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, 1996 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 (933,000 shares) at September 20, 1996 was $3,499,000 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 to be filed by Section 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, 1996 there were approximately 3,742,072 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Notice of Meeting of Shareholders and Proxy Statement
for the Annual Shareholders Meeting, which are expected to be filed with the
Security and Exchange Commission in the next 30 days, are incorporated into Part
III of this Form by amendment.
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy information statements
incorporated by reference in part III of this form 10-K on any amendment to this
Form 10-K [ ].
PART I
ITEM 1: BUSINESS
K-tel International, Inc., through its subsidiaries, is an international
marketing and distribution company for packaged consumer entertainment (music
and video) and consumer convenience (lower priced housewares, automotive
accessories, exercise devices, and other merchandise) products 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., Canada 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, MN 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) television 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 occasional new
product tests.
The Company has not maintained active operations in Australia since the early
1990's when it divested of its unprofitable operation there. The Company does
maintain a limited presence in that territory by licensing the K-tel name and
trademarks along with its owned music master catalog to a third party. No
determination has been made as to when or if the Company will recommence active
operations in that market.
In the early 1990's the Company increased marketing consumer convenience
products in the U.S., U.K. and Europe primarily by expanding direct to consumer
marketing. By fiscal 1995, consumer convenience product marketing generated
approximately 40% of the Company's consolidated net sales. A large part of this
growth was due to strong U.S. consumer convenience product retail sales growth
(sales to wholesalers and retailers, usually supported by television
advertising). In fiscal 1994 and fiscal 1995, the Company closed down
unprofitable operations in New Zealand, France and Spain which relied almost
entirely on consumer convenience products. Also during this period, the Company
restructured unprofitable operations in the U.K. and Germany eliminating most
consumer convenience product marketing and sales. In fiscal 1996, consumer
convenience product represented only approximately 25% of the Company's
consolidated net sales with most of those sales resulting from U.S. consumer
convenience product retail sales.
Description of Current Business
During fiscal 1996, as in the past, the Company continued to market and sell
pre-recorded music both from the Company's owned music master catalog and under
licenses from third party record companies. Sales of albums, cassettes and
compact discs were made to rackjobbers, wholesalers and retailers in the U.S.
and through subsidiaries and licensees in the U.K. and Europe. 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 small part of the Company's U.K. business is the marketing and sale of
sell-through video product. 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 in
the case with music, advances against royalties are often required in order to
obtain these video rights.
One of the company's principle 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 significant source of revenue for the Company,
specifically in Europe. The Company initiated its direct response business in
Germany and expanded this form of marketing to sister entities in Spain and
France (prior to the closedown of those entities in fiscal 1994 and fiscal
1995). The Company continues to perform direct response marketing activities 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 but also to generate subsequent retail demand which
is expected help to enhance profitability. The U.S. operation intends to
continue developing direct response marketing in the upcoming fiscal years. In
fiscal 1996, the U.S. operation had some significant direct response marketing
campaigns which produced revenues and profits from either the campaigns
themselves, or from subsequent retail sales.
Public awareness of the Company's products is created through television and
print advertising campaigns, in-store displays and eye-catching 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 of pre-recorded music products to Handleman Company represented 12%, 11%
and 14% of the Company's consolidated net sales for the years ended June 30,
1996, 1995 and 1994. 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, 1996 the Company employed 171 full time people worldwide.
For financial information about the Company's foreign and domestic operations
for each of the last three fiscal years ended June 30, 1996, see Note 8 to the
consolidated financial statements.
INFORMATION CONTAINED IN THIS ITEM CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE," "ESTIMATE," OR
"CONTINUE," OR NEGATIVE VARIATIONS THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. MANY FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS, INCLUDING OVERALL
ECONOMIC CONDITIONS, CONSUMER PURCHASING, CUSTOMER ACCEPTANCE OF PRODUCTS,
MARKETING AND PROMOTION EFFORTS, FOREIGN CURRENCY VARIATIONS AND CHANGES IN
INTEREST RATES
ITEM 2: PROPERTIES
K-tel's corporate offices and U.S. operations are located in leased facilities
in a suburb of Minneapolis, Minnesota, consisting of approximately 21,985 square
feet of office space and approximately 83,991 square feet of warehouse.
K-tel's foreign subsidiaries lease a total of 45,176 square feet of office and
warehouse facilities.
Due to growth, the Company's U.S. operations expanded the amount of its leased
warehouse distribution space at the end of fiscal year 1995. The new facilities
carry lease payment obligations through the year 2000. The facilities leased are
part of multi-tenant facilities. See Note 6 to the consolidated financial
statements.
ITEM 3: LEGAL PROCEEDINGS
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.
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 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the executive
officers of the Company at October 11, 1996.
Name of Officer Age Positions and Offices Held
- --------------- --- -------------------------------------------------
Philip Kives 67 Chairman of the Board and Chief Executive Officer
David Weiner 39 President and Secretary
Jeffrey Koblick 49 Senior Vice President, Purchasing and Operations
Mark Dixon 37 Vice President-Finance, Chief Financial Officer,
Treasurer
Business Experience
Messrs. Kives, Koblick, and Dixon have held various offices and/or managerial
positions with the Company for more than the past five years.
Mr. Weiner joined K-tel in December 1993 and held the position of Sr. Vice
President of Corporate Development and became President of K-tel International,
Inc. in September 1996. Prior to joining K-tel, Mr. Weiner held various
managerial positions within the firm of Deloite & Touche Management Consulting.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
On September 20, 1996 there were 1,753 record owners of the Company's common
stock and approximately 3,764,572 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:
1995 1996
----------------- ----------------
High Low High Low
First Quarter 5 1/8 3 5 1/8 3 1/4
Second Quarter 5 3/4 3 5 3 1/2
Third Quarter 6 1/8 3 3/4 4 3/8 3 1/4
Fourth Quarter 4 3 4 1/8 3 1/4
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, 1996. 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.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $ 71,987 $ 65,917 $ 54,270 $ 55,714 $ 48,234
========= ========= ========= ========= =========
Operating Income (loss) $ 4 $ (2,188) $ 223 $ 3,623 $ 2,488
========= ========= ========= ========= =========
Net Income (loss) $ (745) $ (2,483) $ 376 $ 2,701 $ 1,875
========= ========= ========= ========= =========
Net Income (Loss) Per Common
and Common Equivalent Share $ (.20) $ (.67) $ .10 $ .72 $ .50
========= ========= ========= ========= =========
Total Assets $ 27,795 $ 28,637 $ 26,874 $ 21,922 $ 22,292
========= ========= ========= ========= =========
Long-Term Debt $ -- $ -- $ -- $ 2 $ 66
========= ========= ========= ========= =========
Cash Dividends Declared and Paid $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
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 dollar amount
and as a percentage of net sales. All amounts are in thousands of dollars.
<TABLE>
<CAPTION>
Year Ended June 30, 1996 Year Ended June 30, 1995
----------------------------------------------- --------------------------------------------------
North America Europe Total North America Europe Total
------------- ------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $48,605 100% $23,382 100% $71,987 100% $36,579 100% $29,338 100% $65,917 100%
Costs and expenses
Cost of goods sold 27,690 57% 10,975 47% 38,665 54% 22,053 61% 13,607 46% 35,660 54%
Advertising 7,495 15% 5,025 21% 12,520 17% 3,490 9% 8,111 28% 11,601 17%
Selling, general &
administrative 11,423 24% 7,420 32% 18,843 26% 9,233 25% 9,641 33% 18,874 29%
Restructuring/closedown
charges -- -- -- -- -- -- -- -- 652 2% 652 1%
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Operating Income (Loss) 1,997 4% (38) 0% 1,959 3% 1,803 5% (2,673) (9)% (870) (1)%
======= === ======= === ======= === ======= === ======= === ======= ===
</TABLE>
The parent company incurred $1,955,000 in expenses for the year ended June 30,
1996 and incurred $1,318,000 in expenses for the year ended June 30, 1995. The
increase in costs was due to increased legal and professional fees associated
with the proposed sale of the consumer entertainment business, which was
terminated in January 1996.
<TABLE>
<CAPTION>
Year Ended June 30, 1995 Year Ended June 30, 1994
----------------------------------------------- ----------------------------------------------------
North America Europe Total North America Europe and Pacific Total
------------- ------------- ------------- ------------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $36,579 100% $29,338 100% $65,917 100% $28,606 100% $25,664 100% $54,270 100%
Costs and expenses
Cost of goods sold 22,053 61% 13,607 46% 35,660 54% 16,003 56% 11,268 44% 27,271 50%
Advertising 3,490 9% 8,111 28% 11,601 17% 2,787 10% 7,676 30% 10,463 19%
Selling, general & 9,233 25% 9,641 33% 18,874 29% 6,225 22% 8,374 33% 14,599 28%
administrative
Restructuring/closedown -- -- 652 2% 652 1% -- -- 624 2% 624 1%
charges
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Operating Income (Loss) 1,803 5% (2,673) (9)% (870) (1)% 3,591 12% (2,278) (9)% 1,313 2%
======= === ======= === ======= === ======= === ======= === ======= ===
</TABLE>
In addition to the operating amounts above, the parent company incurred
$1,318,000 in expenses for the year ended June 30, 1995 and $1,090,000 for the
year ended June 30, 1994.
Fiscal 1996 in Comparison with Fiscal 1995
Consolidated net sales for the fiscal year ended June 30, 1996 were $71,987,000
with operating income of $4,000 and net loss of $745,000 or $.20 per share.
Consolidated net sales for the fiscal year ended June 30, 1995 were $65,917,000
with an operating loss of $2,188,000 and net loss of $2,483,000 or $.67 per
share.
Consolidated net sales increased $6,070,000 or 9% for the fiscal year ended June
30, 1996. North American net sales were up 33% over the prior fiscal year due
primarily to U.S. music sales success in most of its widely diverse and
expanding product offerings covering nearly all genres of music, with specific
success in a line of new Club/Dance music releases, as well as a successful
direct response television infomercial. North American consumer convenience
product sales have also shown an increase over prior year due mainly to a
successful third and fourth quarter promotion of a new microwave cooking
product. European sales were down from the prior fiscal year due mainly to the
discontinuance of operations in the Spanish entity at the end of fiscal 1995.
The North American sales increase more than offset the European sales decrease
for fiscal 1996.
Consolidated cost of goods sold were 54% of sales in both 1996 and 1995. North
American cost of goods sold, as a percentage of sales, were less than the prior
year due mainly to strong sales from a successful new line of higher margin
Club/Dance music product, sales of a new, higher margin microwave cooking
product, and a successful music television direct response infomercial. Direct
response sales typically carry higher gross margins before advertising than
retail sales. These positive margin trends more than offset the negative effect
on cost of goods sold caused by some North American consumer convenience product
inventory writedowns to net realizable value and a fourth quarter $400,000
charge for a defective product replacement program (undertaken in coordination
with the United States Consumer Products Safety Commission). (see Note 6 to the
consolidated financial statements). European cost of goods sold as a percentage
of net sales were up slightly over the previous year due mainly to prior year
sales from the Spanish operation which sold mainly high margin (before
advertising), direct response product.
Advertising costs as a percentage of net sales for the fiscal year ended June
30, 1996 were 17% compared to 18% for the previous year. North American
advertising costs as a percent of net sales were greater than the previous year
due mainly to a successful direct response television music infomercial, a
successful consumer convenience product direct response promotion, (direct
response television sales require higher levels of advertising than retail
sales) and a Canadian television promotion supporting certain new music product
releases. European advertising costs as a percentage of net sales were less than
the previous year due primarily to the discontinuance of operations by 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
as a percentage of net sales was the German operations which had more success in
direct response television promotions in the current year than in the previous
year.
Selling, general and administrative expenses for the fiscal year ended June 30,
1996 were $20,798,000 or 29% of net sales compared to $20,192,000 or 31% of net
sales in the prior fiscal year. Selling, general and administrative expenses for
the year ended June 30, 1996 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, 1996 were lower due mainly to the discontinuance of
operations in the Spanish entity and the restructuring of the German entity at
the end of fiscal 1995. Also contributing to the current year increase in
selling, general and administrative expenses from the previous year were
increased parent holding company legal and professional expenses associated with
the proposed sale of the consumer entertainment businesses which was not
completed and was terminated in January 1996.
The Company generated operating income of $4,000 for the year ended June 30,
1996, compared to an operating loss of $2,188,000 for the fiscal year ended June
30, 1995. North American operating income increased from the prior year mainly
due to improved overall music sales led by successful Club/Dance music product
releases. Although the company experienced strong fiscal 1996 sales success for
a new, higher margin North American consumer convenience microwave cooking
product, this success was more than offset by some North American consumer
convenience product inventory carrying cost writedowns to net realizable value
and a $400,000 charge related to a consumer convenience defective product
replacement program. European operating income improved over fiscal 1995 due
mainly to the restructuring of the German operation, which incurred significant
losses in the second half of the prior fiscal year, and the discontinuance of
operations in the Spanish subsidiary in the fourth quarter of fiscal 1995, which
also contributed to losses in the prior year. Consolidated operating income was
also impacted in the current year by increased parent holding company legal and
professional expenses associated with the proposed sale of the consumer
entertainment businesses, which was terminated in January 1996.
Interest expense increased to $409,000 for the fiscal year ended June 30, 1996
compared to $220,000 for the fiscal year ended June 30, 1995. The increase in
interest expense is due to more current year usage of the Company's asset based
line of credit.
During the year ended June 30, 1996, the Company experienced a foreign currency
transaction loss of $119,000 compared to a gain of $180,000 in the previous
year. For the year ended June 30, 1996, foreign exchange rate fluctuations have
been less 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 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 $351,000 for the year ended June 30, 1996
compared to $375,000 for the fiscal year ended June 30, 1995. 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 1995 in Comparison with Fiscal 1994
Consolidated net sales for the 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.
Net sales increased $11,647,000 or 21% for the fiscal year ended June 30, 1995.
The sales 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.
Cost of goods sold for the fiscal year ended June 30, 1995 increased to 54% of
net sales compared to 50% for the fiscal year ended June 30, 1994. The increase
was mainly 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.
For the year ended June 30, 1995, advertising costs were 18% of net sales
compared to 19% for the fiscal year ended June 30, 1994. The slight decrease was
attributable mainly to 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 expenditures
than consumer convenience products. North American advertising costs as a
percentage of net sales were flat for the year ended June 30, 1995 compared to
the previous fiscal year.
Selling, general and administrative expenses for the 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 fiscal year ended June 30, 1994. The increase was mainly due to North
American overhead additions necessary to support sales growth and planned future
sales growth of retail sales in both entertainment and consumer convenience
product lines. European selling, general and administrative expense for the year
ended June 30, 1995 were higher in absolute dollars but comparable as a percent
of net sales to the previous fiscal year due primarily to more television direct
response promotions in the current year which produced higher revenues but also
resulted in more variable selling and shipping expenses.
Restructure/closedown charges of $652,000 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 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 distribution
facility to approximately one third of the current size and cost. The resulting
smaller German operation is focusing on short and long form (infomercials,
generally 30 minute commercials) direct response marketing of music products. Of
the $652,000 charges recorded in 1995, $264,000 represented future cash outflows
of the Company. These cash outflows were funded by these subsidiaries. The
restructuring/discontinuance was completed in fiscal 1996 and the accrued charge
approximately reflected the actual costs incurred to complete the
restructuring/discontinuance.
The Company provided closedown charges of $624,000 in fiscal 1994 relating to
the 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.
The Company had 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.
Interest expense for the year ended June 30, 1995 was $220,000 compared to
$27,000 for the year ended June 30, 1994. The increase in interest expense was
due primarily to usage of the Company's asset based line of credit.
During the fiscal year ended June 30, 1995, the Company experienced a $180,000
foreign currency transaction gain compared to a gain of $28,000 in the fiscal
year ended June 30, 1994. In fiscal 1995, foreign exchange rate fluctuations
were more favorable to the company than in the previous year. The Company has a
policy to reduce foreign currency exchange 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 Company had an income tax provision of $375,000 for the fiscal year ended
June 30, 1995 compared to an income tax benefit of $35,000 in the previous year.
The prior year tax benefit was 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.
Liquidity and Capital Resources
During the fiscal year ended June 30, 1996, cash and cash equivalents increased
approximately $1,101,000 to $3,255,000. The overall increase in cash was
primarily due to net decreases in inventory, royalty advances and prepaid
expenses. The decreases in these current operating items were mainly the result
of less North American retail music product releases at the end of fiscal 1996
compared to previous year end and less prepaid advertising at the end of fiscal
1996 due to timing of direct response television promotions. Offsetting some of
this cash increase was a net repayment of borrowings, decreases in cash due to
the net loss for the period and increases in accounts receivable, driven by
strong sales growth in the third and fourth quarters. The related collections
and payments will occur in the first and second quarter of fiscal 1997.
During fiscal year ended June 30, 1996 the Company purchased approximately
$1,050,000 of consumer convenience product from an affiliate controlled by
Philip Kives, the Company's Chairman and Chief Executive Officer. The Company
had no outstanding payable to the affiliate at June 30, 1996. This same
affiliate purchased approximately $217,000 of consumer convenience product from
the Company during the fiscal year ended June 30, 1996 and had no outstanding
payable to the Company at June 30, 1996. Outstanding balances are settled on a
timely basis. No interest was charged on the related outstanding balances during
fiscal 1996.
Two of the Company's United States subsidiaries, K-tel International (USA),
Inc., and Dominion Entertainment, Inc., (the "Subsidiaries") have revolving
credit agreements maturing November 30, 1996. The agreements provide for an
asset based line of credit not to exceed $5,000,000 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. The Company has guaranteed
all borrowings of the Subsidiaries. Interest on borrowings is accrued and due
monthly at a rate of prime plus one and three quarter percent (10% at June 30,
1996). The amounts outstanding under these lines of credit were $1,864,000 at
June 30, 1996 and the maximum additional available under the borrowing base
limitations at June 30, 1996 was $2,551,384. During 1996 and 1995, average
borrowings under the lines of credit were approximately $3,478,000 and
$2,200,000, and the weighted average interest rate was 10.1% and 10.2%. The
maximum amount outstanding under the lines of credit was $4,995,000 during
fiscal 1996 and $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, 1996 the Subsidiaries were in
compliance or have obtained waivers for these covenants.
Management considers its cash needs for fiscal year 1997 to be adequately
covered by its operations, borrowings under the lines of credit or by funding
from another company controlled by the Chairman and Chief Executive Officer.
Although management is not privy to the financial statements of the Chairman's
other companies, he has assured the Company that he will fund its operations on
an as needed basis consistent with his past practices. Past funding has
generally consisted of open-ended payment terms on product purchases from the
Chairman's affiliated 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,
1996. The Company has initiated discussions with the bank and believes the lines
of credit will be renewed. There can be no assurance of either extension of the
lines of credit or availability of additional funds.
INFORMATION CONTAINED IN THIS ITEM CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE," "ESTIMATE," OR
"CONTINUE," OR NEGATIVE VARIATIONS THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. MANY FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS, INCLUDING OVERALL
ECONOMIC CONDITIONS, CONSUMER PURCHASING, CUSTOMER ACCEPTANCE OF PRODUCTS,
MARKETING AND PROMOTION EFFORTS, FOREIGN CURRENCY VARIATIONS AND CHANGES IN
INTEREST RATES
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 18.
ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information concerning Directors required under this Item will be included
in the Company's Notice of Meeting of Shareholders and Proxy Statement to be
filed with the Securities and Exchange Commission and is incorporated herein by
reference. The information concerning Executive Officers of the Registrant is
furnished as an unnumbered item in Part I following Item 4.
ITEM 11: MANAGEMENT REMUNERATION
The information required under this Item will be included in the Company's
Notice of Meeting of Shareholders and Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item will be included in the Company's
Notice of Meeting of Shareholders and Proxy Statement to be filed with the
Securities and Exchange Commission and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item will be included in the Company's
Notice of Meeting of Shareholders and Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities Exchange Commission and is
incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The consolidated 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
No reports on Form 8-K were filed during the fourth quarter ended June 30,
1996.
(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.
<TABLE>
<CAPTION>
Exhibit Item
- ------- ----
<S> <C> <C>
3 Restated Article and Restated By-Laws incorporated herein by reference to Exhibit (3) of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1985
10.1 Employment Agreement - David Weiner incorporated herein by reference 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 - Mickey Elfenbein incorporated herein by reference 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 July 22, 1994 incorporated herein by reference to Exhibit 10.3 of
with TCF Bank Minnesota, K-tel International the Registrant's Annual Report on Form 10-K for the
(USA), Inc. and Dominion Entertainment, Inc. year ended June 30, 1994
10.4 Promissory Note for up to $5,000,000 by K-tel incorporated herein by reference to Exhibit 10.4 of
International (USA), Inc. and Dominion the Registrant's Annual Report on Form 10-K for the
Entertainment, Inc. 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 Agreement incorporated herein by reference to 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 Agreement incorporated herein by reference to 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 January 30, incorporated herein by reference to Exhibit 10.14 of
1995 with TCF Bank Minnesota FSB and K-tel, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.15 Revolving Note for up to $3,000,000 by incorporated herein by reference to Exhibit 10.15 of
K-tel, Inc. 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 Agreement of incorporated herein by reference to Exhibit 10.17 of
K-tel USA the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.18 Amended and Restated Security Agreement of incorporated herein by reference to Exhibit 10.18 of
Dominion the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.19 Amended to K-tel USA's Copyright Security incorporated herein by reference to Exhibit 10.19 of
Agreement the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.20 Amendment to Dominion's Copyright Security incorporated herein by reference to Exhibit 10.20 of
Agreement 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 Agreement of K-tel incorporated herein by reference to Exhibit 10.25 of
International, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.26 Amended and Restated Security Agreement of incorporated herein by reference to Exhibit 10.26 of
K-tel International, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.27 First Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.27 of
with K-tel USA, Dominion and TCF Bank Minnesota the Registrant's Quarterly Report on Form 10-Q for
FSB the quarter ended December 31, 1994
10.28 Replacement Revolving Note for up to $2,000,000 incorporated herein by reference to Exhibit 10.28 of
with K-tel USA and Dominion the Registrant's 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 incorporated herein by reference to Exhibit 10.30 of
and to Revolving Note the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.31 Second Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.31 of
and to Revolving Note the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.32 Debt Subordination Agreement incorporated herein by reference to Exhibit 10.32 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.33 Second Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.33 of
K-tel, Inc. the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.34 Third Amendment to Revolving Credit incorporated herein by reference to Exhibit 10.34 of
Agreement-K-tel USA and Dominion the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.35 Replacement Revolving Note for up to $3,500,000 incorporated herein by reference to Exhibit 10.35 of
with K-tel USA and Dominion the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.36 Fourth Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.36 of
- K-tel USA and Dominion the Registrant's Annual Report on Form 10-Q for the
quarter ended December 31, 1995
10.37 Third Amendment of Revolving Credit Agreement - incorporated herein by reference to Exhibit 10.37 of
K-tel, Inc. the Registrant's Annual Report on Form 10-Q for the
quarter ended December 31, 1995
10.38 Fifth Amendment to Revolving Credit Agreement - incorporated herein by reference to Exhibit 10.38 of
K-tel USA and Dominion the Registrant's Annual Report on Form 10-Q for the
quarter ended December 31, 1995
10.39 Fourth Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.39 of
- K-tel, Inc. the Registrant's Annual Report on Form 10-Q for the
quarter ended December 31, 1995
10.40 Sixth Amendment to Revolving Credit Agreement - attached to this report as Exhibit 10.40
K-tel USA and Dominion
10.41 Separation Agreement and Release - Mickey attached to this report as Exhibit 10.41
Elfenbein
10.42 Amendment No. 1 Separation Agreement and attached to this report as Exhibit 10.42
Release - Mickey Elfenbein
11 Statement Regarding Computation of Earnings Per attached to this report as Exhibit 11
Share
21 Subsidiaries of the Registrant attached to this report as Exhibit 21
23 Consent of Independent Public Accountants attached to this report as Exhibit 23
27 Financial Data Schedule (SEC use)
</TABLE>
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, 1996 by the undersigned, there unto duly authorized.
K-TEL INTERNATIONAL, INC.
By /S/ Philip Kives
-------------------------------------
(Philip Kives - Chairman of the Board
and Chief Executive Officer)
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.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/S/ Philip Kives Chairman, Chief Executive Officer and October 11, 1996
- ------------------------------- Director
Philip Kives
/S/ David Weiner President and Secretary October 11, 1996
- -------------------------------
David Weiner
/S/ Mark Dixon Vice President-Finance, Director, October 11, 1996
- ------------------------------- Chief Financial Officer and Treasurer
Mark Dixon (Principal Accounting Officer)
/S/ Garry Kieves Director October 11, 1996
- -------------------------------
Garry Kieves
/S/ Jeffrey Koblick Director October 11, 1996
- -------------------------------
Jeffrey Koblick
</TABLE>
(ITEM 14(A))
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Public Accountants.................................. 19
Consolidated Statements of Operations for the
years in the period ended June 30, 1996................................. 20
Consolidated Balance Sheets as of June 30, 1996 and 1995................ 21
Consolidated Statements of Shareholders' Investment
for the years in the period ended June 30, 1996......................... 22
Consolidated Statements of Cash Flows for
the years in the period ended June 30, 1996............................. 23
Notes to Consolidated Financial Statements for the
years in the period ended June 30, 1996................................. 24-31
Supplemental Schedule to Consolidated Financial Statements:
Schedule II - Valuation and Qualifying Accounts for
the years in the period ended June 30, 1996......................... 32
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,
1996 and 1995, and the related consolidated statements of operations,
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1996. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996 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 Commissions 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
October 11, 1996
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS - EXCEPT SHARE AND PER SHARE DATA)
1996 1995 1994
-------- -------- --------
NET SALES $ 71,987 $ 65,917 $ 54,270
-------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold 38,665 35,660 26,842
Advertising 12,520 11,601 10,495
Selling, general & administrative 20,798 20,192 16,086
Restructuring/closedown charges (Note 7) -- 652 624
-------- -------- --------
Total Costs and Expenses 71,983 68,105 54,047
-------- -------- --------
OPERATING INCOME (LOSS) 4 (2,188) 223
-------- -------- --------
NON-OPERATING INCOME (EXPENSE):
Interest income 130 120 117
Interest expense (409) (220) (27)
Foreign currency transaction gain (loss) (119) 180 28
-------- -------- --------
Total Non-operating Income (Expense) (398) 80 118
-------- -------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (394) (2,108) 341
PROVISION (BENEFIT) FOR INCOME TAXES (Note 4) 351 375 (35)
-------- -------- --------
NET INCOME (LOSS) $ (745) $ (2,483) $ 376
======== ======== ========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.20) $ (.67) $ .10
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 3,729 3,711 3,822
======== ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
(IN THOUSANDS - EXCEPT PER SHARE DATA)
ASSETS 1996 1995
- --------------------------------------------------------- -------- --------
Current Assets:
Cash and cash equivalents $ 3,255 $ 2,154
Restricted cash -- 536
Accounts receivable, less allowances of $1,035 and $771 15,028 11,971
Inventories 5,808 7,382
Royalty advances 1,188 2,176
Prepaid expenses 645 2,108
Income tax refund receivable 89 540
-------- --------
Total Current Assets 26,013 26,867
-------- --------
Property and Equipment 2,759 2,820
Less-Accumulated depreciation and amortization (1,966) (1,797)
-------- --------
Property and Equipment, net 793 1,023
Other Assets 989 747
-------- --------
$ 27,795 $ 28,637
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
--------
Current Liabilities:
Line of credit (Note 3) $ 1,864 $ 2,516
Accounts payable 4,112 4,929
Accrued royalties 10,866 9,047
Reserve for returns 6,817 6,802
Other current liabilities 2,328 2,517
Income taxes payable 244 373
-------- --------
Total Current Liabilities 26,231 26,184
-------- --------
Commitments and Contingencies (Note 2 and 6)
Shareholders' Investment:
Preferred stock - 4,000,000 shares authorized;
none issued -- --
Common stock - 7,500,000 shares authorized;
par value $.01; 3,742,072 and 3,713,797
issued and outstanding 37 37
Contributed capital 7,870 7,816
Accumulated deficit (5,666) (4,921)
Cumulative translation adjustment (677) (479)
-------- --------
Total Shareholders' Investment 1,564 2,453
-------- --------
$ 27,795 $ 28,637
======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
<TABLE>
<CAPTION>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS)
Common Stock Cumulative
------------------- Contributed Accumulated Translation
Shares Amount Capital Deficit Adjustment
------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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)
Net loss -- -- -- (745) --
Proceeds from exercise of stock options 28 -- 54 -- --
Translation adjustment -- -- -- -- (198)
------- ------- ------- ------- -------
Balance, June 30, 1996 3,742 $ 37 $ 7,870 $(5,666) $ (677)
======= ======= ======= ======= =======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS)
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ (745) $ (2,483) $ 376
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization 805 567 618
Restructuring/closedown charges -- 652 624
Changes in current operating items:
Restricted cash 536 1,612 (2,148)
Accounts receivable (3,216) (309) (1,712)
Inventories 1,458 (1,915) (1.228)
Royalty advances 966 (1,250) (10)
Prepaid expenses 1,395 (835) 66
Accounts payable and other liabilities 1,110 1,250 4,050
Income tax refund receivable 437 (101) (340)
Income taxes payable (125) 288 (138)
-------- -------- --------
Cash provided by (used for) operating activities 2,621 (2,524) 158
-------- -------- --------
Investing Activities:
Property and equipment purchases (240) (639) (337)
Proceeds from sale of property and equipment 215 116 83
Music catalog additions (781) (444) (298)
Other (42) (22) (232)
-------- -------- --------
Cash used for investing activities (848) (989) (784)
-------- -------- --------
Financing Activities:
Borrowings on line of credit 33,493 30,265 --
Repayments on line of credit (34,145) (27,749) --
Repayments on note payable to affiliate -- (1,000) (62)
Proceeds from exercise of stock options 54 15 89
-------- -------- --------
Cash provided by (used for) financing activities (598) 1,531 27
Effect of Exchange Rate Changes on Cash and Cash Equivalents (74) (35) (28)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 1,101 (2,017) (627)
Cash and Cash Equivalents at Beginning of Year 2,154 4,171 4,798
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 3,255 $ 2,154 $ 4,171
======== ======== ========
Supplemental Cash Flow Information
Cash Paid For -
Interest $ 220 $ 174 $ 44
======== ======== ========
Income Taxes $ 494 $ 425 $ 310
========= ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
</TABLE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
1. BUSINESS DESCRIPTION
K-tel International, Inc. and its subsidiaries (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.
In January 1996, the Company terminated the proposed sale of the consumer
entertainment businesses to the former President of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated 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
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 customer represented 12%, 11% and 14% of the Company's
consolidated net sales for the years ended June 30, 1996, 1995 and 1994,
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 have original
maturities of less than 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. The Company charged approximately $1
million to operations during the fourth quarter of fiscal 1996 to write
inventories down to its net realizable 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 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.
During the fourth quarter of 1996, an agent for various licensors submitted
a royalty audit claim of approximately $3.2 million plus interest based on
the results of an audit for the period from 1986 to 1994. Management
estimates the ultimate payment will be significantly lower than the claim
because on a preliminary review of the claim has identified errors in the
data and the use of multiple and extensive extrapolations based on
non-representative samples used to derive the claim amount. A reserve has
been recorded for management's estimate of the ultimate resolution of this
matter. The amount the Company will ultimately pay could differ materially
in the near term from the amounts currently recorded.
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 is
included in other assets of 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, and adjusted for the dilutive effect of common stock equivalents.
Derivatives
The Company has entered 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, 1996, the Company has no foreign exchange currency forward
exchange contracts.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect 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. Principal estimates include allowances
for bad debts, return reserves, royalty obligations and product replacement
costs. Ultimate results could differ materially from those estimates.
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"), 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.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require, a fair value
based method of accounting for employee stock options, the sale of stock
under the Company's employee stock purchase plan or similar equity
instruments. The Company anticipates it will to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" as was previously required, and
to comply with pro forma disclosure of net income and earnings per share as
if the fair value based method of accounting had been applied. The Company
will be required to adopt SFAS No. 123 in fiscal 1997.
3. LINE OF CREDIT
Two of the Company's United States subsidiaries, K-tel International (USA),
Inc., and Dominion Entertainment, Inc., (the "Subsidiaries") have revolving
credit agreements maturing November 30, 1996. The agreements provide for an
asset based line of credit not to exceed $5,000,000 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. The Company has guaranteed all borrowings of the
Subsidiaries. Interest on borrowings is accrued and due monthly at a rate of
prime plus one and three quarter percent (10% at June 30, 1996). The amounts
outstanding under these lines of credit were $1,864,000 at June 30, 1996 and
the maximum additional available under the borrowing base limitations at
June 30, 1996 was $2,551,384. During 1996 and 1995, average borrowings under
the lines of credit were approximately $3,478,000 and $2,200,000, and the
weighted average interest rate was 10.1% and 10.2%. The maximum amount
outstanding under the lines of credit was $4,995,000 during fiscal 1996 and
$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, 1996 the
Subsidiaries were in compliance or have obtained waivers for these
covenants. The Company has initiated discussions with the bank and believes
the lines of credit will be renewed.
4. INCOME TAXES
The Company operates in several countries and is subject to various tax
regulations and tax rates. The provisions 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):
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Income (loss) before provision (benefit) for income
taxes:
United States $ 141 $ 1,564 $ 3,705
Foreign (535) (3,672) (3,364)
------- --------- ---------
Total $ (394) $ (2,108) $ 341
======= ========= =========
Provision (benefit) for income taxes:
Currently payable
United States $ 210 $ 226 $ 315
Foreign 141 149 (350)
------- --------- ---------
Total currently payable (receivable) and
total provision (benefit) for income taxes $ 351 $ 375 $ (35)
======= ========= =========
</TABLE>
A reconciliation of the U.S. federal statutory rate to the effective tax rate
for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal Statutory Rate (34%) (34%) 34%
State Taxes, net of federal benefit 26% 5% 33%
Change in valuation allowance 99% 50% (136%)
Effect of different tax rates on foreign earnings (2%) (3%) 59%
------- ------- -------
89% 18% (10%)
======= ======= =======
</TABLE>
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 are all deferred tax assets are as
follows (in thousands):
June 30, June 30,
1996 1995
---------- ----------
Net operating loss carryforwards $ 7,595 $ 7,994
Alternative minimum tax credits 465 431
Reserve for returns 2,065 2,241
Depreciation 79 92
Royalty reserves 573 467
Inventory reserves 1,204 790
Nondeductible accruals 357 44
Allowance for bad debts 310 200
Valuation allowance (12,648) (12,259)
---------- ----------
$ -- $ --
========== ==========
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 $15,994,000 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 carryforwards are subject to review and possible
adjustment by taxing authorities. In addition, the Company has approximately
$465,000 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 $5,103,000 as of June 30, 1996.
5. 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.
The Stock Incentive Plan information is summarized below:
Incentive Non-qualified
Stock Options Stock Options
------------- -------------
Outstanding June 30, 1993 139,875 82,500
Granted 23,000 19,500
Exercised - at prices ranging from
$1.50 - $4.00 (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 - $2.50 per share (1,125) (5,875)
Forfeited (2,000) (16,375)
------------- -------------
Outstanding June 30, 1995 149,775 52,875
Granted -- --
Exercised - at prices ranging from
$1.50 - $3.00 per share (28,275) (2,125)
Forfeited (12,750) (7,625)
------------- -------------
Outstanding June 30, 1996 108,750 43,125
============= =============
Options Exercisable 103,374 41,000
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.
Restricted Stock Plan information is summarized below:
Outstanding June 30, 1993 --
Granted 152,500
Exercised - at prices ranging from
$6.75 - $9.25 --
Forfeited --
-------------
Outstanding June 30, 1994 152,500
Granted 20,000
Exercised - at prices ranging from
$3.75 - $9.25 per share --
Forfeited --
-------------
Outstanding June 30, 1995 172,500
Granted --
Exercised - at prices ranging from
$3.75 - $9.25 --
Forfeited (145,000)
-------------
Outstanding June 30, 1996 27,500
=============
Options Exercisable 20,625
Exercise Price $3.75 - $9.25
6. 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.
Product Replacement Program
The Consumer Products Safety Commission notified the Company during the
fourth quarter of fiscal 1996 that a consumer product sold by the Company
was defective. The Company has agreed to commence a product replacement
program (the Program) during fiscal 1997 and charged $400,000 to expense
during the fourth quarter of 1996 to reserve for estimated costs to complete
the Program. This charge is based on management's best estimate of the unit
costs and the level of product replacements. The costs of the Program could
differ materially in the near term from the amounts currently recorded. The
Company will seek full indemnity from the manufacturer of the product for
all costs associated with the Program.
Leases
The Company has entered into several office and warehouse leases which
expire through 2000. Commitments under these leases are $536,000 in 1997,
$486,000 in 1998, $299,000 in 1999, $163,000 in 2000 and $163,000 in 2001.
Rental expense was $923,000 in 1996, $855,000 in 1995 and $592,000 in 1994.
7. 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 is focusing on short and long
form direct response marketing of music products. The expected future effect
of the restructure/closedown was 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 fiscal 1995, and the accrued
charge at June 30,1994 approximated the actual costs incurred to compete the
closedowns. The fiscal 1995 restructuring closedown was completed in fiscal
1996 and the accrued charge at June 30, 1995 approximated the actual costs
incurred to complete the restructure/closedown.
8. 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):
1996 1995 1994
-------- -------- --------
Net Sales:
North America $ 48,953 $ 38,228 $ 27,816
Europe 23,382 29,338 25,088
Pacific -- -- 576
Transfers between geographic areas (348) (1,649) 790
-------- -------- --------
Net Sales $ 71,987 $ 65,917 $ 54,270
======== ======== ========
Operating Income (Loss):
North America $ 1,997 $ 1,803 $ 3,591
Europe (38) (2,673) (2,023)
Pacific -- -- (255)
-------- -------- --------
Operating Income before General
Corporate Expenses, net 1,959 (870) 1,313
General Corporate Expenses, net (1,955) (1,318) (1,090)
-------- -------- --------
Operating Income (Loss) $ 4 $ (2,188) $ 223
======== ======== ========
Identifiable Assets:
North America $ 20,282 $ 18,816 $ 15,711
Europe 7,513 9,821 10,918
Pacific -- -- 245
-------- -------- --------
Identifiable Assets $ 27,795 $ 28,637 $ 26,874
======== ======== ========
9. RELATED PARTY TRANSACTIONS
The Company sold approximately $217,000 in fiscal 1996, $228,000 in fiscal
1995 and $693,000 in fiscal 1994 of consumer convenience product to an
affiliate controlled by the Company's Chairman of the Board. There was no
balance receivable from the affiliate at June 30, 1996 while $208,000 was
owed to the Company at June 30, 1995
The Company purchased $1,050,000 in fiscal 1996, $354,000 in fiscal 1995 and
$425,000 in fiscal 1994 of consumer convenience product from another
affiliate controlled by the Company's Chairman of the Board. Management
believes 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 also reimbursed the 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 $4,000 during 1996, $3,000 during 1995, and $43,000 during
1994. There was no balance payable at June 30, 1996 and the amount owed at
June 30, 1995 was $175,000.
SCHEDULE II
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands)
Charged to
Balance at Costs and Charged to Balance at
Beginning of Expenses or Net Other End of
Period Sales Accounts Deductions Period
------------- --------------- ------------ --------------- ----------
Allowance for
Doubtful Accounts
- -----------------
<S> <C> <C> <C> <C> <C>
1996 $ 771 $ 694 $(15) (1) $ (415) (2) $ 1,035
1995 $ 489 $ 370 $ 18 (1) $ (106) $ 771
1994 $ 336 $ 338 $ 12 (1) $ (197) (2) $ 489
Reserve for
Returns
- -----------------
1996 $6,802 $10,485 $(18) (1) $(10,452) $ 6,817
1995 $6,412 $ 9,480 $ 42 (1) $ (9,132) $ 6,802
1994 $5,738 $ 6,703 $ 29 (1) $ (6,058) $ 6,412
</TABLE>
(1) Exchange rate change
(2) Uncollectible accounts written off, net of recoveries
EXHIBIT 10.40
SIXTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Sixth Amendment is made as of this 23rd day of August,
1996, but effective as of July 1, 1996, by and among K-TEL INTERNATIONAL (USA),
INC., a Minnesota corporation, having its principal place of business in
Plymouth, Minnesota ("K-Tel USA"), DOMINION ENTERTAINMENT, INC., a Minnesota
corporation, having its principal place of business in Plymouth, Minnesota
("Dominion"; K-Tel USA and Dominion are sometimes herein collectively referred
to as the "Borrowers" and each is sometimes individually referred to as a
"Borrower"), and TCF BANK MINNESOTA FSB, a federally chartered stock savings
bank (the "Bank").
RECITALS
A. The Borrowers and the Bank have entered into a Revolving
Credit Agreement dated as of July 22, 1994, as amended by a First Amendment to
Revolving Credit Agreement dated as of January 30, 1995, by a Second Amendment
to Revolving Credit Agreement and to Revolving Note dated as of July 20, 1995,
by a Third Amendment to Revolving Credit Agreement dated as of October 2, 1995,
by a Fourth Amendment to Revolving Credit Agreement and to Revolving Note dated
as of November 28, 1995 and by a Fifth Amendment to Revolving Credit Agreement
and to Revolving Note dated as of December 28, 1995 (as amended, the "Credit
Agreement"), pursuant to which the Bank, subject to the terms and conditions set
forth therein, agreed to make revolving advances to the Borrowers in the
aggregate amount of up to $2,750,000.
B. The Borrowers' joint and several obligation to repay the
revolving advances made by the Bank under the Credit Agreement is evidenced by
the Borrowers' Revolving Note dated October 2, 1995, payable to the Bank's order
in the original principal amount of $3,500,000, as amended (the "Previous
Note"). As of August 14, 1996, the outstanding principal balance of the Previous
Note was zero and interest thereon has been paid through August 1, 1996.
C. K-Tel, Inc., a Minnesota corporation, having its principal
place of business in Plymouth, Minnesota ("K-Tel") and the Bank have entered
into a Revolving Credit Agreement dated as of January 30, 1995, as amended by a
First Amendment to Revolving Credit Agreement and to Revolving Note dated as of
July 20, 1995, by a Second Amendment to Revolving Credit Agreement dated as of
October 2, 1995, by a Third Amendment to Revolving Credit Agreement and to
Revolving Note dated as of November 28, 1995 and by a Fourth Amendment to
Revolving Credit Agreement and to Revolving Note dated as of December 28, 1995
(as amended, the "K-Tel Credit Agreement"), pursuant to which the Bank, subject
to the terms and conditions set forth therein, agreed to make revolving advances
to K-Tel in the aggregate amount of up to $2,500,000.
D. K-Tel's obligation to repay the revolving advances made by
the Bank under the K-Tel Credit Agreement is evidenced by K-Tel's Revolving Note
dated January 30, 1995, payable to the Bank's order in the original principal
amount of $3,000,000, as amended (the "K-Tel Revolving Note"). As of August 14,
1996, the outstanding principal balance of the K-Tel Revolving Note was zero and
interest thereon has been paid through August 1, 1996.
E. The Borrowers and K-Tel desire to merge K-Tel into K-Tel
USA with K-Tel USA as the surviving corporation.
F. The Borrowers have requested, among other things, that the
Bank (i) consent to the merger of K-Tel into K-Tel USA with K-Tel USA as the
surviving corporation, (ii) amend certain provisions of the Credit Agreement in
view of such merger and (iii) waive certain Events of Default on the part of
K-Tel USA and Dominion.
G. The Bank is willing to grant the Borrowers' requests
subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. All capitalized terms used in this Sixth Amendment, unless
specifically defined herein, shall have the meanings given to such terms in the
Credit Agreement.
2. Events of Default have occurred under Section 7.1(c) of the
Credit Agreement because (i) K-Tel USA did not have a minimum Capital Base of at
least $3,000,000 as of May 31, 1996 and June 30, 1996 as required by Section
5.10 of the Credit Agreement, (ii) K-Tel USA did not have a Debt to Capital Base
Ratio of less than 5.0 to 1.0 as of May 31, 1996 and June 30, 1996 as required
by Section 5.8 of the Credit Agreement and (iii) Dominion did not have a minimum
Capital Base of at least $2,300,000 as of May 31, 1996 and June 30, 1996 as
required by Section 5.11 of the Credit Agreement. Upon the terms and subject to
the conditions set forth in this Sixth Amendment, the Bank hereby waives the
foregoing Events of Default. This waiver shall be effective only in this
specific instance and for the specific purpose for which it is given, and this
waiver shall not entitle the Borrower to any other or further waiver in any
similar or other circumstances.
3. The Bank hereby consents to the merger of K-Tel into K-Tel
USA with K-Tel USA as the surviving corporation, subject to the terms and
conditions of this Sixth Amendment.
4. Section 1.1 of the Credit Agreement is hereby amended by
deleting the existing definitions of "Commitment Amount", "Loan Documents" and
"Returns" and by substituting therefor the following new definitions:
"'Commitment Amount' means $5,000,000."
"'Loan Documents' means this Agreement, the Note, the Security
Documents and the Letter of Credit Applications."
"'Returns' means, as of the date of determination, the sum of
(i) 20% of K-Tel USA's billed and unpaid Accounts generated from the
sale of music products, plus (ii) 10% of K-Tel USA's billed and unpaid
Accounts generated from the sale of all other products, including,
without limitation, consumer products."
5. Section 1.1 of the Credit Agreement is hereby amended by
adding the following new definitions of "L/C Amount", "Letter of Credit",
"Letter of Credit Applications", "Obligation of Reimbursement", "Previous Note",
"Sixth Amendment" and "Special Account" in the appropriate alphabetical
locations:
"'L/C Amount' means the sum of (i) the aggregate face amount
of any issued and outstanding Letters of Credit and (ii) the unpaid
amount of the Obligation of Reimbursement."
"'Letters of Credit' has the meaning specified in Section 2.11
hereof."
"'Letter of Credit Applications' has the meaning specified in
Section 2.11 hereof."
"'Obligation of Reimbursement' has the meaning specified in
Section 2.11 hereof."
"'Previous Note' means that certain promissory note issued by
the Borrowers, payable to the order of the Bank, in the principal
amount of $3,500,000, dated as of October 2, 1995, as amended, which
was issued in substitution for, and in replacement of, not in payment
of the Borrowers' revolving note dated as of January 30, 1995, payable
to the Bank's order in the original principal amount of $2,000,000."
"'Sixth Amendment' means that certain Sixth Amendment to
Revolving Credit Agreement dated as of August __, 1996, but effective
as of July 1, 1996, between the Bank and the Borrowers."
"'Special Account' means a cash collateral account maintained
by the Bank in connection with Letters of Credit, as contemplated by
Section 2.11."
6. Section 2.1 of the Credit Agreement is hereby amended to
read as follows:
"Section 2.1 The Advances. The Bank agrees, on the terms and
conditions here set forth, to make Advances to the Borrowers from time
to time during the period from the date when all of the conditions set
forth in Section 3.1 hereof are met (the "Closing Date") to and
including the Commitment Termination Date in an aggregate amount not to
exceed at any time outstanding the Borrowing Base less the L/C Amount.
Within the above limits, the Borrowers may borrow, prepay pursuant to
Section 2.7 and reborrow under this Section 2.1. The Borrowers'
obligation to pay the Advances made by the Bank shall be evidenced by a
single promissory note of the Borrowers, dated as of the date of the
Sixth Amendment, payable to the order of the Bank appropriately
completed in substantially the form of Exhibit A attached to the Sixth
Amendment, as the same may be renewed, extended, amended or any note
shall be issued in substitution therefor from time to time (the
"Note"). The Note has been issued in substitution for, and in
replacement of, but not in payment of, the Previous Note. The Note
shall bear interest in accordance with Section 2.3 hereof and principal
of and interest on the Note shall be due and payable as provided in
Section 2.5 hereof."
7. Section 2.6 of the Credit Agreement is hereby amended to
read as follows:
"Section 2.6 Mandatory Prepayments. The Borrowers shall,
within one Business Day following the delivery of each Borrowing Base
Certificate under Section 5.1(e) hereof, prepay the Advances in the
amount, if any, by which the sum of the outstanding principal amount of
the Advances and of the L/C Amount on the date of prepayment under this
Section 2.6 exceeds the Borrowing Base set forth in such Borrowing Base
Certificate."
8. Section 2.10 of the Credit Agreement is hereby amended to
read as follows:
"Section 2.10 Use of Loan Proceeds. The Borrowers shall use
the proceeds of each Advance for general working capital purposes and
to make advances to Affiliates to the extent permitted by this
Agreement. The Borrowers will use each Letter of Credit for general
corporate purposes."
9. Article II of the Credit Agreement is hereby amended by
adding the following new Section 2.11 immediately following Section 2.10:
"Section 2.11 Letters of Credit.
(a) Subject to the terms and conditions set forth in
this Section 2.11 and in Article III, the Bank shall issue one
or more letters of credit for the account of the Borrowers
(each a "Letter of Credit") from time to time during the
period from the date hereof to and including the Commitment
Termination Date, in an aggregate amount at any time
outstanding not to exceed the lesser of (i) $2,000,000 or (ii)
the Borrowing Base less the sum of (A) all outstanding
Advances under this Agreement and (B) the L/C Amount.
(b) The Borrowers acknowledge and agree that the
Letters of Credit issued under this Section 2.11 include all
letters of credit existing as of the date of this Sixth
Amendment and listed on Schedule 2.11 attached to the Sixth
Amendment (the "Existing Letters of Credit"). The Borrowers
further acknowledge that they are jointly and severally liable
for all reimbursement and other obligations with respect to
the Existing Letters of Credit.
(c) Whenever the Borrowers desire to obtain issuance
of a Letter of Credit, the Borrowers shall request the same by
written notice to the Bank from the Borrowers, which notice or
request shall specify the date of the requested issuance
(which date shall be a Business Day). Prior to the requested
date of issuance, the Borrowers shall provide the Bank with an
application for letter of credit in a form provided by the
Bank (each a "Letter of Credit Application") duly executed on
behalf of the Borrowers. The Borrowers acknowledge and agree
that (i) the Letter of Credit Applications include all letter
of credit applications executed in connection with the
Existing Letters of Credit and (ii) the Borrowers are jointly
and severally liable with respect to all obligations under the
letter of credit applications executed in connection with the
Existing Letters of Credit. The terms and conditions set forth
in each such Letter of Credit Application shall supplement the
terms and conditions hereof, but in the event of inconsistency
between the terms of any such Letter of Credit Application and
the terms hereof, the terms hereof shall control. Any request
for the issuance of a Letter of Credit under this Section 2.11
shall be deemed to be a representation by the Borrowers that
(i) the conditions set forth in this Section 2.11 have been
met, and (ii) the statements set forth in Section 3.2 hereof
are correct as of the time of the request.
(d) The Borrowers shall pay to the Bank a letter of
credit fee in connection with each Letter of Credit issued
hereunder as determined by the Bank on a case-by-case basis.
Each such letter of credit fee shall be payable at the time or
times determined by the Bank. In addition, the Borrowers agree
to pay to the Bank, on written demand by the Bank, the
administrative fees charged by the Bank in the ordinary course
of business in connection with the honoring of drafts under
any Letter of Credit, and all other activity with respect to
the Letters of Credit at the then-current rates of the Bank.
(e) Draws under any Letter of Credit shall be
reimbursed to the Bank in accordance with the applicable
Letter of Credit Application and as follows:
(i) Whenever a draft under a Letter of
Credit is presented to the Bank for payment, the
Borrowers hereby agree to immediately reimburse the
Bank for the amount paid by the Bank under the Letter
of Credit, plus any and all reasonable charges and
expenses that the Bank may pay or incur relative to
such draw, plus interest on all such amounts, charges
and expenses as set forth below (all such amounts
with respect to all Letters of Credit are hereinafter
referred to, collectively, as the "Obligation of
Reimbursement").
(ii) The Borrowers hereby agree to pay to
the Bank, on demand of the Bank, interest on all
amounts, charges and expenses payable by the
Borrowers to the Bank under this Section 2.11,
accrued from the date any such draft, charge or
expense is paid by the Bank until payment in full by
the Borrowers at the interest rate in effect under
Section 2.3 hereof.
(iii) If the Borrowers fail to pay to the
Bank promptly the amount of its Obligation of
Reimbursement in accordance with the terms of this
Agreement and of the applicable Letter of Credit
Applications, the Bank is hereby irrevocably
authorized and directed, in its sole discretion, to
make an Advance under Section 2.1 hereof in an amount
sufficient to discharge the Obligation of
Reimbursement, including all interest accrued thereon
but unpaid at the time of such Advance, and such
Advance shall be added to the outstanding principal
balance of the Note.
(f) On the Commitment Termination Date or earlier
termination of the Commitment, the Borrowers shall pay to the
Bank in immediately available funds for deposit in the Special
Account an amount equal to the maximum aggregate amount
available to be drawn under all Letters of Credit then
outstanding, assuming compliance with all conditions for
drawing thereunder. Amounts on deposit in the Special Account
may be applied by the Bank at any time or from time to time to
the Borrower's Obligation of Reimbursement or any other
obligations of the Borrowers to the Bank arising under this
Agreement or otherwise, in the Bank's sole discretion, and
shall not be subject to withdrawal by the Borrowers so long as
the Bank maintains a security interest therein.
(g) The Borrowers hereby pledge, and grant to the
Bank a security interest in, all funds held in the Special
Account from time to time and all proceeds thereof, as
security for the payment of all present and future Obligations
of Reimbursement and all other amounts due and to become due
from the Borrowers to the Bank pursuant to this Agreement or
otherwise. The Bank shall have full ownership and control of
the Special Account, and the Borrowers shall have no right to
withdraw the funds maintained in the Special Account."
10. Section 3.2 of the Credit Agreement is hereby amended to
read as follows:
"Section 3.2 Conditions Precedent to All Advances and to
Issuance of All Letters of Credit. The Bank's obligation to make each
Advance (including the initial Advance) and to issue any Letter of
Credit shall be subject to the further conditions precedent that on the
date of making such Advance or of issuing such Letter of Credit, as the
case may be, the statements set forth in (a) and (b) below shall be
true (and the Borrowers' receipt of the proceeds or benefit of such
Advance or such Letter of Credit shall be deemed to constitute a
representation and warranty by the Borrowers that such statements are
true on such date):
(a) The representations and warranties contained in
Article IV of this Agreement are correct on and as of the date
of such Advance or such Letter of Credit as though made on and
as of such date;
(b) No event has occurred and is continuing, or would
result from the making of such Advance or the issuance of such
Letter of Credit, which constitutes a Default or an Event of
Default."
11. Section 5.1(a) of the Credit Agreement is hereby amended
by deleting the words "a certificate of the chief financial officer of such
Borrower substantially in the form of Exhibit I to the First Amendment" as it
appears in the twenty-second through twenty-fourth lines thereof and by
substituting therefor the words "a certificate of the chief financial officer of
such Borrower substantially in the form of Exhibit B to the Sixth Amendment".
12. Section 5.1(b) of the Credit Agreement is hereby amended
by deleting the words "a certificate of the chief financial officer of such
Borrower substantially in the form of Exhibit I to the First Amendment" as it
appears in the seventeenth through nineteenth lines thereof and by substituting
therefor the words "a certificate of the chief financial officer of such
Borrower substantially in the form of Exhibit B to the Sixth Amendment."
13. Section 5.8 of the Credit Agreement is hereby amended to
read as follows:
"Section 5.8 Debt to Capital Base Ratio of K-Tel USA. K-Tel
USA will maintain at all times the ratio of its Debt to Capital Base at
not more than 13.0 to 1.0."
14. Section 5.9 of the Credit Agreement is hereby amended to
read as follows:
"Section 5.9 Debt to Capital Base Ratio of Dominion. Dominion
will maintain at all times the ratio of its Debt to Capital Base at not
more than 0.50 to 1.00."
15. Section 5.10 of the Credit Agreement is hereby amended to
read as follows:
"Section 5.10 Capital Base of K-Tel USA. K-Tel USA will
maintain at all times its Capital Base in an amount not less than
$1,500,000."
16. Section 5.11 of the Credit Agreement is hereby amended to
read as follows:
"Section 5.11 Capital Base of Dominion. Dominion will maintain
at all times its Capital Base in an amount not less than $1,800,000."
17. Article V of the Credit Agreement is hereby amended by
adding the following new Section 5.12 immediately following existing Section
5.11:
"Section 5.12 Minimum Inventory Reserve for Non-Music
Products. K-Tel USA shall at all times maintain an inventory reserve
with respect to all non-music inventory, in an amount not less than
$300,000."
18. Section 6.7(b) of the Credit Agreement is hereby amended
to read as follows:
"(b) Accounts receivable from and advances to Affiliates of
K-Tel USA; provided, however, without the Bank's prior written consent,
the aggregate amount of accounts receivable from and advances to all
Affiliates of K-Tel USA shall not exceed $5,000,000 in the aggregate at
any time."
19. Section 6.8 of the Credit Agreement is hereby amended to
read as follows:
"Section 6.8 Investments of Dominion. Dominion will not
purchase or hold beneficially any stock or other securities or evidence
of indebtedness of, make or permit to exist any loans advances to, or
make any investment or acquire any interest whatsoever in, any other
Person, except:
(a) Investments in direct obligations of the United
States of America or any agency or instrumentality thereof
whose obligations constitute full faith and credit obligations
of the United States of America having a maturity of one year
or less, commercial paper issued by U.S. corporations rated
"A-1" or "A-2" by Standard & Poors Corporation "P-1" or "P-2"
by Moody's Investors Service or certificates of deposit or
bankers' acceptances having a maturity or one year or less
issued by members of the Federal Reserve System having
deposits in excess of $100,000,000.
(b) Accounts receivable from and advances to
Affiliates of Dominion; provided, however, without the Bank's
prior written consent, the aggregate amount of accounts
receivable from and advances to all Affiliates of Dominion
shall not exceed $2,300,000 at any time."
20. Section 6.13 of the Credit Agreement is hereby amended to
read as follows:
"Section 6.13 Capital Expenditures to Acquire Copyrights in
Sound Recordings, Compilations and Compositions. K-Tel USA will not
make any Capital Expenditure to acquire copyrights in Sound Recordings,
Compilations and/or Compositions or long-term licenses (having a term
of more than 5 years) of copyrights. Dominion will not make any Capital
Expenditure to acquire copyrights in Sound Recordings, Compilations
and/or Compositions or long-term licenses (having a term of more than 5
years) of copyrights if, after giving effect to any such Capital
Expenditure, (i) the aggregate amount of Capital Expenditures made by
Dominion to acquire copyrights in Sound Recordings, Compilations,
Compositions and/or long-term licenses of copyrights would exceed
$2,500,000 during the period from July 22, 1994 through the Commitment
Termination Date or (ii) the Borrowers would not be in compliance with
all provisions of this Agreement."
21. Section 7.1(a) of the Credit Agreement is hereby amended
to read as follows:
"(a) Default in the payment of any interest on or principal of
the Note when due, including, without limitation, any mandatory
prepayment required under Section 2.6 hereof, or default in the payment
of any Obligation of Reimbursement when due."
22. This Sixth Amendment shall not become effective until the
Bank shall have received each of the following in form and substance acceptable
to the Bank:
(a) The Note, duly executed on behalf of the Borrowers.
(b) A certified copy of the resolutions of the Board of
Directors of K-Tel USA evidencing approval of this Sixth Amendment and
the Note and other matters contemplated hereby, certified by the
Secretary or Assistant Secretary of K-Tel USA as being a true, correct
and complete copy thereof which has been duly adopted and is in full
force and effect, together with a certificate of such Secretary or
Assistant of K-Tel USA certifying the names and true signatures of the
officers of K-Tel USA authorized to sign this Sixth Amendment and the
Note and the other documents to be delivered by K-Tel USA hereunder.
(c) A certified copy of the resolutions of the Board of
Directors of Dominion evidencing approval of this Sixth Amendment and
the Note and other matters contemplated hereby, certified by the
Secretary or Assistant Secretary of Dominion as being a true, correct
and complete copy thereof which has been duly adopted and is in full
force and effect, together with a certificate of such Secretary or
Assistant of Dominion certifying the names and true signatures of the
officers of Dominion authorized to sign this Sixth Amendment and the
Note and the other documents to be delivered by Dominion hereunder.
(d) A Certificate of the Secretary of K-Tel USA certifying as
to the fact that the articles of incorporation and bylaws of K-Tel USA,
which were previously certified and delivered to the Bank continue in
full force and effect and have not been amended or otherwise modified
except as set forth in the Certificate to be delivered.
(e) A Certificate of the Secretary of Dominion certifying as
to the fact that the articles of incorporation and bylaws of Dominion,
which were previously certified and delivered to the Bank continue in
full force and effect and have not been amended or otherwise modified
except as set forth in the Certificate to be delivered.
(f) A copy of the Articles of Merger, certified by the
Minnesota Secretary of State, pursuant to which K-Tel was merged into
K-Tel USA, with K-Tel USA as the surviving corporation.
(g) The Acknowledgment and Agreement of Guarantor attached
below.
(h) An Opinion of Counsel to the Borrowers and the Guarantor.
(i) Such other items as the Bank may require.
23. References. From and after the date of this Sixth
Amendment: (i) all references in the Loan Documents to "the Note" shall be
deemed to refer to the Note as defined in, and delivered under, this Sixth
Amendment; and (ii) all references in the Credit Agreement to "this Agreement"
shall be deemed to refer to the Credit Agreement as amended by this Sixth
Amendment.
24. No Other Changes. Except as explicitly amended by this
Sixth Amendment, all of the original terms and conditions of the Credit
Agreement shall remain in full force and effect.
25. No Other Waiver. Except as explicitly set forth in
paragraph 2 of this Sixth Amendment, the execution of this Sixth Amendment and
acceptance of any documents related thereto shall not be deemed to be a waiver
of any Default or Event of Default under the Credit Agreement or any other Loan
Document, whether or not known to the Bank and whether or not such Default or
Event of Default exists on the date of this Sixth Amendment.
26. Release. The Borrowers and K-Tel International, Inc. by
signing the Acknowledgment and Agreement of Guarantor set forth below, each
hereby absolutely and unconditionally releases and forever discharges the Bank,
and any and all participants, parent corporations, subsidiary corporations,
affiliated corporations, insurers, indemnitors, successors and assigns thereof,
together with all of the present and former directors, officers, agents and
employees of any of the foregoing, from any and all claims, demands or causes of
action of any kind, nature or description, whether arising in law or equity or
upon contract or tort or under any state or federal law or otherwise, which the
Borrowers or any Guarantor has had, now has or has made claim to have against
any such person for or by reason of any act, omission, matter, cause or thing
whatsoever arising from the beginning of time to and including the date of this
Sixth Amendment, whether such claims, demands and causes of action are matured
or unmatured or known or unknown.
27. Expenses. The Borrowers hereby reaffirm their agreement
under Section 8.5 of the Credit Agreement. Without limiting the generality of
the foregoing, the Borrowers specifically agree to pay all fees and
disbursements of counsel to the Bank for the services performed by such counsel
in connection with the preparation of this Sixth Amendment and the documents and
instruments incidental thereto.
28. Counterparts. This Sixth Amendment and the Acknowledgment
and Agreement of Guarantor may be executed in any number of counterparts, each
of which when so executed and delivered shall be deemed an original and all of
which counterparts, taken together, shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Sixth
Amendment to be duly executed as of the date first above written.
K-TEL INTERNATIONAL (USA), INC.
By /S/ Mark Dixon
-------------------------------------
Its V.P.
DOMINION ENTERTAINMENT, INC.
By /S/ Mark Dixon
-------------------------------------
Its V.P.
TCF BANK MINNESOTA fsb
By /S/ Richard D. Larson
-------------------------------------
Its Vice President
And
By /S/ Milli A. Navara
-------------------------------------
Its Assistant Vice President
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR
The undersigned, K-Tel International, Inc., a guarantor of the
indebtedness of K-Tel International (USA), Inc. and Dominion Entertainment, Inc.
(together, the "Borrowers") to the Bank pursuant to its Guaranty dated as of
July 22, 1994 (the "Guaranty), hereby (i) acknowledges receipt of the foregoing
Sixth Amendment; (ii) consents to the terms (including without limitation the
release set forth in paragraph 26 of the foregoing Sixth Amendment) and
execution thereof; (iii) reaffirms its obligations to the Bank pursuant to the
terms of its Guaranty, its Amended and Restated Collateral Pledge Agreement (the
"Pledge Agreement") dated as of January 30, 1995 and its Amended and Restated
Security Agreement dated as of January 30, 1995 (the "Security Agreement"); and
(iv) acknowledges and agrees that the Bank may amend, restate, extend, renew or
otherwise modify the Credit Agreement and any indebtedness or agreement of the
Borrowers, or enter into any agreement or extend additional or other credit
accommodations, without notifying or obtaining the consent of the undersigned
and without impairing the liability of the undersigned under its Guaranty,
Pledge Agreement and/or its Security Agreement for all of the present and future
indebtedness of the Borrowers to the Bank.
K-TEL INTERNATIONAL, INC.
By /S/ Mark Dixon
-------------------------------------
Its V.P.
SCHEDULE 2.11 TO
SIXTH AMENDMENT TO
REVOLVING CREDIT AGREEMENT
Schedule of Existing Letters of Credit
as of the Date of the Sixth Amendment
L/C NUMBER DATE ISSUED AMOUNT EXPIRY DATE
---------- ----------- ------ -----------
I147157 6/20/96 $222,480.00 8/30/96
I147610 7/15/96 $41,488.80 8/15/96
I147761 7/19/96 $185,400.00 9/13/96
I148016 7/26/96 $44,550.00 8/30/96
I148017 7/26/96 $32,625.00 8/23/96
96-004 5/20/95 $20,000.00 5/31/97
EXHIBIT A TO SIXTH AMENDMENT
TO REVOLVING CREDIT AGREEMENT
REVOLVING NOTE
(K-TEL INTERNATIONAL (USA), INC.
AND DOMINION ENTERTAINMENT, INC.)
$5,000,000.00 August 23, 1996
FOR VALUE RECEIVED, the undersigned, K-TEL INTERNATIONAL
(USA), INC., a Minnesota corporation ("K-Tel USA"), and DOMINION ENTERTAINMENT,
INC., a Minnesota corporation ("Dominion"; collectively K-Tel USA and Dominion
are called the "Borrowers"), hereby jointly and severally promise to pay to the
order of TCF BANK MINNESOTA fsb (the "Bank"), on November 30, 1996, the
principal sum of Five Million Dollars ($5,000,000.00) or, if less, the aggregate
unpaid principal amount of all Advances (as defined in the Credit Agreement)
made by the Bank to the Borrowers under the Credit Agreement (defined below),
together with interest on the unpaid principal amount of the Advances from the
date hereof until such principal amount is paid in full at the interest rate and
on the dates specified in the Credit Agreement.
This Note is the Note referred to in, and is entitled to the
benefits of, and is subject to the terms of, the Revolving Credit Agreement
dated as of July 22, 1994, by and between the Borrowers and the Bank, as amended
by a First Amendment to Revolving Credit Agreement dated as of January 30, 1995,
a Second Amendment to Revolving Credit Agreement and to Revolving Note dated as
of July 20, 1995, a Third Amendment to Revolving Credit Agreement dated as of
October 2, 1995, a Fourth Amendment to Revolving Credit Agreement and to
Revolving Note dated as of November 28, 1995, a Fifth Amendment to Revolving
Credit Agreement and to Revolving Note dated as of December 28, 1995 and by a
Sixth Amendment to Revolving Credit Agreement of even date herewith, (such
Credit Agreement, as amended, supplemented, modified or restated from time to
time herein called the "Credit Agreement"), which Credit Agreement, among other
things (i) provides for the making of Advances by the Bank to the Borrowers
subject to the terms of the Credit Agreement and (ii) contains provisions for
the mandatory prepayment hereof and for acceleration of the maturity hereof upon
the happening of certain stated events.
This Note is issued in substitution for, and in replacement
of, but not in payment of, the Borrowers' Revolving Note dated October 2, 1995,
payable to the order of the Bank in the original principal amount of $3,500,000,
as amended, and the Revolving Note of K-Tel, Inc. dated January 30, 1995,
payable to the order of the Bank in the original principal amount of $3,000,000,
as amended.
K-TEL INTERNATIONAL (USA), INC.
By /S/ Mark Dixon
-------------------------------------
Its V.P.
DOMINION ENTERTAINMENT, INC.
By /S/ Mark Dixon
-------------------------------------
Its V.P.
EXHIBIT B TO SIXTH AMENDMENT
TO REVOLVING CREDIT AGREEMENT
COMPLIANCE CERTIFICATE
In accordance with our Revolving Credit Agreement dated as of
July 22, 1994, as amended (such Revolving Credit Agreement, together with any
and all amendments, supplements or modifications thereto or restatements thereof
is herein called the "Credit Agreement"), attached are the financial statements
of K-TEL INTERNATIONAL (USA), INC. ("K-Tel USA") and of DOMINION ENTERTAINMENT,
INC. ("Dominion"; collectively, K-Tel USA and Dominion are called the
"Borrowers") as of and for the month and year-to-date period ended
_______________ __, 1996 (the "Current Financials").
I certify that the Current Financials have been prepared in
accordance with generally accepted accounting principles, subject to year-end
audit adjustments.
Defaults and Events of Default. (check one)
|_| I have no knowledge of the occurrence of any Default or Event
of Default under the Credit Agreement which has not previously
been reported to you and remedied.
|_| Attached is a detailed description of all Defaults and Events
of Default of which I have knowledge and which have not
previously been reported to you and remedied.
For the date and periods covered by the Current Financials,
the Borrowers are in compliance with the covenants set forth in Sections 5.7,
5.8, 5.9, 5.10, 5.11 and 6.13 of the Credit Agreement, except as indicated
below. The calculations made to determine compliance are as follows:
<TABLE>
<CAPTION>
Covenant Actual Requirement
- -------- ------ -----------
<S> <C> <C>
5.7) Current Ratio of K-Tel USA
As of month ending
________________________ ____ to 1 Minimum 1.0 to 1
5.8) Debt to Capital Base Ratio of
K-Tel USA
As of month ending
________________________ ____ to 1 Minimum 13.0 to 1
5.9) Debt to Capital Base Ratio
of Dominion
As of month ending
________________________ ____ to 1 Maximum .50 to 1
5.10) Capital Base of K-Tel USA
As of month ending
________________________ $________ Minimum $1,500,000
5.11) Capital Base of Dominion
As of month ending
________________________ $________ Minimum $1,800,000
</TABLE>
K-TEL INTERNATIONAL (USA), INC.
By
-------------------------------------
Its
DOMINION ENTERTAINMENT, INC.
By
-------------------------------------
Its
EXHIBIT 10.41
SEPARATION AGREEMENT AND RELEASE
THIS AGREEMENT, is made and entered into as of February 19, 1996,
between MICKEY ELFENBEIN ("Elfenbein") and K-TEL INTERNATIONAL, INC., a
Minnesota corporation (the "Company").
W I T N E S S E T H:
WHEREAS, Elfenbein is employed by the Company as its President and
Secretary and has served as a director of the Company and an officer and
director of its subsidiaries and affiliates;
WHEREAS, the purpose of this Agreement is to set forth the terms and
conditions under which Elfenbein and the Company will terminate their employment
relationship; and
WHEREAS, Elfenbein and K-5 Leisure Products, Inc. ("K-5") have entered
into the stock transfer and loan repayment agreement dated the date hereof (the
"Simitar Agreement") pursuant to which Elfenbein will acquire K-5 shares in
Simitar Entertainment, Inc.
NOW, THEREFORE, in consideration of the covenants and promises set
forth below, the adequacy of which the parties acknowledge, the parties agree as
follows:
1. Resignation. The Company has requested that Elfenbein resign as an
officer and director of the Company and its subsidiaries. Elfenbein hereby
acknowledges and confirms his resignation as an employee and officer of the
Company and as a director of the Company and an officer and director of its
subsidiaries and affiliates effective March 1, 1996; provided, however that from
the date hereof through March 1, 1996 Elfenbein shall remain on the payroll of
the Company as an employee but shall be on paid leave of absence. Elfenbein will
provide the Company with a letter of resignation in the form attached hereto as
Exhibit A on the date he signs this Agreement. The Company will maintain
Elfenbein's letter of resignation with its official records, which will state
that Elfenbein voluntarily resigned his employment and other positions with the
Company and its subsidiaries and affiliates.
2. Payments. The Company has made or agrees to transfer the property
described below and make the following payments, less regular payroll deductions
and subject to applicable federal and state tax and FICA and Medicare
withholding, to Elfenbein:
(a) Final Payroll. $10,513.48 as the final payroll for the
period February 16, 1996 through March 1, 1996.
(b) Additional Consideration.
(i) The Company will pay Elfenbein $45,000 (without
any federal or state income tax withholding) upon expiration
of the period described in paragraph 10 below as full and
complete severance compensation (including all amounts due for
accrued vacation pay, sick pay or other severance or
compensation benefits) and as a consideration for the
undertakings of Elfenbein herein contained.
(ii) Elfenbein may receive up to an additional
$100,000 (which amount shall be escrowed to assure performance
of the Company's obligations hereunder) if he disposes of
350,000 of his shares of the Company pursuant to a Stock
Transfer and Loan Repayment Agreement of even date herewith by
and between Elfenbein and K-5 Leisure Products, Inc. on the
following basis:
If Shares Additional
--------- ----------
Disposed Of By Amount Received
-------------- ---------------
April 30, 1996 $100,000
or
after April 30, 1996
and on or before May 31, 1996 $ 65,000
or
after May 31, 1996
and on or before July 1, 1996 $ 35,000
or
after July 1, 1996 -0-
(iii) That certain equipment described on Exhibit B
hereto (the "Retained Equipment").
If Elfenbein rescinds this Agreement pursuant to paragraph 10 below, then this
Agreement shall be null and void, neither party shall have any obligations
hereunder and the Company will not be obligated to make the additional payments
or to provide the consideration specified in paragraph 2(b) above.
3. Insurance. Elfenbein has the right at his sole expense to continue
his health and life insurance under the C.O.B.R.A. laws upon his termination.
4. Benefits. Elfenbein is a participant in various employee benefit
plans sponsored by the Company as listed on Exhibit C. The payment of benefits,
including the amounts and the timing thereof, will be governed by the terms of
the employee benefit plans.
5. Full Compensation; Termination of Options and Consulting Agreement.
The payments that will be made to Elfenbein or for his benefit pursuant to this
Agreement will compensate him for and extinguish any and all of his claims
arising out of his employment with the Company or the termination of his
employment with the Company, including but not limited to his claims for
attorney's fees and costs, and all of his claims for any type of legal or
equitable relief as further set forth in paragraph 13 hereof. All options
granted by the Company to Elfenbein to purchase shares of the Company's common
stock shall terminate and expire as of the date hereof. Elfenbein also hereby
confirms that the consulting agreement dated January 1, 1986 between the Company
and Elex Resources, Inc., a company owned by Elfenbein, has been terminated and
no amounts are owing thereunder.
6. Records, Documents and Property. Prior to his execution of this
Agreement, Elfenbein will return to the Company (a) all its records,
correspondence, computer tapes and disks, and documents, and (b) all property of
the Company, including corporate credit cards and keys, except that Elfenbein
may retain for his personal use the following property ("Excluded Property"):
(i) sample products of the Company or its subsidiaries currently in Elfenbein's
possession and which has been and will be used solely for personal enjoyment or
use, (ii) any public information concerning the Company, and (iii) Elfenbein's
personal correspondence file currently in his possession at his residence,
provided that such files shall not contain any contracts or other material
information which is confidential or proprietary to the Company or its
subsidiaries. Elfenbein hereby represents that he has returned to the Company
all of its property in his possession or under his control, including, without
limitation, keys, badges, computer sheets, price sheets, reports, other
documents and copies of same, except for the Excluded Property and the Retained
Equipment. Elfenbein further represents that he has no such property in his
possession or under his control, except for the Excluded Property and the
Retained Equipment. Elfenbein understands that these representations are
material, and the Company is relying on these representations in entering into
this Agreement.
7. Proprietary Information and Relationships.
(a) Elfenbein reaffirms his continuing obligation to and
agrees not take for his own use, or disclose to others, trade secrets
or confidential information which he received as an employee, executive
officer or director of the Company or any of its subsidiaries.
Elfenbein further agrees that he will not disparage the Company, any of
its subsidiaries or affiliates and their respective officers,
directors, employees, shareholders, suppliers or customers and will not
do anything to harm the Company or any of its subsidiaries or
affiliates or their respective businesses or to interfere with their
respective relations with their officers, directors, employees,
shareholders, suppliers or customers, provided that competition with
the Company or its subsidiaries or affiliates shall not be deemed to be
any harm or interference so long as Elfenbein complies with all of the
other provisions of this Agreement. Elfenbein agrees that he will not
divulge to any other person, firm or corporation, or in any way use for
his own benefit, any trade secrets or confidential information of the
Company or its subsidiaries obtained during the course of his
employment with the Company.
(b) The Company agrees it will not disparage Elfenbein,
Simitar Entertainment, Inc. ("SEI") or its officers, directors,
employees, shareholders, suppliers or customers and will not do
anything to harm Elfenbein or SEI or their respective businesses or to
interfere with their respective relations with their officers,
directors, employees, shareholders, suppliers or customers, provided
that competition with Elfenbein or Simitar shall not be deemed to be
any harm or interference so long as the Company complies with it
obligations under paragraph 8(b) below.
(c) By executing this Agreement below, Philip Kives ("Kives")
agrees he will not disparage Elfenbein, SEI or its officers, directors,
employees, shareholders, suppliers or customers and will not do
anything to harm Elfenbein or SEI or their respective businesses or to
interfere with their respective relations with their officers,
directors, employees, shareholders, suppliers or customers, provided
that competition with Elfenbein or Simitar shall not be deemed to be
any harm or interference so long as Kives complies with it obligations
under paragraph 8(b) below.
8. Non-Solicitation/Non-Hire of Employees.
(a) Elfenbein agrees that for a period of twelve months from
the date of this Agreement he will not, either directly or indirectly,
on his own behalf or in the service or on behalf of others solicit,
divert or hire, or in any manner attempt to solicit, divert or hire any
full-time employee of the Company or any subsidiary or affiliate, and
whether or not such employment was pursuant to a written or oral
contract of employment and whether or not such employment was for a
determined period or was at will except for those employees listed on
Exhibit D; provided that, in the event Elfenbein desires to employ any
such employee of the Company or its subsidiaries, he will contact the
Company's designated representative (who shall be Philip Kives unless
otherwise notified by the Company) and such representative will give
Elfenbein permission to make an employment offer to such employee
unless the departure of such employee could cause a material hardship
to the Company or any of its subsidiaries.
(b) The Company agrees that for a period of twelve months from
the date of this Agreement it will not, either directly or indirectly,
on its own behalf or in the service or on behalf of others solicit,
divert or hire, or in any manner attempt to solicit, divert or hire any
full-time employee of Elfenbein or SEI, and whether or not such
employment was pursuant to a written or oral contract of employment and
whether or not such employment was for a determined period or was at
will.
(c) By executing this Agreement below, Kives agrees that for a
period of twelve months from the date of this Agreement he will not,
either directly or indirectly, on his own behalf or in the service or
on behalf of others solicit, divert or hire, or in any manner attempt
to solicit, divert or hire any full-time employee of Elfenbein or SEI,
and whether or not such employment was pursuant to a written or oral
contract of employment and whether or not such employment was for a
determined period or was at will.
(d) In the event the Simitar Agreement is terminated in
accordance with paragraph 9 thereof without the transaction
contemplated thereby having been closed (the "Simitar Agreement
Termination"), then the obligations of the parties hereto and Kives
under this paragraph 8 shall terminate and expire upon the Simitar
Agreement Termination.
9. Time to Consider this Agreement. Elfenbein may have twenty-one (21)
days from the day that he receives this Agreement, not counting that day upon
which he receives it, to consider whether he wishes to sign this Agreement.
Elfenbein acknowledges that if he signs this Agreement before the end of the
21-day period, it will be his personal voluntary decision to do so.
10. Rescission. Elfenbein may rescind this Agreement within fifteen
(15) days after he signs it, not counting the day upon which he signs it. This
Agreement shall not become effective or enforceable until after the 15-day
rescission period has expired. If Elfenbein rescinds this Agreement, the Company
shall have no obligations under this Agreement.
11. Procedures for Acceptance or Revocation. To accept the terms of
this Agreement, Elfenbein must deliver this Agreement, after it has been signed,
to the Company by hand or by mail within the 21-day period that he has to
consider this Agreement. To rescind acceptance, Elfenbein must deliver to the
Company a written, signed statement of rescission within the 15-day rescission
period. All deliveries shall be made to the Company at the following address:
Mr. Philip Kives
K-5 Leisure Products, Inc.
220 Saulteaux Crescent
Winnipeg, Manitoba
Canada R3J 3W2
If Elfenbein chooses to deliver acceptance or notice of rescission by mail, it
must be (a) postmarked within the period stated above, (b) properly addressed to
the Company at the address stated in the preceding sentence, and (c) sent by
certified mail, return receipt requested.
12. Advice to Consult with an Attorney. Elfenbein understands and
acknowledges that he is being advised by the Company to consult with an attorney
prior to signing this Agreement. Elfenbein represents that he has consulted with
an attorney to the extent that he thinks appropriate. Elfenbein has not relied
on any explanations, statements or premises made by the Company or its agents or
attorneys other than as set forth in this Agreement.
13. General Release by Elfenbein and the Company.
(a) Definitions. All the words in this paragraph have their
plain meaning in ordinary English. Specific terms used in this
paragraph have the following meanings:
(i) "Elfenbein" means Mickey Elfenbein and includes
Elfenbein and anyone who has or obtains any legal rights or
claims through him.
(ii) "Company" means K-tel International, Inc., a
Minnesota corporation and its subsidiaries and affiliates and
any organization or entity related to K-tel International,
Inc. in the present or past, and past or present officers,
directors, employees, shareholders, committees, agents,
attorneys, insurers, indemnitors, successors or assigns of,
any person who acted on behalf of, or an instruction from,
K-tel International, Inc. or any related organization or
entity.
(b) Elfenbein's Claims. The claims Elfenbein is releasing in
paragraph 13(c) below include all of his rights to any relief of any
kind from the Company, including but not limited to:
(i) all claims he has now, whether or not he now
knows about the claims;
(ii) all claims for attorney's fees;
(iii) all claims against the Company for alleged
discrimination against him under any federal, state, or local
law, including, for example, the federal Age Discrimination in
Employment Act ("ADEA") and the Minnesota Human Rights Act
("MHRA");
(iv) all claims arising out of Elfenbein's
employment, the Company's request for his resignation, or
separation from employment with the Company, including, but
not limited to, any alleged breach of contract, wrongful
termination, defamation or intentional infliction of emotional
distress;
(v) all claims for any other alleged unlawful
employment practices arising out of or relating to Elfenbein's
employment or separation from employment;
(vi) all claims for any other form of remuneration;
and
(vii) all claims against all parties related to that
certain transaction described in an Agreement of Purchase and
Sale dated June 28, 1995, as amended.
(c) Elfenbein's Release. The money and benefits Elfenbein will
receive as set forth in this Agreement are full and fair payment for
the release of all his claims. The Company does not owe him anything in
addition to what he will receive under this Agreement; provided,
however, that Elfenbein shall continue to be entitled to any applicable
indemnification under the Company's current By-laws or Minnesota law as
an officer and director of the Company and its subsidiaries and
affiliates.
(d) Payment by Related Companies. Elfenbein shall cause to be
paid prior to payment to him of the amount due pursuant to paragraph
2(b)(i) the net amount of $8,019.70 owing by Excel International, Inc.
to the Company as of the date hereof.
(e) Release by Company. The Company hereby releases Elfenbein
from any claims or liabilities to the Company arising prior to the date
hereof, except for (i) Elfenbein's obligations under this Agreement and
(ii) matters where material information concerning the matter has been
concealed by Elfenbein from the Company.
14. Statements. If either party is asked about the circumstances of
Elfenbein's departure, the party shall respond that a mutually satisfactory
agreement was reached.
15. Claims Involving the Company; Reasonable Assistance. In
consideration of the payments provided above, Elfenbein agrees to make himself
reasonably available to the Company (consistent with any obligations Elfenbein
has or may have to any future employer or business in which he engages) for
consultation regarding the Company's past operations, record catalogue and
licensing and any pending or future lawsuits involving the Company where
Elfenbein has or may have knowledge of the underlying facts. Should the Company
require Elfenbein's assistance either (i) at any place outside the state of
Minnesota, (ii) for any extended period or (iii) after the earlier of the
Simitar Agreement Termination or December 31, 1996, Elfenbein will be reasonably
compensated, plus appropriate out of pocket expenses (including business class
airfare). The Company will advance Elfenbein the anticipated compensation and
out of pocket expenses prior to his providing the requested assistance and
Elfenbein will promptly present an expense statement to the Company upon
completion of the assistance and any balance due Elfenbein will be promptly paid
by the Company or any refund due the Company will be promptly paid by Elfenbein.
In addition, Elfenbein will not voluntarily aid, assist, or cooperate with any
actual or potential claimants or plaintiffs or their attorneys or agents in any
claims or lawsuits proposed to be asserted, pending or commenced on the date
hereof or in the future against the Company; provided, however, that nothing in
this Agreement will be construed to prevent Elfenbein from testifying at an
administrative hearing, a deposition, or in court in response to a lawful
subpoena in any litigation or proceeding involving the Company.
16. Non-Admission. Nothing in this Agreement is intended to be, nor
will be deemed to be, an admission of liability by the Company that it has
violated any state or federal statute, local ordinance, or principal of common
law, or that it has engaged in any wrongdoing or that Elfenbein has any claim
against the Company.
17. No Other Agreements. This Agreement and the employee benefit plans
in which Elfenbein is a participant as described on Exhibit C supersede all
prior oral and written agreements and communications between the parties.
Elfenbein agrees that any and all claims which he might have against the Company
are fully released and discharged by this Agreement and that the only claims
that he may hereafter assert against the Company will be derived only from an
alleged breach of the terms of this Agreement or of an employee benefit plan as
described on Exhibit C in which Elfenbein is a participant.
18. Entire Agreement. This Agreement and the employee benefit plans as
described on Exhibit C in which Elfenbein is a participant constitute the entire
agreement between the parties with respect to the termination of Elfenbein's
employment relationship with the Company, and the parties agree that there were
no inducements or representations leading to the execution of this Agreement
except as stated in this Agreement.
19. Invalidity. In case any one or more of the provisions of this
Agreement should be invalid, illegal, or unenforceable in any respect, the
validity, legality, and enforceability of the remaining provisions contained in
this Agreement will not in any way be affected or impaired thereby.
20. Voluntary and Knowing Action. Elfenbein represents that he has read
and understands the terms of this Agreement and that he is voluntarily entering
into this Agreement to resolve his disputes against the Company.
21. Future Dealings between the Parties. The parties acknowledge that
they may in the future have dealings with each other. Any such future dealings
will be determined by such written agreement as the parties may enter into after
this Agreement is signed and this Agreement will not apply to any such future
dealings.
22. Governing Law. This Agreement will be construed and interpreted in
accordance with the laws of the State of Minnesota.
23. Jurisdiction, Service of Process. Any suit, action or proceeding
between the parties with respect to this Agreement or any judgment entered by
any court in respect of any thereof may be brought in the courts of the State of
Minnesota or in the U.S. District Court for the District of Minnesota as a party
hereto may elect, and the other party hereby accepts the nonexclusive
jurisdiction of those courts for the purpose of any such suit, action or
proceeding. In addition, each party hereby irrevocably waives, to the fullest
extent permitted by law, any objection that he or it may now or hereafter have
to the laying of venue of any such suit, action or proceeding arising out of or
relating to this Agreement or any judgment entered by any court in respect of
any thereof brought in the State of Minnesota, and hereby further irrevocably
waives any claim that any such suit, action or proceeding brought in the State
of Minnesota has been brought in an inconvenient forum.
24. Binding Effect. This Agreement is binding upon and inures to the
benefit of the parties hereto and their respective heirs, successors or assigns.
25. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the respective parties hereto have executed this
Agreement on the day and year written below their respective signatures to this
Agreement.
K-TEL INTERNATIONAL, INC.
By /S/ Philip Kives
-------------------------------------
Philip Kives, Chairman
and Chief Executive Officer
Dated: March 1, 1996
/S/ Mickey Elfenbein
-----------------------------------------
Mickey Elfenbein
Dated: March 15, 1996
By executing this Agreement in the space below, Philip Kives agrees to
the provisions of paragraphs 7(c) and 8(c) of this Agreement as if he was a
party to this Agreement.
/S/ Philip Kives
-----------------------------------------
Philip Kives
Dated: March 1, 1996
Exhibit A
RESIGNATION
Effective March 1, 1996, the undersigned resigns as the President,
Secretary, as a member of its Board of Directors and as an officer of K-tel
International, Inc. and as an Officer and Director of its subsidiaries and
affiliates.
/S/ Mickey Elfenbein
-----------------------------------------
Mickey Elfenbein
Exhibit B
Retained Equipment
------------------
1. Compaq 575 and peripheral equipment
2. HP Laser Jet 4
3. Compaq Contura Aero and peripherals
4. NEC P60M and peripherals
5. Satellite dish
Exhibit C
Employee Benefit Plans
401(k) Plan
(participation through date of termination,
benefits as defined in the plan)
Exhibit D
List of Certain Employees
1. Denise Bois
2. Barbara Elfenbein
3. Mark Elfenbein
4. Jonathan Finegold
EXHIBIT 10.42
AMENDMENT NO. 1 TO
SEPARATION AGREEMENT AND RELEASE
THIS AGREEMENT, is made and entered into as of March 29, 1996, between
MICKEY ELFENBEIN ("Elfenbein") and K-TEL INTERNATIONAL, INC., a Minnesota
corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the parties have entered into the Separation Agreement and
Release dated as of February 19, 1996 (the "Agreement"); and
WHEREAS, the parties desire to amend the Agreement as herein provided,
NOW, THEREFORE, in consideration of the covenants and promises set
forth below, the adequacy of which the parties acknowledge, the parties agree as
follows:
1. Paragraph 2(b)(ii) of the Agreement is hereby amended in its
entirety to read as follows:
"(ii) Elfenbein may receive up to an additional $100,000
(which amount shall be escrowed to assure performance of the Company's
obligations hereunder) if he disposes of 350,000 of his shares of the
Company pursuant to a Stock Transfer and Loan Repayment Agreement of
even date herewith by and between Elfenbein and K-5 Leisure Products,
Inc. on the following basis:
If Shares Additional
--------- ----------
Disposed Of By Amount Received
-------------- ---------------
May 31, 1996 $100,000
or
after May 31, 1996
and on or before June 30, 1996 $ 65,000
or
after June 30, 1996
and on or before August 1, 1996 $ 35,000
or
after August 1, 1996 -0-"
2. The period within which Elfenbein may rescind the Agreement is
hereby extended to April 5, 1996.
3. Except as herein expressly provided, this Agreement as amended
hereby shall continue in full force and effect.
IN WITNESS WHEREOF, the respective parties hereto have executed this
Agreement on the day and year written below their respective signatures to this
Agreement.
K-TEL INTERNATIONAL, INC.
By /S/ Philip Kives
-------------------------------------
Philip Kives, Chairman
and Chief Executive Officer
/S/ Mickey Elfenbein
----------------------------------------
Mickey Elfenbein
EXHIBIT 11
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Amounts)
For the years ended June 30, 1996, 1995 and 1994
1996 1995 1994
------- ------- -------
Primary earnings per share -
<S> <C> <C> <C>
Weighted average number of issued shares outstanding 3,729 3,711 3,680
Effect of Stock Incentive Plan -- -- 142
------- ------- -------
Shares outstanding used to compute primary earnings per share 3,729 3,711 3,822
======= ======= =======
Net Income (Loss) $ (745) $(2,483) $ 376
======= ======= =======
Primary earnings per share $ (.20) $ (.67) $ .10
======= ======= =======
Fully diluted earnings per share -
Weighted average number of shares used
for primary earnings per share 3,729 3,711 3,822
Effect of Stock Incentive Plan -- -- --
------- ------- -------
Shares outstanding used to compute
fully diluted earnings per share 3,729 3,711 3,822
======= ======= =======
Net Income(Loss) $ (745) $(2,483) $ 376
======= ======= =======
Fully diluted earnings per share $ (.20) $ (.67) $ .10
======= ======= =======
</TABLE>
K-tel International, Inc.
1996 Form 10-K
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of the Company and the jurisdiction in which each company was
incorporated are listed below. Unless otherwise indicated, all of the voting
securities of each subsidiary are owned by K-tel International, Inc. or one of
its subsidiaries. A number of subsidiaries not important to an understanding of
K-tel's business have been omitted. Such subsidiaries in the aggregate would not
constitute a significant subsidiary.
K-tel International (USA), Inc.
Minneapolis, Minnesota (a Minnesota corporation)
Dominion Entertainment, Inc.
Minneapolis, MN (a Minnesota corporation)
K-tel Ireland Limited
Dublin, Ireland (an Ireland Corporation)
K-tel International Finland OY
Helsinki, Finland (a Finland Corporation)
K-tel Entertainment (CAN) Inc.
(formerly ERA International, Ltd.)
Winnipeg, Manitoba (a Canada corporation)
Dominion Vertriebs GmbH
Karben, Germany (a Germany corporation)
K-tel Entertainment (U.K.) Ltd.
London, England (an England corporation)
K-tel International (France) S.R.L.
Paris, France (a France corporation)
K-tel (Australia) Pty. Limited
Southport, Queensland, Australia (an Australian corporation)
U.S. Distribution Services, Inc.
Minneapolis, Minnesota (a Minnesota corporation)
E-Direct, Inc.
Minneapolis, Minnesota (a Minnesota corporation)
K-tel, Inc.
Minneapolis, Minnesota (a Minnesota corporation)
K-tel Direct, Inc.
Minneapolis, Minnesota (a Minnesota corporation)
K-tel International, Inc.
1996 Form 10-K
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 relating to the 1987 Stock Incentive Plan
(Registration Number 33-18723).
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
October 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,255
<SECURITIES> 0
<RECEIVABLES> 15,028
<ALLOWANCES> 0
<INVENTORY> 5,808
<CURRENT-ASSETS> 26,013
<PP&E> 2,759
<DEPRECIATION> (1,966)
<TOTAL-ASSETS> 27,795
<CURRENT-LIABILITIES> 26,231
<BONDS> 0
0
0
<COMMON> 3,729
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,795
<SALES> 71,987
<TOTAL-REVENUES> 0
<CGS> 38,665
<TOTAL-COSTS> 71,983
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (409)
<INCOME-PRETAX> (394)
<INCOME-TAX> (351)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (745)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
