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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1996 Commission File Number 0-6664
K-TEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0946588
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2605 Fernbrook Lane North, Minneapolis, Minnesota 55447-4736
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 559-6888
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock-par value $.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes__X__ No_____
The aggregate market value of the voting stock held by non-affiliates of the
registrant (933,000 shares) at September 20, 1996 was $3,499,000 based on the
closing price of the stock as of that date on the NASDAQ National Market System.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes_____ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
At June 30, 1996 there were approximately 3,742,072 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Notice of Meeting of Shareholders and Proxy Statement
for the Annual Shareholders Meeting, which are expected to be filed with the
Security and Exchange Commission in the next 30 days, are incorporated into Part
III of this Form by amendment.
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy information statements
incorporated by reference in part III of this form 10-K on any amendment to this
Form 10-K [ ].
PART I
ITEM 1: BUSINESS
K-tel International, Inc., through its subsidiaries, is an international
marketing and distribution company for packaged consumer entertainment (music
and video) and consumer convenience (lower priced housewares, automotive
accessories, exercise devices, and other merchandise) products and is a leader
in the market niche for pre-recorded music compilations. With its more than
twenty years of marketing experience in the United States ("U.S."), Canada and
Europe, the Company has developed the resources, including knowledgeable
personnel, information systems, distribution capabilities and media buying
ability, to launch music, consumer convenience and video products quickly in the
North American and European markets through both retail (direct to retailers or
through rackjobbers who are distributors which stock and manage inventory within
certain music and video departments for some retail stores) and direct response
(direct to consumer) in the U.S., Canada and through foreign subsidiaries and
licensees in the United Kingdom ("U.K."), Europe and the Pacific region.
The Company was incorporated in 1968 with its current corporate offices located
at 2605 Fernbrook Lane North, Minneapolis, MN 55447-4736.
As used in this report the terms, "Registrant", "K-tel" and the "Company" refer
to K-tel International, Inc. and its Subsidiaries, unless the context otherwise
requires.
Development of Business
The Company's core business for many years has been the marketing and selling of
pre-recorded music, mainly in compilation format including various artists under
a similar theme. The Company's source for music is either its owned music master
catalog or songs licensed from third party record companies.
Videos with a special theme concept provide the Company with a product line
compatible with music and have been marketed and distributed throughout the
Company's foreign subsidiaries, mainly in the United Kingdom.
In the late 1980's, the Company initiated its marketing of recorded music into
Germany through direct to consumer advertising, utilizing terrestrial (local,
within country) television stations. Shortly thereafter, the Company expanded
its direct response marketing in Europe through Pan European satellite
television which enabled the Company to market its products in various countries
and languages simultaneously. The Company is currently not actively involved in
Pan European satellite television marketing with the exception of occasional new
product tests.
The Company has not maintained active operations in Australia since the early
1990's when it divested of its unprofitable operation there. The Company does
maintain a limited presence in that territory by licensing the K-tel name and
trademarks along with its owned music master catalog to a third party. No
determination has been made as to when or if the Company will recommence active
operations in that market.
In the early 1990's the Company increased marketing consumer convenience
products in the U.S., U.K. and Europe primarily by expanding direct to consumer
marketing. By fiscal 1995, consumer convenience product marketing generated
approximately 40% of the Company's consolidated net sales. A large part of this
growth was due to strong U.S. consumer convenience product retail sales growth
(sales to wholesalers and retailers, usually supported by television
advertising). In fiscal 1994 and fiscal 1995, the Company closed down
unprofitable operations in New Zealand, France and Spain which relied almost
entirely on consumer convenience products. Also during this period, the Company
restructured unprofitable operations in the U.K. and Germany eliminating most
consumer convenience product marketing and sales. In fiscal 1996, consumer
convenience product represented only approximately 25% of the Company's
consolidated net sales with most of those sales resulting from U.S. consumer
convenience product retail sales.
Description of Current Business
During fiscal 1996, as in the past, the Company continued to market and sell
pre-recorded music both from the Company's owned music master catalog and under
licenses from third party record companies. Sales of albums, cassettes and
compact discs were made to rackjobbers, wholesalers and retailers in the U.S.
and through subsidiaries and licensees in the U.K. and Europe. The pre-recorded
music business is highly competitive and dominated by six major record
companies. The Company primarily operates in a niche market and is largely
dependent on its continued ability to utilize its owned music master catalog in
addition to obtaining licenses which enable the Company to create compilation
packages. The Company obtains master and mechanical rights ("Rights") through
licensing arrangements with many record companies and publishers. The Rights are
generally limited to a specific use and require payment of royalties based on
the number of units sold. In most instances, advances against royalties are
required in order to obtain the Rights.
A small part of the Company's U.K. business is the marketing and sale of
sell-through video product. The Company licenses or buys this product from third
party video production companies. The Rights obtained to market video product
generally require payment of royalties based on the number of units sold. As in
the case with music, advances against royalties are often required in order to
obtain these video rights.
One of the company's principle assets is its music master catalog consisting of
original recordings and re-recordings of music from the 1950s through the 1980s
("Master Recordings"). The Master Recordings, in addition to internal use, are
licensed to third parties world wide for either a flat fee or a royalty based on
the number of units sold.
Television direct response marketing of recorded music, sell-through video and
consumer convenience product is a significant source of revenue for the Company,
specifically in Europe. The Company initiated its direct response business in
Germany and expanded this form of marketing to sister entities in Spain and
France (prior to the closedown of those entities in fiscal 1994 and fiscal
1995). The Company continues to perform direct response marketing activities in
Germany, through terrestrial (local, within country) television advertising
campaigns. Product awareness created through direct response advertising
contributes to customer demand at the retail store level. One of the Company's
primary goals in its direct response campaigns is not only to generate revenues
and profits from such sales but also to generate subsequent retail demand which
is expected help to enhance profitability. The U.S. operation intends to
continue developing direct response marketing in the upcoming fiscal years. In
fiscal 1996, the U.S. operation had some significant direct response marketing
campaigns which produced revenues and profits from either the campaigns
themselves, or from subsequent retail sales.
Public awareness of the Company's products is created through television and
print advertising campaigns, in-store displays and eye-catching packaging.
The Company's products are manufactured by third party suppliers with components
supplied by independent vendors. Management believes that alternative sources of
supply are available for all of its product needs.
Sales of pre-recorded music products to Handleman Company represented 12%, 11%
and 14% of the Company's consolidated net sales for the years ended June 30,
1996, 1995 and 1994. Loss of business with the Handleman Company would have a
material adverse effect on the Company's operating results.
Most music product sales are made with the right of the Company's customer to
return unsold product for full credit. The Company does not carry extensive
inventories and returns are generally resold.
At June 30, 1996 the Company employed 171 full time people worldwide.
For financial information about the Company's foreign and domestic operations
for each of the last three fiscal years ended June 30, 1996, see Note 8 to the
consolidated financial statements.
INFORMATION CONTAINED IN THIS ITEM CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE," "ESTIMATE," OR
"CONTINUE," OR NEGATIVE VARIATIONS THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. MANY FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS, INCLUDING OVERALL
ECONOMIC CONDITIONS, CONSUMER PURCHASING, CUSTOMER ACCEPTANCE OF PRODUCTS,
MARKETING AND PROMOTION EFFORTS, FOREIGN CURRENCY VARIATIONS AND CHANGES IN
INTEREST RATES
ITEM 2: PROPERTIES
K-tel's corporate offices and U.S. operations are located in leased facilities
in a suburb of Minneapolis, Minnesota, consisting of approximately 21,985 square
feet of office space and approximately 83,991 square feet of warehouse.
K-tel's foreign subsidiaries lease a total of 45,176 square feet of office and
warehouse facilities.
Due to growth, the Company's U.S. operations expanded the amount of its leased
warehouse distribution space at the end of fiscal year 1995. The new facilities
carry lease payment obligations through the year 2000. The facilities leased are
part of multi-tenant facilities. See Note 6 to the consolidated financial
statements.
ITEM 3: LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its business.
Although the outcomes of any such legal actions cannot be predicted, in the
opinion of management there is no legal proceeding pending or asserted against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the consolidated financial position or results of operations
of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of fiscal 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the executive
officers of the Company at October 11, 1996.
Name of Officer Age Positions and Offices Held
- --------------- --- -------------------------------------------------
Philip Kives 67 Chairman of the Board and Chief Executive Officer
David Weiner 39 President and Secretary
Jeffrey Koblick 49 Senior Vice President, Purchasing and Operations
Mark Dixon 37 Vice President-Finance, Chief Financial Officer,
Treasurer
Business Experience
Messrs. Kives, Koblick, and Dixon have held various offices and/or managerial
positions with the Company for more than the past five years.
Mr. Weiner joined K-tel in December 1993 and held the position of Sr. Vice
President of Corporate Development and became President of K-tel International,
Inc. in September 1996. Prior to joining K-tel, Mr. Weiner held various
managerial positions within the firm of Deloite & Touche Management Consulting.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
On September 20, 1996 there were 1,753 record owners of the Company's common
stock and approximately 3,764,572 shares outstanding. On July 19, 1993, K-tel
International, Inc. common stock commenced trading on the NASDAQ National Market
System under the symbol "KTEL". Previously, trading of shares of the Company's
common stock was limited and sporadic in the local over-the-counter market.
The following table shows the range of high and low closing sales prices per
share of the Company's Common Stock as reported by the NASDAQ Stock Market for
the fiscal year periods indicated:
1995 1996
----------------- ----------------
High Low High Low
First Quarter 5 1/8 3 5 1/8 3 1/4
Second Quarter 5 3/4 3 5 3 1/2
Third Quarter 6 1/8 3 3/4 4 3/8 3 1/4
Fourth Quarter 4 3 4 1/8 3 1/4
No dividends have been declared on the Company's common stock during the past
two fiscal years and the Company does not expect to pay cash dividends in the
foreseeable future. Management plans to use cash generated from operations for
expansion of its business.
ITEM 6: SELECTED FINANCIAL DATA
The following summary of consolidated operations and certain balance sheet
information includes the consolidated results of operations of K-tel
International, Inc. and its subsidiaries as of and for the five years ended June
30, 1996. This summary should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this report. All
share and per share amounts are based on the weighted average shares issued. All
amounts are in thousands of dollars, except per share data.
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Net Sales $ 71,987 $ 65,917 $ 54,270 $ 55,714 $ 48,234
========= ========= ========= ========= =========
Operating Income (loss) $ 4 $ (2,188) $ 223 $ 3,623 $ 2,488
========= ========= ========= ========= =========
Net Income (loss) $ (745) $ (2,483) $ 376 $ 2,701 $ 1,875
========= ========= ========= ========= =========
Net Income (Loss) Per Common
and Common Equivalent Share $ (.20) $ (.67) $ .10 $ .72 $ .50
========= ========= ========= ========= =========
Total Assets $ 27,795 $ 28,637 $ 26,874 $ 21,922 $ 22,292
========= ========= ========= ========= =========
Long-Term Debt $ -- $ -- $ -- $ 2 $ 66
========= ========= ========= ========= =========
Cash Dividends Declared and Paid $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
A. Results of Operations
The following tables set forth, for the periods indicated, certain items from
the Company's consolidated statements of operations expressed as a dollar amount
and as a percentage of net sales. All amounts are in thousands of dollars.
Year Ended June 30, 1996 Year Ended June 30, 1995
----------------------------------------------- --------------------------------------------------
North America Europe Total North America Europe Total
------------- ------------- ------------- ------------- ------------- ---------------
Net Sales $48,605 100% $23,382 100% $71,987 100% $36,579 100% $29,338 100% $65,917 100%
Costs and expenses
Cost of goods sold 27,690 57% 10,975 47% 38,665 54% 22,053 61% 13,607 46% 35,660 54%
Advertising 7,495 15% 5,025 21% 12,520 17% 3,490 9% 8,111 28% 11,601 17%
Selling, general &
administrative 11,423 24% 7,420 32% 18,843 26% 9,233 25% 9,641 33% 18,874 29%
Restructuring/closedown
charges -- -- -- -- -- -- -- -- 652 2% 652 1%
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Operating Income (Loss) 1,997 4% (38) 0% 1,959 3% 1,803 5% (2,673) (9)% (870) (1)%
======= === ======= === ======= === ======= === ======= === ======= ===
The parent company incurred $1,955,000 in expenses for the year ended June 30,
1996 and incurred $1,318,000 in expenses for the year ended June 30, 1995. The
increase in costs was due to increased legal and professional fees associated
with the proposed sale of the consumer entertainment business, which was
terminated in January 1996.
Year Ended June 30, 1995 Year Ended June 30, 1994
----------------------------------------------- ----------------------------------------------------
North America Europe Total North America Europe and Pacific Total
------------- ------------- ------------- ------------- ------------------ --------------
Net Sales $36,579 100% $29,338 100% $65,917 100% $28,606 100% $25,664 100% $54,270 100%
Costs and expenses
Cost of goods sold 22,053 61% 13,607 46% 35,660 54% 16,003 56% 11,268 44% 27,271 50%
Advertising 3,490 9% 8,111 28% 11,601 17% 2,787 10% 7,676 30% 10,463 19%
Selling, general & 9,233 25% 9,641 33% 18,874 29% 6,225 22% 8,374 33% 14,599 28%
administrative
Restructuring/closedown -- -- 652 2% 652 1% -- -- 624 2% 624 1%
charges
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Operating Income (Loss) 1,803 5% (2,673) (9)% (870) (1)% 3,591 12% (2,278) (9)% 1,313 2%
======= === ======= === ======= === ======= === ======= === ======= ===
In addition to the operating amounts above, the parent company incurred
$1,318,000 in expenses for the year ended June 30, 1995 and $1,090,000 for the
year ended June 30, 1994.
Fiscal 1996 in Comparison with Fiscal 1995
Consolidated net sales for the fiscal year ended June 30, 1996 were $71,987,000
with operating income of $4,000 and net loss of $745,000 or $.20 per share.
Consolidated net sales for the fiscal year ended June 30, 1995 were $65,917,000
with an operating loss of $2,188,000 and net loss of $2,483,000 or $.67 per
share.
Consolidated net sales increased $6,070,000 or 9% for the fiscal year ended June
30, 1996. North American net sales were up 33% over the prior fiscal year due
primarily to U.S. music sales success in most of its widely diverse and
expanding product offerings covering nearly all genres of music, with specific
success in a line of new Club/Dance music releases, as well as a successful
direct response television infomercial. North American consumer convenience
product sales have also shown an increase over prior year due mainly to a
successful third and fourth quarter promotion of a new microwave cooking
product. European sales were down from the prior fiscal year due mainly to the
discontinuance of operations in the Spanish entity at the end of fiscal 1995.
The North American sales increase more than offset the European sales decrease
for fiscal 1996.
Consolidated cost of goods sold were 54% of sales in both 1996 and 1995. North
American cost of goods sold, as a percentage of sales, were less than the prior
year due mainly to strong sales from a successful new line of higher margin
Club/Dance music product, sales of a new, higher margin microwave cooking
product, and a successful music television direct response infomercial. Direct
response sales typically carry higher gross margins before advertising than
retail sales. These positive margin trends more than offset the negative effect
on cost of goods sold caused by some North American consumer convenience product
inventory writedowns to net realizable value and a fourth quarter $400,000
charge for a defective product replacement program (undertaken in coordination
with the United States Consumer Products Safety Commission). (see Note 6 to the
consolidated financial statements). European cost of goods sold as a percentage
of net sales were up slightly over the previous year due mainly to prior year
sales from the Spanish operation which sold mainly high margin (before
advertising), direct response product.
Advertising costs as a percentage of net sales for the fiscal year ended June
30, 1996 were 17% compared to 18% for the previous year. North American
advertising costs as a percent of net sales were greater than the previous year
due mainly to a successful direct response television music infomercial, a
successful consumer convenience product direct response promotion, (direct
response television sales require higher levels of advertising than retail
sales) and a Canadian television promotion supporting certain new music product
releases. European advertising costs as a percentage of net sales were less than
the previous year due primarily to the discontinuance of operations by the
Spanish entity at the end of fiscal 1995. The Spanish entity sales were mainly
direct response television sales which require higher levels of advertising than
retail sales. Also contributing to the reduction in European advertising costs
as a percentage of net sales was the German operations which had more success in
direct response television promotions in the current year than in the previous
year.
Selling, general and administrative expenses for the fiscal year ended June 30,
1996 were $20,798,000 or 29% of net sales compared to $20,192,000 or 31% of net
sales in the prior fiscal year. Selling, general and administrative expenses for
the year ended June 30, 1996 were higher than the previous year due to North
American overhead additions necessary to support recent sales growth and planned
future sales growth of retail sales in both entertainment and consumer
convenience product lines. European selling, general and administrative expenses
for the year ended June 30, 1996 were lower due mainly to the discontinuance of
operations in the Spanish entity and the restructuring of the German entity at
the end of fiscal 1995. Also contributing to the current year increase in
selling, general and administrative expenses from the previous year were
increased parent holding company legal and professional expenses associated with
the proposed sale of the consumer entertainment businesses which was not
completed and was terminated in January 1996.
The Company generated operating income of $4,000 for the year ended June 30,
1996, compared to an operating loss of $2,188,000 for the fiscal year ended June
30, 1995. North American operating income increased from the prior year mainly
due to improved overall music sales led by successful Club/Dance music product
releases. Although the company experienced strong fiscal 1996 sales success for
a new, higher margin North American consumer convenience microwave cooking
product, this success was more than offset by some North American consumer
convenience product inventory carrying cost writedowns to net realizable value
and a $400,000 charge related to a consumer convenience defective product
replacement program. European operating income improved over fiscal 1995 due
mainly to the restructuring of the German operation, which incurred significant
losses in the second half of the prior fiscal year, and the discontinuance of
operations in the Spanish subsidiary in the fourth quarter of fiscal 1995, which
also contributed to losses in the prior year. Consolidated operating income was
also impacted in the current year by increased parent holding company legal and
professional expenses associated with the proposed sale of the consumer
entertainment businesses, which was terminated in January 1996.
Interest expense increased to $409,000 for the fiscal year ended June 30, 1996
compared to $220,000 for the fiscal year ended June 30, 1995. The increase in
interest expense is due to more current year usage of the Company's asset based
line of credit.
During the year ended June 30, 1996, the Company experienced a foreign currency
transaction loss of $119,000 compared to a gain of $180,000 in the previous
year. For the year ended June 30, 1996, foreign exchange rate fluctuations have
been less favorable to the Company than in the previous fiscal year. The Company
has a policy to reduce its foreign currency exchange exposure by hedging its
exposure through the use of forward contracts. Most of the Company's foreign
currency transaction exposure is due to certain European subsidiary liabilities
which are payable to the Company's U.S. parent or U.S. subsidiaries. The
Company's use of forward contracts has been strictly limited to hedging specific
intercompany or third party receivable balances denominated in foreign currency.
In accordance with generally accepted accounting principles, the payable
balances are adjusted quarterly to the local currency equivalent of the U.S.
dollar. Gains or losses resulting from these intercompany liabilities remain
unrealized until such time as the underlying liabilities are settled.
The provision for income taxes was $351,000 for the year ended June 30, 1996
compared to $375,000 for the fiscal year ended June 30, 1995. Variations in the
Company's tax provision are a factor of the country of origin of profits and the
availability of net operating loss carryforwards.
Fiscal 1995 in Comparison with Fiscal 1994
Consolidated net sales for the year ended June 30, 1995 were $65,917,000 with an
operating loss of $2,188,000 and a net loss of $2,483,000 or $.67 per share.
Consolidated net sales for the fiscal year ended June 30, 1994 were $54,270,000
with operating income of $223,000 and net income of $376,000 or $.10 per share.
Net sales increased $11,647,000 or 21% for the fiscal year ended June 30, 1995.
The sales increase was primarily due to sales volume growth in the Company's
United States (U.S.) consumer convenience product lines from new and higher
priced products and some European sales growth resulting from more television
direct response promotions than in the prior year. Foreign currency conditions
were more favorable than in the fiscal year ended June 30, 1994 and caused sales
to be $2,932,000 higher for the year ended June 30, 1995 than they would have
been had exchange rates remained consistent with the prior year.
Cost of goods sold for the fiscal year ended June 30, 1995 increased to 54% of
net sales compared to 50% for the fiscal year ended June 30, 1994. The increase
was mainly the result of the change in product lines in the United Kingdom to a
predominance of budget priced entertainment products (mainly music products)
compared to mainly consumer convenience products sold in the prior year. Also,
in Europe, the Company incurred inventory write downs to realizable value
indirectly related to the overall restructuring/downsizing effort in Germany and
the closing of the Spanish entity (as discussed in more detail below). In North
America, cost of goods sold increased due mainly to the sale of some higher
priced, lower margin consumer convenience product items and a product mix of
slightly higher cost music product.
For the year ended June 30, 1995, advertising costs were 18% of net sales
compared to 19% for the fiscal year ended June 30, 1994. The slight decrease was
attributable mainly to the changing of product lines in the United Kingdom to
predominantly budget priced entertainment product (mainly music products) from
primarily consumer convenience product sold in the fiscal year ended June 30,
1994. Entertainment products typically require less advertising expenditures
than consumer convenience products. North American advertising costs as a
percentage of net sales were flat for the year ended June 30, 1995 compared to
the previous fiscal year.
Selling, general and administrative expenses for the year ended June 30, 1995
were $20,192,000 or 31% of net sales compared to $16,086,000 or 30% of net sales
in the fiscal year ended June 30, 1994. The increase was mainly due to North
American overhead additions necessary to support sales growth and planned future
sales growth of retail sales in both entertainment and consumer convenience
product lines. European selling, general and administrative expense for the year
ended June 30, 1995 were higher in absolute dollars but comparable as a percent
of net sales to the previous fiscal year due primarily to more television direct
response promotions in the current year which produced higher revenues but also
resulted in more variable selling and shipping expenses.
Restructure/closedown charges of $652,000 resulted from the fourth quarter
decision to close loss operations in Spain and to restructure/downsize loss
operations in Germany. Throughout fiscal year 1995, the Company evaluated
various alternatives to improve operating performance or eliminate future
potential negative results from the German and Spanish operations. Investment
banking assistance was retained to identify strategic partners or buyers for
each company but no suitable agreements were reached resulting in the
restructuring and closing down of the entities. In the fourth quarter of fiscal
1995, management developed and began implementation of a formal plan to wind
down the operations in Spain and restructure/downsize the operations in Germany
by eliminating short form (30, 60, 90 second spot television commercials) direct
response consumer convenience product marketing (which was previously a
significant part of the German operations) and downsizing the distribution
facility to approximately one third of the current size and cost. The resulting
smaller German operation is focusing on short and long form (infomercials,
generally 30 minute commercials) direct response marketing of music products. Of
the $652,000 charges recorded in 1995, $264,000 represented future cash outflows
of the Company. These cash outflows were funded by these subsidiaries. The
restructuring/discontinuance was completed in fiscal 1996 and the accrued charge
approximately reflected the actual costs incurred to complete the
restructuring/discontinuance.
The Company provided closedown charges of $624,000 in fiscal 1994 relating to
the closing of loss operations in France and New Zealand and consumer
convenience product operations in the United Kingdom. The closedowns were
completed in the fiscal year ended June 30, 1995.
The Company had an operating loss of $2,188,000 for the year ended June 30,
1995, compared to operating income of $223,000 for the fiscal year ended June
30, 1994. Operating income declined in North America for the year ended June 30,
1995 compared to the prior year as a result of increases in overhead and product
cost discussed above and some unsuccessful advertising promotions in the second
quarter of fiscal 1995. Operating losses in Europe for the year ended June 30,
1995 increased in comparison to the prior fiscal year despite very successful
entertainment product operations in Finland and the closedown of operations in a
French subsidiary at the end of fiscal 1994 (that had significant prior year
operating losses) and the discontinuance of unprofitable consumer convenience
product lines in the United Kingdom at the end of fiscal 1994. This overall
increase in European operating losses was due to continued losses from the
Company's German and Spanish operations and the aforementioned fourth quarter
restructure/closedown charges associated with those entities.
Interest expense for the year ended June 30, 1995 was $220,000 compared to
$27,000 for the year ended June 30, 1994. The increase in interest expense was
due primarily to usage of the Company's asset based line of credit.
During the fiscal year ended June 30, 1995, the Company experienced a $180,000
foreign currency transaction gain compared to a gain of $28,000 in the fiscal
year ended June 30, 1994. In fiscal 1995, foreign exchange rate fluctuations
were more favorable to the company than in the previous year. The Company has a
policy to reduce foreign currency exchange by hedging its exposure through the
use of forward contracts. Most of the Company's foreign currency transaction
exposure is due to its European subsidiaries liabilities which are payable to
the Company's U.S. parent or U.S. Subsidiaries. In accordance with generally
accepted accounting principles the payable balances are adjusted quarterly to
the local currency equivalent of the U.S. dollar.
The Company had an income tax provision of $375,000 for the fiscal year ended
June 30, 1995 compared to an income tax benefit of $35,000 in the previous year.
The prior year tax benefit was the result of loss carrybacks available in
certain foreign subsidiaries. Variations in the Company's tax provision are a
factor of the country of origin of profits and the availability of net operating
loss carryforwards.
Liquidity and Capital Resources
During the fiscal year ended June 30, 1996, cash and cash equivalents increased
approximately $1,101,000 to $3,255,000. The overall increase in cash was
primarily due to net decreases in inventory, royalty advances and prepaid
expenses. The decreases in these current operating items were mainly the result
of less North American retail music product releases at the end of fiscal 1996
compared to previous year end and less prepaid advertising at the end of fiscal
1996 due to timing of direct response television promotions. Offsetting some of
this cash increase was a net repayment of borrowings, decreases in cash due to
the net loss for the period and increases in accounts receivable, driven by
strong sales growth in the third and fourth quarters. The related collections
and payments will occur in the first and second quarter of fiscal 1997.
During fiscal year ended June 30, 1996 the Company purchased approximately
$1,050,000 of consumer convenience product from an affiliate controlled by
Philip Kives, the Company's Chairman and Chief Executive Officer. The Company
had no outstanding payable to the affiliate at June 30, 1996. This same
affiliate purchased approximately $217,000 of consumer convenience product from
the Company during the fiscal year ended June 30, 1996 and had no outstanding
payable to the Company at June 30, 1996. Outstanding balances are settled on a
timely basis. No interest was charged on the related outstanding balances during
fiscal 1996.
Two of the Company's United States subsidiaries, K-tel International (USA),
Inc., and Dominion Entertainment, Inc., (the "Subsidiaries") have revolving
credit agreements maturing November 30, 1996. The agreements provide for an
asset based line of credit not to exceed $5,000,000 in total, with availability
based on a monthly borrowing base derived from the Subsidiaries' accounts
receivable and inventory. Borrowings are collateralized by the assets of the
Subsidiaries, including accounts receivable, inventories, equipment and Dominion
Entertainment, Inc.'s owned music master recordings. The Company has guaranteed
all borrowings of the Subsidiaries. Interest on borrowings is accrued and due
monthly at a rate of prime plus one and three quarter percent (10% at June 30,
1996). The amounts outstanding under these lines of credit were $1,864,000 at
June 30, 1996 and the maximum additional available under the borrowing base
limitations at June 30, 1996 was $2,551,384. During 1996 and 1995, average
borrowings under the lines of credit were approximately $3,478,000 and
$2,200,000, and the weighted average interest rate was 10.1% and 10.2%. The
maximum amount outstanding under the lines of credit was $4,995,000 during
fiscal 1996 and $4,334,000 during fiscal 1995.
The Subsidiaries are required to maintain minimum levels of tangible net worth
and certain other financial ratios. As of June 30, 1996 the Subsidiaries were in
compliance or have obtained waivers for these covenants.
Management considers its cash needs for fiscal year 1997 to be adequately
covered by its operations, borrowings under the lines of credit or by funding
from another company controlled by the Chairman and Chief Executive Officer.
Although management is not privy to the financial statements of the Chairman's
other companies, he has assured the Company that he will fund its operations on
an as needed basis consistent with his past practices. Past funding has
generally consisted of open-ended payment terms on product purchases from the
Chairman's affiliated companies. It is the Company's intention to renew its
lines of credit for at least an additional year when they mature on November 30,
1996. The Company has initiated discussions with the bank and believes the lines
of credit will be renewed. There can be no assurance of either extension of the
lines of credit or availability of additional funds.
INFORMATION CONTAINED IN THIS ITEM CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE," "ESTIMATE," OR
"CONTINUE," OR NEGATIVE VARIATIONS THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. MANY FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS, INCLUDING OVERALL
ECONOMIC CONDITIONS, CONSUMER PURCHASING, CUSTOMER ACCEPTANCE OF PRODUCTS,
MARKETING AND PROMOTION EFFORTS, FOREIGN CURRENCY VARIATIONS AND CHANGES IN
INTEREST RATES
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes and schedules required
by this Item are set forth in Part IV, Item 14, and identified in the index on
page 18.
ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information concerning Directors required under this Item will be included
in the Company's Notice of Meeting of Shareholders and Proxy Statement to be
filed with the Securities and Exchange Commission and is incorporated herein by
reference. The information concerning Executive Officers of the Registrant is
furnished as an unnumbered item in Part I following Item 4.
ITEM 11: MANAGEMENT REMUNERATION
The information required under this Item will be included in the Company's
Notice of Meeting of Shareholders and Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item will be included in the Company's
Notice of Meeting of Shareholders and Proxy Statement to be filed with the
Securities and Exchange Commission and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item will be included in the Company's
Notice of Meeting of Shareholders and Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities Exchange Commission and is
incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The consolidated statements and schedules listed in the accompanying Index
to Consolidated Financial Statements and Schedules on Page 25 hereof are
filed as part of this report.
(b) Reports on 8-K
No reports on Form 8-K were filed during the fourth quarter ended June 30,
1996.
(c) Exhibits
The Exhibits listed below, which are numbered corresponding to Item 601 of
Regulation S-K, are filed as a part of this report.
Exhibit Item
- ------- ----
3 Restated Article and Restated By-Laws incorporated herein by reference to Exhibit (3) of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1985
10.1 Employment Agreement - David Weiner incorporated herein by reference to Exhibit 10.1 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.2 Employment Agreement - Mickey Elfenbein incorporated herein by reference to Exhibit (10)v of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1985
10.3 Revolving Credit Agreement dated July 22, 1994 incorporated herein by reference to Exhibit 10.3 of
with TCF Bank Minnesota, K-tel International the Registrant's Annual Report on Form 10-K for the
(USA), Inc. and Dominion Entertainment, Inc. year ended June 30, 1994
10.4 Promissory Note for up to $5,000,000 by K-tel incorporated herein by reference to Exhibit 10.4 of
International (USA), Inc. and Dominion the Registrant's Annual Report on Form 10-K for the
Entertainment, Inc. year ended June 30, 1994
10.5 K-tel USA Security Agreement incorporated herein by reference to Exhibit 10.5 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.6 Dominion Security Agreement incorporated herein by reference to Exhibit 10.6 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.7 K-tel USA Copyright Security Agreement incorporated herein by reference to Exhibit 10.7 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.8 Dominion Copyright Security Agreement incorporated herein by reference to Exhibit 10.8 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.9 Collateral Bank Account Agreements incorporated herein by reference to Exhibit 10.9 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.10 Guaranty of K-tel International, Inc. incorporated herein by reference to Exhibit 10.10 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.11 Guarantor's Pledge Agreement incorporated herein by reference to Exhibit 10.11 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.12 Guarantor's Security Agreement incorporated herein by reference to Exhibit 10.12 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1994
10.13 1987 Stock Incentive Plan incorporated herein by reference to Exhibit (10)iv of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1987
10.14 Revolving Credit Agreement dated January 30, incorporated herein by reference to Exhibit 10.14 of
1995 with TCF Bank Minnesota FSB and K-tel, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.15 Revolving Note for up to $3,000,000 by incorporated herein by reference to Exhibit 10.15 of
K-tel, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.16 Security Agreement of K-tel, Inc. incorporated herein by reference to Exhibit 10.16 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.17 Amended and Restated Security Agreement of incorporated herein by reference to Exhibit 10.17 of
K-tel USA the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.18 Amended and Restated Security Agreement of incorporated herein by reference to Exhibit 10.18 of
Dominion the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.19 Amended to K-tel USA's Copyright Security incorporated herein by reference to Exhibit 10.19 of
Agreement the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.20 Amendment to Dominion's Copyright Security incorporated herein by reference to Exhibit 10.20 of
Agreement the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.21 Collateral Bank Account Agreement incorporated herein by reference to Exhibit 10.21 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.22 Guaranty of K-tel International, Inc. incorporated herein by reference to Exhibit 10.22 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.23 Guaranty of K-tel USA incorporated herein by reference to Exhibit 10.23 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.24 Guaranty of Dominion incorporated herein by reference to Exhibit 10.24 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.25 Amended and Restated Pledge Agreement of K-tel incorporated herein by reference to Exhibit 10.25 of
International, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.26 Amended and Restated Security Agreement of incorporated herein by reference to Exhibit 10.26 of
K-tel International, Inc. the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.27 First Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.27 of
with K-tel USA, Dominion and TCF Bank Minnesota the Registrant's Quarterly Report on Form 10-Q for
FSB the quarter ended December 31, 1994
10.28 Replacement Revolving Note for up to $2,000,000 incorporated herein by reference to Exhibit 10.28 of
with K-tel USA and Dominion the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.29 Guaranty of K-tel, Inc. incorporated herein by reference to Exhibit 10.29 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994
10.30 First Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.30 of
and to Revolving Note the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.31 Second Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.31 of
and to Revolving Note the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.32 Debt Subordination Agreement incorporated herein by reference to Exhibit 10.32 of
the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.33 Second Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.33 of
K-tel, Inc. the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.34 Third Amendment to Revolving Credit incorporated herein by reference to Exhibit 10.34 of
Agreement-K-tel USA and Dominion the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.35 Replacement Revolving Note for up to $3,500,000 incorporated herein by reference to Exhibit 10.35 of
with K-tel USA and Dominion the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1995
10.36 Fourth Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.36 of
- K-tel USA and Dominion the Registrant's Annual Report on Form 10-Q for the
quarter ended December 31, 1995
10.37 Third Amendment of Revolving Credit Agreement - incorporated herein by reference to Exhibit 10.37 of
K-tel, Inc. the Registrant's Annual Report on Form 10-Q for the
quarter ended December 31, 1995
10.38 Fifth Amendment to Revolving Credit Agreement - incorporated herein by reference to Exhibit 10.38 of
K-tel USA and Dominion the Registrant's Annual Report on Form 10-Q for the
quarter ended December 31, 1995
10.39 Fourth Amendment to Revolving Credit Agreement incorporated herein by reference to Exhibit 10.39 of
- K-tel, Inc. the Registrant's Annual Report on Form 10-Q for the
quarter ended December 31, 1995
10.40 Sixth Amendment to Revolving Credit Agreement - attached to this report as Exhibit 10.40
K-tel USA and Dominion
10.41 Separation Agreement and Release - Mickey attached to this report as Exhibit 10.41
Elfenbein
10.42 Amendment No. 1 Separation Agreement and attached to this report as Exhibit 10.42
Release - Mickey Elfenbein
11 Statement Regarding Computation of Earnings Per attached to this report as Exhibit 11
Share
21 Subsidiaries of the Registrant attached to this report as Exhibit 21
23 Consent of Independent Public Accountants attached to this report as Exhibit 23
27 Financial Data Schedule (SEC use)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
on October 11, 1996 by the undersigned, there unto duly authorized.
K-TEL INTERNATIONAL, INC.
By /S/ Philip Kives
-------------------------------------
(Philip Kives - Chairman of the Board
and Chief Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/S/ Philip Kives Chairman, Chief Executive Officer and October 11, 1996
- ------------------------------- Director
Philip Kives
/S/ David Weiner President and Secretary October 11, 1996
- -------------------------------
David Weiner
/S/ Mark Dixon Vice President-Finance, Director, October 11, 1996
- ------------------------------- Chief Financial Officer and Treasurer
Mark Dixon (Principal Accounting Officer)
/S/ Garry Kieves Director October 11, 1996
- -------------------------------
Garry Kieves
/S/ Jeffrey Koblick Director October 11, 1996
- -------------------------------
Jeffrey Koblick
(ITEM 14(A))
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Public Accountants.................................. 19
Consolidated Statements of Operations for the
years in the period ended June 30, 1996................................. 20
Consolidated Balance Sheets as of June 30, 1996 and 1995................ 21
Consolidated Statements of Shareholders' Investment
for the years in the period ended June 30, 1996......................... 22
Consolidated Statements of Cash Flows for
the years in the period ended June 30, 1996............................. 23
Notes to Consolidated Financial Statements for the
years in the period ended June 30, 1996................................. 24-31
Supplemental Schedule to Consolidated Financial Statements:
Schedule II - Valuation and Qualifying Accounts for
the years in the period ended June 30, 1996......................... 32
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted as not
required, not applicable or the information required has been included elsewhere
in the consolidated financial statements and notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To K-tel International, Inc.:
We have audited the accompanying consolidated balance sheets of K-tel
International, Inc. (a Minnesota corporation) and subsidiaries as of June 30,
1996 and 1995, and the related consolidated statements of operations,
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1996. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of K-tel International, Inc. and
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to consolidated
financial statements and schedule is presented for purposes of complying with
the Securities and Exchange Commissions rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
October 11, 1996
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS - EXCEPT SHARE AND PER SHARE DATA)
1996 1995 1994
-------- -------- --------
NET SALES $ 71,987 $ 65,917 $ 54,270
-------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold 38,665 35,660 26,842
Advertising 12,520 11,601 10,495
Selling, general & administrative 20,798 20,192 16,086
Restructuring/closedown charges (Note 7) -- 652 624
-------- -------- --------
Total Costs and Expenses 71,983 68,105 54,047
-------- -------- --------
OPERATING INCOME (LOSS) 4 (2,188) 223
-------- -------- --------
NON-OPERATING INCOME (EXPENSE):
Interest income 130 120 117
Interest expense (409) (220) (27)
Foreign currency transaction gain (loss) (119) 180 28
-------- -------- --------
Total Non-operating Income (Expense) (398) 80 118
-------- -------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (394) (2,108) 341
PROVISION (BENEFIT) FOR INCOME TAXES (Note 4) 351 375 (35)
-------- -------- --------
NET INCOME (LOSS) $ (745) $ (2,483) $ 376
======== ======== ========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.20) $ (.67) $ .10
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 3,729 3,711 3,822
======== ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
(IN THOUSANDS - EXCEPT PER SHARE DATA)
ASSETS 1996 1995
- --------------------------------------------------------- -------- --------
Current Assets:
Cash and cash equivalents $ 3,255 $ 2,154
Restricted cash -- 536
Accounts receivable, less allowances of $1,035 and $771 15,028 11,971
Inventories 5,808 7,382
Royalty advances 1,188 2,176
Prepaid expenses 645 2,108
Income tax refund receivable 89 540
-------- --------
Total Current Assets 26,013 26,867
-------- --------
Property and Equipment 2,759 2,820
Less-Accumulated depreciation and amortization (1,966) (1,797)
-------- --------
Property and Equipment, net 793 1,023
Other Assets 989 747
-------- --------
$ 27,795 $ 28,637
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
--------
Current Liabilities:
Line of credit (Note 3) $ 1,864 $ 2,516
Accounts payable 4,112 4,929
Accrued royalties 10,866 9,047
Reserve for returns 6,817 6,802
Other current liabilities 2,328 2,517
Income taxes payable 244 373
-------- --------
Total Current Liabilities 26,231 26,184
-------- --------
Commitments and Contingencies (Note 2 and 6)
Shareholders' Investment:
Preferred stock - 4,000,000 shares authorized;
none issued -- --
Common stock - 7,500,000 shares authorized;
par value $.01; 3,742,072 and 3,713,797
issued and outstanding 37 37
Contributed capital 7,870 7,816
Accumulated deficit (5,666) (4,921)
Cumulative translation adjustment (677) (479)
-------- --------
Total Shareholders' Investment 1,564 2,453
-------- --------
$ 27,795 $ 28,637
======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS)
Common Stock Cumulative
------------------- Contributed Accumulated Translation
Shares Amount Capital Deficit Adjustment
------- ------- ----------- ----------- -----------
Balance, June 30, 1993 3,661 $ 37 $ 7,712 $(2,814) $ (785)
Net income -- -- -- 376 --
Proceeds from exercise of stock options 46 -- 89 -- --
Translation Adjustment -- -- -- -- (69)
------- ------- ------- ------- -------
Balance, June 30, 1994 3,707 37 7,801 (2,438) (854)
Net loss -- -- -- (2,483) --
Proceeds from exercise of stock options 7 -- 15 -- --
Translation adjustment -- -- -- -- 375
------- ------- ------- ------- -------
Balance, June 30, 1995 3,714 37 7,816 (4,921) (479)
Net loss -- -- -- (745) --
Proceeds from exercise of stock options 28 -- 54 -- --
Translation adjustment -- -- -- -- (198)
------- ------- ------- ------- -------
Balance, June 30, 1996 3,742 $ 37 $ 7,870 $(5,666) $ (677)
======= ======= ======= ======= =======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30
(IN THOUSANDS)
1996 1995 1994
-------- -------- --------
Operating Activities:
Net income (loss) $ (745) $ (2,483) $ 376
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization 805 567 618
Restructuring/closedown charges -- 652 624
Changes in current operating items:
Restricted cash 536 1,612 (2,148)
Accounts receivable (3,216) (309) (1,712)
Inventories 1,458 (1,915) (1.228)
Royalty advances 966 (1,250) (10)
Prepaid expenses 1,395 (835) 66
Accounts payable and other liabilities 1,110 1,250 4,050
Income tax refund receivable 437 (101) (340)
Income taxes payable (125) 288 (138)
-------- -------- --------
Cash provided by (used for) operating activities 2,621 (2,524) 158
-------- -------- --------
Investing Activities:
Property and equipment purchases (240) (639) (337)
Proceeds from sale of property and equipment 215 116 83
Music catalog additions (781) (444) (298)
Other (42) (22) (232)
-------- -------- --------
Cash used for investing activities (848) (989) (784)
-------- -------- --------
Financing Activities:
Borrowings on line of credit 33,493 30,265 --
Repayments on line of credit (34,145) (27,749) --
Repayments on note payable to affiliate -- (1,000) (62)
Proceeds from exercise of stock options 54 15 89
-------- -------- --------
Cash provided by (used for) financing activities (598) 1,531 27
Effect of Exchange Rate Changes on Cash and Cash Equivalents (74) (35) (28)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 1,101 (2,017) (627)
Cash and Cash Equivalents at Beginning of Year 2,154 4,171 4,798
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 3,255 $ 2,154 $ 4,171
======== ======== ========
Supplemental Cash Flow Information
Cash Paid For -
Interest $ 220 $ 174 $ 44
======== ======== ========
Income Taxes $ 494 $ 425 $ 310
========= ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
1. BUSINESS DESCRIPTION
K-tel International, Inc. and its subsidiaries (the Company) is an
international marketing and distribution company for packaged consumer
entertainment and convenience products. The Company has operations in North
America and Europe. The Company primarily sells its products through retail
stores and by direct response marketing.
In January 1996, the Company terminated the proposed sale of the consumer
entertainment businesses to the former President of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
K-tel International, Inc. and its domestic and foreign subsidiaries, all of
which are wholly owned. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Revenue is generally recognized upon shipment to the customer. Most music
sales are made with the right of return of unsold units. Estimated reserves
for returns are established by management based on historical experience and
product mix and are subject to the ongoing review and adjustment by the
Company. The Company grants credit to customers and generally does not
require collateral or any other security to support amounts due.
One United States customer represented 12%, 11% and 14% of the Company's
consolidated net sales for the years ended June 30, 1996, 1995 and 1994,
respectively.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist principally of cash, certificates of
deposits and commercial paper which are highly liquid and have original
maturities of less than ninety days. Restricted cash serves as collateral
pledged for letters of credit for product purchases. This cash becomes
unrestricted simultaneously with the payments on the letters of credit.
Inventories
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, or net realizable value. The cost of finished goods
includes all direct product costs. The Company charged approximately $1
million to operations during the fourth quarter of fiscal 1996 to write
inventories down to its net realizable value.
Rights to Use Music Product
Certain of the Company's compilation products are master recordings under
license from record companies and publishers. In most instances, minimum
guarantees or non-returnable advances are required to obtain the licenses
and are realized through future sales of the product. The amounts paid for
minimum guarantees or non-returnable advances are charged to expense as
sales are made. When anticipated sales appear to be insufficient to fully
recover the minimum guarantees or non-returnable advances, a provision
against current operations is made for anticipated losses. The unrealized
portion of guarantees and advances is included in royalty advances in the
accompanying consolidated balance sheets. Licenses are subject to audit by
licensors.
During the fourth quarter of 1996, an agent for various licensors submitted
a royalty audit claim of approximately $3.2 million plus interest based on
the results of an audit for the period from 1986 to 1994. Management
estimates the ultimate payment will be significantly lower than the claim
because on a preliminary review of the claim has identified errors in the
data and the use of multiple and extensive extrapolations based on
non-representative samples used to derive the claim amount. A reserve has
been recorded for management's estimate of the ultimate resolution of this
matter. The amount the Company will ultimately pay could differ materially
in the near term from the amounts currently recorded.
The Company also owns a catalog of master recordings which were purchased
and are recorded at cost and amortized over the anticipated useful life of
the master, which range from four to ten years. During 1995, the Company
changed the amortization period to seven years on all newly acquired owned
masters. The effect of this change reduced amortization expense in 1995 by
approximately $216,000. The unamoritized cost of the master recordings is
included in other assets of the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment are stated at cost and include expenditures which
increase the useful lives of existing property and equipment. Maintenance,
repairs and minor renewals are charged to operations as incurred.
Depreciation and amortization is provided using straight line or declining
balance methods over the estimated useful lives of the assets which range
from three to nine years.
Royalties
The Company has entered into license agreements with various record
companies and publishers under which it pays royalties on units sold. The
Company accrues royalties using contractual rates and certain estimated
rates on applicable units sold. On a quarterly basis, the contractual
royalty liability is computed and the accrued royalty balance is adjusted
accordingly.
Translation
The operations of all foreign entities are measured in local currencies.
Assets and liabilities are translated into U.S. dollars at year end exchange
rates. Revenues and expenses are translated at the average exchange rates
prevailing during the year. Adjustments resulting from translating the
financial statements of foreign entities into U.S. dollars are recorded as a
separate component of shareholders' investment.
Income Taxes
Deferred income taxes are provided for temporary differences between the
financial reporting basis and tax basis of the Company's assets and
liabilities at currently enacted tax rates.
Net Income (Loss) Per Share
Net income (loss) per common and common equivalent share is based on the
weighted average number of shares of common stock outstanding during the
year, and adjusted for the dilutive effect of common stock equivalents.
Derivatives
The Company has entered into forward exchange contracts to hedge specific
intercompany balances denominated in foreign currency. The terms of the
forward exchange contracts are primarily less than three months. The purpose
of the Company's foreign currency hedging activities is to protect the
Company from the risk that the extended dollar net cash inflows will not be
adversely affected by changes in exchange rates.
The Company records any gains or losses on its hedging activities related to
current intercompany balances as a component of foreign currency transaction
gain or loss. Hedging gains and losses related to long term intercompany
balances are included as a component of the cumulative translation
adjustment. The Company incurred a $199,000 loss on hedging activities for
1995, of which $164,000 is included as a foreign currency transaction loss
and $35,000 as a reduction of the cumulative translation adjustment.
As of June 30, 1996, the Company has no foreign exchange currency forward
exchange contracts.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Principal estimates include allowances
for bad debts, return reserves, royalty obligations and product replacement
costs. Ultimate results could differ materially from those estimates.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("Statement 121"), effective for fiscal years beginning after December 15,
1995, establishes accounting standards for the recognition and measurement
of impairment of long-lived assets, certain identifiable intangibles, and
goodwill either to be held or disposed of. Management believes the adoption
of Statement 121 will not have a material impact on the Company's financial
position or results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require, a fair value
based method of accounting for employee stock options, the sale of stock
under the Company's employee stock purchase plan or similar equity
instruments. The Company anticipates it will to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" as was previously required, and
to comply with pro forma disclosure of net income and earnings per share as
if the fair value based method of accounting had been applied. The Company
will be required to adopt SFAS No. 123 in fiscal 1997.
3. LINE OF CREDIT
Two of the Company's United States subsidiaries, K-tel International (USA),
Inc., and Dominion Entertainment, Inc., (the "Subsidiaries") have revolving
credit agreements maturing November 30, 1996. The agreements provide for an
asset based line of credit not to exceed $5,000,000 in total, with
availability based on a monthly borrowing base derived from the
Subsidiaries' accounts receivable and inventory. Borrowings are
collateralized by the assets of the Subsidiaries, including accounts
receivable, inventories, equipment and Dominion Entertainment, Inc.'s owned
music master recordings. The Company has guaranteed all borrowings of the
Subsidiaries. Interest on borrowings is accrued and due monthly at a rate of
prime plus one and three quarter percent (10% at June 30, 1996). The amounts
outstanding under these lines of credit were $1,864,000 at June 30, 1996 and
the maximum additional available under the borrowing base limitations at
June 30, 1996 was $2,551,384. During 1996 and 1995, average borrowings under
the lines of credit were approximately $3,478,000 and $2,200,000, and the
weighted average interest rate was 10.1% and 10.2%. The maximum amount
outstanding under the lines of credit was $4,995,000 during fiscal 1996 and
$4,334,000 during fiscal 1995.
The Subsidiaries are required to maintain minimum levels of tangible net
worth and certain other financial ratios. As of June 30, 1996 the
Subsidiaries were in compliance or have obtained waivers for these
covenants. The Company has initiated discussions with the bank and believes
the lines of credit will be renewed.
4. INCOME TAXES
The Company operates in several countries and is subject to various tax
regulations and tax rates. The provisions for income taxes is computed based
on income reported for financial statement purposes in accordance with the
tax rules and regulations of the taxing authorities where the income is
earned.
The provision (benefit) for income taxes consists of the following for the
years ended June 30 (in thousands):
1996 1995 1994
-------- --------- ---------
Income (loss) before provision (benefit) for income
taxes:
United States $ 141 $ 1,564 $ 3,705
Foreign (535) (3,672) (3,364)
------- --------- ---------
Total $ (394) $ (2,108) $ 341
======= ========= =========
Provision (benefit) for income taxes:
Currently payable
United States $ 210 $ 226 $ 315
Foreign 141 149 (350)
------- --------- ---------
Total currently payable (receivable) and
total provision (benefit) for income taxes $ 351 $ 375 $ (35)
======= ========= =========
A reconciliation of the U.S. federal statutory rate to the effective tax rate
for the years ended June 30 are as follows:
1996 1995 1994
------- ------- -------
Federal Statutory Rate (34%) (34%) 34%
State Taxes, net of federal benefit 26% 5% 33%
Change in valuation allowance 99% 50% (136%)
Effect of different tax rates on foreign earnings (2%) (3%) 59%
------- ------- -------
89% 18% (10%)
======= ======= =======
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. Temporary differences which are all deferred tax assets are as
follows (in thousands):
June 30, June 30,
1996 1995
---------- ----------
Net operating loss carryforwards $ 7,595 $ 7,994
Alternative minimum tax credits 465 431
Reserve for returns 2,065 2,241
Depreciation 79 92
Royalty reserves 573 467
Inventory reserves 1,204 790
Nondeductible accruals 357 44
Allowance for bad debts 310 200
Valuation allowance (12,648) (12,259)
---------- ----------
$ -- $ --
========== ==========
A valuation allowance equal to the aggregate amount of deferred tax assets has
been established until such time as realizability is assured.
For U.S. tax reporting purposes, the Company has net operating loss
carryforwards ("NOL") of approximately $15,994,000 available through 2001. The
tax NOL carryforward may be reduced in future years, without financial statement
benefit, to the extent of intercompany dividends received from foreign
subsidiaries. Also, the NOL carryforwards are subject to review and possible
adjustment by taxing authorities. In addition, the Company has approximately
$465,000 in U.S. federal alternative minimum tax credits which may be utilized
in the future to offset any regular corporate income tax liability. NOL's
available in foreign countries approximated $5,103,000 as of June 30, 1996.
5. STOCK OPTIONS
Stock Incentive Plan
The Company's Stock Incentive Plan for officers and other key employees of
the Company covers a maximum of 350,000 shares of common stock. Under terms
of this plan, the Board of Directors has the sole authority to determine the
employees to whom options and awards are granted, the type, size and terms
of the awards, timing of the grants, the duration of the exercise period and
any other matters arising under the plan. The common stock incentives may
take the form of incentive stock options, nonqualified stock options, stock
appreciation rights and/or restricted stock.
The Stock Incentive Plan information is summarized below:
Incentive Non-qualified
Stock Options Stock Options
------------- -------------
Outstanding June 30, 1993 139,875 82,500
Granted 23,000 19,500
Exercised - at prices ranging from
$1.50 - $4.00 (14,975) (31,375)
Forfeited (10,000) (500)
------------- -------------
Outstanding June 30, 1994 137,900 70,125
Granted 15,000 5,000
Exercised - at prices ranging from
$1.50 - $2.50 per share (1,125) (5,875)
Forfeited (2,000) (16,375)
------------- -------------
Outstanding June 30, 1995 149,775 52,875
Granted -- --
Exercised - at prices ranging from
$1.50 - $3.00 per share (28,275) (2,125)
Forfeited (12,750) (7,625)
------------- -------------
Outstanding June 30, 1996 108,750 43,125
============= =============
Options Exercisable 103,374 41,000
Exercise Price $1.50 - $8.50 $1.50 - $6.75
Restricted Stock Options
In addition to stock options granted under the terms of the Stock Incentive
Plan, the Board of Directors has the sole authority to grant employees,
officers and directors restricted stock options outside the Stock Incentive
Plan. The Board of Directors determines the type, size and terms of the
grants, timing of the grants, the duration of the exercise period and any
other matters pertaining to options or awards granted outside of the Stock
Incentive Plan.
Restricted Stock Plan information is summarized below:
Outstanding June 30, 1993 --
Granted 152,500
Exercised - at prices ranging from
$6.75 - $9.25 --
Forfeited --
-------------
Outstanding June 30, 1994 152,500
Granted 20,000
Exercised - at prices ranging from
$3.75 - $9.25 per share --
Forfeited --
-------------
Outstanding June 30, 1995 172,500
Granted --
Exercised - at prices ranging from
$3.75 - $9.25 --
Forfeited (145,000)
-------------
Outstanding June 30, 1996 27,500
=============
Options Exercisable 20,625
Exercise Price $3.75 - $9.25
6. COMMITMENTS AND CONTINGENCIES
Litigation and Disputes
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be
predicted, in the opinion of management there is no legal proceeding pending
or asserted against or involving the Company for which the outcome is likely
to have a material adverse effect upon the consolidated financial position
or results of operations of the Company.
Product Replacement Program
The Consumer Products Safety Commission notified the Company during the
fourth quarter of fiscal 1996 that a consumer product sold by the Company
was defective. The Company has agreed to commence a product replacement
program (the Program) during fiscal 1997 and charged $400,000 to expense
during the fourth quarter of 1996 to reserve for estimated costs to complete
the Program. This charge is based on management's best estimate of the unit
costs and the level of product replacements. The costs of the Program could
differ materially in the near term from the amounts currently recorded. The
Company will seek full indemnity from the manufacturer of the product for
all costs associated with the Program.
Leases
The Company has entered into several office and warehouse leases which
expire through 2000. Commitments under these leases are $536,000 in 1997,
$486,000 in 1998, $299,000 in 1999, $163,000 in 2000 and $163,000 in 2001.
Rental expense was $923,000 in 1996, $855,000 in 1995 and $592,000 in 1994.
7. RESTRUCTURING/CLOSEDOWN CHARGES
In the fourth quarter of fiscal 1995, the Company recorded a
restructuring/closedown charge of $652,000 related to the decision, planning
and implementation of a formal plan to close down the operations in Spain
and restructure the operations in Germany by eliminating short form direct
response consumer convenience product marketing and downsizing the current
distribution facility to approximately one third of the current size and
cost. The resulting smaller German operation is focusing on short and long
form direct response marketing of music products. The expected future effect
of the restructure/closedown was to improve the Company's consolidated
operating results by eliminating probable future operating losses in Germany
and Spain based on past experiences and expectations of the markets in the
near term future. The combined fiscal 1995 Germany and Spain revenues and
operating losses before restructuring/closedown charges were $18,992,000 and
$2,381,000, respectively.
During the fourth quarter of fiscal 1994, the Company recorded closedown
charges of $624,000 for costs associated with the closing of loss operations
in France and New Zealand, and the closedown of the consumer convenience
product operation in the United Kingdom. Management decided to close these
operations due to recurring losses and limited future market potential. The
expected future effect of the closedowns was to improve the Company's
consolidated operating results from probable future operating losses in
France, New Zealand and the United Kingdom based on past experiences and
expectations on the markets for the near term future. The combined fiscal
1994 France and New Zealand revenues and operating losses before closedown
charges were approximately $4,000,000 and $900,000.
The components of the 1995 and 1994 restructuring/closedown charges are as
follows:
(In thousands)
1995 1994
-------- -------
Inventory write down costs $ 79 $ 363
Employee termination costs 264 120
Lease termination costs -- 46
Property write downs 8 39
Cumulative translation adjustment 251 (62)
Other 50 118
------- -------
Total $ 652 $ 624
======= =======
Sixteen employees consisting primarily of sales, administrative, and
distribution employees were terminated during fiscal 1995, while ten
employees consisting primarily of sales and other administrative managers
were terminated during fiscal 1994.
The fiscal 1994 closedown was completed in fiscal 1995, and the accrued
charge at June 30,1994 approximated the actual costs incurred to compete the
closedowns. The fiscal 1995 restructuring closedown was completed in fiscal
1996 and the accrued charge at June 30, 1995 approximated the actual costs
incurred to complete the restructure/closedown.
8. OPERATIONS BY GEOGRAPHIC AREA
The following table sets forth the Company's operations by geographic area
as of and for the fiscal years ended June 30 (in thousands):
1996 1995 1994
-------- -------- --------
Net Sales:
North America $ 48,953 $ 38,228 $ 27,816
Europe 23,382 29,338 25,088
Pacific -- -- 576
Transfers between geographic areas (348) (1,649) 790
-------- -------- --------
Net Sales $ 71,987 $ 65,917 $ 54,270
======== ======== ========
Operating Income (Loss):
North America $ 1,997 $ 1,803 $ 3,591
Europe (38) (2,673) (2,023)
Pacific -- -- (255)
-------- -------- --------
Operating Income before General
Corporate Expenses, net 1,959 (870) 1,313
General Corporate Expenses, net (1,955) (1,318) (1,090)
-------- -------- --------
Operating Income (Loss) $ 4 $ (2,188) $ 223
======== ======== ========
Identifiable Assets:
North America $ 20,282 $ 18,816 $ 15,711
Europe 7,513 9,821 10,918
Pacific -- -- 245
-------- -------- --------
Identifiable Assets $ 27,795 $ 28,637 $ 26,874
======== ======== ========
9. RELATED PARTY TRANSACTIONS
The Company sold approximately $217,000 in fiscal 1996, $228,000 in fiscal
1995 and $693,000 in fiscal 1994 of consumer convenience product to an
affiliate controlled by the Company's Chairman of the Board. There was no
balance receivable from the affiliate at June 30, 1996 while $208,000 was
owed to the Company at June 30, 1995
The Company purchased $1,050,000 in fiscal 1996, $354,000 in fiscal 1995 and
$425,000 in fiscal 1994 of consumer convenience product from another
affiliate controlled by the Company's Chairman of the Board. Management
believes purchase prices for these products were at prices comparable to
transactions with a third party. However, the payment terms have been open
ended as a method of financing the Company's consumer convenience product
expansion in Europe and the U.S.. The Company also reimbursed the affiliate
for warehousing and shipping services provided in Canada and travel,
telephone, and legal fees directly incurred on behalf of the Company. These
amounts were $4,000 during 1996, $3,000 during 1995, and $43,000 during
1994. There was no balance payable at June 30, 1996 and the amount owed at
June 30, 1995 was $175,000.
SCHEDULE II
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 1996, 1995 and 1994
(In thousands)
Charged to
Balance at Costs and Charged to Balance at
Beginning of Expenses or Net Other End of
Period Sales Accounts Deductions Period
------------- --------------- ------------ --------------- ----------
Allowance for
Doubtful Accounts
- -----------------
1996 $ 771 $ 694 $(15) (1) $ (415) (2) $ 1,035
1995 $ 489 $ 370 $ 18 (1) $ (106) $ 771
1994 $ 336 $ 338 $ 12 (1) $ (197) (2) $ 489
Reserve for
Returns
- -----------------
1996 $6,802 $10,485 $(18) (1) $(10,452) $ 6,817
1995 $6,412 $ 9,480 $ 42 (1) $ (9,132) $ 6,802
1994 $5,738 $ 6,703 $ 29 (1) $ (6,058) $ 6,412
(1) Exchange rate change
(2) Uncollectible accounts written off, net of recoveries