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As filed with the Securities and Exchange Commission on June 3, 1999
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________________
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
Incorporation or Organization) Identification Number)
2605 FERNBROOK LANE NORTH
MINNEAPOLIS, MINNESOTA 55447-4736
(612) 559-6800
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
__________________________
STEVEN A. KAHN, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
2605 FERNBROOK LANE NORTH
MINNEAPOLIS, MINNESOTA 55447-4736
(612) 559-6800
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
COPIES TO:
AVRON L. GORDON, ESQ.
THOMAS F. STEICHEN, ESQ.
BRIGGS AND MORGAN, PROFESSIONAL ASSOCIATION
2400 IDS CENTER
MINNEAPOLIS, MINNESOTA 55402
(612) 334-8400
_______________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
_______________
If the only securities being registered on this form are being offered
pursuant to dividend or investment reinvestment plans, please check the
following box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT TO BE AGGREGATE PRICE AGGREGATE OFFERING AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED(1)(2) PER SHARE(3) PRICE(3) REGISTRATION FEE
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Common Stock ($.01 par value per share)... 2,263,822 $6.140625 $13,901,281 $3,865
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(1) Includes (a) 931,586 shares issued or issuable to the selling
shareholders pursuant to a securities purchase agreement, (b) an
indeterminate number of shares estimated at 1,164,482, purchasable
pursuant to a warrant issued in connection with the securities purchase
agreement, and (c) 167,754 shares issuable pursuant to an additional
warrant to the selling shareholders.
(2) In accordance with Rule 416 under the Securities Act of 1933, common
stock offered hereby shall also be deemed to cover an indeterminate
number of securities to be offered or issued to prevent dilution
resulting from stock splits, stock dividends or similar transactions.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and based upon the average of the high and low
sale prices for such stock on May 28, 1999, as reported by the Nasdaq
National Market.
____________________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING
PURSUANT TO SAID SECTION 8(a) MAY DETERMINE.
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PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 3, 1999
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2,263,822 SHARES
K-TEL INTERNATIONAL, INC.
COMMON STOCK
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The shareholders of K-tel listed on page 14 below are offering and
selling 2,263,822 shares of common stock under this prospectus. We will not
receive any part of the proceeds from this offering.
Our common stock is quoted on the Nasdaq National Market and trades
under the ticker symbol "KTEL." On May 28, 1999, the closing price of one
share of our stock on the Nasdaq National Market was $6.0625.
________________________________
Purchase of our common stock involves a high degree of risk. You should
purchase shares only if you can afford a loss on your investment. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT CERTAIN FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
________________________________
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal offense.
________________________________
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with
the SEC is effective. This prospectus is not an offer to sell nor is it
soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
THE DATE OF THIS PROSPECTUS IS __________, 1999
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We were incorporated in Minnesota in 1968. Our principal offices are
located at 2605 Fernbrook Lane North, Minneapolis, Minnesota 55447-4736. Our
telephone number is (612) 559-6800. In this prospectus, the "Company,"
"K-tel," "we," "us" and "our" refer to K-tel International, Inc. and our
subsidiaries, unless the context otherwise requires.
TABLE OF CONTENTS
<TABLE>
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Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Where You Can Find More Information. . . . . . . . . . . . . . . . . . . . . .16
</TABLE>
We have not authorized any dealer, salesperson or other person to give
any information or represent anything not contained in this prospectus. You
should not rely on any unauthorized information. This prospectus does not
offer to sell or buy any shares in any jurisdiction in which it is unlawful.
The information in this prospectus is current as of the date on the cover.
<PAGE>
PROSPECTUS SUMMARY
BECAUSE THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS AND
SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET FORTH
UNDER "RISK FACTORS" BEFORE YOU DECIDE TO PURCHASE OUR STOCK.
K-tel markets and distributes entertainment and consumer products
internationally. With more than 35 years of marketing experience in the
United States and Europe, we have developed the resources, knowledgeable
personnel, information systems, and distribution capabilities to market music
and consumer products through traditional retail and direct-response
marketing channels. We also market through our internet e-commerce site,
K-tel On-line (www.ktel.com), which features a wide spectrum of music and
video products. K-tel On-line features more than 250,000 music titles and
35,000 video titles conveniently available to on-line shoppers at value
prices.
We market and sell pre-recorded music both from our owned music
master catalog and under licenses obtained from other record companies, as
well as pre-recorded music developed by other companies who desire to use
K-tel for sales and distribution of their music products. We sell compact
discs, cassettes and albums direct to retailers, wholesalers and rack service
distributors which stock and manage inventory within music departments for
retail stores. We also sell such products through subsidiaries and licensees
in the United Kingdom and elsewhere in Europe. The principal entertainment
products we market and sell consist primarily of pre-recorded thematic music
packages in a compilation format featuring various artists. These thematic
music selections cover nearly all music genres and are targeted to a variety
of age groups. We provide marketing support for our music sales through
cooperative advertising with retailers, print media and television
advertising, and in-store promotions and displays. We have two sources for
our music compilations: our proprietary music master catalog, which consists
of 3,500 "Top 100" titles, and music licensed from third party music
companies. Our master music catalog, consisting of original recordings and
re-recordings of music from the 1950's through today, represents one of our
major assets. In addition to utilizing master recordings in our compilation
products, we also license the rights to master recordings to third parties
world-wide, for use in albums, films, television programs, and commercials,
for either a flat fee or a royalty based on the number of units sold. We
continuously add to our music master catalog to ensure growth and product
diversity. Licensing of our proprietary music rights to third parties has
historically been an important revenue source for us.
K-tel On-line, our virtual music store, enables customers to choose from
the proprietary brand-name compilations that have made the K-tel name
synonymous with quality music for over 35 years. K-tel On-line also gives
customers the opportunity to create their own custom CD compilations from our
master music catalog. K-tel On-line features audio sampling, user-friendly
navigation and search capabilities, as well as customer service, competitive
pricing, and an auction service. Sales generated through K-tel On-line does
not represent a significant part of our total revenue at present. We
believe, however, that e-commerce presents us with a significant opportunity
to capture market share by capitalizing on our high name recognition,
extensive catalog of proprietary music and existing capabilities and
expertise in niche marketing, which we believe will be critical to success
in internet retailing. We intend to use the same combination of resources
that has made us a leader in the direct marketing arena which we pioneered.
We will also rely heavily on our brand identity with consumers. A number of
characteristics of on-line music retailing, such as audio sampling, search
capabilities, availability of deep catalog content, and at home shopping
convenience, make the sale of pre-recorded music via the internet
particularly attractive relative to traditional retail outlets. The success
of our on-line marketing cannot be currently determined, and further
penetration in this market may require substantial additional financial
resources, development and acquisition of technology and investments in
marketing. Results will also be affected by existing competition, which we
anticipate will intensify, and by additional entrants to the market who may
already have the necessary technology and expertise, many of which may have
substantially greater resources than us. We intend to continue to analyze
and explore the best strategy for the exploitation of our new e-commerce
market place. To market K-tel On-line services and
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increase our exposure, we have entered into agreements with such companies as
Microsoft-Registered Trademark- and Playboy-Registered Trademark- Enterprises
for presence on their Web sites.
We have provided additional enhancements to our e-commerce site. These
include user-friendly technology that enables consumers to create customized
CD compilations and artwork on-line. K-tel On-line also posts
Billboard-Registered Trademark- Magazine's industry music charts. In order
to provide a secure and convenient shopping environment for K-tel On-line
customers, we have entered into an agreement with CyberSource to integrate
its scalable payment processing infrastructure. In addition to our presence
on the Microsoft-Registered Trademark- and Playboy-Registered Trademark- Web
sites, we have affiliate agreements with several other e-commerce
participants. In April 1999, we entered into an agreement with FairMarket,
Inc. for participation in FairMarket's on-line community auction service,
which is operational on our e-commerce site. K-tel and FairMarket share
auction transaction fees.
Our consumer products consist primarily of housewares, consumer
convenience items and exercise equipment. We concentrate on products that
have the potential for worldwide appeal and that are innovative, readily
demonstrated and inexpensive (generally retailing for less than $100). In
Europe, we engage in an extensive amount of direct response marketing.
European direct response business is solicited through television and radio
advertising campaigns and the internet (our German Web site is www.K-tel.de).
Our direct response strategy is to generate revenues and profits from both
the direct response campaigns and subsequent retail demand.
THIS OFFERING
We issued or will issue the securities covered by this prospectus to the
selling shareholders in connection with a securities purchase agreement
between us and the selling shareholders. The selling shareholders may offer
their shares through public or private transactions, on or off the Nasdaq
National Market, at prevailing market prices or privately negotiated prices.
No period of time has been fixed within which the shares may be offered or
sold.
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RISK FACTORS
The prospectus contains or incorporates both historical and
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipates", "believes",
"expects", "intends", "future", and similar expressions identify
forward-looking statements. Any such "forward-looking" statements in this
prospectus reflect our current views with respect to future events and
financial performance, and are subject to a variety of factors that could
cause the actual results or performance to differ materially from historical
results or from the anticipated results or performance expressed or implied
by such forward-looking statements. Because of such factors, we cannot
assure you that the actual results or developments that we anticipate will be
realized or, even if substantially realized, that they will have the
anticipated results. The risks and uncertainties that may affect our
business include, but are not limited to, those set forth below. You should
not place undue reliance on such forward-looking statements, which speak only
as of the date hereof. You should also be aware that, except as the law may
otherwise require, we undertake no obligation to publicly revise any such
forward-looking statements to reflect events or circumstances that may arise
after the date of this prospectus.
You should consider carefully the following risks before you decide to
buy our common stock. The risks and uncertainties described below are not
the only ones we face. Additional risks and uncertainties not presently
known to us may also adversely impact our business. If any of the following
risks actually occur, they could adversely affect our business, financial
condition or operating results, which could adversely affect the trading
price of our common stock.
RISKS RELATING TO OUR FINANCIAL CONDITION
WE HAVE INCURRED OPERATING LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES FOR
THE REMAINDER OF FISCAL 1999.
We incurred losses in fiscal 1998 and have continued to incur losses in
fiscal 1999. For the fiscal year ended June 30, 1998, we incurred a net loss
of $2.4 million, and have incurred losses totaling $9.9 million for the nine
months ended March 31, 1999. Approximately $2.7 million of this loss relates
to businesses we have exited, mainly media buying and non-theatrical videos.
We expect to incur losses for the remainder of fiscal 1999. Our future
operating results depend on many factors, including:
- demand for our products,
- traffic on our Web site, K-tel On-line,
- the level of competition,
- our ability to acquire, develop, license and market new titles and
consumer products, and
- the ability of our officers and key employees to manage our business
and control costs.
WE WILL NEED ADDITIONAL CAPITAL TO FINANCE OUR GROWTH AND OPERATIONS.
Successful implementation of our strategy will require continued access
to financing to meet working capital requirements and develop new business
opportunities, including our on-line strategies. If we do not have
sufficient access to financing, our growth will be limited. As a distributor
of music and consumer products, we purchase products or components for
assembly into finished products directly from manufacturers for resale to
retailers and consumers. As a result, we have significant working capital
requirements, the majority of which are to finance inventory and accounts
receivable. These working capital needs will expand as inventory and
accounts receivable increase in response to our growth. The future success
of our on-line marketing may require additional financial resources for
development and acquisition of
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technology and investments in marketing and contractual relationships with
third parties. Future growth will likely require additional working capital.
Although our credit lines with a lender are sufficient to meet our needs at
this time, there can be no assurance that they will be adequate in the future
or that we will be able to obtain additional financing upon favorable terms
when we need it.
To increase our working capital level, we entered into an agreement for
the sale in a private placement of up to a minimum of $8.0 million and a
maximum of $18.0 million of our common stock. This equity financing involves
an initial investment of a $8.0 million tranche, to be invested in two $4.0
million purchases and an additional tranche of not less than $4.0 million or
more than $10.0 million depending upon a future value of our stock price.
If, however, the future stock price should fall below $6.00, the investors
may not be required to fund the second tranche. This financing also provides
for the issuance of warrants to the investors as well as an adjustable
warrant, requiring the issuance of additional shares to the investors, the
amount of which depends on the future market price of our common stock. The
initial $4.0 million purchase was made on April 21, 1999. We can not assure
that our stock price will be at a level sufficient to fund the second
tranche. The amount of funding from the second tranche, the issuance of the
warrants and the issuance of the adjustment warrant could have an impact on
the market price of our stock.
If we exhaust our current sources of capital and are not able to obtain
additional financing, we will be required to take various steps to reduce
costs and conserve capital. Any of such actions could adversely affect our
ability to grow, increase sales and implement our growth plans.
WE HAVE RISKS ASSOCIATED WITH OUR EXISTING CREDIT AGREEMENT.
We currently have a $10.0 million credit agreement with a lending
institution which consists of a $4.0 million term loan and up to a $6.0
million revolving loan, limited to a percent of our eligible receivables.
Both loans are due and expire on November 20, 2001. Borrowings under the
facility bear interest at a variable rate based on a "base rate" announced by
a banking affiliate associated with the lending institution (7.75% at March
31, 1999) and are secured by the assets of certain of our U.S. subsidiaries,
including accounts receivable, inventories, equipment, music library and
general intangibles. The loan agreement contains certain financial and other
covenants or restrictions, including the maintenance of a minimum tangible
net worth, limitations on capital expenditures, restrictions on music library
acquisitions, limitations on the incurrence of indebtedness and restrictions
on payment of dividends. We have guaranteed the obligations of our
subsidiaries under the credit facility and have pledged the stock of those
subsidiaries and assets to secure our obligations under the guaranty. As of
March 31, 1999, $4.0 million was outstanding under the term loan and
approximately $3.1 million was outstanding under the line of credit and the
maximum additional available under the borrowing limitations at that date was
$193,000. At March 31, 1999 we were in compliance with all covenants,
limitations and restrictions of the agreement. We have amended certain
financial covenants with the lender for fiscal 1999 and beyond, but expect to
be out of compliance with the tangible net worth requirement that becomes
effective December 31, 1999 unless we obtain sufficient equity capital, are
able to reduce losses, or further modify the covenants. As a result, the
$4.0 million term loan has been classified as a current liability on our
financial statements. Future losses or the inability to complete our pending
private equity placement in a sufficient amount may result in such further
renegotiations of such covenants or the need to seek replacement financing.
There can be no assurances that replacement financing will be available on
terms satisfactory to us.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE.
We expect to experience fluctuations in future quarterly operating
results that may be caused by a variety of factors, many of which are outside
of our control. These factors include:
- seasonality of sales,
- the success of our promotions and sales programs,
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- the amount and timing of operating costs and capital expenditures,
- the level of merchandise returns we experience,
- the mix of products we sell, and
- supply and timing of product deliveries.
As a result, we believe that period-to-period comparisons of our results
of operations are not and will not necessarily be meaningful and should not
be relied upon as an indication of future performance. Due to all of the
foregoing factors, it is possible that in some future quarter or quarters our
operating results will be below the expectations of securities analysts and
investors. In such event, the price of the common stock could be adversely
affected. We expect to experience seasonality in our business, reflecting a
combination of seasonal fluctuations in internet usage and traditional retail
seasonality patterns affecting sales of pre-recorded music. Sales in the
traditional retail music industry are significantly higher in the third and
fourth calendar quarters of each year than in the preceding two quarters and
our sales of products in Europe through infomercials is stronger in the first
and fourth calendar quarters of each year. Our limited operating history in
e-commerce makes it difficult to ascertain the effects of seasonality on that
segment of our business. In addition we have discontinued certain operating
divisions whose revenues and losses have been reported in the respective
accounting periods.
RISKS ASSOCIATED WITH OUR MUSIC BUSINESS
K-tel's music business consists of three principal elements:
- the licensing, manufacturing and distribution of proprietary music
products to direct retail accounts, one stop distributors and
distributors which stock and manage inventory within music departments
of retail stores.
- the distribution of music products obtained from other suppliers.
- the licensing of our music catalog to other entertainment and media
companies for a fee.
THE MUSIC BUSINESS IS HIGHLY COMPETITIVE AND DOMINATED BY MAJOR COMPANIES.
Our business is highly competitive. We face competition for
discretionary consumer purchases of our products from other record companies
and other entertainment companies, such as film and video companies. The
market for pre-recorded music is dominated by five major record companies in
the United States, including Thorne EMI, Bertelsmann AG, Sony Corp., Time
Warner, Inc. and Universal Music Group. We do not have the financial
resources nor do we have the depth or breadth of catalog, distribution
capabilities or current repertoire of these companies. Our ability to
compete in this market depends upon:
- the skill and creativity of our employees to expand and utilize our
music catalog, acquire licenses to enable us to create compilation
packages,
- our ability to effectively and efficiently distribute our products,
and
- our ability to build upon and maintain our reputation for producing,
licensing, acquiring, marketing and distributing high quality music.
WE FACE RISKS ASSOCIATED WITH OUR MUSIC COMPILATION BUSINESS.
The core of our music business involves the licensing of third party
rights and utilization of our own catalog to create music compilations for
retail distribution. Recently, the major pre-recorded music
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companies, either directly or through subsidiaries, have begun to directly
manufacture and distribute pre-recorded music compilations in direct
competition to our music compilation products. With this new competition, it
may be more difficult to access pre-recorded music from these major companies
at reasonable rates.
WE HAVE RISKS RELATED TO THIRD PARTY LICENSING.
We license the rights to numerous master recordings and compositions
from third parties for recording and re-recording of music to produce
compilations and to expand our catalog. We also seek to license the rights
to our master recordings to third parties for use in albums, films, and
television programs for a royalty or a flat fee. These cross-licensing
arrangements are generally made possible by existing industry practices,
which are based on reciprocity. Any material change in these existing
practices could materially affect our business.
WE FACE RISKS ASSOCIATED WITH ADVANCES FOR ROYALTIES AND PURCHASE COMMITMENTS.
Certain of the recordings in our music compilations require the advance
payment of royalties, publishing rights or commitments to purchase a minimum
number of CDs or cassettes. The royalty and publishing amounts which are
advanced based on these commitments may not be recoverable if the sales of
the CDs and cassettes do not meet the contractual minimum. In addition, we
may also be required to purchase additional inventory or re-negotiate
contracts related to products which are not selling well. Further, certain
recordings have a fixed term over which we have licensed the recording. Our
failure to recover the royalty and publishing advances and/or meet the sales
contractual minimums related and/or sell out products on a timely basis,
could have an adverse effect on our business.
WE HAVE RISKS ASSOCIATED WITH PRODUCT RETURNS.
We maintain a significant investment in product inventory and, like
other companies in the pre-recorded music industry, experience a relatively
high level of product returns as a percentage of revenues. We maintain a
sales return reserve based on our experience of returns by product line and
inventory obsolescence. We have historically experienced an actual return
rate ranging from 25% to 30%, depending upon the product. Although our past
experience indicates that these levels are adequate to cover potential
returns in these areas, there can be no assurance that these reserves will be
adequate in the future.
Our agreements with suppliers to distribute their pre-recorded music
generally allow us to return unsold products after a period of time. Adverse
financial or other developments with respect to a particular supplier could
cause a significant decline in the value and marketability of its products,
and could make it difficult for us to return products to such a supplier and
recover its initial product acquisition costs.
WE DEPEND ON LARGE CUSTOMERS.
Approximately 40% of our domestic music sales, which is approximately
16% of our consolidated revenue for the first nine months of fiscal 1999,
were derived from four customers: Handleman Company, Anderson Merchandisers,
Best Buy Co., Inc. and The Musicland Group. While none of these accounts
individually represent more than 10% of our consolidated revenue, the loss of
any of these accounts could have an adverse effect on our business.
WE FACE UNCERTAIN EFFECTS OF DIGITAL DOWNLOADING TECHNOLOGY.
We currently deliver music products (CD's and cassette tapes) through
traditional wholesale and retail distribution channels. Existing methods of
distributing music could be materially altered by new technologies which will
enable users and customers of pre-recorded music material to electronically
download pre-recorded music at home to various personal computer media
formats. The technology is at an early stage in which a number of competing
companies are seeking to have the industry and the public embrace their
technologies
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with a view to extending them to become accepted technologies and formats.
Participants in this technology competition include Microsoft, AT&T, IBM,
Apple, MP3 and others. Digital music distribution provides both significant
risks and opportunities for us. The risks include our uncertain ability to
compete with other music companies from a marketing and a technological
standpoint. Opportunities include the ability to enhance and augment current
distribution methods, as well as increasing opportunities to sell our owned
library of master recordings. If electronic distribution of music becomes
widespread and significantly displaces the current demand for the standard
physical formats which we now sell, and we are unable to invest in the
electronic distribution market, our business and financial results could be
adversely affected.
RISKS ASSOCIATED WITH OUR INTERNET ACTIVITIES
Our e-commerce activities conducted through K-tel On-line are subject to
technological and market risks including the following:
WE HAVE A LIMITED OPERATING HISTORY IN INTERNET RETAILING.
Although we have been marketing music entertainment and consumer
products for more than 35 years, we only commenced the operation of K-tel
On-line in May 1998. Accordingly, we have a relatively short operating
history in on-line retailing upon which you can evaluate our business and
prospects in this segment. To date, our on-line business has not been a
significant factor of our total sales. You should consider our prospects in
light of the risks, expenses and difficulties frequently encountered by
companies in the early stages of on-line commerce. As an early stage on-line
retailer, our business is evolving and is an unpredictive business model. We
cannot assure you that we will succeed in this relatively new, rapidly
evolving and challenging market.
WE MUST CONTINUE TO INVEST IN OUR ON-LINE BUSINESS, BUT CANNOT ASSURE
INVESTORS THAT WE WILL RECOVER OUR OUTLAY.
We intend to continue to invest in marketing and enhancing K-tel
On-line. Because we have relatively low product gross margins in our on-line
business, achieving profitability in our on-line business will depend upon
our ability to generate and sustain substantially increased revenue from
internet sales. Operating losses relating to our on-line businesses are
likely to continue for the foreseeable future and it is not possible to
accurately predict at what point it may become profitable.
WE DEPEND ON CONTINUED GROWTH OF ON-LINE COMMERCE.
The future success of K-tel On-line will be substantially dependent,
among other things, upon the widespread acceptance and use of the internet
and other on-line services as an effective medium of commerce by consumers.
Rapid growth in the use of and interest in the World Wide Web, the internet
and other on-line services is a recent phenomenon, and there can be no
assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
internet and other on-line services as a medium of commerce. We rely on
consumers who have historically used traditional means of commerce to
purchase merchandise. K-tel On-line's success is dependent on these
consumers utilizing the internet and K-tel On-line as a means of purchasing
pre-recorded music.
WE FACE INTENSE E-COMMERCE COMPETITION.
The on-line commerce market is rapidly expanding and intensely
competitive. We expect this competition to intensify. The barriers to entry
are low and both current and new competitors can launch internet-based
businesses at relatively low cost. K-tel On-line competes with a variety of
music and video marketing companies, including:
- on-line vendors of music, videos and related products such as
CDNow.com, Amazon.com and Barnes & Noble.com,
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<PAGE>
- traditional retailers of music products, including mass merchandisers
such as consumer electronics stores, and specialty music retailers,
and
- non-store retailers such as music clubs.
Many of our current and potential competitors in e-commerce have larger
customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than we have. They may be able to
secure merchandise from vendors on more favorable terms and may be able to
adopt more aggressive pricing or inventory policies. They can also devote
more resources to technology development and marketing than we can. We
cannot predict the level of financial resources that will be required to
successfully compete in the e-commerce business segment.
WE FACE RISKS OF INTERNET WEB SITE INTERRUPTION AND CAPACITY CONSTRAINTS.
A key element of our strategy is to generate a high volume of traffic on
K-tel On-line. Accordingly, the satisfactory performance, reliability and
availability of our Web site, transaction-processing systems and network
infrastructure are critical to our reputation and ability to attract and
retain customers and maintain customer service levels. We anticipate that a
significant portion of our revenues will depend upon the number of visitors
who shop at our Web site and the volume of orders we fulfill. We rely upon a
third party, UUNET Technologies, Inc., to host K-tel On-line's Web site
servers. UUNET is the internet services division of MCI WorldCom. All
communications systems are vulnerable to natural or manmade damage or
interruption. Despite implementation of network security measures, servers
are vulnerable to computer viruses, physical or electronic break-ins and
similar disruptions, which could lead to interruptions, delays, loss of data
or the inability to accept and fulfill customer orders. UUNET's backup
recovery plan should allow K-tel On-line to continue to operate in the event
of a disaster or breach of network security. In addition, our customers
depend on internet service providers, on-line service providers and other Web
site operators for access to our Web site. While systems are continually
being upgraded and improved some of the providers have experienced delays and
other difficulties due to system failures unrelated to our systems. Any of
these problems could affect our business.
WE FACE RISKS ASSOCIATED WITH OUR FULFILLMENT STRATEGY.
Fulfillment and distribution related to the K-tel On-line Web site is
dependent upon maintaining our existing relationship with Valley Media Inc.,
our provider of order fulfillment music and video products sold on our Web
site or establishing a new fulfillment relationship with another fulfillment
operation. While we are satisfied with our current arrangement with Valley,
there can be no assurance that we will maintain our relationship with Valley
or that we will be able to find an alternative, comparable supplier capable
of providing fulfillment services on terms satisfactory to us, should our
relationship with Valley terminate. An unanticipated termination of our
relationship with Valley could adversely affect our operations for the
quarter in which such termination occurred, even if we are able to establish
a relationship with an alternative fulfillment house. We or Valley may
terminate our existing agreement upon 30 days' written notice. To date,
Valley has satisfied our requirements on a timely basis. However, to the
extent that Valley does not have sufficient capacity and is unable to satisfy
our requirements on a timely basis, such capacity constraint would have an
adverse effect on our business.
IMPOSITION OF SALES AND OTHER TAXES ON E-COMMERCE TRANSACTIONS MAY IMPAIR OUR
ABILITY TO DERIVE FINANCIAL BENEFITS FROM E-COMMERCE.
We generally do not collect sales or other taxes in respect of goods
sold to users on K-tel On-line. However, one or more states may seek to
impose sales tax collection obligations on out-of-state companies, such as
K-tel On-line, which engage in or facilitate on-line commerce. A number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the internet.
Such proposals, if adopted, could affect the growth of electronic commerce
and could adversely affect our opportunity to derive financial benefit from
electronic commerce. Moreover, if any state or foreign
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<PAGE>
country were to successfully assert that K-tel On-line should have collected
sales or other taxes on the exchange of merchandise on its system, our
results of operations could be adversely affected.
Legislation limiting the ability of states to impose taxes on
internet-based transactions has been proposed in the U.S. Congress. We
cannot assure you that this legislation will ultimately become law or that
the tax moratorium in the final version of this legislation will be ongoing.
Failure to enact or renew this legislation, once enacted, could allow various
states to impose taxes on internet-based commerce, which could adversely
affect our business.
RISKS ASSOCIATED WITH CONSUMER PRODUCTS
OUR INFOMERCIAL BUSINESS FACES RISKS.
Our infomercial business is concentrated in Europe. Our success in
marketing through infomercials depends upon product acceptance, which we
believe is achieved through the efficient airing of our infomercials, our
merchandising mix, our ability to achieve adequate response rates to our
infomercials and our ability to accurately forecast consumer demand.
Infomercials may involve substantial costs, which are committed to prior to
the airing of the infomercial. If for any reason we experience a significant
shortfall in anticipated sales from a particular infomercial and thereby not
recover costs associated with that product, our business could be adversely
affected. In addition, quantity and quality of air time, response rates and
sales generated by each infomercial can be affected by factors such as
consumer preferences, economic conditions, and timing of competitors'
infomercials and merchandise mix. Further, our ability to obtain inventory
of consumer products on a timely basis is critical to our marketing of a
particular product and may affect sales and customer return levels. Failure
to accurately target the appropriate customers, to achieve adequate response
rates or have sufficient inventory levels, could result in lower sales and
lower margins which could have an adverse effect on our business.
WE MAY EXPERIENCE DIFFICULTIES IN OBTAINING INFOMERCIAL TIME.
Our infomercial business is dependent upon agreements with European
television broadcast stations or cable system operators. A significant
number of our customers are reached through the broadcasting of our
infomercials pursuant to such agreements. These agreements contain various
provisions, including agreements to carry our programming for 57 hours
weekly. These agreements are subject to renegotiations and renewal from time
to time. Certain agreements provide the station or cable system operator
with the right to terminate the agreement at any time. Failure to maintain
distribution of our infomercials in particular markets could have an adverse
effect on us. Our ability to maintain these agreements is dependent on our
ability to negotiate renewals on these agreements. There can be no
assurance, however, that any such agreements can be renewed on acceptable
terms.
INTENSE COMPETITION IN INFOMERCIAL SALES AFFECTS OUR BUSINESS.
We operate in an industry dominated by two established European
competitors - Quantum and TV SHOP Europe - both of which have substantially
more television and cable carriage than K-tel, as well as greater financial,
distribution, and marketing resources. We also must compete with store and
catalog retailers, many of whom have substantially greater financial,
distribution and marketing resources. In addition, we compete with existing
and future on-line companies that may offer similar consumer products. We
cannot assure you that we will be able to effectively compete with these
companies.
WE DEPEND ON PRODUCT SUPPLIERS AND THE CONTINUAL AVAILABILITY OF NEW PRODUCTS.
We have endeavored to position K-tel in the home shopping market as the
seller of certain unique consumer products. We depend upon a limited number
of product suppliers for such products. We believe that there are sufficient
product suppliers to allow us to continue to offer such products
consistently, but there is no assurance that an adequate supply will remain
available at commercially reasonable costs. If we are not
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<PAGE>
able to obtain certain products currently offered to customers or obtain a
supply of new products acceptable to customers, such events could have an
adverse impact on business.
WE DEPEND ON SERVICE PROVIDERS.
In France, Belgium, Ireland, Holland and Switzerland (markets handled by
K-tel Marketing UK) our ability to handle in-bound telephone orders and to
fill customer orders depends on services provided by third parties. We are
dependent on (a) outside telemarketers to answer customer questions and take
orders, (b) shipping companies and the country's postal service for timely
delivery of our merchandise to customers and (c) outside distribution centers
to handle shipments and returned goods. Any disruption in these services
including strikes, delays or disruptions in service, could have an adverse
effect on our business.
RISKS ASSOCIATED WITH ALL OF OUR BUSINESS SEGMENTS
WE HAVE RISKS RELATED TO OUR FOREIGN OPERATIONS.
In addition to our activities in the United States, 53% of our sales
through the first nine months of 1999 were generated internationally.
Foreign operations are subject to general risks attendant to the conduct of
business in each foreign country, including economic and political
uncertainties and each foreign government's regulations. In addition, our
international business may be affected by changes in demand or pricing
resulting from fluctuations in currency exchange rates or other factors.
TRADEMARKS AND PROPRIETARY RIGHTS MAY NOT PROTECT OUR INTELLECTUAL PROPERTY.
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success, and
rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our proprietary rights. We pursue the
registration of our trademarks and service marks in the U.S. and
internationally. Effective trademark, service mark and copyright protection
may not be available in every country in which our products and services are
made available on-line. We have licensed in the past, and expect that we may
license in the future, certain of our proprietary music, such as trademarks
or copyrighted material, to third parties. While we attempt to ensure that
the quality of our brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of our proprietary rights or reputation, which
could have a material adverse effect on our business, financial condition and
results of operations. There can be no assurance that the steps taken by us
to protect our proprietary rights will be adequate or that third parties will
not infringe or misappropriate our copyrights, trademarks, trade dress and
similar proprietary rights. In addition, there can be no assurance that
other parties will not assert infringement claims against us. We have been
subject to claims and expect to be subject to legal proceedings and claims
from time to time in the ordinary course of our business, including claims of
alleged infringement of the intellectual property rights of third parties by
us and our licensees. Such claims, even if not meritorious, could result in
the expenditure of significant financial and managerial resources.
WE DEPEND ON OUR KEY PERSONNEL.
Our success depends largely on the skills, experience and efforts of our
executive officers and key employees. The loss of the services of members of
our senior management, could materially adversely affect our business,
financial condition or results of operations. In addition, in large part,
our success will depend on our ability to attract and retain qualified
management, marketing and sales personnel. We face intense competition for
qualified personnel from other companies. We do not have employment
agreements with any of our key executive officers or employees. If we are
unable to hire or retain qualified personnel, our business could be adversely
affected.
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OUR READINESS FOR YEAR 2000 MAY AFFECT OUR BUSINESS.
We have developed a plan to ensure our systems are compliant with the
requirements to process transactions in the Year 2000. The majority of our
internal information systems have been upgraded or are in the process of
being upgraded or replaced with fully compliant new systems. The new systems
implementation related to accounting for royalties is in progress and we
expect will be substantially completed by July 31, 1999. We believe our
other significant systems to be Y2K complaint. Some of our customers utilize
equipment to ensure it will be effective in the Y2K. We are also working
with our processing banks and network providers to ensure their systems are
Y2K compliant. All of these costs will be or have been borne by the
processors and network companies. We do not expect that the failure of any
customer or vendor to comply with Y2K should have a material impact on our
operations. However, should we or our customers, our vendors or the
processing banks fail to resolve Y2K issues, we could lose certain financial
and operating data. We are in the process of developing a contingency plan,
which we expect to be completed by the end of the fiscal year. The total
cost of the software implementation to bring us into Y2K compliance is
estimated to be approximately $200,000.
MANAGEMENT AND CERTAIN SHAREHOLDERS CAN EXERCISE SIGNIFICANT INFLUENCE OVER
OUR COMPANY.
Based upon stock ownership as of May 31, 1999, Philip Kives, the
Chairman and Chief Executive Officer of K-tel, beneficially owned an
aggregate 45% of our outstanding shares. As a result, he has the ability to
significantly influence our management, shareholder voting, and the
operations and direction of the Company.
WE ARE SUBJECT TO ANTI-TAKEOVER CONSIDERATIONS.
As a Minnesota corporation, we are subject to certain anti-takeover
provisions of Minnesota law. Certain provisions of the law could have the
effect of delaying, deferring or preventing a change in control of K-tel, may
discourage bids for our common stock, and may adversely affect the market
price of our stock.
WE MUST CONTINUE TO MEET NASDAQ MAINTENANCE REQUIREMENTS.
Under the currently effective criteria for continued listing of
securities on the Nasdaq National Market-TM-, companies may qualify for
continued listing under two different Continued Listing Standards. Standard 1
requires, among other things, Net Tangible Assets greater than $4.0 million,
Market Value of Public Float in excess of $5.0 million and a minimum Bid Price
greater than $1 per share. Standard 2 requires, among other things, Market
Value of Public Float in excess of $15.0 million, a Market Capitalization of
$50.0 million and a minimum Bid Price of $5 per share. In the event that we
are unable to maintain the standards for continued listing, our shares could
be subject to delisting from the Nasdaq National Market-TM-. If our common
stock were delisted, we would seek listing on Nasdaq's SmallCap Market. If
we did not meet the initial listing requirements for the Nasdaq SmallCap
Market, trading, if any, in our shares would thereafter be conducted in the
over-the-counter market on the OTC Bulletin Board established for securities
that do not meet the Nasdaq National Market-TM- listing requirements or in
what are commonly referred to as the "pink sheets." This may result in
investors finding it more difficult to trade our stock.
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET BY THE SELLING SHAREHOLDERS
AND EXISTING INVESTORS COULD CAUSE OUR STOCK PRICE TO DECLINE.
We have 10,246,199 shares of common stock outstanding and have
outstanding options to purchase an additional 1,283,149 shares of common
stock pursuant to various stock option plans (of which 335,349 shares are
currently vested). We will also have outstanding warrants to acquire an
aggregate of 167,754 shares of our common stock. The outstanding shares
(including the 2,263,822 maximum number of shares assumed to be sold in this
offering) will be freely tradable without restriction or further registration
under federal securities laws unless they are purchased by our affiliates as
that term is defined in SEC Rule 144 under the Securities Act. If our
shareholders, option holders or warrant holders sell substantial amounts of
our
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<PAGE>
common stock in the public market following this offering, the market price
of our common stock could decline. Sales in the public market also might make
it more difficult for us to sell our securities in the future at an
appropriate time and price.
VOLATILITY OF OUR STOCK PRICE.
Our common stock is traded on the Nasdaq National Market. The market
price of our common stock has historically been volatile. We believe the
market price of our common stock could fluctuate substantially, based on a
variety of factors, including:
- quarterly fluctuations in results of operations,
- timing of product and press releases,
- announcements of new products and acquisition or acquisitions by our
competitors,
- changes in earnings estimates by research analysts, and
- changes in accounting treatments or principles.
The market price of our common stock may be affected by our ability to
meet or exceed analysts' or "street" expectations. Any failure to meet or
exceed such expectations could have an adverse effect on the market price of
our common stock. Furthermore, stock prices for many companies, particularly
entertainment and internet companies, fluctuate widely for reasons that may
be unrelated to their operating results. These fluctuations and general
economic, political and market conditions, such as recessions or
international currency fluctuations and demand for our products, may affect
the market price of our common stock either negatively or positively.
RECENT LITIGATION AGAINST K-TEL.
K-tel, Philip Kives, K-tel's Chairman and Chief Executive Officer, and
Lawrence Kieves, K-tel's President, are currently defendants of 23 proposed
class action lawsuits which have been consolidated into one action in the
United States District Court for the District of Minnesota. The lawsuits
have been brought by purchasers of our stock during an approximately
three-week period in November 1998, who allege that the defendants made
material misrepresentations or failed to provide accurate information in
public statements concerning our business. Our company and the individual
defendants intend to seek a dismissal of the claims based upon provisions
under the Private Securities Litigation Reform Act of 1995 on the basis that
the lawsuits do not state a viable claim under such law. It is likely that
anticipated motions by us and the individual defendants to dismiss the
lawsuits will not be heard until the summer of 1999. The complaints against
us and the defendants allege unspecified damages, if any, and the amount
cannot be determined at this time. The lawsuits are at an early stage, and
we do not know the full amount of the claimed losses, if any. We intend to
vigorously contest the claims and believe there is no sound basis for the
lawsuits. Because the cases are at an early stage, however, we are unable to
accurately assess its liability. If the claimants in the litigation prevail
against us, our business could, depending upon the amount of any damages
awarded against it, be materially and adversely affected. Our company and
the named officers have tendered the defense of the claims against them to
their insurance carriers who have agreed to defend them, but have reserved
all rights they might have to contest their responsibility under the
insurance policies in question. We can give no assurance that insurers will
not contest their responsibility under the policies or that any award against
us or the named directors and officers will not exceed any coverage.
The nature of our business is such that we are routinely a party or
subject to other items of pending or threatened litigation, which management
of K-tel believes, based upon information currently available, will not
result in any material adverse effect on our financial condition, results of
operation or liquidity.
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SELLING SHAREHOLDERS
The following table presents information regarding the selling
shareholders. The shares listed below represent the shares which each
selling shareholder owned on May 24, 1999 and the shares which each selling
shareholder may own upon the exercise of warrants.
The securities "beneficially owned" by a person are determined in
accordance with the SEC's definition of "beneficial ownership" and,
accordingly, may include securities owned by or for, among others, the
spouse, children or other relatives of such person, as well as other
securities over which the person has or shares voting or investment power or
securities which the person has the right to acquire within 60 days of May
24, 1999.
In the following table, percentage of beneficial ownership is based on
10,246,199 outstanding shares of common stock. Shares issuable pursuant to
the exercise of warrants are deemed outstanding for computing the percentage
of the person holding such securities but are not deemed outstanding for
computing the percentage of any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED IF ALL SHARES ARE
SELLING SHAREHOLDER OFFERING (1) SHARES OFFERED (2) SOLD IN THE OFFERING
- ------------------- ------------------- ------------------ -----------------------
<S> <C> <C> <C>
Strong River Investments Inc. 549,670 1,131,911 0
c/o Cavallo Capital Corp.
630 Fifth Avenue, Suite 2000
New York, New York 10111
Catharine Street LLC 549,670 1,131,911 0
c/o Citco Trustees (Cayman)
Limited
Commercial Centre
P.O. Box 31106 SMB
Grand Cayman
Cayman Islands, British West Indies
</TABLE>
- ------------------
(1) Represents (a) 232,897 shares purchased on April 21, 1999, (b) 232,896
shares which will be purchased upon the effectiveness of this
registration statement, and (c) 83,877 shares issuable upon exercise of
warrants.
(2) Represents the shares beneficially owned by the selling shareholders as
well as shares issuable to the selling shareholders pursuant to an
adjustable warrant. Since the number of shares issuable upon exercise
of such warrants depends in part upon the market price of the common
stock prior to issuance, the actual number of shares that will be issued
and, consequently, offered for sale under this registration statement,
cannot be determined at this time. K-tel has, however, included in this
registration statement its best estimate of the maximum number of shares
issuable upon exercise of the adjustable warrants. The adjustable
warrants prohibit each holder from exercising to the extent that such
exercise would result in the holder, together with any of its affiliates
beneficially owning in excess of 4.999% of the outstanding shares of
common stock following such exercise. The adjustable warrants also
prohibit each holder from exercising such warrant to the extent that
such exercise would result in the holder, together with any of its
affiliates, beneficially owning in excess of 9.999% of the outstanding
shares of common stock following such exercise. Either restriction may
be waived by a holder of an adjustable warrant as to itself upon not
less than 75 days' notice to K-tel.
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SALES TO SELLING SHAREHOLDERS
In April 1999, we entered into a securities purchase agreement with the
selling shareholders. The agreement provided for the sale in a private
placement of up to a minimum of $8.0 million and a maximum of $18.0 million
of our common stock. The agreement also provided for the issuance of
warrants to the selling shareholders, including an adjustable warrant.
SELLING SHAREHOLDERS' REGISTRATION RIGHTS
Under our securities purchase agreement with the selling shareholders,
we agreed to register (a) shares of common stock previously issued to them,
(b) shares of common stock to be issued upon effectiveness of the
registration statement, and (c) shares of common stock to be issued upon
exercise of their warrants. We also agreed to use our best efforts to keep
the registration statement effective for two years, until they no longer hold
or have the right to acquire shares, or until all of their shares may be sold
pursuant to SEC rules without volume restrictions, whichever comes first. We
also agreed to bear all expenses, other than selling commissions and fees, in
connection with the registration and sale of the shares being offered by the
selling shareholders.
Our registration of the shares does not necessarily mean that the
selling shareholders will sell all or any of the shares covered by this
prospectus.
USE OF PROCEEDS
The shares offered by this prospectus will be sold by the selling
shareholders. We will not receive any of the proceeds from the sale of the
shares by the selling shareholders.
PLAN OF DISTRIBUTION
The selling shareholders, and any of their pledgees, assignees and
successors-in-interest, may from time to time sell any or all of their shares
on any stock exchange on which the shares are traded or in private
transactions. These sales may be at fixed or negotiated prices. The selling
shareholders may use any one or more of the following methods when selling
shares:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may purchase and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- short sales;
- broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
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The selling shareholders may also sell shares under SEC Rule 144, if
available, rather than under this prospectus.
The selling shareholders may sell shares short, short sales against the
box, puts and calls and other transactions in our securities or derivatives
of our securities, and may sell or deliver shares in connection with these
trades. The selling shareholders may pledge their shares to their brokers
under the margin provisions of customer agreements. If a selling shareholder
defaults on a margin loan, the broker may, from time to time, offer and sell
the pledged shares.
Broker-dealers engaged by the selling shareholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling shareholders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser)
in amounts to be negotiated. The selling shareholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The selling shareholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of Section 2(a)(11) of the Securities Act. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to
the selling shareholders. We have agreed to indemnify the selling
shareholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares offered hereby was passed upon on behalf of
K-tel by Briggs and Morgan, Professional Association, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements as of June 30, 1998 and for the
three years in the period ended June 30, 1998, incorporated by reference in
this prospectus, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm
as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any documents we file
at the SEC's public reference rooms in Washington, D.C., New York, New York,
and Chicago, Illinois. Please call the SEC at 1-800-732-0330 for further
information on the public reference rooms. Our SEC filings are also
available to the public from the SEC's Web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to documents we file with the SEC. The information
incorporated by reference is considered to be part of this prospectus.
Information that we later file with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings made with the SEC under Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, until the selling
shareholders sell all of the shares covered by this prospectus:
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- Annual Report on Form 10-K for the year ended June 30, 1998;
- Quarterly Reports on Form 10-Q for the quarters ended September 30,
1998, December 30, 1998 and March 31, 1999;
- Current Report on Form 8-K filed April 27, 1999;
- Description of our common stock contained in our Current Report on
Form 8-K filed June 2, 1999; and
- Definitive Schedule 14A Proxy Statement filed on January 22, 1999.
This prospectus is part of a registration statement we filed with the
SEC. You may request a copy of the registration statement or any of the above
filings, at no cost, by writing or telephoning our Vice President and Chief
Financial Officer at the following address:
K-tel International, Inc.
2605 Fernbrook Lane North
Minneapolis, Minnesota 55447-4736
(612) 559-6800
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PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by us in
connection with the sale and distribution of the shares being registered.
All amounts shown are estimates, except the registration fee.
<TABLE>
<S> <C>
SEC registration fee. . . . . . . . . . . . . . . . . . . . $ 3,865
Legal fees and expenses . . . . . . . . . . . . . . . . . . 20,000
Accounting fees and expenses. . . . . . . . . . . . . . . . 15,000
Miscellaneous (including listing fees, if applicable) . . . 17,500
---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 56,365
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article V, Section 5.01 of our Bylaws provide that we shall indemnify
persons to the extent required by Minnesota Statutes, section 302A.521.
Section 302A.521 provides that a corporation shall indemnify any person who
was or is made or is threatened to be made a party to any proceeding by
reason of the former or present official capacity of such person against
judgments, penalties and fines, including, without limitation, excise taxes
assessed against such person with respect to an employee benefit plan,
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person has not been indemnified by another organization or
employee benefit plan for the same penalties, fines, taxes and expenses with
respect to the same acts or omissions; acted in good faith; received no
improper personal benefit and Section 302A.255 (regarding conflicts of
interest), if applicable, has been satisfied; in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and
in the case of acts or omissions by persons who are or were serving other
organizations at the request of the corporation or whose duties involve or
involved service for other organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
5.1 Opinion of Briggs and Morgan, Professional Association
10.1 Securities Purchase Agreement, dated as of April 21, 1999, by and
among the Company and the Purchasers identified therein (incorporated
by reference to K-tel's Current Report on Form 8-K, filed on April 27,
1999 (File No. 0-6664)).
10.2 Registration Rights Agreement, dated as of April 21, 1999, by and
among the Company and the Purchasers identified therein (incorporated
by reference to K-tel's Current Report on Form 8-K, filed on April 27,
1999 (File No. 0-6664)).
10.3 Warrant No. A-001 issued to Strong River Investments Inc., to purchase
shares of common stock, dated April 21, 1999 (incorporated by
reference to K-tel's Current Report on Form 8-K, filed on April 27,
1999 (File No. 0-6664)).
10.4 Warrant No. A-002 issued to Catharine Street LLC, to purchase shares
of common stock, dated April 21, 1999 (incorporated by reference to
K-tel's Current Report on Form 8-K, filed on April 27, 1999
(File No. 0-6664)).
10.5 Warrant No. B-001 issued to Strong River Investments Inc., to purchase
83,877 shares of common stock at an exercise price equal to $10.73,
dated April 21, 1999 (incorporated by reference to K-tel's Current
Report on Form 8-K, filed on April 27, 1999 (File No. 0-6664)).
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<PAGE>
10.6 Warrant No. B-002 issued to Catharine Street LLC, to purchase 83,877
shares of common stock at an exercise price equal to $10.73, dated
April 21, 1999 (incorporated by reference to K-tel's Current Report on
Form 8-K, filed on April 27, 1999 (File No. 0-6664)).
23.1 Consent of Briggs and Morgan, Professional Association (included in
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page to the Registration
Statement)
</TABLE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that the undertakings set forth in paragraphs (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the provisions summarized
in Item 15 above, or otherwise, the registrant has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities
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<PAGE>
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plymouth, State of Minnesota, on June 3, 1999.
K-TEL INTERNATIONAL, INC.
By /s/LAWRENCE KIEVES
-----------------------------------------
Lawrence Kieves
President and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Lawrence Kieves and Steven A.
Kahn, jointly and severally, his or her true and lawful attorneys-in-fact,
each with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the SEC,
hereby ratifying and confirming all that each of said attorneys-in-fact or
any of them, or his or their substitute or substitutes, may lawfully do or
cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on the dates
and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/PHILIP KIVES Chairman and Chief Executive June 3, 1999
- ---------------------- Officer and Director (Principal
Philip Kives Executive Officer)
/s/LAWRENCE KIEVES President and Director June 3, 1999
- ----------------------
Lawrence Kieves
/s/STEVEN A. KAHN Vice President and Chief June 3, 1999
- ---------------------- Financial Officer (Principal
Steven A. Kahn Accounting and Financial
Officer)
/s/HERBERT DAVIS Director June 3, 1999
- ----------------------
Herbert Davis
Director June 3, 1999
- ----------------------
Jay William Smalley
Director June 3, 1999
- ----------------------
Dennis W. Ward
/s/DAVID WOLINSKY Director June 3, 1999
- ----------------------
David Wolinsky
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------
<S> <C>
5.1 Opinion of Briggs and Morgan, Professional Association
10.1 Securities Purchase Agreement, dated as of April 21, 1999, by and
among the Company and the Purchasers identified therein (incorporated
by reference to K-tel's Current Report on Form 8-K, filed on April 27,
1999 (File No. 0-6664)).
10.2 Registration Rights Agreement, dated as of April 21, 1999, by and
among the Company and the Purchasers identified therein (incorporated
by reference to K-tel's Current Report on Form 8-K, filed on April 27,
1999 (File No. 0-6664)).
10.3 Warrant No. A-001 issued to Strong River Investments Inc., to purchase
shares of common stock, dated April 21, 1999 (incorporated by
reference to K-tel's Current Report on Form 8-K, filed on April 27,
1999 (File No. 0-6664)).
10.4 Warrant No. A-002 issued to Catharine Street LLC, to purchase shares
of common stock, dated April 21, 1999 (incorporated by reference to
K-tel's Current Report on Form 8-K, filed on April 27, 1999
(File No. 0-6664)).
10.5 Warrant No. B-001 issued to Strong River Investments Inc., to purchase
83,877 shares of common stock at an exercise price equal to $10.73,
dated April 21, 1999 (incorporated by reference to K-tel's Current
Report on Form 8-K, filed on April 27, 1999 (File No. 0-6664)).
10.6 Warrant No. B-002 issued to Catharine Street LLC, to purchase 83,877
shares of common stock at an exercise price equal to $10.73, dated
April 21, 1999 (incorporated by reference to K-tel's Current Report on
Form 8-K, filed on April 27, 1999 (File No. 0-6664)).
23.1 Consent of Briggs and Morgan, Professional Association (included in
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page to Registration
Statement)
</TABLE>
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<PAGE>
EXHIBIT 5.1
June 3, 1999
K-tel International, Inc.
2605 Fernbrook Lane North
Minneapolis, Minnesota 55447-4736
Gentlemen:
We are counsel to K-tel International, Inc., a Minnesota corporation
(the "Company"), in connection with its filing of a registration statement on
Form S-3 (the "Registration Statement"), under the Securities Act of 1933, as
amended, relating to the proposed sale by selling shareholders of 2,263,822
shares of the Company's common stock (the "Shares").
We have examined the Registration Statement and those documents,
corporate records, and other instruments we deemed relevant as a basis for
the opinion herein expressed.
Based on the foregoing, it is our opinion that when the Registration
Statement shall have been declared effective by order of the Securities and
Exchange Commission, and the Shares have been sold as contemplated by the
Registration Statement, the Shares will be legally and validly issued,
fully-paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the prospectus included in such Registration Statement.
Very truly yours,
BRIGGS AND MORGAN,
Professional Association
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated October 9, 1998
included in K-tel International, Inc.'s Form 10-K for the year ended June 30,
1998 and to all references to our Firm included in this registration
statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Minneapolis, Minnesota,
June 3, 1999
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