABLE>
<CAPTION>
Quarter Ended September 30, 1995 Quarter Ended September 30 1994
North America Europe Total North America Europe Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $11,626 100% $ 4,998 100% $16,624 100% $7,040 100% $ 6,721 100% $13,761 100%
Costs and expenses
Cost of goods sold 6,086 52% 2,427 49% 8,513 51% 4,017 58% 3,010 45% 7,027 52%
Advertising 1,800 15% 935 19% 2,735 16% 350 5% 1,969 29% 2,319 17%
Selling, general & 2,907 25% 1,647 33% 4,554 27% 1,842 26% 2,316 34% 4,158 30%
administrative
Operating Income (Loss) 834 7% (11) 0% 823 5% 831 12% (574) (9)% 257 2%
</TABLE>
In addition to the operating amounts above for the quarter ended September
30, 1995, the parent holding company recorded $435,000 in expenses. For the
quarter ended September 30, 1994, the parent holding company recorded
$205,000 in expenses. The increase in costs was due to additions in
personnel and the increased legal fees associated with the proposed sale of
the consumer entertainment business. (see Note 3 to consolidated financial
statements)
Consolidated net sales for the first quarter ended September 30, 1995, were
$16,624,000 with operating income of $388,000 and net income of $305,000 or
$.08 per share. Consolidated net sales for the same period in the prior
year were $13,761,000 with operating income of $52,000 and net income of
$66,000 or $.02 per share.
North American sales were up 65% over the prior year comparable period due
primarily to U.S. music sales success in most of its widely diverse and
expanding product offerings covering nearly all genres of music. Also
contributing to the sales increase was a successful first quarter U.S.
music direct response television infomercial. European sales were down from
the prior year comparable period due mainly to the close down of the
Spanish entity at the end of fiscal 1995.
For the quarter ended September 30, 1995, cost of goods sold as a
percentage of net sales were 51% as compared to 52% in the prior year
comparable period. North American cost of goods sold were 52% compared to
58% for the same period last year due mainly to consumer convenience
product margin improvement over the prior year. Prior year consumer
convenience product first quarter margins were adversely affected by sales
of some higher priced, low margin items. European cost of goods sold
increased over prior year due mainly to a change in business in the United
Kingdom, to mostly lower margin budget music product from a combination of
music and consumer convenience product in the prior year. The German
subsidiary had a small increase in percentage of cost of goods sold due to
sales product mix varying slightly from the previous year.
Consolidated advertising costs as a percent of sales were 16% as compared
to 17% in the previous year comparable period. North American advertising
costs as a percent of sales were 15% compared to 5% in the previous year.
This increase was due mainly to additional U.S. music retail advertising in
support of sales growth, a successful direct response television music
infomercial in the current year first quarter (direct response television
sales require higher levels of advertising than retail sales), and a first
quarter Canadian television promotion supporting some new music product
releases. European advertising cost as a percent of sales were 19% compared
to 29% in the previous year. The decrease was primarily due to the
closedown of the Spanish entity at the end of fiscal 1995. The Spanish
entity sales were mainly direct response television sales which require
higher levels of advertising than retail sales. Also contributing to the
reduction in European advertising costs was Germany which had more success
in direct response television promotions in the current year first quarter.
Selling, general and administrative expenses for the quarter ended
September 30, 1995 were $4,989,000 or 30% of net sales, as compared to
$4,363,000 or 32% of net sales in the previous year comparable period.
North American selling, general and administrative expenses were up
$1,085,000 over the previous year comparable period in support of a 65%
growth in sales for the same period. European selling, general and
administrative expenses were down from the previous year due mainly to the
closedown of the Spanish entity and the restructuring of the German entity
in the fourth quarter ending June 30, 1995.
Operating income for the quarter ended September 30, 1995 increased to
$388,000 from $52,000 for the same period last year. Improvement in
operating income for the first quarter was due mainly to closedown of loss
operations in Spain, restructuring of the German operation and significant
profit improvement over the prior year in the Company's Finnish entity due
to very strong retail music sales.
During the quarter ended September 30, 1995, the Company experienced a
foreign currency transaction gain of $10,000 compared to a gain of $76,000
experienced during the comparable period in the prior year. In the first
quarter of fiscal 1996, foreign exchange rate fluctuations have been less
favorable to the Company than in the previous year comparable period. Also,
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 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 1996
first quarter translation gains 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 provision for income taxes for the quarter ended September 30, 1995 was
$124,000 compared to a provision of $75,000 in the prior year comparable
period. Variations in the Company's tax provision are a factor of the
country of origin of profits and the availability of any net operating loss
carryforwards.
Operating results for the quarter ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the year as
a whole.
The Company provided restructuring/closedown charges of $652,000 in 1995
relating to the Company's restructuring/closedown of it Spanish and German
operations.. The restructuring/closedowns will be completed during the
first two quarters of fiscal 1996 and the accrued charge at June 30, 1995
should approximate the actual cost incurred to complete the
restructuring/closedown.
B. Liquidity and Capital Resources
During the first quarter ended September 30, 1995, cash and cash
equivalents decreased approximately $400,000 to $1,754,000. The overall
decrease in cash was primarily due to increases in nearly all current
operating items (accounts receivable, inventories, royalty advances and
current liabilities) which continued to be driven by strong sales growth
continuing into the first quarter of fiscal 1996. The related collections
and payments will occur in the second and third quarter of this fiscal
year. Part of the cash decrease was offset by proceeds received under the
Company's working capital line of credit.
During the first quarter of fiscal 1996, the Company purchased
approximately $313,000 of consumer convenience product from an affiliate
controlled by the Chairman of the Board. The Company owed approximately
$394,000 to the affiliate at September 30, 1995. The Chairman's company
purchased less than $1,000 of products from the Company during the first
quarter ended September 30, 1995 and owed the Company $233,000 at September
30, 1995. No interest will be charged on the related outstanding balances
during fiscal 1996.
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. The amounts outstanding
under these lines of credit were $3,837,000 at September 30, 1995. The
Subsidiaries are required to maintain minimum levels of tangible net worth
and certain other financial ratios. As of September 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 which have mainly been by way of
giving the Company open ended payment terms on product purchased from his
affiliate companies. 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
Exhibit 11 - Statement Regarding Computation of Earnings Per Share.
Exhibit 27: Financial Data Schedule (SEC use)
(b) REPORTS ON FORM 8-K
On August 16, 1995 the Company filed a Form 8K, 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.
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/ MICKEY ELFENBEIN
MICKEY ELFENBEIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ MARK DIXON
MARK DIXON
CHIEF FINANCIAL OFFICER
(principal accounting officer)
Exhibit 11
<TABLE>
<CAPTION>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
For the Quarters ended September 30, 1995 and 1994
1995 1994
<S> <C> <C>
Primary earnings per share --
Weighted average number of issued shares outstanding 3,707 3,707
Effect of:
Stock Incentive Plan 96 97
Shares outstanding used to compute primary earnings per share 3,803 3,805
Net Income $ 305 $ 66
Primary earnings per share $ .02 $ .08
Fully diluted earnings per share --
Weighted average number of shares used for primary earnings per share 3,803 3,805
Effect of:
Stock Incentive Plan -- --
Shares outstanding used to compute fully diluted earnings per share 3,803 3,805
Net Income $ 305 $ 66
Fully diluted earnings per share $ .08 $ .02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 1,754
<SECURITIES> 0
<RECEIVABLES> 14,389
<ALLOWANCES> 0
<INVENTORY> 7,896
<CURRENT-ASSETS> 29,277
<PP&E> 2,910
<DEPRECIATION> (1,856)
<TOTAL-ASSETS> 31,167
<CURRENT-LIABILITIES> 28,443
<BONDS> 0
<COMMON> 3,803
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 31,167
<SALES> 16,624
<TOTAL-REVENUES> 305
<CGS> 8,512
<TOTAL-COSTS> 16,236
<OTHER-EXPENSES> 41
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (75)
<INCOME-PRETAX> 429
<INCOME-TAX> (124)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
