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, 1997 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 (942,000 shares) at September 25, 1997 was $5,828,000 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, 1997 there were 3,783,784 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 [ ].
<PAGE>
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-five 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 market 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).
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 pre-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.
In the early 1990's, the Company increased marketing consumer convenience
products in the U.S., United Kingdom ("U.K.") and Europe primarily by expanding
direct to consumer marketing. In fiscal 1997, consumer convenience product
represented approximately 25% of the Company's consolidated net sales, with most
of those sales resulting from U.S. consumer convenience product retail sales and
Germany direct response product sales. In fiscal 1995 and fiscal 1994, 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. eliminating
most consumer convenience product marketing and sales.
Description of Current Business
During fiscal 1997, 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
<PAGE>
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 principal assets is its music master catalog consisting of
original recordings and re-recordings of music from the 1950s through current
times ("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 pre-recorded music and consumer
convenience product is a significant source of revenue for the Company,
specifically in Europe. The Company engages in 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. In fiscal
1997 and 1996, the U.S. operation had certain significant direct response
marketing campaigns which produced revenues and profits from both the campaigns
themselves and from subsequent retail sales. One of the Company's primary goals
in its U.S. 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 mainly in the
form of infomercials (typically 15 or 30 minute programs/commercials).
In the second half of fiscal 1997, the Company formed a new U.S. media buying
and infomercial marketing subsidiary. This company performs media buying
services for third parties for a fee and also markets products through
infomercials produced by third parties whereby K-tel provides media placement
and financial strength to third parties for a share in infomercial revenues and
profits. Marketing infomercials in this way minimizes the Company's up front
risk of product development and production.
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 8%, 12%
and 11% of the Company's consolidated net sales for the years ended June 30,
1997, 1996 and 1995. 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, 1997, the Company employed 195 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, 1997, 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.
<PAGE>
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. In
September 1997, the Company's California operations relocated to a new leased
facility in Calabasas, California, which consists of approximately 6,758 square
feet of office space.
K-tel's foreign subsidiaries lease a total of 45,176 square feet of office and
warehouse 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.
On March 3, 1997, the Company entered into the Purchase and Sale Agreement (the
"Sale Agreement") with Platinum Entertainment, Inc. ("Platinum"). Pursuant to
the Sale Agreement and subject to certain conditions, including Platinum's
receipt of sufficient financing to close the transaction under the Sale
Agreement, Platinum agreed to purchase two domestic subsidiaries of the Company
which operated its music business outside of Europe for $35 million subject to
certain adjustments. On March 3, 1997, the Company and Platinum also entered
into an earnest money escrow agreement (the "Escrow Agreement") with a third
party bank and Platinum deposited $1.75 million in escrow. The Sale Agreement
provided that the $1.75 million escrow deposit is paid to the Company in the
event the transaction contemplated by the Sale Agreement is not consummated,
subject to certain conditions.
Under the Sale Agreement, the Company had the right to terminate the Sale
Agreement if the sale was not consummated by August 30, 1997. On September 10,
1997, the Company's Board of Directors concluded that it would be in the best
interests of the Company to terminate the Sale Agreement and the Company gave
notice of termination to Platinum. On September 10, 1997, Platinum also gave the
Company notice of termination claiming that the Company was in breach of its
representations and covenants under the Sale Agreement. The Company disputes
these allegations by Platinum.
On September 12, 1997, the Company initiated legal action in Minnesota state
court seeking an order directing the escrow bank to disburse the funds held
under the Escrow Agreement to the Company. On October 2, 1997, the Company
amended its complaint to assert additional claims against Platinum, including
breaches by Platinum of its confidentiality covenant and employee
non-solicitation agreement as well as detrimental reliance damages. Platinum has
not yet answered the Company's complaint, but Platinum has removed the action to
federal court in Minnesota and initiated a declaratory judgment action in
Illinois federal court on October 3, 1997. In the Illinois action, Platinum
asserted that it terminated the Sale Agreement due to the Company's breach of
representations and covenants and claimed that Platinum is entitled to the
escrow funds and damages of $1.75 million from the Company. The Company intends
to vigorously pursue recovery of the escrow deposit and contest any claims which
Platinum may assert.
<PAGE>
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 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the executive
officers of the Company at June 30, 1997.
Name of Officer Age Positions and Offices Held
- --------------- --- -------------------------------------------------
Philip Kives 68 Chairman of the Board and Chief Executive Officer
David Weiner 40 President and Secretary
Jeffrey Koblick 50 Senior Vice President, Purchasing and Operations
Mark Dixon 38 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.
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
On September 25, 1997 there were 1,701 record owners of the Company's common
stock and approximately 3,808,109 shares outstanding. The Company's common stock
trades on the NASDAQ National Market System under the symbol "KTEL".
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:
1996 1997
------------------- --------------------
High Low High Low
---- --- ---- ---
First Quarter 5 1/8 3 1/4 3 15/16 3 1/2
Second Quarter 5 3 1/2 7 5/8 3 1/2
Third Quarter 4 3/8 3 1/4 9 3/4 6 3/4
Fourth Quarter 4 1/8 3 1/4 8 1/4 7 1/2
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, 1997. This summary should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this filing. 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>
1997 1996 1995 1994 1993
----------- ---------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C>
Net Sales $ 75,501 $ 71,987 $ 65,917 $ 54,270 $55,714
=========== ========== ========== ============ =======
Operating Income (loss) $ 3,582 $ 4 $ (2,188) $ 223 $ 3,623
=========== ========== ========== ============ =======
Net Income (loss) $ 3,204 $ (745) $ (2,483) $ 376 $ 2,701
=========== ========== ========== ============ =======
Net Income (Loss) Per Common
and Common Equivalent Share $ .81 $ (.20) $ (.67) $ .10 $ .72
=========== ========== ========== ============ =======
Total Assets $ 30,492 $ 27,795 $ 28,637 $ 26,874 $21,922
=========== ========== ========== ============ =======
Long-Term Debt $ -- $ -- $ -- $ -- $ 2
=========== ========== ========== ============ =======
Cash Dividends Declared and Paid $ -- $ -- $ -- $ -- $ --
=========== ========== ========== ============ =======
</TABLE>
<PAGE>
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, 1997 Year Ended June 30, 1996
------------------------------------------------ --------------------------------------------------
North America Europe Total North America Europe Total
-------------- -------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $47,786 100% $27,715 100% $75,501 100% $48,605 100% $ 23,382 100% $71,987 100%
Costs and expenses
Cost of goods sold 28,985 61% 12,402 45% 41,387 55% 27,690 57% 10,975 47% 38,665 54%
Advertising 5,820 12% 5,700 21% 11,520 15% 7,495 15% 5,025 21% 12,520 17%
Selling, general &
administrative 10,309 21% 7,270 26% 17,579 23% 11,423 24% 7,420 32% 18,843 26%
------- --- ------- --- ------- --- ------- --- -------- --- ------- ---
Operating Income (Loss) $ 2,672 6% $ 2,343 8% $ 5,015 7% $ 1,997 4% $ (38) 0% $ 1,959 3%
======= === ======= === ======= === ======= === ======== === ======= ===
</TABLE>
In addition to the operating amounts above for the year ended June 30, 1997, the
parent holding company incurred $1,433,000 in expenses. For the year ended June
30, 1996, the parent holding company incurred $1,955,000 in expenses.
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1996 Year Ended June 30, 1995
-------------------------------------------------- -------------------------------------------------------
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 $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>
In addition to the operating amounts above, the parent company incurred
$1,955,000 in expenses for the year ended June 30, 1996 and $1,318,000 for the
year ended June 30, 1995.
<PAGE>
Fiscal 1997 in Comparison with Fiscal 1996
Consolidated net sales for the fiscal year ended June 30, 1997 were $75,501,000
with operating income of $3,582,000 and net income of $3,204,000 or $.81 per
share. Consolidated net sales for the fiscal year ended June 30, 1996 were
$71,987,000 with an operating income of $4,000 and net loss of $745,000 or $.20
per share.
Consolidated net sales increased $3,514,000 or 5% for the fiscal year ended June
30, 1997. North American net sales decreased 2% from the prior fiscal year due
primarily to prior year fourth quarter divestitures of unprofitable
businesses/divisions, lower U.S. consumer convenience product retail sales
resulting from less new product promotions and lower U.S. direct response
television sales resulting from fewer promotions. This decrease in U.S. sales
more than offset a current year increase in sales derived from the Company's new
U.S. media buying and infomercial company. European sales increased from the
prior fiscal year due mainly to stronger German and United Kingdom sales in the
current year. Foreign currency conditions were less favorable than in the
comparable prior year period and caused sales to be $1,250,000 lower for the
year ended June 30, 1997, than they would have been had exchange rates remained
consistent with the prior year.
Consolidated cost of goods sold for the year ended June 30, 1997 were 55% of
sales compared to 54% for the prior year ended. North American cost of goods
sold, as a percentage of sales, were 61% compared to 57% for the prior year
comparable period due primarily to the start up of a U.S. media buying and
infomercial business which generated mainly media buying revenue in fiscal 1997
(media buying revenues carry small margins consisting only of media buying fees
charged to third parties), and to slightly higher cost of goods sold in the U.S.
retail music business. European cost of goods sold as a percent of net sales
were 45% compared to 47% in the prior year period due mainly to overall higher
music and consumer product margins resulting from a stronger margin product mix
in the current period.
Advertising costs as a percentage of net sales for the fiscal year ended June
30, 1997, were 15% compared to 17% for the previous year. North American
advertising costs as a percent of net sales were 12% compared to 15% for the
prior year comparable period due to higher prior year levels of direct response
television advertising in the U.S.. This decrease more than offset an increase
in U.S. retail music current year advertising expenditures. Direct response
sales carry higher advertising requirements than normal retail sales. European
advertising costs as a percentage of net sales for the year ended June 30, 1997,
were the same as the prior year.
Selling, general and administrative expenses for the fiscal year ended June 30,
1997, were $19,012,000 or 25% of net sales compared to $20,798,000 or 29% of net
sales in the prior fiscal year. North American selling, general and
administrative expenses were down $1,114,000 for the year ended June 30, 1997,
due mainly to the second quarter settlement of a long outstanding legal dispute
with a United Kingdom entertainment company regarding infringement of a number
of the Company's owned music master recordings. The settlement resulted in a
second quarter net benefit (recovery of legal expenses) to the Company of
$850,000. European selling, general and administrative expenses for the year
ended June 30, 1997, were lower as a percent of sales compared to the prior year
due mainly to better overall European sales performance in the current fiscal
year.
The Company generated operating income of $3,582,000 for the year ended June 30,
1997, compared to operating income of $4,000 for the fiscal year ended June 30,
1996. North American operating income increased from the prior year mainly due
to the positive profit impact from the above mentioned settlement with a U.K.
entertainment company regarding infringement of a number of the Company's owned
music master recordings, stronger profit from third party licensing of the
Company's owned music master catalog and lower current year losses from the U.S.
consumer convenience product business. These increases more than offset
decreases in operating income in the Company's U.S. retail music business
resulting mainly from slightly higher cost of goods sold, higher current year
advertising expenditures and increased selling, general and administrative
expenses from the prior year in anticipation of future sales growth. European
operating income improved over fiscal 1996 due mainly to strong current year
profit in the Company's German operation versus a minor prior year profit and
current profit from the Company's United Kingdom operation compared to prior
year comparable period loss as a result of restructuring those operations.
Interest expense decreased to $122,000 for the fiscal year ended June 30, 1997,
compared to $409,000 for the fiscal year ended June 30, 1996. The decrease in
interest expense is due to less current year usage of the Company's asset based
line of credit.
<PAGE>
During the year ended June 30, 1997, the Company experienced a foreign currency
transaction loss of $162,000 compared to a loss of $119,000 in the previous
year. For the year ended June 30, 1997, foreign exchange rate fluctuations have
been less favorable to the Company than in the previous fiscal year. The Company
has in the past, reduced its foreign currency exchange exposure by hedging some
of that 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 $218,000 for the year ended June 30, 1997,
compared to $351,000 for the fiscal year ended June 30, 1996. 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 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 fiscal year ended June
30, 1995, 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 had also shown an increase over the 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. Those 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). 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 fiscal year ended June 30, 1995. 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 which supported certain 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 required 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 fiscal year
ended June 30, 1996 than in the prior 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 fiscal year ended June 30, 1995. 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
sales growth and planned future sales growth of retail sales in both
entertainment and consumer convenience product lines. European selling, general
and administrative
<PAGE>
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 increase in
selling, general and administrative expenses from the prior 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 which were 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 fiscal year ended June 30, 1996 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 was $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 was due to the Company's usage of the asset based line of credit in the
fiscal year ended June 30, 1996.
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 prior year.
For the year ended June 30, 1996, foreign exchange rate fluctuations were less
favorable to the Company than in the prior fiscal year. The Company had 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.
Liquidity and Capital Resources
During the fiscal year ended June 30, 1997, cash and cash equivalents increased
approximately $600,000 to $3,855,000. The overall increase in cash was primarily
due to net income for the period, the proceeds from a loan from an affiliate
owned and operated by the Chairman of the Board (as discussed below) and
decreases in inventory due to a reduction of inventory in the consumer
convenience products company. Offsetting some of the cash increase were
increases in accounts receivable driven by strong fourth quarter sales (mainly
due to the strong sales growth in the new U.S. media buying and infomercial
company), increases in prepaid expenses driven mainly by the purchase of video
production rights for the Company's new U.S. video division, by purchases of
property and equipment (mainly fixed asset increases for information systems in
support of old and new businesses) and repayment of the line of credit.
During fiscal year ended June 30, 1997, the Company purchased approximately
$381,000 of consumer convenience product from an affiliate controlled by Philip
Kives, the Company's Chairman and Chief Executive Officer. The Company had an
outstanding payable to the affiliate at June 30, 1997, of $255,000. This same
affiliate purchased approximately $229,000 of consumer convenience product from
the Company during the fiscal year ended June 30, 1997 and had an outstanding
payable to the Company at June 30, 1997, of $83,000. Outstanding balances are
settled on a timely basis. No interest was charged on the related outstanding
balances during fiscal 1997.
<PAGE>
At June 30, 1997, the affiliate controlled by the Chairman of the Board had
provided $1,500,000 in short term working capital financing to the Company to
fund the Company's U.S. operations. The Company pays interest on the unpaid
principal amount of financing at the same rate as the Company pays on its
revolving credit agreement, until repayment of the loan, which is due on demand.
The Company's United States subsidiaries, K-tel International (USA), Inc., and
Dominion Entertainment, Inc., K-tel Productions, Inc., K-tel Video, Inc., K-tel
Direct, Inc., K-tel TV, Inc., and K-tel Consumer Products, Inc. (the
"Subsidiaries") had a revolving credit agreement maturing August 31, 1997. The
agreement provided for an asset based line of credit not to exceed $1,000,000 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 two percent (10.5%
at June 30, 1997). The amount outstanding under these lines of credit was
$836,000 at June 30, 1997 and the maximum additional available under the
borrowing base limitations at June 30, 1996 was $100,855. During 1997 and 1996,
average borrowings under the lines of credit were approximately $167,000 and
$3,478,000, and the weighted average interest rate was 10.25% and 10.1%. The
maximum amount outstanding under the lines of credit was $836,000 during fiscal
1997 and $4,995,000 during fiscal 1996.
The Subsidiaries are required to maintain minimum levels of tangible net worth
and certain other financial ratios. As of June 30, 1997, the Subsidiaries were
in compliance or have obtained waivers for these covenants.
Subsequent to August 31, 1997, the lines of credit were renegotiated to extend
the maturity date to December 31, 1997, and increase the borrowing capacity to
$2,500,000 in total, subject to 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 two
percent.
Management considers its cash needs for fiscal year 1998 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. 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.
<PAGE>
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.
<PAGE>
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,
1997.
(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
10.5 K-tel International (USA), Inc. Security incorporated herein by reference to Exhibit 10.5 of
Agreement the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.6 Dominion Entertainment, Inc. 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 International (USA), Inc. Copyright incorporated herein by reference to Exhibit 10.7 of
Security Agreement the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.8 Dominion Entertainment, Inc. Copyright Security incorporated herein by reference to Exhibit 10.8 of
Agreement 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
10.13 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
10.16 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 International (USA), Inc. 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 Entertainment, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
<PAGE>
Exhibit Item
- ------- ----
10.19 Amended to K-tel International (USA), Inc. incorporated herein by reference to Exhibit 10.19 of
Copyright Security Agreement the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.20 Amendment to Dominion Entertainment, Inc. incorporated herein by reference to Exhibit 10.20 of
Copyright Security 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 International (USA), Inc. 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 Entertainment, Inc. 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
10.29 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
10.32 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
10.44 Employment Agreement - David Weiner incorporated herein by reference to Exhibit 10.44 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996
10.45 Non-Qualified Stock Option Agreement - incorporated herein by reference to Exhibit 10.45 of
David Weiner the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997
10.46 Restated Revolving Credit Agreement dated April incorporated herein by reference to Exhibit 10.46 of
10, 1997 - K-tel International (USA), Inc., the Registrant's Quarterly Report on Form 10-Q for
Dominion Entertainment, Inc. and TCF National the quarter ended March 31, 1997
Bank Minnesota
10.47 Non-Qualified Stock Option Agreement - incorporated herein by reference to Exhibit 10.47 of
Philip Kives the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997
<PAGE>
Exhibit Item
- ------- ----
10.48 First Amendment to Amended and Restated attached to this report as Exhibit 10.48
Revolving Credit Agreement and to Revolving
Note - K-tel International (USA), Inc.,
Dominion Entertainment, Inc. and TCF National
Bank Minnesota
10.49 Second Amendment to Amended and Restated attached to this report as Exhibit 10.49
Revolving Credit Agreement and to Revolving
Note - K-tel International (USA), Inc.,
Dominion Entertainment, Inc. and TCF National
Bank Minnesota
10.50 First Replacement Revolving Note - K-tel attached to this report as Exhibit 10.50
International (USA), Inc., Dominion
Entertainment, Inc. and TCF National Bank
Minnesota
10.51 First Amendment to Guaranty - K-tel attached to this report as Exhibit 10.51
International, Inc.
10.52 1997 Stock Option Plan attached to this report as Exhibit 10.52
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>
<PAGE>
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 10, 1997 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 October 10, 1997
- ----------------------------------------- (Principal Executive Officer) and Director
Philip Kives
/S/ David Weiner President, Secretary and Director October 10, 1997
- -----------------------------------------
David Weiner
/S/ Mark Dixon Vice President-Finance, Director, October 10, 1997
- ----------------------------------------- Chief Financial Officer and Treasurer
Mark Dixon (Principal Accounting Officer)
/S/ Jeffrey Koblick Senior Vice President, Purchasing and October 10, 1997
- ----------------------------------------- Operations and Director
Jeffrey Koblick
/S/ Garry Kieves Director October 10, 1997
- -----------------------------------------
Garry Kieves
/S/ Louis Scheimer Director October 10, 1997
- -----------------------------------------
Louis Scheimer
</TABLE>
<PAGE>
(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 each of the
three years ended June 30, 1997.......................................... 20
Consolidated Balance Sheets as of June 30, 1997 and 1996.................. 21
Consolidated Statements of Shareholders' Investment
for each of the three years ended June 30, 1997........................... 22
Consolidated Statements of Cash Flows for each of the
three years ended June 30, 1997........................................... 23
Notes to Consolidated Financial Statements................................ 24-32
Supplemental Schedule to Consolidated Financial Statements:
Schedule II - Valuation and Qualifying Accounts for each of the
three years ended June 30, 1997....................................... 33
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.
<PAGE>
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,
1997 and 1996, and the related consolidated statements of operations,
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, 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 8, 1997
<PAGE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS - EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET SALES $ 75,501 $ 71,987 $ 65,917
-------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold 41,387 38,665 35,660
Advertising 11,520 12,520 11,601
Selling, general & administrative 19,012 20,798 20,192
Restructuring/closedown charges (Note 7) -- -- 652
-------- -------- --------
Total Costs and Expenses 71,919 71,983 68,105
-------- -------- --------
OPERATING INCOME (LOSS) 3,582 4 (2,188)
-------- -------- --------
NON-OPERATING INCOME (EXPENSE):
Interest income 124 130 120
Interest expense (122) (409) (220)
Foreign currency transaction gain (loss) (162) (119) 180
-------- -------- --------
Total Non-operating Income (Expense) (160) (398) 80
-------- -------- --------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 3,422 (394) (2,108)
PROVISION FOR INCOME TAXES (Note 4) 218 351 375
-------- -------- --------
NET INCOME (LOSS) $ 3,204 $ (745) $ (2,483)
======== ======== ========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.81 $ (.20) $ (.67)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 3,962 3,729 3,711
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
(IN THOUSANDS - EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- --------------------------------------------------------- -------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,855 $ 3,255
Accounts receivable, less allowances of $952 and $1,035 16,667 15,028
Inventories 4,287 5,808
Royalty advances 1,552 1,188
Prepaid expenses and other 2,073 734
-------- --------
Total Current Assets 28,434 26,013
-------- --------
Property and Equipment 3,154 2,759
Less-Accumulated Depreciation and Amortization (2,172) (1,966)
-------- --------
Property and Equipment, Net 982 793
Other Assets 1,076 989
-------- --------
$ 30,492 $ 27,795
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ---------------------------------------------------------
Current Liabilities:
Line of credit $ 836 $ 1,864
Note payable to affiliate 1,500 --
Accounts payable 3,708 4,112
Accrued royalties 11,296 10,866
Reserve for returns 4,930 6,817
Other current liabilities 3,572 2,328
Income taxes payable 70 244
-------- --------
Total Current Liabilities 25,912 26,231
-------- --------
Commitments and Contingencies (Note 2 and 6)
Shareholders' Investment:
Common stock - 7,500,000 shares authorized;
par value $.01; 3,783,784 and 3,742,072
issued and outstanding 37 37
Additional Paid In Capital 7,969 7,870
Accumulated Deficit (2,462) (5,666)
Cumulative translation adjustment (964) (677)
-------- --------
Total Shareholders' Investment 4,580 1,564
-------- --------
$ 30,492 $ 27,795
======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
<PAGE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Cumulative
-------------------------- Contributed Accumulated Translation
Shares Amount Capital Deficit Adjustment
----------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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)
Net income -- -- -- 3,204 --
Proceeds from exercise of stock options 42 -- 99 -- --
Translation adjustment -- -- -- -- (287)
----------- ---------- ------------- ----------- ------------
Balance, June 30, 1997 3,784 $ 37 $ 7,969 $ (2,462) $ (964)
=========== ========== ============= =========== ============
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 3,204 $ (745) $ (2,483)
Adjustments to reconcile net income to cash
used for operating activities:
Depreciation and amortization 630 805 567
Restructuring/closedown charges -- -- 652
Changes in current operating items:
Restricted cash -- 536 1,612
Accounts receivable (1,927) (3,216) (309)
Inventories 1,461 1,458 (1,915)
Royalty advances (347) 966 (1,250)
Prepaid expenses (1,441) 1,395 (835)
Accounts payable and other liabilities (411) 1,110 1,250
Income tax refund receivable 86 437 (101)
Income taxes payable (176) (125) 288
------- -------- --------
Cash provided by (used for) operating activities 1,079 2,621 (2,524)
------- -------- --------
Investing Activities:
Property and equipment purchases (740) (240) (639)
Proceeds from sale of property and equipment 141 215 116
Music catalog additions (200) (781) (444)
Other (114) (42) (22)
------- -------- --------
Cash used for investing activities (913) (848) (989)
------- -------- --------
Financing Activities:
Borrowings on line of credit 5,533 33,493 30,265
Repayments on line of credit (6,561) (34,145) (27,749)
Borrowings(repayment)on note payable to affiliate 1,500 -- (1,000)
Proceeds from exercise of stock options 99 54 15
------- -------- --------
Cash provided by (used for) financing activities 571 (598) 1,531
Effect of Exchange Rate Changes on Cash and Cash Equivalents (137) (74) (35)
------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 600 1,101 (2,017)
Cash and Cash Equivalents at Beginning of Year 3,255 2,154 4,171
------- -------- --------
Cash and Cash Equivalents at End of Year $ 3,855 $ 3,255 $ 2,154
======= ======== ========
Supplemental Cash Flow Information
Cash Paid For -
Interest $ 67 $ 220 $ 174
======= ======== ========
Income Taxes $ 268 $ 494 $ 425
======= ======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
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 and during fiscal 1997, the Company
formed a new U.S. media buying and infomercial subsidiary. This company
performs media buying services for third parties for a fee and also markets
products through infomercials. The Company has operations in North America
and Europe. The Company primarily sells its products through retail stores
and by direct response marketing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
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.
<PAGE>
One United States customer represented 12% and 11% of the Company's
consolidated net sales for the years ended June 30, 1996 and 1995,
respectively. No customer represented greater than 10% of net sales for the
year ended June 30, 1997.
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.
There was no restricted cash balances at June 30, 1997 and June 30, 1996.
Inventories
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, or net realizable value. The cost of finished goods
includes all direct product costs.
Rights to Use Music Product
Certain of the Company's compilation products are master recordings under
license from record companies and publishers. In most instances, minimum
guarantees or non-returnable advances are required to obtain the licenses
and are realized through future sales of the product. 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 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 settlement
amount has not been determined as of June 30, 1997. A reserve is recorded
for management's estimate of the ultimate resolution of this matter. The
amount the Company will ultimately pay could differ materially from the
amounts currently recorded.
In 1993, Dominion Entertainment, Inc. and K-tel Entertainment (U.K.), Ltd.
filed a lawsuit against a United Kingdom entertainment company regarding
infringement on a number of the Company's owned music master copyrights.
During December, 1996, the Company settled the lawsuit for $950,000,
consisting of a reimbursement of legal costs (which produced an $850,000 net
income benefit) to the Company which is recorded as a reduction of selling,
general and administrative expenses in the accompanying statement of
operations for the period ended June 30, 1997. The Company also entered into
a license agreement with the United Kingdom company which included an
advance of future royalties of approximately $650,000 which has been
recorded as deferred income in the accompanying balance sheet as of June 30,
1997.
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 less accumulated depreciation 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.
<PAGE>
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.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. 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
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share", which requires the disclosure of basic earnings per share and
diluted earnings per share. The Company expects to adopt SFAS No. 128 in
fiscal 1998 and anticipates it will not have a material impact on previously
reported earnings per share.
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information", which
requires a disclosure of business segments in the financial statements of
the Company. The Company expects to adopt SFAS No. 131 in fiscal 1999 and
anticipates a change in segment disclosure at the time of adoption.
3. LINE OF CREDIT
The Company's United States subsidiaries, K-tel International (USA), Inc.,
and Dominion Entertainment, Inc., K-tel Productions, Inc., K-tel Video,
Inc., K-tel Direct, Inc., K-tel TV, Inc., and K-tel Consumer Products, Inc.
(the "Subsidiaries") had a revolving credit agreement maturing August 31,
1997. The agreement provided for an asset based line of credit not to exceed
$1,000,000 in total, with availability based on a monthly borrowing base
derived from the Subsidiaries' accounts receivable and inventory. Borrowings
were collateralized by the assets of the Subsidiaries, including accounts
receivable, inventories, equipment and Dominion Entertainment, Inc.'s owned
music master recordings. The Company had guaranteed all borrowings of the
Subsidiaries. Interest on borrowings was accrued and due monthly at a rate
of prime plus two percent (10.5% at June 30, 1997). The amount outstanding
under this line of credit was $835,900 at June 30, 1997 and the maximum
<PAGE>
additional available under the borrowing base limitations at June 30, 1997
was $100,800. During 1997 and 1996, average borrowing under the line of
credit was approximately $167,000 and $3,478,000, and the weighted average
interest rate was 10.25% and 10.1%. The maximum amount outstanding under the
line of credit was $835,900 during fiscal 1997 and $4,995,000 during fiscal
1996.
The Subsidiaries are required to maintain minimum levels of tangible net
worth and certain other financial ratios. As of June 30, 1997, the
Subsidiaries were in compliance with or had obtained waivers for these
covenants.
Subsequent to August 31, 1997, the lines of credit were renegotiated to
extend the maturity date to December 31, 1997 and increase the borrowing
capacity to $2,500,000 in total, subject to availability based on a monthly
borrowing base derived from the Subsidiaries' accounts receivable and
inventory.
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>
1997 1996 1995
------ ----- -------
<S> <C> <C> <C>
Income (loss) before provision (benefit) for income taxes:
United States $1,694 $ 141 $ 1,564
Foreign 1,728 (535) (3,672)
------ ----- -------
Total $3,422 $(394) $(2,108)
====== ===== =======
Provision (benefit) for income taxes:
Currently payable
United States $ 111 $ 210 $ 226
Foreign 107 141 149
------ ----- -------
Total currently payable (receivable) and
total provision (benefit) for income taxes $ 218 $ 351 $ 375
====== ===== =======
</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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate 34% (34)% (34)%
State Taxes, net of federal benefit 1% 26% 5%
Change in valuation allowance (29)% 99% 50%
Effect of different tax rates on foreign earnings -- (2)% (3)%
-------- -------- --------
6% 89% 18%
======== ======== ========
</TABLE>
<PAGE>
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):
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 1,116 $ 7,595
Alternative minimum tax credits 411 465
Reserve for returns 1,419 2,065
Depreciation and amortization 136 79
Royalty reserves 964 573
Inventory reserves 943 1,204
Nondeductible accruals 647 357
Allowance for bad debts 284 310
Valuation allowance (5,920) (12,648)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
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 $3,100,000 as of June 30, 1997.
<PAGE>
5. STOCK OPTIONS
Stock Incentive Plan
The Company's 1987 Stock Incentive Plan for officers and other key employees
of the Company covers a maximum of 350,000 shares of common stock. Under the
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.
In February 1997, the Company's Board of Directors approved a new stock
option plan covering a maximum of 300,000 shares of common stock. There had
been no shares granted as of June 30, 1997.
The Stock Incentive Plan share information is summarized below:
Incentive Non-qualified
Stock Options Stock Options
------------- -------------
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
Granted 41,500 --
Exercised - at prices ranging from
$1.50 - $6.75 per share (23,587) (18,125)
Forfeited (6,025) (3,000)
------------- -------------
Outstanding June 30, 1997 120,638 22,000
============= =============
Options Exercisable 92,738 22,000
Exercise Price $1.50 - $8.50 $1.50 - $6.75
<PAGE>
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 share information is summarized below:
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 per share --
Forfeited (145,000)
--------------
Outstanding June 30, 1996 27,500
Granted 430,000
Exercised - at prices ranging from --
$3.75 - $9.25 per share
Forfeited (15,000)
--------------
Outstanding June 30, 1997 442,500
==============
Options Exercisable 320,000
Exercise Price $3.75 - $9.25
<PAGE>
Pro forma Option Information
Effective June 30, 1997, the Company adopted SFAS No. 123. "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the Company has
elected to continue to account for its stock option plans under the
provisions of APB Opinion No. 25, under which no compensation costs have
been recognized. Had compensation costs for these plans been recorded at
fair value consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been as follows:
1997 1996
-------- --------
Net income (in thousands):
As reported $ 3,204 $ (745)
Pro forma $ 2,757 $ (745)
Primary EPS:
As reported $ .81 $ (.20)
Pro forma $ .70 $ (.20)
Fully Diluted EPS:
As reported $ .81 $ (.20)
Pro forma $ .70 $ (.20)
The weighted average fair values of options granted in fiscal 1997 was $2.20
and no options were granted in fiscal 1996.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used to
estimate the fair value of options:
1997
-------
Risk-free interest rate 6.3%
Expected life 5 years
Expected volatility 50%-57%
Expected dividend yield None
Because the measurement provisions of SFAS No. 123 have not been applied to
options granted prior to June 30, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
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.
On March 3, 1997, the Company entered into the Purchase and Sale Agreement
(the "Sale Agreement") with Platinum Entertainment, Inc. ("Platinum").
Pursuant to the Sale Agreement and subject to certain conditions, including
Platinum's receipt of sufficient financing to close the transaction under
the Sale Agreement, Platinum agreed to purchase two domestic subsidiaries of
the Company which operated its music business outside of Europe for $35
million subject to certain adjustments. On March 3, 1997, the Company and
Platinum also entered into an earnest money escrow agreement (the "Escrow
Agreement") with a third party bank and Platinum deposited $1.75 million in
escrow. The Sale Agreement provided that the $1.75 million escrow deposit is
paid to the Company in the event the transaction contemplated by the Sale
Agreement is not consummated, subject to certain conditions.
Under the Sale Agreement, the Company had the right to terminate the Sale
Agreement if the sale was not consummated by August 30, 1997. On September
10, 1997, the Company's Board of Directors concluded that it would be in the
best interests of the Company to terminate the Sale Agreement and the
Company gave notice of termination to Platinum. On September 10, 1997,
Platinum also gave the Company notice of termination claiming that the
Company was in breach of its representations and covenants under the Sale
Agreement. The Company disputes these allegations by Platinum.
On September 12, 1997, the Company initiated legal action in Minnesota state
court seeking an order directing the escrow bank to disburse the funds held
under the Escrow Agreement to the Company. On October 2, 1997, the Company
amended its complaint to assert additional claims against Platinum,
including breaches by Platinum of its confidentiality covenant and employee
non-solicitation agreement as well as detrimental reliance damages. Platinum
has not yet answered the Company's complaint, but Platinum has removed the
action to federal court in Minnesota and initiated a declaratory judgment
action in Illinois federal court on October 3, 1997. In the Illinois action,
Platinum asserted that it terminated the Sale Agreement due to the Company's
breach of representations and covenants and claimed that Platinum is
entitled to the escrow funds and damages of $1.75 million from the Company.
The Company intends to vigorously pursue recovery of the escrow deposit and
contest any claims which Platinum may assert.
Leases
The Company has entered into several office and warehouse leases which
expire through 2002. Commitments under these leases are $568,000 in 1998,
$400,000 in 1999, $258,000 in 2000, $206,000 in 2001 and $163,000 in 2002.
Rental expense was $938,000 in 1997, $974,000 in 1996 and $855,000 in 1995.
<PAGE>
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 focused 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.
The components of the 1995 restructuring/closedown charges were as follow
(in thousands):
1995
------------
Inventory write down costs $ 79
Employee termination costs 264
Property write downs 8
Cumulative translation adjustment 251
Other 50
------------
Total $ 652
============
Sixteen employees consisting primarily of sales, administrative, and
distribution employees were terminated during fiscal 1995.
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.
<PAGE>
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):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
North America $ 48,952 $ 48,953 $ 38,228
Europe 27,715 23,382 29,338
Transfers between geographic areas (1,166) (348) (1,649)
-------- -------- --------
Net Sales $ 75,501 $ 71,987 $ 65,917
======== ======== ========
Operating Income (Loss):
North America $ 2,672 $ 1,997 $ 1,803
Europe 2,343 (38) (2,673)
Operating Income before General
Corporate Expenses, net 5,015 1,959 (870)
General Corporate Expenses, net (1,433) (1,955) (1,318)
-------- -------- --------
Operating Income (Loss) $ 3,582 $ 4 $ (2,188)
======== ======== ========
Identifiable Assets:
North America $ 22,781 $ 20,282 $ 18,816
Europe 7,711 7,513 9,821
-------- -------- --------
Identifiable Assets $ 30,492 $ 27,795 $ 28,637
======== ======== ========
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company sold approximately $229,000 in fiscal 1997, $217,000 in fiscal
1996 and $228,000 in fiscal 1995, of consumer convenience product to an
affiliate controlled by the Company's Chairman of the Board. There was a
balance receivable from the affiliate at June 30, 1997 of $83,000, while
there was no receivable balance owed to the Company at June 30, 1996.
The Company purchased $381,000 in fiscal 1997, $1,050,000 in fiscal 1996 and
$354,000 in fiscal 1995 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 $1,000 during 1997, $4,000 during 1996 and $3,000 during 1995.
There was a payable balance at June 30, 1997 of $255,000, no balance payable
at June 30, 1996 and the amount owed at June 30, 1995, was $175,000.
At June 30, 1997, the affiliate controlled by the Chairman of the Board had
provided $1,500,000 in short term working capital financing to the Company
to fund the Company's U.S. operations. The Company pays interest on the
unpaid principal amount of financing, at the same rate as the Company pays
on its revolving credit agreement, until repayment of the loan which is due
on demand.
<PAGE>
SCHEDULE II
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
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>
1997 $ 1,035 $ 533 $ (29) (1) $ (587) (2) $ 952
1996 $ 771 $ 694 $ (15) (1) $ (415) (2) $ 1,035
1995 $ 489 $ 370 $ 18 (1) $ (106) (2) $ 771
Reserve for
Returns
- ------------------
1997 $ 6,817 $ 10,096 $ (24) (1) $ (11,959) $ 4,930
1996 $ 6,802 $ 10,485 $ (18) (1) $ (10,452) $ 6,817
1995 $ 6,412 $ 9,480 $ 42 (1) $ (9,132) $ 6,802
</TABLE>
(1) Exchange rate change
(2) Uncollectible accounts written off, net of recoveries
EXHIBIT 10.48
EXHIBIT A TO
OFFER TO LEND
FIRST AMENDMENT TO AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
AND TO REVOLVING NOTE
This First Amendment is made as of this ____ day of July,
1997, 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 PRODUCTIONS, INC.,
a Minnesota corporation, having its principal place of business in Plymouth,
Minnesota ("K-Tel Productions"), K-TEL VIDEO, INC., a Minnesota corporation,
having its principal place of business in Plymouth, Minnesota ("K-Tel Video"),
K-TEL DIRECT, INC., a Minnesota corporation, having its principal place of
business in Plymouth, Minnesota ("K-Tel Direct"), K-TEL TV, INC., a Minnesota
corporation, having its principal place of business in Plymouth, Minnesota
("K-Tel TV"), K-TEL CONSUMER PRODUCTS, INC., a Minnesota corporation, having its
principal place of business in Plymouth, Minnesota ("K-Tel Consumer Products";
K-Tel USA, Dominion, K-Tel Productions, K-Tel Video, K-Tel Direct, K-Tel TV and
K-Tel Consumer Products are sometimes herein collectively referred to as the
"Borrowers" and each is sometimes individually referred to as a "Borrower"), and
TCF NATIONAL BANK MINNESOTA, a national banking association, formerly known and
organized as TCF Bank Minnesota fsb, a federally chartered stock savings bank
(the "Bank").
RECITALS
A. The Borrowers and the Bank have entered into an Amended and
Restated Revolving Credit Agreement dated as of April 10, 1997 (as may be
amended from time to time, 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 $1,000,000.
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 April 10, 1997, payable to the Bank's order
in the original principal amount of $1,000,000 (the "Note").
<PAGE>
C. The Borrowers have requested, among other things, that the
Bank (i) extend the Maturity Date from July 31, 1997 to August 31, 1997 and (ii)
waive certain Events of Default.
D. 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 First 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's accounts receivable from and advances
due from K-Tel Video exceeded the aggregate limit of $250,000 permitted by the
Credit Agreement, (ii) K-Tel USA's accounts receivable from and advances due
from K-Tel TV exceeded the aggregate limit of $250,000 permitted by the Credit
Agreement, (iii) K-Tel USA's accounts receivable from and advances due from
K-Tel Consumer Products exceeded the aggregate limit of $1,523,000 permitted by
the Credit Agreement, (iv) K-Tel USA's accounts receivable from and advances due
from Dominion Vertriebs exceeded the aggregate limit of $41,000 permitted by the
Credit Agreement, (v) K-Tel USA's accounts receivable from and advances due from
K-Tel International Limited exceeded the aggregate limit of $24,000 permitted by
the Credit Agreement. Upon the terms and subject to the conditions set forth in
this First Amendment, the Bank hereby waives the foregoing Events of Default and
the Bank hereby prospectively waives future Events of Default arising from the
Borrowers failure to comply with the requirements of Sections 6.2 and 6.4 of the
Credit Agreement through August 31, 1997. 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. Section 1.1 of the Credit Agreement is hereby amended by
deleting the existing definitions of "Commitment Termination Date" and "Maturity
Date" and by substituting therefor the following new definitions:
"'Commitment Termination Date' means August 31, 1997 or the
earlier termination of the Commitment pursuant to Section 7.2 hereof."
"'Maturity Date' means August 31, 1997."
4. Section 1.1 of the Credit Agreement is hereby amended by
adding the following new definition of "First Amendment" in the appropriate
alphabetical location:
<PAGE>
"'First Amendment' means that certain First Amendment to
Amended and Restated Revolving Credit Agreement dated as of July __,
1997, between the Bank and the Borrowers."
5. The Note is hereby amended by deleting the date "July 31,
1997" as it appears in the twelfth line of the first paragraph thereof and by
substituting therefor the date "August 31, 1997".
6. References. From and after the date of this First Amendment
all references in the Credit Agreement to "this Agreement" and all references in
the other Loan Documents to the Credit Agreement shall be deemed to refer to the
Credit Agreement as amended by this First Amendment. From and after the date of
this First Amendment all references in the Note to "this Note" and all
references in the other Loan Documents to "the Note" shall be deemed to refer to
the Credit Agreement as amended by this First Amendment.
7. No Other Changes. Except as explicitly amended by this
First Amendment, all of the original terms and conditions of the Credit
Agreement and the Note shall remain in full force and effect.
8. No Other Waiver. Except as explicitly set forth in
paragraph 2 of this First Amendment, the execution of this First Amendment and
acceptance of any documents related thereto shall not be deemed to be a waiver
of any existing or future 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 First Amendment.
9. 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
First Amendment, whether such claims, demands and causes of action are matured
or unmatured or known or unknown.
10. 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
<PAGE>
services performed by such counsel in connection with the preparation of this
First Amendment and the documents and instruments incidental thereto.
11. Counterparts. This First 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 First
Amendment to be duly executed as of the date first above written.
K-TEL INTERNATIONAL (USA), INC.
By ______________________________________
Its___________________________________
DOMINION ENTERTAINMENT, INC.
By ______________________________________
Its___________________________________
K-TEL PRODUCTIONS, INC.
By ______________________________________
Its___________________________________
K-TEL VIDEO, INC.
By ______________________________________
Its___________________________________
<PAGE>
K-TEL DIRECT, INC.
By ______________________________________
Its___________________________________
K-TEL TV, INC.
By ______________________________________
Its___________________________________
K-TEL CONSUMER PRODUCTS, INC.
By ______________________________________
Its___________________________________
TCF NATIONAL BANK MINNESOTA
By ______________________________________
Its___________________________________
And
By ______________________________________
Its___________________________________
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR
The undersigned, K-Tel International, Inc., a guarantor of the
indebtedness of K-Tel International (USA), Inc., Dominion Entertainment, Inc.,
K-Tel Productions, Inc., K-Tel Video, Inc., K-Tel Direct, Inc., K-Tel TV, Inc.
and K-Tel Consumer Products, Inc. (together, the "Borrowers") to the Bank
pursuant to its Amended and Restated Guaranty dated as of April 10, 1997 (the
"Guaranty), hereby (i) acknowledges receipt of the foregoing First Amendment;
(ii) consents to the terms (including without limitation the release set forth
in paragraph 9 of the foregoing First 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 April 10, 1997 and its Amended and Restated Security Agreement dated as of
April 10, 1997 (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 ______________________________________
Its
EXHIBIT 10.49
SECOND AMENDMENT TO AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
This Second Amendment is made as of this ____ day of
September, 1997, 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
PRODUCTIONS, INC., a Minnesota corporation, having its principal place of
business in Plymouth, Minnesota ("K-Tel Productions"), K-TEL VIDEO, INC., a
Minnesota corporation, having its principal place of business in Plymouth,
Minnesota ("K-Tel Video"), K-TEL DIRECT, INC., a Minnesota corporation, having
its principal place of business in Plymouth, Minnesota ("K-Tel Direct"), K-TEL
TV, INC., a Minnesota corporation, having its principal place of business in
Plymouth, Minnesota ("K-Tel TV"), K-TEL CONSUMER PRODUCTS, INC., a Minnesota
corporation, having its principal place of business in Plymouth, Minnesota
("K-Tel Consumer Products"; K-Tel USA, Dominion, K-Tel Productions, K-Tel Video,
K-Tel Direct, K-Tel TV and K-Tel Consumer Products are sometimes herein
collectively referred to as the "Borrowers" and each is sometimes individually
referred to as a "Borrower"), and TCF NATIONAL BANK MINNESOTA, a national
banking association, formerly known and organized as TCF Bank Minnesota fsb, a
federally chartered stock savings bank (the "Bank").
RECITALS
A. The Borrowers and the Bank have entered into an Amended and
Restated Revolving Credit Agreement dated as of April 10, 1997, as amended by a
First Amendment to Amended and Restated Revolving Credit Agreement and to
Revolving Note dated as of July 31, 1997 (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 $1,000,000.
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 April 10, 1997, payable to the Bank's order
in the original principal amount of $1,000,000 (the "Prior Note").
C. The Borrowers have requested, among other things, that the
Bank (i) extend the Commitment Termination Date and the Maturity Date from
August 31, 1997 to
<PAGE>
December 31, 1997, (ii) increase the Commitment Amount from $1,000,000 to
$2,500,000 and (iii) waive certain Events of Default on the part of the
Borrowers.
D. 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 Second 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 the required minimum Net
Income before Taxes through the date of this Second Amendment as required by
Section 5.9 of the Credit Agreement, and (ii) the Borrower was not in compliance
with the provisions of Sections 6.2 and 6.4 of the Credit Agreement through the
date of this Second Amendment. Upon the terms and subject to the conditions set
forth in this Second Amendment, the Bank hereby waives the foregoing Events of
Default. This waiver shall be effective only in the 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 circumstance.
3. Section 1.1 of the Credit Agreement is hereby amended by
deleting the existing definitions of "Commitment Amount," "Commitment
Termination Date" and "Maturity Date" and by substituting therefor the following
new definitions:
"'Commitment Amount' means $2,500,000."
"'Commitment Termination Date' means December 31, 1997 or the
earlier termination of the Commitment pursuant to Section 7.2 hereof."
"'Maturity Date' means December 31, 1997."
4. Section 1.1 of the Credit Agreement is hereby amended by
adding the following new definition of "Second Amendment" in the appropriate
alphabetical location:
"'Second Amendment' means that certain Second Amendment to
Amended and Restated Revolving Credit Agreement dated as of September
__, 1997, between the Bank and the Borrowers."
<PAGE>
5. Section 2.2 of the Credit Agreement is hereby amended to
read as follows:
"Section 2.2 The Advances. The Bank agrees, on the terms and
conditions herein set forth, to make Advances to K-Tel USA and Dominion
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, K-Tel USA and Dominion may borrow,
prepay pursuant to Section 2.8 and reborrow under this Section 2.2. The
Borrowers agree that the proceeds of all Advances made after the
effective date of the Second Amendment shall be made only to K-Tel USA
and Dominion (and not to the other Borrowers) and shall be used by
K-Tel USA and Dominion (and not by the other Borrowers) for the general
working capital purposes of K-Tel USA and Dominion. The Advances made
by the Bank shall be evidenced by a single promissory note of the
Borrowers, dated as of the date of the Second Amendment, payable to the
order of the Bank appropriately completed in substantially the form of
Exhibit A attached to the Second 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 shall bear interest in
accordance with Section 2.4 hereof and principal of and interest on the
Note shall be due and payable as provided in Section 2.6 hereof. The
Note has been issued in substitution for, and in replacement of, but
not in payment of, the Borrowers' Revolving Note dated April 10, 1997,
payable to the order of the Bank in the original principal amount of
$1,000,000, as amended."
6. Section 2.10 of the Credit Agreement is hereby amended to
read as follows:
"Section 2.10 Use of Loan Proceeds and Letters of Credit.
K-Tel USA and Dominion shall use the proceeds of each Advance only for
general working capital purposes of K-Tel USA and Dominion. K-Tel USA
and Dominion will use each Letter of Credit for its general corporate
purposes. Neither the proceeds of any Advances nor any Letter of Credit
shall be used by or for the benefit of any of the Borrowers (other than
K-Tel USA and Dominion) or any Affiliate of the Borrowers (other than
K-Tel USA or Dominion), except for existing documentary Letters of
Credit issued for the benefit of K-Tel Consumer Products and
documentary Letters of Credit issued after the date of the Second
Amendment for the benefit of K-Tel Consumer Products in the ordinary
course of business."
7. Section 5.8 of the Credit Agreement is hereby amended to
read as follows:
<PAGE>
"Section 5.8 Capital Base of K-Tel USA. K-Tel USA will
maintain at all times its Capital Base in an amount not less than
($100,000)."
8. Section 5.9 of the Credit Agreement is hereby amended to
read as follows:
"Section 5.9 Intentionally Omitted."
9. Article V of the Credit Agreement is hereby amended by
adding the following new Section 5.11:
"Section 5.11 Prohibition of Repayment of Indebtedness owing
to Philip Kives. The Borrowers covenant and agree that, so long as any
Advances shall be unpaid and/or the Bank's Commitment shall be
outstanding, none of the Loan Parties will repay any principal of any
indebtedness owing by the Loan Parties or any of them to Philip Kives
or to any entity controlled by Philip Kives. Nothing in this Section
5.11 shall be deemed to prohibit the payment of interest, when due, by
the Loan Parties to Philip Kives or to an entity controlled by Philip
Kives with respect to the outstanding principal indebtedness owed by
the Loan Parties or any of them to Philip Kives or to an entity
controlled by Philip Kives."
10. Article V of the Credit Agreement is hereby amended by
adding the following new Section 5.12:
"Section 5.12 Prohibition on Repurchase Stock of K-Tel
International. The Borrowers covenant and agree that, so long as any
Advance shall be unpaid and/or the Bank's Commitment shall be
outstanding, none of the Loan Parties shall repurchase any of the
issued and outstanding stock of K-Tel International."
11. Section 6.2 of the Credit Agreement is hereby amended to
read as follows:
"Section 6.2 Indebtedness of the Borrowers. None of the
Borrowers will incur, create, assume or permit to exist any
indebtedness for borrowed money, or any other indebtedness or
liability, including, without limitation, trade debt or other payables
or Capitalized Leases, except:
(a) Indebtedness of the Borrowers to the Bank.
(b) Indebtedness of the Borrowers in existence on the date of
the Second Amendment and listed in Schedule 6.2 attached to the Second
Amendment.
(c) Trade debt and other payables of the Borrowers incurred in
the ordinary course of business.
<PAGE>
(d) Indebtedness of K-Tel USA incurred in connection with
foreign exchange contracts which are entered into by K-Tel USA solely
for the purpose of protecting against exchange change rate
fluctuations.
(e) Accounts payable of Dominion to attorneys who have
represented Dominion in the ordinary course of Dominion's business.
(f) Royalties payable by Dominion or K-Tel USA in the ordinary
course of Dominion's or K-Tel USA's business.
(g) Commissions payable by Dominion or K-Tel USA incurred in
the ordinary course of Dominion's or K-Tel USA's business."
12. Section 6.4 of the Credit Agreement is hereby amended to
read as follows:
"Section 6.4 Investments of the Borrowers. None of the
Borrowers will purchase or hold beneficially any stock or other
securities or evidence of indebtedness of, make or permit to exist any
loans or 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 or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a maturity of
one year or less issued by members of the Federal Reserve System having
deposits in excess of $100,000,000.
(b) Travel advances to officers and employees of the Borrowers
in the ordinary course of business.
(c) Advances in the form of progress payments, prepaid rent or
security deposits.
(d) Investments of the Borrowers in existence on the date of
the Second Amendment and listed in Schedule 6.4 attached to the Second
Amendment."
13. Conditions Precedent. The effectiveness of this Second
Amendment shall be subject to the conditions precedent that the Bank shall have
received an executed original hereof, together with each of the following, each
in form and substance acceptable to the Bank:
<PAGE>
(a) The Note, duly executed on behalf of the Borrowers.
(b) The First Amendment to Amended and Restated Guaranty by
Corporation, duly executed on behalf of K-Tel International, in the
form attached hereto as Exhibit B.
(c) A certified copy of the resolutions of the Board of
Directors of each Loan Party evidencing approval of this Second
Amendment and the Note and other matters contemplated hereby, certified
by the Secretary or Assistant Secretary of each Loan Party 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 such Loan Party certifying the names and true
signatures of the officers of such Loan Party who are authorized to
sign this Second Amendment and the Note and the other documents to be
delivered by the Loan Parties hereunder.
(d) Acknowledgment of Borrowers, duly executed on behalf of
the Borrowers.
(e) Acknowledgment and Agreement of Guarantor attached below,
duly executed on behalf of K-Tel International.
(f) Form W-9, duly executed by the Borrowers.
(g) Payment to the Bank of a fee in the amount of $25,000.
(h) Such other items as the Bank may require.
14. References. From and after the date of this Second
Amendment all references in the Credit Agreement to "this Agreement" and all
references in the other Loan Documents to the Credit Agreement shall be deemed
to refer to the Credit Agreement as amended by this Second Amendment. From and
after the date of this Second Amendment all references in the Loan Documents to
"the Note" shall be deemed to refer to the Note issued to the Bank pursuant to
this Second Amendment.
15. No Other Changes. Except as explicitly amended by this
Second Amendment, all of the original terms and conditions of the Credit
Agreement and the other Loan Documents shall remain in full force and effect.
16. No Other Waiver. Except as explicitly set forth in
paragraph 2 of this Amendment, the execution of this Second Amendment and
acceptance of any documents related thereto shall not be deemed to be a waiver
of any existing or future Default or Event of Default under the Credit Agreement
or any other Loan Document, whether or not known
<PAGE>
to the Bank and whether or not such Default or Event of Default exists on the
date of this Second Amendment.
17. Release. The Borrowers and K-Tel International 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
Second Amendment, whether such claims, demands and causes of action are matured
or unmatured or known or unknown.
18. 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 Second Amendment and the documents
and instruments incidental thereto.
19. Counterparts. This Second 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the date first above written.
K-TEL INTERNATIONAL (USA), INC.
By ______________________________________
Its___________________________________
DOMINION ENTERTAINMENT, INC.
By ______________________________________
Its___________________________________
K-TEL PRODUCTIONS, INC.
By ______________________________________
Its___________________________________
K-TEL VIDEO, INC.
By ______________________________________
Its___________________________________
K-TEL DIRECT, INC.
By ______________________________________
Its___________________________________
<PAGE>
K-TEL TV, INC.
By ______________________________________
Its___________________________________
K-TEL CONSUMER PRODUCTS, INC.
By ______________________________________
Its___________________________________
TCF NATIONAL BANK MINNESOTA
By ______________________________________
Its___________________________________
And
By ______________________________________
Its___________________________________
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR
The undersigned, K-Tel International, Inc., a guarantor of the
indebtedness of K-Tel International (USA), Inc., Dominion Entertainment, Inc.,
K-Tel Productions, Inc., K-Tel Video, Inc., K-Tel Direct, Inc., K-Tel TV, Inc.
and K-Tel Consumer Products, Inc. (together, the "Borrowers") to the Bank
pursuant to its Amended and Restated Guaranty dated as of April 10, 1997, and as
amended by First Amendment to Amended and Restated Guaranty by Corporation of
even date herewith (as amended, the "Guaranty"), hereby (i) acknowledges receipt
of the foregoing Second Amendment; (ii) consents to the terms (including without
limitation the release set forth in paragraph 17 of the foregoing Second
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 April 10, 1997 and its
Amended and Restated Security Agreement dated as of April 10, 1997 (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 ______________________________________
Its___________________________________
<PAGE>
SCHEDULE 6.2
TO SECOND AMENDMENT TO
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
Schedule of Existing Permitted Indebtedness of Borrowers
1. Lease Agreement dated September 4, 1991 with Bell Atlantic TriCon
Leasing Corporation for certain equipment.
2. Payment Plan Equipment Schedule and Payment Agreement dated August 1,
1989 with Hewlett-Packard Company for certain equipment.
3. Payment Plan Equipment Schedule and Payment Agreement dated September
24, 1990 with Hewlett-Packard Company for certain equipment.
4. $125,000 owed to Simitar Entertainment, Inc. for purchase of certain
video production rights.
[BORROWER TO PREPARE CURRENT LIST OF ALL
INTERCOMPANY INDEBTEDNESS ACCEPTABLE TO TCF]
<PAGE>
SCHEDULE 6.4
TO SECOND AMENDMENT TO
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
Schedule of Existing Permitted Investments of Borrowers
[BORROWER TO PREPARE CURRENT LIST OF ALL
INTERCOMPANY INVESTMENTS ACCEPTABLE TO TCF]
EXHIBIT 10.50
REVOLVING NOTE
$2,500,000.00 September __, 1997
FOR VALUE RECEIVED, the undersigned, K-TEL INTERNATIONAL
(USA), INC., a Minnesota corporation ("K-Tel USA"), DOMINION ENTERTAINMENT,
INC., a Minnesota corporation ("Dominion"), K-TEL PRODUCTIONS, INC., a Minnesota
corporation ("K-Tel Productions"), K-TEL VIDEO, INC., a Minnesota corporation
("K-Tel Video"), K-TEL DIRECT, INC., a Minnesota corporation ("K-Tel Direct"),
K-TEL TV, INC., a Minnesota corporation ("K-Tel TV"), K-TEL CONSUMER PRODUCTS,
INC., a Minnesota corporation ("K-Tel Consumer Products"; collectively K-Tel
USA, Dominion, K-Tel Productions, K-Tel Video, K-Tel Direct, K-Tel TV and K-Tel
Consumer Products are called the "Borrowers"), hereby jointly and severally
promise to pay to the order of TCF NATIONAL BANK MINNESOTA, a national banking
association, formerly known and organized as TCF Bank Minnesota fsb, a federally
chartered stock savings bank (the "Bank"), on December 31, 1997, the principal
sum of Two Million Five Hundred Thousand Dollars ($2,500,000.00) 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
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 Amended and Restated Revolving
Credit Agreement dated as of April 10, 1997, as amended by a First Amendment to
Amended and Restated Revolving Credit Agreement and to Revolving Note dated as
of July 31, 1997, and a Second Amendment to Amended and Restated Revolving
Credit Agreement of even date herewith by and between the Borrowers and the Bank
(such Amended and Restated Credit Agreement, as amended, supplemented, modified
or restated from time to time is 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.
<PAGE>
This Note is issued in substitution for, and in replacement
of, but not in payment of, the Revolving Note of the Borrowers dated April 10,
1997, payable to the order of the Bank in the original principal amount of
$1,000,000, as amended.
K-TEL INTERNATIONAL (USA), INC.
By ______________________________________
Its___________________________________
DOMINION ENTERTAINMENT, INC.
By ______________________________________
Its___________________________________
K-TEL PRODUCTIONS, INC.
By ______________________________________
Its___________________________________
K-TEL VIDEO, INC.
By ______________________________________
Its___________________________________
K-TEL DIRECT, INC.
By ______________________________________
Its___________________________________
<PAGE>
K-TEL TV, INC.
By ______________________________________
Its___________________________________
K-TEL CONSUMER PRODUCTS, INC.
By ______________________________________
Its___________________________________
EXHIBIT 10.51
FIRST AMENDMENT TO GUARANTY BY CORPORATION
(K-Tel International, Inc.)
This Amendment, dated as of September __, 1997, is made by and
between K-TEL INTERNATIONAL, INC., a Minnesota corporation (the "Guarantor") and
TCF NATIONAL BANK MINNESOTA, a national banking association, formerly known and
organized as TCF Bank Minnesota fsb, a federally chartered stock savings bank
(the "Bank").
RECITALS
A. The Guarantor has executed and delivered to the Bank an
Amended and Restated Guaranty by Corporation dated April 10, 1997 (the
"Guaranty"), pursuant to which the Guarantor has guaranteed, among other things,
all of the present and future debts, liabilities and obligations of K-Tel
International (USA), Inc., a Minnesota corporation ("K-Tel USA"), Dominion
Entertainment, Inc., a Minnesota corporation ("Dominion"), K-Tel Productions,
Inc., a Minnesota corporation ("K-Tel Productions"), K-Tel Video, Inc., a
Minnesota corporation ("K-Tel Video"), K-Tel Direct, Inc., a Minnesota
corporation ("K-Tel Direct"), K-Tel TV, Inc., a Minnesota corporation ("K-Tel
TV"), and K-Tel Consumer Products, Inc., a Minnesota corporation ("K-Tel
Consumer Products"; collectively, the "Borrowers") to the Bank, including,
without limitation, all present and future debts, liabilities and obligations of
the Borrower arising under the Amended and Restated Revolving Credit Agreement
dated as of April 10, 1997, as amended by a First Amendment to Amended and
Restated Revolving Credit Agreement dated as of July 31, 1997, and by a Second
Amendment to Amended and Restated Revolving Credit Agreement of even date
herewith, as the same may be amended or restated from time to time (the "Credit
Agreement").
B. As a condition to entering into the Second Amendment to
Amended and Restated Revolving Credit Agreement of even date herewith and to
making any further loans or extensions of credit to the Borrowers, the Bank has
required that the Guarantor execute and deliver this Amendment.
ACCORDINGLY, in consideration of the premises and for other
good and valuable consideration, the Guarantor and the Bank hereby agree as
follows:
1. Paragraph 16 of the Guaranty is hereby amended to read as
follows:
<PAGE>
"16. The Guarantor will not incur, create, assume or permit to
exist any indebtedness for borrowed money, or any other indebtedness or
liability evidenced by notes, bonds, debentures or similar obligations,
except unsecured indebtedness to Philip Kives or an entity controlled
by Philip Kives. The Guarantor covenants and agrees that, so long as
any Advances (as defined in the Credit Agreement) shall be outstanding
and/or the Bank's Commitment (as defined in the Credit Agreement) shall
be outstanding, the Guarantor will not repay any principal of any
indebtedness owing by the Guarantor to Philip Kives or to an entity
controlled by Philip Kives. Nothing in this paragraph 16 shall be
deemed to prohibit the payment of interest, when due, by the Guarantor
to Philip Kives or to an entity controlled by Philip Kives with respect
to the outstanding principal indebtedness owed by the Guarantor to
Philip Kives or to an entity controlled by Philip Kives."
2. The Guaranty is hereby amended by adding the following new
paragraph 21:
"21. The Guarantor covenants and agrees that, so long as any
Advances (as defined in the Credit Agreement) to the Borrowers shall be
unpaid or the Bank's Commitment (as defined in the Credit Agreement)
shall be outstanding, the Guarantor will not repurchase any of the
issued and outstanding stock of the Guarantor."
3. Except as amended by this Amendment, all of the terms and
conditions of the Guaranty shall remain in all other respects in full force and
effect.
4. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
counterparts taken together shall constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed by
the parties hereto as the date first written above.
K-TEL INTERNATIONAL, INC.
By ______________________________________
Its___________________________________
TCF NATIONAL BANK MINNESOTA
By ______________________________________
Its___________________________________
And
By ______________________________________
Its___________________________________
Exhibit 10.52
K-TEL INTERNATIONAL, INC.
1997 STOCK OPTION PLAN
------------------------------
PART I
PURPOSES; DEFINITIONS; SHAREHOLDER APPROVAL;
RESERVATION OF SHARES; AND PARTICIPATION IN PLAN
ARTICLE I
Purposes
1.1 Purposes of Plan. The purpose of this K-tel International, Inc.
1997 Stock Option Plan (the "Plan") is to provide incentives to employees of the
Company and/or any Subsidiary who contribute, and are expected to contribute, to
the success of the Company and any Subsidiary, to provide a means of rewarding
outstanding performance, and to enhance the interest of such employees in the
Company's continued success and progress by providing them a proprietary
interest in the Company. Further, this Plan is designed to enhance the Company's
ability to maintain a competitive position in attracting and retaining qualified
personnel necessary for the continued success and progress of the Company.
ARTICLE II
Definitions
2.1 Certain terms used herein shall have the meaning below stated,
subject to the provisions of Section 7.1.
"Board" or "Board of Directors" means the Board of Directors of the
Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee appointed by the Board to administer
this Plan pursuant to Article VII or, if no Committee is appointed by the Board,
means the Board.
"Common Stock" means, subject to the provisions of Section 9.3, the
Common Stock of the Company, par value $.01 per share.
<PAGE>
"Company" means K-tel International, Inc., a Minnesota corporation.
"Disability" means (subject to Section 6.2) a physical or mental
impairment of sufficient severity such that an Employee is permanently unable to
continue his employment with the Company as determined by the Committee.
"Employee" means an employee (including an officer) of the Company or
of any Subsidiary of the Company.
"Fair Market Value" means the fair market value of the Company's Common
Stock as determined by the Committee on the basis of available prices for such
Common Stock or in such manner as may be authorized by applicable regulations
under the Code.
"Incentive Stock Option" means an option to purchase Common Stock,
granted by the Company to an Employee pursuant to Section 5.1, which is intended
to meet the requirements of Section 422A of the Code and which is designated at
the time of the award of an Incentive Stock Option.
"Non-Statutory Option" means an option to purchase Common Stock,
granted by the Company to an Optionee pursuant to Section 5.1, which is not an
Incentive Stock Option.
"Option" means an Incentive Stock Option or a Non-Statutory Option.
"Optionee" means the holder of an Option granted under the Plan.
"Plan" means the Damark International, Inc. 1991 Stock Option Plan, as
set forth herein and as from time to time amended.
"Subsidiary" means a subsidiary or parent corporation, as defined in
Section 425(e) and (f) of the Code, with respect to the Company.
"1933 Act" means the Securities Act of 1933, as amended.
ARTICLE III
Shareholder Approval; Reservations of Shares
3.1 Shareholder Approval. This Plan was approved by the Board of
Directors on February 18, 1997 and shall be subject to approval by the
affirmative vote of the holders of a majority of the Company's Common Stock at a
meeting of shareholders, which approval must be obtained no later than February
17, 1998.
3.2 Shares Reserved Under Plan. Subject to adjustment under the
provisions of Section 9.3 hereof, the maximum number of shares of Common Stock
which may be issued and sold under this Plan is 300,000 shares. Such shares may
be either authorized and unissued shares or shares issued and thereafter
acquired by the Company. Shares issued pursuant to this Plan
<PAGE>
shall be subject to all applicable provisions of the Articles of Incorporation
and Bylaws of the Company in existence at the time of issuance of such shares
and at all times thereafter. If Options granted under this Plan shall terminate
or cease to be exercisable by reason of expiration, surrender for cancellation
or otherwise without having been wholly exercised, new Options may be granted
under this Plan covering the number of shares to which such termination or
cessation relates. At no time may the sum of the maximum number of shares
issuable under outstanding Options granted under this Plan and the number of
shares previously issued under Options granted under this Plan exceed the
maximum number of shares that may be issued and sold under this Plan, as above
stated.
ARTICLE IV
Participation in Plan
4.1 Eligibility to Receive Options. Options under this Plan may be
granted only to Employees who are employed by the Company or a Subsidiary on the
date the Option is granted and who the Committee believes are in a position to
make an important contribution to the success of the Company, all as determined
by the Committee, provided that no Employee shall be eligible for Options under
this Plan if such person has been a member of the Board of Directors of the
Company or a Subsidiary within one year of the grant.
4.2 Participation Not Guarantee of Employment. Nothing in this Plan or
in the instrument evidencing the grant of an Option shall in any manner be
construed to limit in any way the right of the Company or a Subsidiary to
terminate an Employee's employment at any time without regard to the effect of
such termination on any rights such Employee would otherwise have under this
Plan, or give any right to such an Employee to remain employed by the Company or
a Subsidiary in any particular position or at any particular rate of
compensation.
PART II
OPTIONS;
TERMINATION OF EMPLOYMENT AND DEATH
ARTICLE V
Options
5.1 Grants of Options.
(a) Grant. The Committee may grant Incentive Stock Options
and/or Non-Statutory Options to Employees, subject to the limitations provided
in Section 5.1(f) and Section 7.1. All Options under this Plan shall be granted
within ten years of March 20, 1991, the date on which this Plan was adopted by
the Board of Directors subject to approval of the Plan by shareholders.
<PAGE>
(b) Option Price. The purchase price per share of Common Stock
under each Incentive Stock Option and Non-Statutory Option shall be determined
by the Committee but shall be not less than 100% of the Fair Market Value per
share of such Common Stock on the date the Option is granted for Incentive Stock
Options and no less than 85% of the Fair Market Value per share of such Common
Stock on the date the Option is granted for Non-Statutory Options. The purchase
price per share may be subject to adjustment in accordance with the provisions
of Section 9.3 hereof.
(c) Options Agreements. Options shall be evidenced by option
agreements in such form and containing such terms and conditions as the
Committee shall approve, which terms and conditions need not be the same for all
Options.
(d) Options Nontransferable. Except with the prior written
consent of the Committee, an Option granted under this Plan shall by its terms
be nontransferable by the Optionee other than by will or the laws of descent and
distribution, and, during the lifetime of the Optionee, shall be exercisable
only by such Optionee. No transfer of an Option by an Optionee by will or by the
laws of descent and distribution shall be effective to bind the Company unless
the Company shall have been furnished with written notice thereof and a copy of
the will and/or such other evidence as the Committee may determine necessary to
establish the validity of the transfer.
(e) Substitution and Cancellation. The Committee may, in its
sole discretion, grant to an Optionee who has been granted an Option under this
Plan, in exchange for the surrender and cancellation of such Option, a new
Option having a purchase price lower (or higher) than the purchase price
provided in the Option so surrendered and cancelled and containing such other
terms as the Committee may deem appropriate, subject to Section 5.1(b) and such
other limitations or restrictions with respect to an Incentive Stock Option as
may be imposed by the Code.
(f) Annual Per-Employee Limitation. The number of shares of
Common Stock subject to all Options granted to any Employee during any calendar
year shall not exceed 50,000 shares.
5.2 Exercise.
(a) Term of Options; Vesting; and Exercise. The term of each
Option granted under this Plan shall not exceed ten (10) years from the date of
grant. An Option granted under this Plan shall become vested and exercisable at
such rate and on such conditions as the Committee shall determine at the time
such Option is granted.
(b) Exercise; Payment on Exercise. Options shall be exercised
by delivering to the Company an exercise notice in the form prescribed by the
Committee. No shares of Common Stock shall be issued on the exercise of an
Option unless paid for in full at the time of purchase as provided in the next
sentence and until the provisions of 9.4 shall have been satisfied. Payment for
shares of Common Stock purchased upon the exercise of an Option shall be made
(i) in cash, or (ii) the following alternative forms of payment: (A) in whole or
in part in shares
<PAGE>
of Common Stock held by the Optionee for at least six months and valued at the
then Fair Market Value thereof, or (B) by delivery to the Company of irrevocable
instructions to the Optionee's broker, which instructions and broker shall be
satisfactory to the Company, to promptly deliver to the Company the total
purchase price for the shares of the Option being exercised from the sale
proceeds for such shares or the loan proceeds for such shares or any other
securities which the Optionee may have in his account with such broker, and the
Company will deliver such shares directly to such broker in accordance with such
procedures as the Committee may establish, which alternative forms of payment
may be permitted by the Committee at the time the Option is granted or at any
time thereafter during the term of the Option. Stock certificates for the shares
of Common Stock so paid for will be issued and delivered to the person entitled
thereto only at the Company's office in Minneapolis, Minnesota. No Optionee
shall have any rights as a shareholder with respect to any share of Common Stock
covered by an Option unless and until such Optionee shall have become the holder
of record of such share and, except as otherwise permitted in Section 9.3
hereof, no adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property or distributions or other rights)
in respect of such share for which the record date is prior to the date on which
such Optionee shall have become the holder of record thereof.
(c) Dissolution, Liquidation, Etc. If at any time after an
Option has become exercisable and prior to its exercise and expiration, a
voluntary dissolution, liquidation (other than a liquidation into another
corporation which agrees to continue this Plan) or winding up of the affairs of
the Company shall be proposed, the Company shall cause notice in writing to be
mailed to each person holding an Option under this Plan, which notice shall be
mailed not less than twenty days prior to the closing of the transfer books of
the Company or the record date for determination of the holders of Common Stock
of the Company entitled to participate in such dissolution, liquidation or
winding up, as the case may be, to the end that during such notice period the
holder of any Option, to the extent that the same is then exercisable by such
holder, subject to the terms of Article V hereof, may purchase Common Stock in
accordance with the terms of the Option and be entitled, in respect of the
number of shares so purchased, to all the rights of the other holders of Common
Stock of the Company with respect to such proposed dissolution, liquidation or
winding up of the affairs of the Company. Each Option at the time outstanding
and all rights thereunder shall terminate at the close of business on the
twentieth day after mailing of such notice to the holder of such Option or on
the record date for determination of holders of Common Stock entitled to
participate in such dissolution, liquidation or winding up, whichever date is
later.
(d) Exercise of Options. In the event that an Optionee
exercises an Option, such Optionee shall comply with all requirements set forth
in the option agreement for such Options in connection with the purchase of
shares of Common Stock under this Plan.
5.3 Incentive Stock Options.
(a) Annual Limitation. In no event shall any Optionee be
granted an Incentive Stock Option under this Plan or any other plan of the
Company or any Subsidiary if such option would, during the calendar year in
which the option first becomes exercisable when combined with other Incentive
Stock Options which first become exercisable in such calendar year, entitle
<PAGE>
such Optionee, to purchase shares of Common Stock or shares of any Subsidiary
having an aggregate fair market value (determined as of the time such option or
options were granted) in excess of $100,000. In the event an option granted
hereunder is designated an Incentive Stock Option and exceeds the limitations
set forth in this Section 5.4(a), whether at the time of grant or thereafter,
such option shall be an Incentive Stock Option only to the extent permitted
hereby and the balance thereof shall be a Non-Statutory Option for the purposes
of this Plan.
(b) Incentive Stock Options Granted to Ten Percent
Shareholders. No Incentive Stock Option shall be granted to any Employee who
owns, directly or indirectly pursuant to Section 425(d) of the Code, stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any Subsidiary, unless at the time such
Incentive Stock Option is granted, the price of the Incentive Stock Option is at
least 110% of the Fair Market Value of the Common Stock subject to the Incentive
Stock Option and such Incentive Stock Option, by its terms, is not exercisable
after the expiration of five (5) years from the date such Incentive Stock Option
is granted.
(c) Notice. Each Optionee shall give prompt notice to the
Company of any disposition of shares acquired upon exercise of an Incentive
Stock Option if such disposition occurs within either two years after the date
of grant or one year after the date of transfer of such shares to the Optionee
upon the exercise of such Incentive Stock Option.
(d) Consent. To the extent appropriate to avoid a
"modification" or other event described in Section 425(h) of the Code, a
Optionee's rights under an Incentive Stock Option (including the rights to pay
the exercise price in Common Stock) shall be set forth in the option agreement
for such Option entered into at the date of grant, so as to preclude any
requirement that further Committee consent be given after the date of grant.
ARTICLE VI
Termination of Employment
6.1 Termination of Employment. Unless earlier terminated in accordance
with its terms, an Option shall terminate thirty (30) days after any termination
of the Optionee's employment with the Company or any Subsidiary for any reason
other than as a result of the death or disability of the Optionee or, in the
case of death or disability of any Optionee, 120 days after the death or the
termination of the Optionee's employment due to disability.
6.2 Employment. For all purposes of this Plan, and any Option granted
hereunder, "employment" shall be defined in accordance with the provisions of
Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations).
<PAGE>
PART III
ADMINISTRATION, AMENDMENT AND TERMINATION
OF PLAN; MISCELLANEOUS
ARTICLE VII
Administration of Plan
7.1 The Committee. This Plan shall be administered by the Board or a
Committee of the Board consisting of two or more directors, each of whom shall
be a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3)(i) of the
Securities and Exchange Commission and shall be appointed by, and serve at the
pleasure of, the Board. A majority of the Committee shall constitute a quorum
thereof and the actions of a majority of the Committee at a meeting at which a
quorum is present, or actions unanimously approved in writing by all members of
the Committee, shall be the actions of the Committee. Vacancies occurring on the
Committee shall be filled by the Board. The Committee shall have full and final
authority to interpret this Plan and the agreements evidencing Options granted
hereunder (which agreements need not be identical), to prescribe, amend and
rescind rules and regulations, if any, relating to this Plan and to make all
determinations necessary or advisable for the administration of this Plan. The
Committee's determination in all matters referred to herein shall be conclusive
and binding for all purposes and upon all persons including, but without
limitation, the Company, the shareholders of the Company, the Committee and each
of the members thereof, and the Employees and the Optionees, and their
respective personal representatives, heirs and assigns.
7.2 Liability of Committee. No member of the Committee shall be liable
for anything done or omitted to be done by such member or by any other member of
the Committee in connection with this Plan, except for the willful misconduct or
gross negligence of such member. The Committee shall have power to engage
outside consultants, auditors or other professional help to assist in the
fulfillment of the Committee's duties under this Plan at the Company's expense.
7.3 Determinations of the Committee. In making its determinations
concerning the Employees, who shall receive Options as well as the number of
shares to be covered thereby and time or times at which they shall be granted,
the Committee shall take into account the nature of the services rendered by the
respective Employees and their past, present, and potential contribution to the
Company's success and such other factors as the Committee may deem relevant. The
Committee shall also determine the form of option agreements to be issued under
this Plan and the terms and conditions to be included therein, provided such
terms and conditions are not inconsistent with the terms of this Plan. In its
discretion or in accordance with a direction from the Board, the Committee may
waive any provisions of any option agreement, provided such waiver is not
inconsistent with the terms of this Plan as then in effect.
<PAGE>
ARTICLE VIII
Amendment and Termination of Plan
8.1 Amendment of Plan.
(a) Generally. The Plan may be amended at any time and from
time to time by the Board of Directors of the Company but no amendment which (i)
increases the aggregate number of shares of Common Stock which may be issued and
sold under this Plan other than adjustments pursuant to Section 9.3, (ii)
decreases the minimum option price provided in this Plan, (iii) extends the
period during which Options may be granted under this Plan, or (vi) changes the
class of Employees eligible to receive Options, shall be effective unless and
until the same is approved by the affirmative vote, in person or by proxy, of
the holders of a majority of the shares of Common Stock of the Company present
and entitled to vote at a meeting held to take such action at which a quorum is
present. No termination or amendment of this Plan, without the consent of the
holder of any Option then existing, may terminate such holder's Option or
materially and adversely affect such holder's rights thereunder.
(b) Amendments Relating to Incentive Stock Options. To the
extent applicable, this Plan is intended to permit the issuance of Incentive
Stock Options in accordance with the provisions of Section 422A of the Code. The
Plan may be modified or amended at any time, both prospectively and
retroactively, and in such manner as to affect Incentive Stock Options
previously granted (after taking into account Section 425(h) of the Code,
relating to "modifications," etc.), if such amendment or modification is
necessary for this Plan and the Incentive Stock Options granted hereunder to
qualify under said provisions of the Code.
8.2 Termination. The Board of Directors of the Company may at any time
terminate this Plan as of any date specified in a resolution adopted by the
Board. If not earlier terminated, this Plan shall terminate on the tenth
anniversary of the effective date of the Plan. No Options may be granted after
this Plan has terminated. After this Plan shall terminate, the function of the
Committee will be limited to supervising the administration of Options
previously granted.
ARTICLE IX
Miscellaneous Provisions
9.1 Restrictions Upon Grant of Options. The registration or
qualification under any Federal or state law of any shares of Common Stock
issuable upon the exercise of Options granted pursuant to this Plan (whether to
permit the grant of Options or the resale or other disposition of any such
shares of Common Stock by or on behalf of the Optionees receiving such shares)
may be necessary or desirable and, in any such event, delivery of the
certificates for such shares of Common Stock shall, if the Board of Directors,
in its sole discretion, shall determine, not be made until such listing,
registration or qualification shall have been completed.
9.2 Restrictions upon Resale of Unregistered Stock. If the shares of
Common Stock that have been transferred to a Optionee pursuant to the terms of
this Plan are not registered
<PAGE>
under the 1933 Act, pursuant to an effective registration statement, such
Optionee, if the Committee shall deem it advisable, may be required to represent
and agree in writing (i) that any shares of Common Stock acquired by such
Optionee pursuant to this Plan will not be sold except pursuant to an effective
registration statement under the 1933 Act, or pursuant to an exemption from
registration under the 1933 Act and (ii) that such Optionee is acquiring such
shares of Common Stock for such Optionee's own account and not with a view to
the distribution thereof.
9.3 Adjustments. In the event of any change whether through
recapitalization, merger, consolidation, stock dividend, split-up, or amount of
the Company's capital stock (or any other transaction described in Section
425(a) of the Code) after any Option is granted hereunder and prior to the
exercise thereof, the Option, to the extent that it has not been exercised,
shall entitle the holder to such number and kind of securities as such holder
would have been entitled to had such holder actually owned the stock subject to
the Option at the time of the occurrence of such change. If any such event
should occur, the number of shares subject to Options which are authorized to be
issued hereunder, but which have not been issued, shall be similarly adjusted.
If any other event shall occur, prior to the exercise of an Option granted to an
Optionee hereunder, which shall increase or decrease the amount of capital stock
outstanding and which the Committee, in its sole discretion, shall determine
equitably requires an adjustment in the number of shares which the holder should
be permitted to acquire, such adjustment as the Committee shall determine may be
made, and when so made shall be effective and binding for all purposes of this
Plan.
9.4 Withholding of Taxes. Each Optionee who exercises an Option to
purchase Common Stock shall, prior to the issuance of any shares, pay to the
Company, or make arrangements (including withholding of shares of Common Stock
purchased upon exercise of the Option at the Fair Market Value thereof)
satisfactory to the Committee regarding payment of, any taxes of any kind
required by law to be withheld with respect to the transfer to such Optionee of
such shares of Common Stock and/or amounts upon exercise of such Option.
9.5 Use of Proceeds. The proceeds from the sale of Common Stock
pursuant to Options granted under this Plan shall constitute general funds of
the Company and may be used for such corporate purposes as the Company may
determine.
9.6 Other Grants. Options may be granted under this Plan from time to
time in substitution for stock options held by employees of other corporations
who are or are about to become employees of the Company or a Subsidiary as the
result of a merger or consolidation of the employing corporation with the
Company or a Subsidiary, or the acquisition by the Company or a Subsidiary of
the assets of the employing corporation, or the acquisition by the Company or a
Subsidiary of stock of the employing corporation as the result of which it
becomes a Subsidiary of the Company. The terms and conditions of the substituted
Options so granted may vary from the terms and conditions set forth in Part II
to such extent as the Committee may deem appropriate to conform, in whole or in
part, to the provisions of the substituted stock incentives.
9.7 Other Benefits. Nothing contained herein shall prevent the Company
from establishing other incentive plans in which Employees under the Plan may
also participate. No award under this Plan shall be considered as compensation
in calculating any insurance, pension
<PAGE>
or other benefit for which the recipient is eligible unless any such insurance,
pension or other benefit is granted under a plan which expressly provides that
compensation under this Plan (and specifying the type of such compensation)
shall be considered as compensation under such plan.
EXHIBIT 11
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
For the years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Primary earnings per share -
Weighted average number of issued shares outstanding 3,756 3,729 3,711
Effect of Stock Incentive Plan 206 -- --
------ ------- -------
Shares outstanding used to compute primary earnings per share 3,962 3,729 3,711
====== ======= =======
Net Income (Loss) $3,204 $ (745) $(2,483)
====== ======= =======
Primary earnings (loss) per share $ .81 $ (.20) $ (.67)
====== ======= =======
Fully diluted earnings per share -
Weighted average number of shares used
for primary earnings per share 3,756 3,729 3,711
Effect of Stock Incentive Plan 219 -- --
------ ------- -------
Shares outstanding used to compute
fully diluted earnings per share 3,975 3,729 3,711
====== ======= =======
Net Income (Loss) $3,204 $ (745) $(2,483)
====== ======= =======
Fully diluted earnings (loss) per share $ .81 $ (.20) $ (.67)
====== ======= =======
</TABLE>
K-tel International, Inc.
1997 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 (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 Consumer Products, Inc.
Minneapolis, Minnesota (a Minnesota corporation)
K-tel Direct, Inc.
Minneapolis, Minnesota (a Minnesota corporation)
K-tel TV, Inc.
Minneapolis, Minnesota (a Minnesota corporation)
K-tel Video, Inc.
Minneapolis, Minnesota (a Minnesota corporation)
K-tel Productions, Inc.
Minneapolis, Minnesota (a Minnesota corporation)
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated October 8, 1997, included in this Form 10-K, into the Company's
previously filed Registration Statement file No. 33-18723.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,855
<SECURITIES> 0
<RECEIVABLES> 16,667
<ALLOWANCES> 0
<INVENTORY> 4,287
<CURRENT-ASSETS> 0
<PP&E> 3,154
<DEPRECIATION> (2,172)
<TOTAL-ASSETS> 30,492
<CURRENT-LIABILITIES> 25,912
<BONDS> 0
0
0
<COMMON> 3,962
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,492
<SALES> 75,501
<TOTAL-REVENUES> 0
<CGS> 41,387
<TOTAL-COSTS> 71,919
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (122)
<INCOME-PRETAX> 3,422
<INCOME-TAX> (218)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,204
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
</TABLE>
