SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(MARK ONE) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended June 30, 2002 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to
Commission file number 0-6664
K-TEL INTERNATIONAL, INC.
(Exact name of
registrant as specified in its charter)
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Minnesota |
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41-0946588 |
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(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
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incorporation or organization) |
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2655 Cheshire Lane North, Suite 100, Plymouth, Minnesota |
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55447 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (763) 559-5566
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
As of September 20, 2002, the aggregate market value of voting stock held by non-affiliates of the registrant based on the last sales price as reported by the Over-the-Counter Bulletin Board on such date was $1,365,374.
As of September 20, 2002, the registrant had 13,653,738 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements of a non-historical nature under the captions “Business,” “Legal Proceedings,” “Market for Registrant’s Common Equity and Related Stockholder Matters,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “should,” or “continue” or the negative thereof or other variations thereon or comparable terminology. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from those results currently anticipated or projected. Such factors include, among other things, the following: changes in consumer purchasing; demand for and market acceptance of new and existing products; the impact from competition for merchandise and recorded music; the outcome of securities laws claims by a purported class action lawsuit; dependence on suppliers and distributors; the outcome of the two subsidiaries’ bankruptcy and liquidation; success of marketing and promotion efforts; technological changes and difficulties; availability of financing; foreign currency variations; general economic, political and business conditions; and other matters. The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements, except as required by law in the normal course of its public disclosure practices.
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K-tel International, Inc. (the “Company,” “K–tel,” or the “Registrant”) was incorporated in 1968. Its corporate offices are located at 2655 Cheshire Lane North, Suite 100, Plymouth, Minnesota, and its phone number is (763) 559-5566. Through its operating subsidiaries, K-tel licenses its music catalog internationally and markets entertainment products mainly derived from its catalog through retail and direct response marketing channels in the United States and Europe. Historically, K-tel subsidiaries had also distributed consumer products through operations which have been discontinued, and operated an Internet e-commerce site which has been suspended due to continuing losses.
Description of Current Businesses
Music Licensing and Sales
Currently K-tel’s primary activity is the licensing of music to other record companies and to other segments of the entertainment industry. K-tel owns a proprietary master music catalog of approximately 6,000 titles consisting of original recordings and re-recordings of music from the 1950’s through today. Supplementing this major asset, K-tel has a non-exclusive worldwide license for a catalog of over 30,000 music titles. The Company also licenses the rights to master recordings to third parties worldwide for use in albums, films, television programs and commercials for either a flat fee or a royalty based on the number of units sold. K-tel continuously adds to its music master catalog to ensure growth and product diversity. Licensing of its proprietary music rights to third parties has historically been an important revenue source for K-tel. The Company also markets and sells pre-recorded compact discs utilizing the master recordings in its music catalog, and DVD’s from its developing catalog of musical performances. Customers include retailers, wholesalers and rack service distributors. These products are also sold through subsidiaries and licensees in the United Kingdom and elsewhere in Europe. The principal entertainment products that K-tel markets and sells consist primarily of pre-recorded thematic music packages in a compilation format featuring various artists. These thematic music selections, which cover nearly all music genres, are targeted to a variety of age groups. K-tel provides marketing support for its music sales through cooperative advertising with retailers, print media, radio and television advertising, and in-store promotions and displays.
One customer, Madacy Entertainment Group, Inc. accounted for approximately 13% of K-tel’s revenue for the year ended June 30, 2002. The loss of, or a substantial reduction in, business from this customer would have a material adverse effect on the Company.
K-tel currently delivers music products (CD’s and DVD’s) through traditional wholesale and retail distribution channels. Prior to April 2001, the Company was distributing its products in the United States to most major music retailers (Transworld Entertainment, Musicland, Best Buy, Circuit City, Tower Records) and to major distributors (Handelman, Anderson Merchandising, Valley Media). The Company now has a customer base that includes only a few selected retailers and distributors, and offers products that are of more interest to these individual customers. This focused approach is intended to improve product sell-through and minimize returns of unsold inventory. These existing methods of distributing music could be materially altered by new technologies that will enable users and customers of pre–recorded music to electronically download pre–recorded music at home to various personal computer media formats. The technology is developing. A number of competing companies are seeking to have the industry and the public embrace their technologies. Participants in this technology competition include Microsoft Corporation, AT&T Corp., Liquid Audio, Inc., Apple Computer, Inc., MP3.com, Inc. 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. The Company believes that there are opportunities to enhance its current distribution methods as well as increase opportunities to license its owned library of master recordings. K-tel’s music sales and licensing subsidiaries are is pursuing these alternative distribution channels.
In March 2001, the Company’s music distribution subsidiary in the United States, K-tel International (USA), Inc. (K-tel (USA)) ceased operations and filed for protection under Chapter 7 of the United States bankruptcy code. This event ended the Company’s traditional method of distributing music products through most retailers. Through another subsidiary, K-tel Entertainment, Inc., the Company is implementing a more-focused method of distribution that targets the strengths of fewer individual retailers and supplies products suited to each retailer’s specific needs. These new products are primarily derived from the Company’s master music catalog. It is anticipated that this will allow the Company to realize more competitive profit margins.
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The Company’s ability to continue its present operations and implement future expansion plans successfully is contingent mainly upon its ability to maintain its line of credit arrangements with K-5 Leisure Products, Inc. (K-5) (See Note 3 to the Company’s financial statements), increase its revenues, and ultimately to attain and sustain profitable operations. Without increased revenues and sustained profitability, the cash generated from the Company’s current operations may not be adequate to fund operations and service its indebtedness on an ongoing basis. Management is concentrating its efforts on returning to profitability by focusing on music licensing and limited music distribution. However, there can be no assurance that the Company’s management will be successful in this effort. In the event the Company is unable to fund its operations and implement its current business plan properly, it may be unable to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty.
K-tel ceased operating its K-tel.com website, which marketed its own and other suppliers’ products to retail customers, in the fourth quarter of 2001 because this business segment was not cost effective. The web site has recently been redeveloped to support the Company’s sale of proprietary brand-name compilations and newly developed CD and DVD products to customers in the United States and United Kingdom.
Competition
The music business is highly competitive and dominated by major companies. K-tel faces competition for discretionary consumer purchases of its products from other record companies and other entertainment sources, such as film and video companies. Several major record companies in the United States including Bertelsmann AG, Sony Corp., Time Warner, Inc. and Universal Music Group dominate the market for pre–recorded music. 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 to create compilation packages;
• its ability to distribute its products effectively and efficiently; and
• its ability to build upon and maintain its reputation for producing, licensing, marketing and distributing high quality music.
The core of K-tel’s music business involves the licensing of third party rights and the utilization of its own catalog to create music compilations for retail distribution. The major pre–recorded music companies, either directly or through subsidiaries, now manufacture or distribute pre–recorded music compilations in direct competition with K-tel’s music compilation products. With this new competition, it is far more difficult for K-tel to access pre–recorded music from these major companies at acceptable rates. Therefore, the Company relies heavily on its own Dominion catalog and has accelerated the rate at which it produces new master recordings.
Another form of competition for the Company is the developing ability for users and customers of pre-recorded music to download pre-recorded music electronically at home to various personal computer media formats. The technology is at an early stage and K-tel is uncertain how this new technology will impact its current operations.
Employees
On June 30, 2002, K-tel employed 27 full time people worldwide.
For financial information about the Company’s business segment and geographic area operations for each of the three fiscal years ended June 30, 2002 see Note 8 to the consolidated financial statements.
K-tel’s corporate offices and U.S. operations are located in leased facilities in Plymouth, a suburb of Minneapolis, Minnesota, consisting of approximately 4,000 square feet of office space and approximately 6,000 square feet of
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warehouse. K-tel’s foreign subsidiaries lease a total of approximately 9,500 square feet of office and warehouse facilities. See Note 6 to the consolidated financial statements for a summary of the lease agreements. The Company believes that these facilities are adequate for its current needs.
Class Action Lawsuit
K-tel and certain of its current and former officers and directors are defendants in In re K-tel International, Inc. Securities Litigation, No. 98-CV-2480. This action consolidates twenty-three purported class actions that were initially filed in various United States District Courts in November 1998, and were subsequently transferred to, and consolidated in, the United States District Court for the District of Minnesota. On July 19, 1999, the plaintiffs filed an amended consolidated class action complaint that challenges the accuracy of certain public disclosures made by K-tel regarding its financial condition during the period from May 1998 through November 1998. The plaintiffs assert claims under the federal securities laws and seek damages in an unspecified amount as well as costs, including attorneys’ fees and any other relief the Court deems just and proper. K-tel moved to dismiss the complaint, and on July 31, 2000, the United States District Court granted the Company’s motion to dismiss. The Court also barred further actions by the plaintiffs and denied plaintiffs’ request to amend the complaint in order to refile the complaint in the future. The plaintiffs appealed to the United States Court of Appeals for the Eighth Circuit, and the Court of Appeals heard the matter in October 2001. On August 7, 2002 the Court of Appeals, in a two to one decision, denied the plaintiff’s appeal. On August 20, 2002 the plaintiff applied for a rehearing by the full Court of Appeals. K-tel filed a response on September 15, 2002 to the plaintiff’s petition for rehearing at the request of the Court. K-tel is awaiting a ruling on this appeal. K-tel has two insurance policies providing coverage of up to $20 million, which is subject to the insurers’ reservations of legal rights under the applicable policies. Under their reservations of rights, the insurers could contest their obligations to indemnify the Company and its directors and officers. K-tel may have an obligation to indemnify the officers and directors named in this lawsuit.
Early v. K-tel International, Inc.
On January 11, 1999, the Company was named in a lawsuit entitled Christopher Early vs. K-tel International, Inc. et al brought in the Circuit Court of Cook County, Illinois, against the Company and certain of its subsidiaries by Christopher Early. The suit also named as defendants certain other manufacturers, distributors and a number of nationwide retailers. The plaintiff sought damages on behalf of himself and a purported class of purchasers of cassette tapes and compact discs produced, distributed and/or sold by the defendants. The claim alleged that defendants engaged in deceptive and misleading packaging of cassette tapes and compact discs by failing to give proper notice to consumers that the songs contained therein were not the original recordings by the original artists. The complaint also alleged consumer fraud, deceptive and unfair practices, and fraud in connection with website advertising and marketing. Similar litigation was brought against the Company by Mr. Early in 1997 and was dismissed by a United States Federal Court in 1999 on jurisdictional grounds. The Company denies that it mislabeled cassette tapes and compact discs or engaged in fraudulent or deceptive conduct and defended vigorously the purported action, which sought an undetermined amount of compensatory damages and punitive damages in the amount of $10 million, an injunction and costs incurred in the litigation, including attorneys fees. The Company filed a motion to dismiss the complaint on June 8, 2000. On February 16, 2001, the court dismissed the complaint against the other manufacturers, distributors and nationwide retailers, but allowed the case to continue against the Company. On May 28, 2002, the Court approved an agreement between the Company and Mr. Early on terms favorable to the Company within the amount previously reserved for in the Company’s financial statements.
RTL Shopping S.A.
The Company has been named in a lawsuit filed in France brought by RTL9, a French cable TV station. Initially, RTL9 was named as a defendant in a suit brought by a competitor of K-tel Marketing Ltd. alleging that RTL9 ran a commercial for K-tel Marketing which presented a product under brand names alleged to infringe on the competitor’s own trademarks and also translated an English language script indicating that the product was “just like” or “as good as” others into “better than” in French, contrary to French law. The suit alleged trademark infringement, unfair competition, illicit comparative advertising and passing off. RTL9 then sued K-tel Marketing on October 4, 2000, pursuant to an indemnification provision the parties had entered into. Subsequently, K-tel Marketing went into liquidation and RTL9 filed a suit in December 2000 against K-tel International, Inc. under its agreement to guarantee payment for the commercial time. On May 28, 2001, RTL9 presented documents in court identifying K-tel International (USA), Inc. as a target of its claim. On September 3, 2001 the Company filed documents disputing the claim and advising the court of K-tel (USA)’s Chapter 7 bankruptcy filing. At a procedural hearing on December 3, 2001, RTL9 filed its brief in response to the Company’s filing. In response,
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the Company filed a further brief. At a further hearing on May 6, 2002, several companies involved in the initial suit against RTL9 filed additional briefs or indicated that additional briefs would be filed. The Court directed that all additional briefs were to be filed by June 24, 2002. Several parties filed additional briefs on September 11, 2002. The Company filed a brief in response. At a hearing on September 16, 2002, the Court received new submissions from three of the other parties and set a hearing date of October 28, 2002, at which time it will declare an end to the written submissions. The Court has scheduled oral arguments for November 12, 2002. The action seeks the approximate amount of 20 million French Francs, or approximately $2.8 million. The Company believes that RTL9 has no basis for a complaint against the Company.
Hollins & Fields, LLP v K-tel International, Inc.
Hollins & Fields, LLP (H&F) sublet a portion of the Company’s former executive offices in Los Angeles. On September 21, 2001, H&F sued K-tel in California for breach of contract and conversion, seeking damages in excess of $150,000. On November 26, 2001, the Court dismissed the punitive damage claim in the amount of $100,000. The Company filed a defense and counterclaim. As a result of information exchanged during discovery, the parties settled the matter on April 30, 2002 on terms favorable to the Company.
K-tel International, Inc. vs. Tristar Products, Inc.
K-tel and its subsidiary in Germany have commenced an action for breach of express and implied warranties against Defendant Tristar Products, Inc. This action is venued in the United States District Court for the District of Minnesota. This action arises out of Tristar’s sale to Plaintiffs of a defective home exercise product called the “BunBlaster” for resale in Germany, Austria and Switzerland. By written contract, Tristar has agreed to indemnify Plantiffs for injuries and damages arising out of the resale of those goods. Plaintiffs are seeking approximately $2 million in consequential damages. Tristar is vigorously defending this claim and the action is currently in discovery.
Tristar has also asserted a patent and trademark/ trade-dress action against K-tel for passing off a product called the “K-tel Hook and Hang” while allegedly a distributor of the original patented Tristar Hook and Hang product. The Company denies the allegation because it never was a distributor of this or any similar product and intends to defend this action vigorously. Tristar has not identified the amount of damages it seeks with respect to this counterclaim. Discovery proceedings have commenced.
K-tel and its subsidiaries are also involved in other legal actions in the ordinary course of its business. With all litigation matters, management considers their likelihood of loss based on the facts and circumstances. If management determines that a loss is probable and the amount of loss can be reasonably estimated, such amount is recorded as a liability. Although the outcome of any such legal actions cannot be predicted, in the opinion of management there is currently no legal proceeding pending or asserted against or involving K-tel for which the outcome is likely to have a material adverse effect upon the consolidated financial position or results of operations of K-tel.
Subsidiaries’ Bankruptcy and Liquidation
In March 2001, the Company’s music distribution subsidiary in the United States, K-tel International (USA), Inc., ceased operations and filed for protection under Chapter 7 of the United States Bankruptcy Code. Although the bankruptcy court has not yet confirmed the formal plan of liquidation, the Company has not been informed by the trustee or its counsel of any plan by the court to attempt to hold it or any of its subsidiaries liable for any of the commitments of K-tel (USA). Management believes the Company will have no ongoing material liability related to K-tel (USA) as a result of the filing and the outcome of the bankruptcy proceeding.
In November 2000, the Company’s consumer products subsidiary in the United Kingdom, K-tel Marketing Ltd., ceased operations and began voluntary liquidation proceedings. At the initial meeting of the creditors on November 24, 2000, the creditors voted for the liquidation to become a creditors’ liquidation under English law. The Company has not been informed by the liquidators or their counsel of any plan to attempt to hold it or any of its subsidiaries liable for any of the commitments of K-tel Marketing Ltd. Management believes the Company will have no ongoing material liability related to K-tel Marketing Ltd. as a result of the liquidation proceeding.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of K-tel’s security holders during the fourth quarter of fiscal 2002.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the executive officers of K-tel at June 30, 2002.
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Age |
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Positions and Offices Held |
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Philip Kives |
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73 |
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Chairman of the Board, Chief Executive Officer, President and Director |
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Dennis Ward |
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56 |
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Chief Financial Officer, Secretary and Director |
The officers of K-tel are elected annually and serve at the discretion of the Board of Directors.
Philip Kives has held various offices and/or managerial positions with K-tel for more than the past five years. Mr. Kives is currently the Company’s Chairman, Chief Executive Officer and President.
Dennis W. Ward was appointed Chief Financial Officer and Secretary of K-tel on December 29, 2000 and has served as Controller of K-5 Leisure Products, Inc. (K-tel’s largest shareholder) for more than twelve years.
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ITEM 5: MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On September 20, 2002 there were 1,393 record holders of K-tel’s common stock and 13,653,738 shares outstanding. Prior to September 27, 2000, K-tel’s common stock traded on the Nasdaq National Market under the symbol “KTEL”. On September 27, 2000, the Company’s common stock was delisted from the Nasdaq National Market and is traded on the Over-the-Counter Bulletin Board.
The following table shows the range of high and low closing prices per share of K-tel’s common stock for the fiscal year periods indicated.
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2002 |
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2001 |
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High |
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Low |
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High |
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Low |
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1st Quarter |
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$ |
.14 |
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$ |
.10 |
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$ |
2.44 |
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$ |
.63 |
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2nd Quarter |
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$ |
.39 |
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$ |
.12 |
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$ |
.92 |
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$ |
.16 |
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3rd Quarter |
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$ |
.40 |
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$ |
.13 |
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$ |
.19 |
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$ |
.10 |
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4th Quarter |
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$ |
.15 |
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$ |
.09 |
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$ |
.15 |
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$ |
.10 |
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No cash dividends have been declared on K-tel’s common stock during the past two fiscal years and K-tel does not expect to pay cash dividends in the foreseeable future. Management plans to use cash generated from operations for expansion of its business. The declaration or payment by K-tel of dividends, if any, on its common stock in the future is subject to the discretion of the Board of Directors and will depend on K-tel’s earnings, financial condition, capital requirements and other relevant factors. The declaration or payment by K-tel of dividends is also subject to the terms of its credit facility.
Equity Compensation Plan Information
The following table provides information as of June 30, 2002 with respect to compensation plans under which the Company’s equity securities are authorized for issuance.
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Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
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Weighted-average exercise price of outstanding options, warrants and rights (b) |
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Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
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Equity compensation plans approved by security holders |
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2,273,839 |
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$ |
5.87 |
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854,350 |
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Equity compensation plans not approved by security holders (2) |
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5,000 |
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$ |
8.73 |
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NA |
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Total |
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2,278,839 |
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$ |
5.90 |
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854,350 |
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(1) Represents shares of common stock remaining available for future issuance under the Company’s 1997 Stock Option Plan, as amended.
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(2) Represents a stock option granted to a non-employee director of the Company on February 26, 1999.
ITEM 6: SELECTED FINANCIAL DATA
The following summary of consolidated operations and certain balance sheet information includes the consolidated results of operations of K–tel and its subsidiaries as of and for the five years ended June 30, 2002. This summary should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this filing. All share and per share amounts are based on the weighted average shares issued. All amounts are in thousands of dollars, except per share data.
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2002 |
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2001 |
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2000 |
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1999 |
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1998 |
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