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2000 Form 10-K
Exhibit 99
CAUTIONARY STATEMENTS
The risks and uncertainties set forth below incorporate 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 reflect
K-tel's 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, K-tel cannot assure you
that the actual results or developments that it anticipates will be realized
or, even if substantially realized, that they will have the anticipated
results. The risks and uncertainties that may affect K-tel's 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, K-tel undertakes no obligation to publicly revise any such
forward-looking statements to reflect events or circumstances that may arise
after the date of this report.
NASDAQ DELISTING
Under the currently effective criteria for continued listing of securities on
the NASDAQ National Market, 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. K-tel was notified by Nasdaq on August 3,
2000 that it did not meet the standards for continued listing and that its
shares are subject to de-listing from the Nasdaq National Market at the
opening of business on August 14, 2000. The Company filed an appeal and
simultaneously applied for listing on the Nasdaq Small Cap Market. The
Company appealed this initial decision and also applied for listing on the
Nasdaq SmallCap Market. A hearing was conducted by a panel authorized by
Nasdaq's Board of Directors on September 21, 2000. On September 26, 2000 the
Company was notified by the Nasdaq Stock Market Inc. that its Common Stock
had been delisted from the Nasdaq National Market, effective with the open of
business September 27, 2000, and that its application for listing on the
Nasdaq SmallCap Market was denied. Delisting of the Company's Common Stock
from Nasdaq could have a material adverse effect on the market price of, and
the efficiency of the trading market for the Company's Common Stock. The
Company's Common Stock will be traded on the Over-the-Counter Bulletin Board
("the OTCBB"). The OTCBB is a controlled quotation service that offers
real-time quote, last sale prices and volume information in over-the-counter
equities.
FINANCIAL CONDITION
K-tel incurred losses in fiscal 2000 and 1999 of $15.7 million and $11.5
million, respectively. Approximately $0.7 million in 2000 and $2.7 million in
1999 of these losses relate to businesses K-tel has exited, mainly media
buying and non-theatrical videos. Future operating results depend on many
factors, including the demand for K-tel's products, traffic on K-tel's web
sites, the level of competition, K-tel's ability to acquire, develop, license
and market new titles and consumer products, and the ability of K-tel's
officers and key employees to manage K-tel's business and control costs.
Successful implementation of K-tel's strategy will require continued access
to financing to meet working capital requirements and develop new business
opportunities, including its on-line strategies. As a distributor of music
and consumer products, K-tel purchases products or components for assembly
into finished products directly from manufacturers for resale to retailers
and consumers. As a result, K-tel has significant working capital
requirements, the majority of which are to finance inventory and accounts
receivable. These working capital needs
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will expand as inventory and accounts receivable increase in response to
K-tel's growth. The future success of K-tel's on-line marketing may require
additional financial resources for development and acquisition of technology
and investments in marketing and contractual relationships with third
parties. Future growth will likely require additional working capital.
Although K-tel's credit lines with its two lenders are sufficient to meet its
needs at this time, there can be no assurance that they will be adequate in
the future or that K-tel will be able to obtain additional financing upon
favorable terms when required.
K-tel expects to experience fluctuations in future quarterly operating
results that may be caused by a variety of factors, many of which are outside
of its control. These factors include the seasonality of sales, the success
of its promotions and sales programs, the amount and timing of operating
costs and capital expenditures, the level of merchandise returns, the mix of
products K-tel sells, and supply and timing of product deliveries.
As a result, K-tel believes that period-to-period comparisons of its 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
K-tel's operating results will be below the expectations of securities
analysts and investors. K-tel expects to experience seasonality in its
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
other two quarters and its sales of products in Europe through infomercials
are stronger in the first and fourth calendar quarters of each year. K-tel's
limited operating history in e-commerce makes it difficult to ascertain the
effects of seasonality on that segment of its business. In addition, K-tel
has discontinued certain operating divisions whose revenues and losses have
been reported in the respective accounting periods.
MUSIC BUSINESS
K-tel's business is highly competitive. K-tel faces competition for
discretionary consumer purchases of its products from other record companies
and other entertainment companies, such as film and video companies. The
market for pre-recorded music is dominated by several major record companies
in the United States, including Bertelsmann AG, Sony Corp., Time Warner, Inc.
and Universal Music Group. K-tel does not have the financial resources nor
does it have the depth or breadth of catalog, distribution capabilities or
current repertoire of these companies. Its ability to compete in this market
depends upon the skill and creativity of its employees to expand and utilize
its music catalog, acquire licenses to enable K-tel to create compilation
packages, its ability to effectively and efficiently distribute its products,
and its ability to build upon and maintain its reputation for producing,
licensing, acquiring, marketing and distributing high quality music.
The core of K-tel's music business involves the licensing of third party
rights and utilization of its own catalog to create music compilations for
retail distribution. Recently, the major pre-recorded music companies, either
directly or through subsidiaries, have begun to directly manufacture and
distribute pre-recorded music compilations in direct competition with their
music compilation products. With this new competition, it may be more
difficult to access pre-recorded music from these major companies at
reasonable rates.
Certain of the recordings in K-tel's 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, K-tel
may also be required to purchase additional inventory or re-negotiate
contracts related to products that are not selling well. Further, certain
recordings have a fixed term over which K-tel has licensed the recording.
K-tel's 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 advance the period in which the expense will be recognized.
K-tel maintains a significant investment in product inventory and, like other
companies in the pre-recorded music industry, experiences a relatively high
level of product returns as a percentage of revenues. K-tel maintains a sales
return reserve based on its experience of returns by product line and
inventory obsolescence. K-tel has historically
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experienced an actual return rate ranging from 25% to 35%, depending upon the
product. Although its 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.
K-tel's distribution division, KTD has agreements with record label companies
to distribute their pre-recorded music which generally allow K-tel 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 K-tel to return products to such a supplier and recover its
costs.
K-tel currently delivers music products (CDs, DVDs and cassette tapes)
through traditional wholesale and retail distribution channels. Demand for
cassette tapes has already shown a substantial decline in favor of CD's.
Existing methods of distributing music could be materially altered by new
technologies that 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 and formats 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
K-tel. The risks include K-tel's 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 its owned library of
master recordings. If electronic distribution of music becomes widespread and
significantly displaces the current demand for the standard physical formats
that K-tel now sells, and K-tel is unable to successfully enter in the
electronic distribution market, its business and financial results could be
affected.
K-TEL'S INTERNET ACTIVITIES
Although K-tel has been marketing music entertainment and consumer products
for more than 35 years, it only commenced the operation of K-tel.com in May
1998. Accordingly, K-tel has a relatively short operating history in on-line
retailing to evaluate its business and prospects in this segment. To date,
the on-line business has not been a significant factor of its total sales. As
an early stage on-line retailer, K-tel's business is evolving and is a
non-predictive business model.
K-tel intends to continue to invest in marketing and enhancing K-tel.com.
Because K-tel has relatively low product gross margins in its on-line
business, achieving profitability in its on-line business will depend upon
its ability to generate and sustain substantially increased revenue from
Internet sales. Operating losses relating to its 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.
The on-line commerce market is rapidly expanding and intensely competitive.
K-tel expects 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.com 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; 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.
Some of K-tel's current and potential competitors in e-commerce have larger
customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than K-tel has. 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 K-tel can. K-tel
cannot predict the level of financial resources that will be required to
successfully compete in the e-commerce business segment.
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CONSUMER PRODUCTS
K-tel's consumer products business is concentrated in Europe. K-tel's success
in marketing its consumer products through infomercials depends upon product
acceptance, which K-tel believes is achieved through the efficient airing of
its infomercials, its merchandising mix, its ability to achieve adequate
response rates to its infomercials and its ability to accurately forecast
consumer demand. Infomercials may involve substantial costs, which are
committed to prior to the airing of the infomercial. In addition, quantity
and quality of airtime, 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, K-tel's ability to obtain inventory of consumer products on a timely
basis is critical to its 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.
K-tel's infomercial business depends upon agreements with European television
broadcast stations or cable system operators. A significant number of its
customers are reached through the broadcasting of its infomercials pursuant
to such agreements. 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.
K-tel's ability to maintain these agreements depends on its ability to
negotiate renewals on these agreements. There can be no assurance, however,
that any such agreements can be renewed on acceptable terms.
K-tel operates 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. K-tel also must compete with store and
catalog retailers, many of whom have substantially greater financial,
distribution and marketing resources. In addition, K-tel competes with
existing and future on-line companies that may offer similar consumer
products.
K-tel has endeavored to position itself in the home shopping market as the
seller of certain unique consumer products. K-tel depends upon a limited
number of product suppliers for such products. K-tel believes that there are
sufficient product suppliers to allow it to continue to offer such products
consistently, but there is no assurance that an adequate supply will remain
available at commercially reasonable costs.
In France, Belgium, Ireland, Holland and Switzerland (markets handled by
K-tel Marketing UK), K-tel's ability to handle in-bound telephone orders and
to fill customer orders depends on services provided by third parties. K-tel
depends on (a) outside telemarketers to answer customer questions and take
orders, (b) shipping companies and the country's postal service for timely
delivery of its 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 effect on
K-tel's business.
OTHER BUSINESS RISKS
In addition to its activities in the United States, 55% of K-tel's sales for
fiscal year 2000 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, K-tel's international business may be
affected by changes in demand or pricing resulting from fluctuations in
currency exchange rates or other factors.
K-tel regards its copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to its success, and
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. K-tel pursues the
registration of its 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 its products and services are
made available on-line. K-tel has licensed in the past, and expects that it
may license in the future, certain of
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its proprietary music, such as trademarks or copyrighted material, to third
parties. While K-tel attempts to ensure that the quality of its 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 its
proprietary rights or reputation, which could have a material adverse effect
on its business, financial condition and results of operations. There can be
no assurance that the steps taken by K-tel to protect its proprietary rights
will be adequate or that third parties will not infringe or misappropriate
its copyrights, trademarks, trade dress and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against K-tel. K-tel has been subject to claims and
expects to be subject to legal proceedings and claims from time to time in
the ordinary course of its business, including claims of alleged infringement
of the intellectual property rights of third parties by K-tel and its
licensees. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Based upon stock ownership as of September 1, 2000, Philip Kives, the
Chairman and Chief Executive Officer of K-tel, beneficially owned an
aggregate 48.2% of K-tel's outstanding shares. As a result, he has the
ability to significantly influence K-tel's management, shareholder voting,
and the operations and direction of K-tel.
As a Minnesota corporation, K-tel is 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 its common stock, and may adversely affect the market
price of its stock.
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