-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MawNQO63qs2RYpTGW++o4eA+hZkSj8C+p7t0QKr8kU8UsyeVW+3k+eMD1s73eg0d oAWF1bb2EkUONjh8Ke2sTg== 0000897101-95-000381.txt : 19951013 0000897101-95-000381.hdr.sgml : 19951013 ACCESSION NUMBER: 0000897101-95-000381 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19951012 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: K TEL INTERNATIONAL INC CENTRAL INDEX KEY: 0000054193 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 410946588 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07115 FILM NUMBER: 95580069 BUSINESS ADDRESS: STREET 1: 2605 FERNBROOK LANE NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55447-4736 BUSINESS PHONE: 6125596800 MAIL ADDRESS: STREET 1: 15525 MEDINA ROAD STREET 2: 15525 MEDINA ROAD CITY: PLYMOUTH STATE: MN ZIP: 55447 10-K 1 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, 1995 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 (879,000 shares) at September 28, 1995 was $3,516,000 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 required to be filed by Sections 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, 1995 there were approximately 3,713,797 common shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 1995, are incorporated into Part IV of this Form. PART I ITEM 1: BUSINESS K-tel International, Inc. is an international marketing and distribution company for packaged consumer entertainment (music and video) and consumer convenience products (lower priced housewares, automotive accessories, exercise devices, etc.) 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. 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, Minnesota, 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) TV 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 some occasional new product tests. During fiscal 1990 the Company completed separate sales of both its consumer convenience products and sell-through video businesses in Australia due to the subsidiary's inability to generate sufficient sales and profits. From 1990 through 1994, the Company maintained a limited presence in Australia by licensing the K-tel name and trademarks along with its owned music master catalog to a third party. The Company has continued to monitor the potential for profit in that region and, in fiscal 1993, re-established a legal entity in Australia. The company has not yet determined when it will commence operations in that market. Throughout fiscal 1989 and 1990 the Company's subsidiary in the U.K. provided distribution services for a major rackjobber of sell-through videos (videos sold to consumers at retail, not rental). Providing these services substantially utilized the U.K. subsidiary's existing distribution assets and systems. The agreement expired in June 1990 as a result of the rackjobber developing its own distribution system. During the period of the agreement the Company evaluated the future distribution business potential and found that it was unable to attract sufficient third party distribution clients to sustain this low margin, high overhead business. At the end of fiscal 1990, the Company decided to discontinue the distribution business and sold all of its distribution assets and systems in the U.K. The result of this sale was reported by the Company during fiscal 1991. As a result of the sale, the Company formed a new U.K. subsidiary to market sell-through videos, music products and consumer convenience products which are distributed by third parties, to license the Company's owned music master catalog, and to assist in the development of direct response business in European markets. In the early 1990's the Company increased its level of marketing consumer convenience product in the U.S., U.K. and Europe primarily by expanding direct to consumer marketing. By the end of fiscal 1993, consumer convenience product sales, generated from direct to consumer marketing and retail sales, comprised over 40% of the Company's consolidated net sales. In fiscal 1994, consumer convenience product marketing generated approximately 34% of the Company's consolidated net sales. At the end of fiscal 1994, the Company decided to cease consumer convenience product marketing in the United Kingdom due to unprofitable results in this area and a reliance on expensive television advertising to support sales levels. In fiscal 1995, consumer convenience product marketing generated approximately 39% of the Company's consolidated net sales with the percentage increasing from fiscal 1994 due to strong U.S. consumer convenience product retail sales growth. In the fourth quarter of fiscal 1995, due to continuing unprofitable operations, the Company decided to close its operations in Spain which relied almost entirely on consumer convenience product, and to restructure/downsize its operations in Germany by eliminating short form (30, 60, 90 second spot television commercials) direct response consumer convenience product marketing. The impact of these decisions should reduce the Company's overall percentage of consumer convenience product sales to total consolidated net sales in the future. In fiscal 1992 the Company incorporated new subsidiaries in Spain and France. The Spanish subsidiary sold consumer convenience product direct to consumers and expanded into retail outlets in fiscal 1993. The Spanish subsidiary also expanded its direct to consumer marketing of consumer convenience product into the Portuguese marketplace in fiscal 1993. The French subsidiary marketed and sold sell-through videos to retail outlets and expanded into retail and mail order markets with consumer convenience product in fiscal 1993. At the end of fiscal 1994, the Company decided to close its operations in France due to continued losses in direct to consumer marketing programs resulting partly from restrictive government regulations on television advertising. The costs of closing the Company's French operations were recorded by the Company in the fourth quarter of fiscal 1994. In the fourth quarter of fiscal 1995, the Company decided to close its operations in Spain due to continued losses in that territory. The expected costs of closing the Spanish operations were recorded by the Company in the fourth quarter of fiscal 1995. The Company operated in the New Zealand marketplace for over twenty years and received marketing and product development support from the Company's Australian subsidiary for many of those years due to the close geographic locations of the companies. As previously described, the Company sold its Australian businesses in fiscal 1990. As a result, the Company's New Zealand product origination and operating costs increased to the point where it was unable to remain profitable. As a result, at the end of fiscal 1994, the Company decided to close operations in New Zealand. The costs of closing the Company's New Zealand operations were recorded by the Company in the fourth quarter of fiscal 1994. Description of Current Business During fiscal 1995 the Company continued to market and sell pre-recorded music both from the Company's owned music master catalog and licensed 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., Europe and Pacific Region. 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 part of the Company's U.K. subsidiary's business is the marketing and sale of sell-through video product. A small amount of video product is also sold in the Company's other foreign subsidiaries. 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 is the case with music, advances against royalties are often required in order to obtain these video rights. One of the Company's major 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 major source of revenue for the Company, specifically in Europe. The Company initiated its direct response business in Germany and expanded into most of Europe. The Company continues to perform direct response marketing activities throughout Europe, mostly 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 themselves, but also to generate subsequent retail demand which should help to enhance profitability. During fiscal 1995, consumer convenience product sales remained a significant portion (approximately 39%) of the Company's overall consolidated net sales compared to 34% in 1994. The increase was largely the result of strong increases in fiscal 1995 U.S. consumer convenience product retail sales due to increased human resources and marketing efforts. Sales growth in this area is expected to continue in fiscal 1996 as the Company dedicates more resources to this expansion. In the fourth quarter of fiscal 1995, due to continuing unprofitable operations, the Company decided to close its operations in Spain which relied almost entirely on consumer convenience product, and to restructure/downsize its operations in Germany by eliminating short form (30, 60, 90 second spot television commercials) direct response consumer convenience product marketing. The impact of these decisions should reduce the Company's overall percentage of consumer convenience product sales to total consolidated net sales in the future. Consumer convenience products were sold to wholesalers and retailers as well as direct to consumers, usually supported by television advertising. Television direct response marketing was mainly focused in Europe; however; the Company continued its development in the U.S. of television direct response marketing of consumer convenience and music products in fiscal 1995 with numerous tests and some smaller roll out promotions. The United States operation intends to continue developing direct response marketing in the upcoming fiscal year. The Company has also initiated print direct response campaigns for consumer convenience and music products. These print campaigns have been and will probably remain a fairly small part of the Company's overall direct response business. Consumer convenience products are developed centrally for potential distribution in all of the Company's subsidiaries. The consumer convenience product market is highly competitive. The Company has operated in this competitive market by selling lower priced (usually under $100 retail price) goods since its inception and relies on its experience in consumer convenience product selection, commercial production and television marketing to be competitive in this business. Public awareness of the Company's products is created through television and print advertising campaigns, in-store displays and eyecatching 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 to Handleman Company represented 11%, 14% and 12% of the Company's consolidated net sales for the years ended June 30, 1995, 1994 and 1993. 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, 1995 the Company employed 186 full time people worldwide. Prospective Information On July 24, 1995, the Board of Directors of K-tel International, Inc. (the Company) approved the sale of its consumer entertainment business to a corporation controlled by the Company's President and Chief Executive Officer (the Purchaser). The Company proposes to sell its consumer entertainment business to the Purchaser by selling to the Purchaser three domestic subsidiaries and ten foreign subsidiaries (the "Entertainment Subsidiaries") which own the master recording catalog rights to music recordings and through which the Company operates its consumer entertainment products business at a purchase price of $25,000,000 plus certain adjustments estimated at June 30, 1995 to increase the total purchase price to approximately $32,000,000. The Company will retain and continue to operate its non-entertainment consumer product business, including two domestic subsidiaries (the "Remaining Subsidiaries") operating the retained business. As part of the transactions, the Company and the Remaining Subsidiaries will repay the net intercompany debt owed by them to the Entertainment Subsidiaries estimated to be approximately $8,700,000 at June 30, 1995 and will repay bank indebtedness estimated at June 30, 1995 to be approximately $1,500,000. For financial information about the Company's foreign and domestic operations for each of the last three fiscal years ended June 30, 1995, see Note 3 to the consolidated financial statements. ITEM 2: PROPERTIES K-tel's corporate offices and U.S. operations are located in leased facilities in a suburb of Minneapolis, Minnesota. The property consists of 115,859 square feet of office and warehouse facilities. K-tel's foreign subsidiaries lease a total of 34,359 square feet of office and warehouse facilities. Due to recent growth, the Company's U.S. operations have expanded the amount of leased warehouse distribution space used in the past two years. In the fourth quarter of fiscal 1995, the Company's U.S. operations leased and sub-leased new, larger office and warehouse facilities to properly accommodate recent growth. These facilities carry lease payment obligations through the year 2000. The facilities leased are part of multi-tenant facilities. See Note 7 to the consolidated financial statements. ITEM 3: LEGAL PROCEEDINGS As of the date hereof, the Company was not involved in any material legal proceedings. 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 1995. PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS On September 28, 1995 there were 1,782 record owners of the Company's common stock and approximately 3,724,172 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: 1994 1995 High Low High Low First Quarter 9 3/8 7 1/2 5 1/8 3 Second Quarter 10 3/4 6 1/2 5 3/4 3 Third Quarter 7 1/4 6 1/4 6 1/8 3 3/4 Fourth Quarter 7 4 3/4 4 3 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, 1995. 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.
Year Ended June 30, 1995 1994 1993 1992 1991 Net Sales $ 65,917 $54,270 $55,714 $ 48,234 $ 35,252 Operating Income (Loss) $ (2,188) $ 223 $ 3,623 $ 2,488 $ 727 Net Income (Loss) $ (2,483) $ 376 $ 2,701 $ 1,875 $ 558 Net Income (Loss) Per Common and Common Equivalent Share $ (.67) $ .10 $ .72 $ .50 $ .15 Total Assets $ 28,637 $26,874 $21,922 $ 22,292 $ 15,942 Long-Term Debt $ -- $ -- $ 2 $ 66 $ 116 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 percentage of net sales. All amounts are in thousands of dollars.
Year Ended June 30, 1994 North America Europe and Pacific Total Net Sales $36,579 100% $ 29,338 100% $ 65,917 100% Costs and expenses Cost of goods sold 22,131 61% 13,607 46% 35,738 54% Advertising 3,490 9% 8,111 28% 11,601 17% Selling, general & administrative 9,155 25% 9,641 33% 18,796 29% Restructuring/closedown charges -- -- 652 2% 652 1% Operating Income (Loss) 1,803 5% (2,673) (9)% (870) (1)%
(ABOVE TABLE CONTINUED)
Year Ended June 30, 1995 North America Europe and Pacific Total Net Sales $28,606 100% $ 25,664 100% $54,270 100% Costs and expenses Cost of goods sold 16,003 56% 11,268 44% 27,271 50% Advertising 2,787 10% 7,676 30% 10,463 19% Selling, general & administrative 6,225 22% 8,374 33% 14,599 28% Restructuring/closedown charges -- -- 624 2% 624 1% Operating Income (Loss) 3,591 12% (2,278) (9)% 1,313 2%
For the year ended June 30, 1995, the parent company recorded $1,318,000 in expenses. For the year ended June 30, 1994, the parent company recorded $1,090,000 in expenses. The increase in costs was due to additions in personnel and the establishment of a corporate satellite office in Los Angeles.
Year Ended June 30, 1994 North America Europe and Pacific Total Net Sales $28,606 100% $ 25,664 100% $54,270 100% Costs and expenses Cost of goods sold 16,003 56% 11,268 44% 27,271 50% Advertising 2,787 10% 7,676 30% 10,463 19% Selling, general & administrative 6,225 22% 8,374 33% 14,599 28% Restructuring/closedown charges -- -- 624 2% 624 1% Operating Income (Loss) 3,591 12% (2,278) (9)% 1,313 2%
(ABOVE TABLE CONTINUED)
Year Ended June 30, 1993 North America Europe and Pacific Total Net Sales $18,976 100% $36,738 100% $55,714 100% Costs and expenses Cost of goods sold 10,551 56% 13,400 37% 23,951 43% Advertising 1,251 6% 10,405 28% 11,656 20% Selling, general & administrative 5,063 27% 10,279 28% 15,342 28% Restructuring/closedown charges -- -- -- -- -- -- Operating Income (Loss) 2,111 11% 2,654 7% 4,765 9%
In addition to the operating amounts above, the parent company recorded $1,090,000 in expenses for the year ended June 30, 1994 and $1,142,000 for the year ended June 30, 1993. Fiscal 1995 in Comparison with Fiscal 1994 Consolidated net sales for the fiscal 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. Consolidated net sales increased $11,647,000 or 21% for the fiscal year ended June 30, 1995. The 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. Consolidated cost of goods sold for the year fiscal ended June 30, 1995 increased to 54% of sales compared to 50% for the fiscal year ended June 30, 1994. In Europe, the increase was 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. Advertising costs as a percentage of net sales for the fiscal year ended June 30, 1995 were 18% compared to 19% for the previous year. The slight decrease from previous fiscal year was mainly the result of 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 than consumer convenience product. North American advertising costs as a percentage of net sales were flat for the year ended June 30, 1995 compared to the previous year. Selling, general and administrative expenses for the fiscal 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 prior fiscal year. Selling, general and administrative expenses for the year ended June 30, 1995 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, 1995 are higher in absolute dollars but comparable as a percentage of net sales to the previous fiscal year due primarily to more television direct response promotions in the current year which produced higher sales revenues but also resulted in more variable selling and shipping expenses. Restructure/closedown charges of $652,000 in 1995 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 made firm commitments and 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 current distribution facility to approximately one third of the current size and cost. The resulting smaller German operation will focus on short and long form (infomercials, generally 30 minute commercials) direct response marketing of music products. The Company provided closedown charges of $624,000 in 1994 relating to the Company's 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 and the accrued charge at June 30, 1994 approximated the actual costs incurred to complete the closedowns resulting in no material additional benefit or expense in fiscal 1995. The Company experienced 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. During the year ended June 30, 1995, the Company experienced a foreign currency transaction gain of $180,000 compared to a gain of $28,000 in the previous year. For the year ended June 30, 1995, foreign exchange rate fluctuations have been more 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's 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 $375,000 for the year ended June 30, 1995 compared to an income tax benefit of $35,000 for the fiscal year ended June 30, 1994. The prior year tax benefits were 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. Fiscal 1994 in Comparison with Fiscal 1993 Consolidated net sales for the 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. Consolidated net sales for the fiscal year ended June 30, 1993 were $55,714,000 with operating income of $3,623,000 and net income of $2,701,000 or $.72 per share. Net sales decreased $1,444,000 or 3% from the prior year period. The sales decrease primarily occurred in the Company's European operations due principally to recessionary economic conditions in Europe, specifically in Germany, which resulted in less direct response advertising, promotions and sales as compared to the prior year. European sales declines were partially offset by sustained growth in music and consumer convenience product retail sales in the U.S. Music sales increased over fiscal year 1993 as a result of the U.S. operations which experienced success in most of its widely diverse, product offerings covering nearly all genres of music. Consumer convenience product sales in the U.S. also increased from fiscal year 1993 levels as the Company continued to apply its resources to the development and marketing of these product lines. Foreign currency conditions discussed below caused sales stated in U.S. dollars for the year ended June 30, 1994 to be approximately $2,181,000 less than they would have been had exchange rates remained consistent with fiscal 1993. Cost of goods sold for the year ended June 30, 1994 was 50% of net sales compared to 43% for the year ended June 30, 1993. The increase was mainly the result of the reduction in European direct response sales in fiscal 1994 as a result of the recessionary conditions described above. Direct response sales typically carry higher gross margins before advertising costs. For the year ended June 30, 1994, advertising costs were 19% of net sales compared to 21% for the year ended June 30, 1993. The decrease was attributable to retail sales representing a greater percentage of the total sales mix in fiscal 1994. Retail sales generally require less advertising expenditures than direct response sales. European advertising costs as a percentage of net sales increased slightly over fiscal year 1993 due in part to the planned expansion of the Company's European direct response efforts utilizing infomercial marketing. Infomercials are information programs of usually 15 to 30 minutes in length with commercial advertisements for consumer products related to the program. The Company commenced its European infomercial marketing activities in January 1994. The Company's U.S. operation experienced an increase in advertising costs over the fiscal year 1993 comparable period due to an increase in direct response advertising as the Company continued its U.S. expansion in this area. Even with this increase, overall Company advertising as a percentage of sales declined due to U.S. sales (mainly retail sales which carry lower advertising costs than European sales) representing a greater percentage of consolidated sales than in fiscal 1993. Closedown charges of $624,000 resulted from the fiscal year 1994 fourth quarter decision to close loss operations in France and New Zealand and to closedown certain unprofitable consumer convenience product lines in the United Kingdom. The charges included provisions for the write-down of assets (inventories, accounts receivable and fixed assets) to estimated realizable values, the cost of certain lease obligations, employee severance costs, committed marketing costs and professional fees and other expenses associated with the closedowns. The closedown of the French and New Zealand operations were completed in the second quarter of fiscal 1995. The Company's United Kingdom operation ceased consumer convenience product marketing in the first quarter of fiscal 1995 due to unprofitable results in this area and a reliance on expensive television advertising to support sales levels. Selling, general and administrative expenses for the year ended June 30, 1994 were $16,086,000 or 30% of net sales compared to $16,539,000 or 30% of net sales in the fiscal year ended June 30, 1993. The small decrease of $453,000 was due to less European sales resulting in less variable sales and distribution expense, specifically for direct to consumer sales. Operating income decreased to $223,000 for the year ended June 30, 1994 compared to $3,623,000 in the fiscal year ended June 30, 1993. The decrease in operating income was mostly attributable to the European sales declines. The closedown charges for France and New Zealand also contributed to the decline. The U.S. operations experienced strong income gains over the previous year; however, these increases only partially offset the European decline. During the year ended June 30, 1994, the Company experienced a $28,000 foreign currency transaction gain compared to a $498,000 loss in the fiscal year ended June 30, 1993. In fiscal 1994, foreign exchange rate fluctuations were more favorable to the Company than in the previous year. Also, in fiscal 1994, the Company initiated 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 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 majority of the fiscal 1993 translation losses were the result of these intercompany liabilities. Gains or losses resulting from these intercompany liabilities remain unrealized until such time as the underlying liabilities are settled. The Company experienced an income tax benefit of $35,000 for the fiscal year ended June 30, 1994 compared to a provision for income taxes of $527,000 in the previous year. The benefit resulted from loss carrybacks available in certain foreign subsidiaries. Also, the effective tax rate before these loss carrybacks was significantly lower than the previous year due to higher pre-tax income from the U.S. operations compared to previous year which results in more utilization of net operating loss carryforwards available to the Company. Liquidity and Capital Resources During the fiscal year ended June 30, 1995, cash and cash equivalents decreased approximately $2,017,000 to $2,154,000. The overall decrease in cash was primarily due to the net loss for the period and increases in nearly all current operating items (accounts receivable, inventories, royalty advances and prepaid expenses) which continued to be driven by strong sales growth through the fourth quarter. The related collections and payments will occur in the first and second quarter of fiscal 1996. Part of the cash decrease was offset by a net increase in borrowings. During fiscal year ended June 30, 1995 the Company purchased approximately $354,000 of consumer convenience product from an affiliate controlled by the Chairman of The Board of Directors. The Company owed approximately $175,000 to the affiliate at June 30, 1995. Also, this same affiliate purchased approximately $228,000 of consumer convenience product from the Company during the fiscal year ended June 30, 1995 and owed the Company $208,000 at June 30, 1995. Outstanding balances are settled on a timely basis. No interest was charged on the related outstanding balances during fiscal 1995. Three of the Company's United States subsidiaries, K-tel International (USA), Inc., Dominion Entertainment, Inc. and K-tel, Inc. (the "Subsidiaries") have revolving credit agreements maturing November 30, 1995. The agreements provide for an asset based line of credit not to exceed $5,500,000 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. K-tel International, Inc. has also guaranteed all borrowings of the Subsidiaries. Interest on borrowings is accrued and due monthly at a rate of prime plus one and one half percent (10.5%) at June 30, 1995. The amounts outstanding under these lines of credit were $2,516,000 at June 30, 1995. During 1995, average borrowings under the lines of credit were approximately $2,500,000, and the weighted average interest rate was 10.2%. The maximum amount outstanding under the lines of credit was $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, 1995 the Subsidiaries were in compliance or have obtained waivers for these covenants. Management considers its cash needs for the current fiscal year to be adequately covered by its operations, borrowings under the TCF lines of credit or by funding from another company controlled by the Chairman of the Board of Directors of the Company. Although management is not privy to the financial statements of the Chairman's other companies, he has assured K-tel International, Inc. that he will fund its operations on an as needed basis consistent with his past practices. It is the Company's intention to renew its lines of credit for at least an additional year when they mature on November 30, 1995. The Company has initiated discussions with the bank and believes the lines of credit will be renewed. Prospective Information On July 24, 1995, the Board of Directors of K-tel International, Inc. (the Company) approved the sale of its consumer entertainment business to a corporation controlled by the Company's President and Chief Executive Officer (the Purchaser). The Company proposes to sell its consumer entertainment business to the Purchaser by selling to the Purchaser three domestic subsidiaries and ten foreign subsidiaries (the "Entertainment Subsidiaries") which own the master recording catalog rights to music recordings and through which the Company operates its consumer entertainment products business at a purchase price of $25,000,000 plus certain adjustments estimated at June 30, 1995 to increase the total purchase price to approximately $32,000,000. The Company will retain and continue to operate its non-entertainment consumer products business, including two domestic subsidiaries (the "Remaining Subsidiaries") operating the retained business. As part of the transactions, the Company and the Remaining Subsidiaries will repay the net intercompany debt owed by them to the Entertainment Subsidiaries estimated to be approximately $8,700,000 at June 30, 1995 and will repay bank indebtedness estimated at June 30, 1995 to be approximately $1,500,000. 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 25. ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The following are the Directors and executive officers of the Company, their respective ages, the year in which each was elected a director and where applicable, the office of the Company held by the director. Each elected director will hold office until the next annual meeting of shareholders or until his respective successor has been duly elected and qualified.
Principal Occupation during the past five Director Name and Age years Since Philip Kives Founder of the Company; 1968 (66) Chairman of the Board of the Company Mickey Elfenbein Chief Executive Officer, 1973 (48) President and Secretary of the Company Mark Dixon Vice President - Finance, 1993 (36) Chief Financial Officer/Treasurer of the Company Seymour Leslie Chairman of the Leslie Group, 1993 (72) Inc. and Co-Chairman of Leslie/Linton Entertainment, Inc. Sanford Sigoloff Chairman, President and 1993 (65) CEO of Sigoloff & Associates, Inc. Jeffrey Koblick Senior Vice President, Purchasing Not Applicable (48) and Operations David Weiner Senior Vice President Not Applicable (38)
Mickey Elfenbein is a nephew of Philip Kives. Philip Kives is the founder and Chairman of the Board of Directors of K-tel International, Inc. Mickey Elfenbein has served K-tel International, Inc. in various capacities since 1969. He was appointed Chief Executive Officer in 1993. Mark J. Dixon is Vice President Finance - Chief Financial Officer/Treasurer of K-tel International, Inc. Mr. Dixon joined the Company in 1983 and became a corporate officer in 1989. Prior to joining the Company, Mr. Dixon was with KPMG Peat Marwick, St. Paul, MN, earning his CPA in 1981. Mr. Dixon is a member of the Minnesota Society of CPA's and the AICPA. Seymour Leslie has served as Chairman of the Leslie Group, Inc., a privately-held diversified investment company, since 1987 and as Co-Chairman of Leslie/Linton Entertainment, Inc., a privately-held diversified investment company, since June 1989. Mr. Leslie has been active in the recorded music industry since 1953 when he founded Pickwick International, Inc. Mr. Leslie served as Chairman of the Board of Pickwick until 1977. During his tenure, Pickwick became a dominant force in the industry and developed the Musicland chain into the largest record retailer in the world. He was named President of CBS Video Enterprises in 1980. In 1982, he left CBS to form the MGM/UA Home Entertainment Group, Inc., a company engaged in the home video and pay television industry, where he served as Chairman until 1987, when he founded the Leslie Group. Mr. Leslie also serves as a director for Shorewood Packaging Corp. (a printing/packaging company), HMG Digital (a tape, video and compact disc manufacturer), Pacific Rim, Inc. (an animation company) and Gametek, Inc. (a video/CD-Rom game company). Sanford C. Sigoloff is Chairman, President and Chief Executive Officer of Sigoloff & Associates, Inc., a crisis management and consulting firm specializing in corporate reorganizations, restructurings and turnarounds. For more than thirty years, Mr. Sigoloff has worked closely with numerous diverse conglomerates composed of worldwide businesses covering virtually every product and service sector. In the position of Chief Executive Officer, Mr. Sigoloff has led the reorganization, recovery and expansion of companies with collective assets in excess of $5 billion dollars. Among the companies for whom Mr. Sigoloff has served in senior executive capacities are L.J. Hooker Corporation, Wickes Companies, Kaufman & Broad, Daylin, Inc. Corporation, Republic Corporation, and Xerox Corporation. Mr. Sigoloff is an adjunct professor at UCLA, his alma mater; and frequently lectures at Pepperdine University, Los Angeles and Carnegie Mellon University in Pittsburgh. Mr. Sigoloff also serves as a director for SunAmerica, Inc. (a financial services company), Kaufman and Broad Home Corporation (a home-building company), Movie Gallery, Inc. (a video distribution company) and Wickes PLC (a lumber company). Jeffrey Koblick has served K-tel International, Inc. in various capacities since 1970 and has been a corporate officer since 1978. David Weiner joined K-tel on December 16,1993 and held various managerial positions within the firm of Deloite & Touche Management Consulting for the five prior years. DIRECTOR'S FEES Board members who are not also officers or employees of the Company receive a fee of $1,000 for each regular meeting attended and an annual directors fee of $12,000 to be paid on a quarterly basis at the end of each quarter. The Company paid director fees of $40,000 during fiscal 1995. During fiscal 1995, the Company's Board of Director's took action by way of Unanimous Actions in writing and held four formal meetings. BOARD COMMITTEES The Audit Committee consists of Messrs. Leslie and Sigoloff. The principal functions of the Audit Committee are to (i) recommend to the Board of Directors the independent public accountants to act as the Company's independent auditors; (ii) discuss with representatives of management and the independent auditors the scope and procedures used in auditing the records of the Company; and (iii) review the financial statements of the Company. The Audit Committee held two meetings in fiscal 1995. The Compensation Committee consists of Messrs. Sigoloff and Leslie. The principal functions of the Compensation Committee are to review and recommend compensation for executive personnel and to administer the Company's stock option and other compensation plans. The Compensation Committee held two meetings in fiscal 1995. ITEM 11: EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following Summary Compensation Table sets forth the cash and noncash compensation for each of the last three fiscal years awarded to or earned by the Chief Executive Officer and each of the other highest paid executive officers of the Company for services in all capacities to the Company and its subsidiaries during the fiscal year ended June 30, 1995.
Long Term Annual Compensation Compensation Other Annual Awards Name and Principal Position[s] Year Salary Bonus Compensation Options Mickey Elfenbein 1995 $ 228,250 $ ---- $ 2,022 ---- Chief Executive Officer 1994 $ 220,000 $ ---- $ 866 75,000 President and Secretary 1993 $ 200,000 $ 227,775 (1) $ ---- ---- Jeffrey M. Koblick 1995 $ 177,482 $ ---- $ 2,022 ---- Senior Vice President - 1994 $ 167,500 $ 58,353 $ 1,275 5,000 Purchasing and Operations 1993 $ 156,750 $ 89,376 (1) $ ---- 10,000 Mark Dixon 1995 $ 97,500 $ ---- $ 1,221 ---- Chief Financial Officer, 1994 $ 88,750 $ ---- $ 681 7,500 Vice President - Finance and Treasurer 1993 $ 80,813 $ 45,198 (1) $ ---- 7,500 David Weiner 1995 $ 117,500 $ ---- $ 1,366 ---- Vice President - Corporate Development 1994 $ 59,583 $ ---- $ 275 10,000 1993 $ ---- $ ---- $ ---- ----
Philip Kives, Chairman of the Board, did not receive any compensation in fiscal 1995 for his services to the Company. Messrs. Elfenbein, Koblick and Dixon received salary increases in fiscal 1995 based upon their individual performances and contributions to the Company. (1) Includes bonuses earned under the management incentive plan in fiscal 1992 and paid in fiscal 1993 and bonuses earned in fiscal 1993 but paid in fiscal 1994, which were $103,075 to Mr. Elfenbein, $50,989 to Mr. Koblick and $27,441 to Mr. Dixon. OPTION GRANTS IN LAST FISCAL YEAR There were no new executive officer stock options granted during the fiscal year ended June 30, 1995. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth, as to each executive officer named in the Summary Compensation Table, certain information with respect to stock options exercised during the last fiscal year and unexercised options held as of the end of the fiscal year.
Number of Unexercised Value of Unexercised Options at Fiscal In-the-Money Options at Year-End (#) Fiscal Year-End (1) Shares Acquired Value Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable Mickey Elfenbein ---- ---- 37,500 37,500 $ ---- $ ---- Jeffrey M. Koblick ---- ---- 47,500 5,000 $ 71,250 $ 1,875 Mark Dixon ---- ---- 18,375 5,625 $ 19,968 $ 1,406 David Weiner ---- ---- 5,000 5,000 $ ---- $ ----
(1) Market value of underlying securities at year-end minus the exercise price. COMPANY STOCK PRICE PERFORMANCE Performance Graph The following Stock Price Performance Graph compares the cumulative total return * of the Company, the S&P 500 Stock Index and peer groups for a five year period: [GRAPHIC]
1990 1991 1992 1993 1994 1995 K-TEL INTERNATIONAL $100.00 $ 57.00 $225.00 $825.00 $475.00 $362.50 S&P 500 100.00 107.40 121.80 138.40 140.35 176.94 PEER GROUP 100.00 57.89 6.84 5.06 6.54 5.76
* Cumulative total return assumes quarterly reinvestment of dividends. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee establishes the general compensation policies of the Company and specific compensation for each executive officer of the Company, and it administers the stock option and other compensation plans. The Compensation Committee attempts to make the compensation packages of the executive officers of the Company sufficient to attract and retain persons of exceptional quality while at the same time including effective incentives to motivate Company executives to perform as necessary to continue the success and growth of the Company. MANAGEMENT INCENTIVE PLAN The Company has a management incentive plan under which management and other key employees may be awarded annual bonuses based upon the achievement of financial goals and objectives and an assessment of personal performance during the year. Approximately 35 employees are current participants in the plan. Payments made to the Executive Officers under the management incentive plan are included in the Cash Compensation Table. Bonuses earned under the plan in fiscal 1993 but paid at the beginning of fiscal 1994 were $103,075 to Mr. Elfenbein, $50,989 to Mr. Koblick and $27,441 to Mr. Dixon. Pursuant to the plan, no bonuses were earned by Messrs. Elfenbein, Dixon and Weiner for fiscal 1994 or fiscal 1995. Mr. Koblick earned a bonus of $58,353 for fiscal 1994 which relates primarily to the performance by the Company's business in the U.S. Pursuant to the plan, no bonus was earned by Mr. Koblick for fiscal 1995. RETIREMENT PLAN Retirement benefits for full-time U.S. based employees of the Company are provided under a retirement savings plan qualified under Section 401(k) of the Internal Revenue Code. Participants may elect to contribute, through salary reductions, up to 20% of their salary to the retirement plan up to a maximum of $9,240 per year, and the Company may make matching contributions up to 20% of the first 6% of the participants contributions. Employee contributions vest immediately; employer contributions vest 50% after one year of service and 100% after two years. Distributions upon death or termination of employment are subject to certain restrictions in order that federal income tax regulations be complied with and the amounts vested remain on a tax deferred basis until retirement. Amounts contributed by Executive Officers through salary reductions are included in the Cash Compensation Table. The Company made matching contributions of $25,334 in fiscal 1995. STOCK OPTIONS On July 15, 1987 the Board of Directors adopted the K-tel International, Inc. Stock Incentive Plan for officers and other key employees of the Company. The shareholders approved the plan on December 8, 1987. The stock incentives may take the form of incentive stock options, nonqualified stock options, stock appreciation rights and/or restricted stock. A total of 350,000 shares of the Company's common stock were reserved for issuance upon exercise of the options. The Board of Directors has sole authority to determine the employees to whom options and awards are granted, the duration of the exercise period and any other matters arising under the plan. The Compensation Committee expects to review option grants on an annual basis. During fiscal 1995, there were no new executive stock options granted. CHIEF EXECUTIVE OFFICER COMPENSATION Mickey Elfenbein has served K-tel International, Inc. in various capacities since 1969. He was appointed Chief Executive Officer in 1993. In recognition of Mr. Elfenbein's importance to the Company as well as his knowledge of the operations and business of the Company, the Compensation Committee approved an increase in Mr. Elfenbein's base salary from $220,000 to $231,000 for fiscal 1995. In addition Mr. Elfenbein was eligible to receive a bonus of up to 100% of his base salary if the Company achieved specific operating income figures. No bonus was earned in fiscal 1995. Seymour Leslie Sanford Sigoloff Compensation Committee Compensation Committee ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of the record date by (i) all persons known to the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each executive officer and director of the Company, and (iii) all executive officers and directors as a group.
Number of Common Shares Percentage of Name and Address Position Owned Beneficially Outstanding Shares Philip Kives Chairman 2,465,470 66.4% 220 Saulteaux Crescent Winnipeg, Manitoba R3J 3W3 Canada Mickey Elfenbein President, Chief 400,111 (1) 10.7% 2605 Fernbrook Lane North Executive Officer and Minneapolis, Minnesota 55447 Director Mark Dixon Vice President - Finance, 20,251 (1) (2) 2605 Fernbrook Lane North Chief Financial Officer, Minneapolis, MN 55447 Treasurer and Director Seymour Leslie Chairman of the Leslie Group, 12,500 (1) (2) 1370 Avenue of the Americas Inc. and Co-Chairman of 26th Floor Leslie/Linton Entertainment, Inc. New York, NY 10019 Sanford Sigoloff Chairman, President and 12,500 (1) (2) 3340 Ocean Park Blvd. CEO of Sigoloff & Associates, Inc. Suite 3050 Santa Monica, CA 90405 Jeffrey Koblick Senior Vice President, Purchasing 63,300 (1) (2) 2605 Fernbrook Lane North and Operations Minneapolis, MN 55447 David Weiner Senior Vice President 9,000 (1) (2) 2605 Fernbrook Lane North Minneapolis, MN 55447 All Officers and directors 2,983,132 (1) (2) as a group (7 persons)
(1) Includes shares pursuant to options of which Mr. Elfenbein has 37,500, Mr. Dixon has 20,250, Mr. Leslie has 12,500, Mr. Sigoloff has 12,500, Mr. Weiner has 5,000, Mr. Koblick has 50,000 and all officers and directors as a group have 137,750. No options are held by Mr. Kives. (2) Represents less than 2%. COMPLIANCE WITH SECTION 16(A) The Company's directors, executive officers and any persons holding more than 10% of the outstanding Common Stock are required to file reports concerning their initial ownership of the securities of the Company and any subsequent changes in that ownership. The Company believes that all filing requirements were met during fiscal 1995. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN TRANSACTIONS During fiscal 1995, the Company purchased $354,000 of consumer convenience product from another company controlled by the Chairman of the Board. The purchase prices for these products were at prices comparable to transactions with a third party. However, the payment terms are open-ended as a method of financing the Company's consumer convenience product expansion in Europe and the U.S. The Company reimbursed such other company $3,000 during fiscal 1995 for warehousing and shipping services provided in Canada and travel, telephone and legal fees incurred on behalf of the Company. The Company sold approximately $228,000 of consumer convenience product in fiscal 1995 to an affiliate controlled by the Company's Chairman of the Board. During April 1994, the company controlled by the Company's Chairman of the Board provided $1,000,000 in short-term financing to the Company to fund consumer convenience product purchases. The Company repaid the loan principal plus interest at the rate of prime plus one and one half percent in October 1994. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules The consolidated financial 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 On August 16, 1995 the Company filed a Form 8-K, with the Securities and Exchange Commission regarding the July 24, 1995 Board of Directors approval of the sale of the Company's entertainment business. The information required under this item is incorporated herein by reference to the Form 8-K. (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 Articles and Restated incorporated herein by reference By-Laws to Exhibit (3) of the Registrant's Annual Report on Form 10-K for the year ended June 30, 1985 10.1 Employment Agreement - incorporated herein by reference David Weiner 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 - incorporated herein by reference Mickey Elfenbein 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 incorporated herein by reference July 22,1994 with TCF Bank Minnesota, to Exhibit 10.3 of the Registrant's K-tel International(USA),Inc. and Annual Report on Form 10-K for the Dominion Entertainment, Inc. year ended June 30, 1994 10.4 Promissory Note for up to $5,000,000 incorporated herein by reference by K-tel International(USA),Inc. and to Exhibit 10.4 of the Registrant's Dominion Entertainment, Inc. Annual Report on Form 10-K for the 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 incorporated herein by reference to Agreement 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 incorporated herein by reference to Agreement 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 incorporated herein by reference to January 30, 1995 with TCF Bank Exhibit 10.14 of the Registrant's Minnesota FSB and K-tel, Inc. Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.15 Revolving Note for up to $3,000,000 incorporated herein by reference to by K-tel, Inc. Exhibit 10.15 of 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 incorporated herein by reference to Agreement of K-tel USA Exhibit 10.17 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.18 Amended and Restated Security incorporated herein by reference to Agreement of Dominion Exhibit 10.18 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.19 Amendment to K-tel USA's Copyright incorporated herein by reference to Security Agreement Exhibit 10.19 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.20 Amendment to Dominion's Copyright incorporated herein by reference to Security Agreement Exhibit 10.20 of 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 incorporated herein by reference to Agreement of K-tel International, Inc. Exhibit 10.25 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.26 Amended and Restated Security incorporated herein by reference to Agreement of K-tel International, Inc. Exhibit 10.26 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.27 First Amendment to Revolving Credit incorporated herein by reference to Agreement with K-tel USA, Dominion Exhibit 10.27 of the Registrant's and TCF Bank Minnesota FSB Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.28 Replacement Revolving Note for up to incorporated herein by reference to $2,000,000 with K-tel USA and Exhibit 10.28 of the Registrant's Dominion 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 and to Revolving Note attached to this report as Exhibit 10.30 10.31 Second Amendment to Revolving Credit Agreement and to Revolving Note attached to this report as Exhibit 10.31 10.32 Debt Subordination Agreement attached to this report as Exhibit 10.32 10.33 Second Amendment to Revolving Credit Agreement-K-tel, Inc. attached to this report as Exhibit 10.33 10.34 Third Amendment to Revolving Credit Agreement-K-tel USA and Dominion attached to this report as Exhibit 10.34 10.35 Replacement Revolving Note for up to $3,500,000 with K-tel USA and Dominion attached to this report as Exhibit 10.35 11 Statement Regarding Computation of Earnings Per Share attached to this report as Exhibit 11 21 Subsidiaries of the Registrant attached to this report as Exhibit 21 23 Consent of Independent Public attached to this report as Exhibit 23 Accountants 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 11,1995 by the undersigned, thereunto duly authorized. K-TEL INTERNATIONAL, INC. By /S/ Philip Kives (Philip Kives - Chairman of the Board) 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 Director October 12, 1995 Philip Kives /S/ Mickey Elfenbein Principal Executive Officer, Mickey Elfenbein President, and Director October 12, 1995 /S/ Mark Dixon Vice President - Finance, Director Mark Dixon Chief Financial Officer and Treasurer October 12, 1995 (Principal Accounting Officer) /S/ Seymour Leslie Director Seymour Leslie October 12, 1995 /S/ Sanford Sigoloff Director Sanford Sigoloff October 12, 1995 (ITEM 14(A)) K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Public Accountants............................ 26 Consolidated Statements of Operations for each of the three years in the period ended June 30, 1995............................. 27 Consolidated Balance Sheets as of June 30, 1995 and 1994............ 28 Consolidated Statements of Shareholders' Investment for each of the three years in the period ended June 30, 1995....... 29 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 1995........... 30 Notes to Consolidated Financial Statements.......................... 31-39 Supplemental Schedule to Consolidated Financial Statements: Schedule II - Valuation and Qualifying Accounts................. 40 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, 1995 and 1994, and the related consolidated statements of operations, shareholders' investment and cash flows for each of the three years in the period ended June 30, 1995. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995 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 Commission's 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, September 15, 1995 K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30 (in thousands - except per share data)
1995 1994 1993 NET SALES $ 65,917 $ 54,270 $ 55,714 COSTS AND EXPENSES: Cost of goods sold 35,660 26,842 23,896 Advertising 11,601 10,495 11,656 Selling, general & administrative 20,192 16,086 16,539 Restructuring/closedown charges (Note 8) 652 624 -- Total Costs and Expenses 68,105 54,047 52,091 OPERATING INCOME (LOSS) (2,188) 223 3,623 NON-OPERATING INCOME (EXPENSE): Interest income 120 117 146 Interest expense (220) (27) (43) Foreign currency transaction gain (loss) 180 28 (498) Total Non-operating Income (Expense) 80 118 (395) INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (2,108) 341 3,228 PROVISION (BENEFIT) FOR INCOME TAXES (Note 5) 375 (35) 527 NET INCOME (LOSS) $ (2,483) $ 376 $ 2,701 NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE $ (.67) $ .10 $ .72 WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 3,711 3,822 3,733
The accompanying notes to consolidated financial statements are an integral part of these statements. K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30 (in thousands - except share data) ASSETS 1995 1994 Current Assets: Cash and cash equivalents $ 2,154 $ 4,171 Restricted cash 536 2,148 Accounts receivable, less allowances of $771 and $489 11,971 11,600 Inventories 7,382 5,143 Royalty advances 2,176 887 Prepaid expenses 2,108 1,162 Income tax refund receivable 540 458 Total Current Assets 26,867 25,569 Property and Equipment 2,820 2,216 Less-Accumulated depreciation and amortization (1,797) (1,465) Property and Equipment, net 1,023 751 Other Assets 747 554 $ 28,637 $ 26,874 LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Line of credit (Note 4) $ 2,516 $ -- Note payable to affiliate (Note 10) -- 1,000 Accounts payable 4,929 4,973 Accrued royalties 9,047 7,864 Reserve for returns 6,802 6,412 Other current liabilities 2,517 1,929 Income taxes payable 373 150 Total Current Liabilities 26,184 22,328 Commitments and Contingencies (Note 7) Shareholders' Investment (Note 6): Preferred stock - 4,000,000 shares authorized; none issued -- -- Common stock - 7,500,000 shares authorized; 37 37 par value $.01; 3,713,797 and 3,706,797 issued and outstanding Contributed capital 7,816 7,801 Accumulated deficit (4,921) (2,438) Cumulative translation adjustment (479) (854) Total Shareholders' Investment 2,453 4,546 $ 28,637 $ 26,874 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)
Cumulative Common Stock Contributed Accumulated Translation Shares Amount Capital Deficit Adjustment Balance, June 30, 1992 3,600 $ 36 $ 7,622 $ (5,515) $ (115) Net income ---- ---- ---- 2,701 ---- Proceeds from exercise of stock options 61 1 90 ---- ---- Translation adjustment ---- ---- ---- ---- (670) 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)
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)
1995 1994 1993 Operating Activities: Net income (loss) $(2,483) $ 376 $ 2,701 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization 567 618 330 Restructuring/closedown charges 652 624 -- Changes in current operating items: Restricted cash 1,612 (2,148) -- Accounts receivable (309) (1,712) (1,317) Inventories (1,915) (1,228) (262) Royalty advances (1,250) (10) 106 Prepaid expenses (835) 66 (675) Accounts payable and accrued liabilities 1,250 4,050 27 Income tax refund receivable (101) (340) (1,049) Income taxes payable 288 (138) -- Cash Provided By (Used For) Operating Activities (2,524) 158 (139) Investing Activities: Property and equipment purchases, net (523) (254) (600) Music catalog additions (444) (298) -- Other (22) (232) (170) Cash Used For Investing Activities (989) (784) (770) Financing Activities: Borrowings on line of credit, net 2,516 -- -- Repayments on note payable to affiliate (1,000) (62) (54) Proceeds from exercise of stock options 15 89 91 Cash Provided By Financing Activities 1,531 27 37 Effect of Exchange Rate Changes on Cash and Cash Equivalents (35) (28) (386) Net Decrease in Cash and Cash Equivalents (2,017) (627) (1,258) Cash and Cash Equivalents at Beginning of Year 4,171 4,798 6,056 Cash and Cash Equivalents at End of Year $ 2,154 $ 4,171 $ 4,798 Supplemental Cash Flow Information Cash paid for - Interest $ 174 $ 44 $ 28 Income Taxes $ 425 $ 310 $ 1,486
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, 1995, 1994 AND 1993 1. BUSINESS DESCRIPTION K-tel International, Inc. (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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company 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 (U.S.) customer represented 11%, 14% and 12% of the Company's consolidated net sales for the years ended June 30, 1995, 1994 and 1993, 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 mature in one to 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. 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. 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. An agent for various licensors has conducted an audit related to amounts owed to the agent on behalf of the licensors but has not yet submitted the results of that audit to the Company. Management believes the ultimate results of the audit will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 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 are included in other assets in 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, adjusted for the dilutive effect of common stock equivalents. 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"), issued in March 1995 and 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. Derivatives The Company enters 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 30,1995, the Company has approximately $650,000 in foreign exchange currency forward exchange contracts, the cost of which approximated market value at that date. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As better information becomes available (or actual amounts determinable), the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates. Reclassifications Certain reclassifications have been made in the 1994 financial statements to conform to the 1995 presentation. Such reclassifications had no affect on net income or shareholders' investment as previously reported. 3. SALE OF CONSUMER ENTERTAINMENT BUSINESS On July 24, 1995, the Board of Directors of the Company approved the sale of its consumer entertainment business to a corporation controlled by the Company's President and Chief Executive Officer (the Purchaser). The Company proposes to sell its consumer entertainment business to the Purchaser by selling to the Purchaser three domestic subsidiaries and ten foreign subsidiaries (the "Entertainment Subsidiaries") which own the master recording catalog rights to music recordings and through which the Company operates its consumer entertainment products business at a purchase price of $25,000,000 plus certain adjustments estimated at June 30, 1995 to increase the total purchase price to approximately $32,000,000. The Company will retain and continue to operate its non-entertainment consumer products business, including two domestic subsidiaries (the "Remaining Subsidiaries") operating the retained business. As part of the transactions, the Company and the Remaining Subsidiaries will repay the net intercompany debt owed by them to the Entertainment Subsidiaries estimated to be approximately $8,700,000 at June 30, 1995 and will repay bank indebtedness estimated at June 30, 1995 to be approximately $1,500,000. The proposed transaction is subject to the Purchaser obtaining financing and various other conditions, including approval of the transaction by the Company's shareholders and the receipt of an opinion of a financial advisor that the proposed transaction is fair from a financial point of view to the shareholders of the Company. The following unaudited pro-forma financial data for the Company has been prepared on a pro-forma basis to give effect to the divestiture of the Entertainment Subsidiaries. The increases and decreases summarized below include the effect of net cash inflows to the Company and the removal of the assets, liabilities, revenues and expenses of the Entertainment Subsidiaries. Pro forma June 30, June 30, 1995 Increase 1995 as reported (decrease) (unaudited) Total current assets $ 26,867 $ 1,260 $ 28,127 Other assets 1,770 (1,725) 45 Total assets $ 28,637 $ (465) $ 28,172 Total current liabilities $ 26,184 $(23,320) $ 2,864 Shareholders' Investment 2,453 22,855 25,308 Total liabilities and shareholders' investment $ 28,637 $ (465) $ 28,172 Net sales $ 65,917 $ 51,721 $ 14,196 Operating loss $ (2,188) $ (1,134) $ (1,054) Net loss $ (2,483) $ (1,468) $ (1,015) Net loss per share $ (.67) $ (.27) 4. LINE OF CREDIT Three of the Company's United States subsidiaries, K-tel International (USA), Inc., Dominion Entertainment, Inc. and K-tel, Inc. (the "Subsidiaries") have revolving credit agreements maturing November 30, 1995 with a bank. The agreements provide for an asset based line of credit not to exceed $5,500,000 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. K-tel International, Inc. has guaranteed all borrowings of the Subsidiaries. Interest on borrowings is accrued and due monthly at a rate of prime plus one and one half percent (10.5% at June 30, 1995). The amounts outstanding under these lines of credit were $2,516,000 at June 30, 1995. During 1995, average borrowings under the lines of credit were approximately $2,200,000, and the weighted average interest rate was 10.2%. The maximum amount outstanding under the lines of credit was $4,334,000 during 1995. The Subsidiaries are required to maintain minimum levels of tangible net worth and certain other financial ratios. As of June 30, 1995 the Subsidiaries were in compliance or have obtained waivers for those covenants. The Company has initiated discussions with the bank and believes the lines of credit will be renewed. 5. INCOME TAXES The Company operates in several countries and is subject to various tax regulations and tax rates. The provision 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):
1995 1994 1993 Income (loss) before provision (benefit) for income taxes: United States $ 1,564 $ 3,705 $ 2,557 Foreign (3,672) (3,364) 671 Total $(2,108) $ 341 $ 3,228 Provision (benefit) for income taxes: Currently payable United States $ 226 $ 315 $ 167 Foreign 149 (350) 360 Total currently payable (receivable) and total provision (benefit) for income taxes $ 375 $ (35) $ 527
A reconciliation of the U.S. federal statutory rate to the effective tax rate for the years ended June 30 are as follows: 1995 1994 1993 Federal statutory rate (34%) 34% 34% State taxes 5% 33% 2% Change in valuation allowance 50% (136%) (26%) Effect of different tax rates on foreign earnings (3%) 59% 6% 18% (10%) 16% 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 comprise all deferred tax assets are as follows: June 30, June 30, 1995 1994 Net operating loss carryforwards $ 8,360 $ 7,797 Alternative minimum tax credits 431 367 Reserve for returns 2,241 2,071 Depreciation 92 39 Royalty reserves 467 405 Inventory reserves 790 614 Nondeductible accruals 44 161 Allowance for bad debts 200 99 Valuation allowance (12,625) (11,553) $ --- $ --- 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 $18,264,000 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's carryforwards are subject to review and possible adjustment by taxing authorities. In addition, the Company has approximately $431,000 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 $4,765,000 as of June 30, 1995. 6. 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. Stock Incentive Plan information is summarized below. Incentive Non-qualified Stock Options Stock Options Outstanding June 30, 1992 151,500 55,000 Granted 53,000 38,000 Exercised - at prices ranging from $1.50 to $4.00 per share (59,625) (1,000) Forfeited (5,000) (9,500) Outstanding June 30, 1993 139,875 82,500 Granted 23,000 19,500 Exercised - at prices ranging from $1.50 to $4.00 per share (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 to $2.50 per share (1,125) (5,875) Forfeited (2,000) (16,375) Outstanding June 30, 1995 149,775 52,875 Options Exercisable 104,525 27,750 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. During 1994, 152,500 restricted options were granted with exercise prices ranging from $6.75 to $9.25. During 1995, 20,000 restricted options were granted with an exercise price of $3.75. As of June 30, 1995 172,500 restricted options were outstanding with 81,250 being execrable at that date. 7. 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. Leases The Company has entered into several office and warehouse leases which expire through 2000. Commitments under these leases are $521,000 in 1996, $456,000 in 1997, $458,000 in 1998, $312,000 in 1999 and $190,000 in 2000. Rental expense was $855,000 in 1995, $592,000 in 1994 and $602,000 in 1993. 8. 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 will focus on short and long form direct response marketing of music products. The expected future effect of the restructure/closedown is 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 the second quarter of fiscal 1995, and the accrued charge at June 30, 1994 approximated the actual costs incurred to complete the closedowns. The implementation of the fiscal 1995 restructuring/ closedown is expected to occur in the first two quarters of fiscal 1996. 9. 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): 1995 1994 1993 Net Sales: North America $ 38,228 $ 27,816 $ 20,799 Europe 29,338 25,088 36,122 Pacific ---- 576 616 Transfers between geographic areas (1,649) 790 (1,823) Net Sales $ 65,917 $ 54,270 $ 55,714 Operating Income (Loss): North America $ 1,803 $ 3,591 $ 2,111 Europe (2,673) (2,023) 2,617 Pacific ---- (255) 37 Operating Income before General Corporate Expenses, net (870) 1,313 4,765 General Corporate Expenses, net (1,318) (1,090) (1,142) Operating Income $ (2,188) $ 223 $ 3,623 Identifiable Assets: North America $ 18,816 $ 15,711 $ 10,629 Europe 9,821 10,918 10,845 Pacific ---- 245 448 Identifiable Assets $ 28,637 $ 26,874 $ 21,922 10. RELATED PARTY TRANSACTIONS The Company sold approximately $228,000 in fiscal 1995, $693,000 in fiscal 1994 and $895,000 in fiscal 1993 of consumer convenience product to an affiliate controlled by the Company's Chairman of The Board. This affiliate owed the Company approximately $208,000 at June 30, 1995 and $4,000 at June 30, 1994. The Company purchased $354,000 in fiscal 1995, $425,000 in fiscal 1994 and $586,000 in fiscal 1993 of consumer convenience product from another affiliate controlled by the Company's Chairman of The Board. The 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 reimbursed that 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 $3,000 during 1995, $43,000 during 1994, and $150,000 during 1993. The amount owed to this affiliate was $175,000 at June 30, 1995 and the amount owed at June 30, 1994 was not material. During April 1994, an affiliate controlled by the Company's Chairman of the Board provided $1,000,000 in short-term financing to the Company to fund consumer convenience product purchases. The Company repaid the $1,000,000 plus interest at a rate of prime plus one and one half percent in October 1994. 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The consolidated results of operations for the four quarters of 1995 and 1994 were as follows (in thousands, except for per share date):
First Second Third Fourth Quarter Quarter Quarter Quarter 1995 Net Sales $ 13,761 $ 19,719 $ 16,425 $ 16,012 Costs and Expenses $ 13,709 $ 19,424 $ 16,943 $ 18,029 Operating Income (Loss) $ 52 $ 295 $ (518) $ (2,017) Net Income (Loss) $ 66 $ 77 $ (330) $ (2,296) Net Income (Loss) per Common and Common Equivalent Share $ .02 $ .02 $ (.09) $ (.62) During the fourth quarter of fiscal 1995, the Company recorded restructuring/closedown charges of $652,000 as described in Note 8. In addition, the Company also recorded other one time charges of $740,000 related to various asset write downs in Germany and Spain not directly related to the restructuring/closedown. First Second Third Fourth Quarter Quarter Quarter Quarter 1994 Net Sales $ 11,858 $ 13,814 $ 13,501 $ 15,097 Costs and Expenses $ 11,441 $ 13,077 $ 13,280 $ 16,249 Operating Income (Loss) $ 417 $ 737 $ 221 $ (1,152) Net Income (Loss) $ 241 $ 680 $ 371 $ (916) Net Income (Loss) per Common and Common Equivalent Share $ .06 $ .18 $ .10 $ (.24)
During the fourth quarter of fiscal 1994, the Company recorded closedown charges of $624,000 as described in Note 8. SCHEDULE II K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the years ended June 30, 1995, 1994 and 1993 (in thousands)
Charged to Balance at Costs and Charged to Balance Beginning of Expenses or Other at End Period Net Sales Accounts Deductions of Period Allowance for Doubtful Accounts 1995 $ 489 $ 370 $ 18 (1) $ (106) (2) $ 771 1994 $ 336 $ 338 $ 12 (1) $ (197) (2) $ 489 1993 $ 260 $ 208 $ (17)(1) $ (115) (2) $ 336 Reserve for Returns 1995 $ 6,412 $ 9,480 $ 42 (1) $ (9,132) $ 6,802 1994 $ 5,738 $ 6,703 $ 29 (1) $ (6,058) $ 6,412 1993 $ 4,529 $ 7,036 $ (125)(1) $ (5,702) $ 5,738
(1) Exchange rate change (2) Uncollectible accounts written off, net of recoveries INDEX TO EXHIBITS
Exhibit Item Page 3 Restated Articles and Restated incorporated herein by reference By-Laws to Exhibit (3) of the Registrant's Annual Report on Form 10-K for the year ended June 30, 1985 10.1 Employment Agreement - incorporated herein by reference David Weiner 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 - incorporated herein by reference Mickey Elfenbein 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 incorporated herein by reference July 22,1994 with TCF Bank Minnesota, to Exhibit 10.3 of the Registrant's K-tel International(USA),Inc. and Annual Report on Form 10-K for the Dominion Entertainment, Inc. year ended June 30, 1994 10.4 Promissory Note for up to $5,000,000 incorporated herein by reference by K-tel International(USA),Inc. and to Exhibit 10.4 of the Registrant's Dominion Entertainment, Inc. Annual Report on Form 10-K for the 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 incorporated herein by reference to Agreement 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 incorporated herein by reference to Agreement 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 incorporated herein by reference to January 30, 1995 with TCF Bank Exhibit 10.14 of the Registrant's Minnesota FSB and K-tel, Inc. Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.15 Revolving Note for up to $3,000,000 incorporated herein by reference to by K-tel, Inc. Exhibit 10.15 of 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 incorporated herein by reference to Agreement of K-tel USA Exhibit 10.17 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.18 Amended and Restated Security incorporated herein by reference to Agreement of Dominion Exhibit 10.18 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.19 Amendment to K-tel USA's Copyright incorporated herein by reference to Security Agreement Exhibit 10.19 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.20 Amendment to Dominion's Copyright incorporated herein by reference to Security Agreement Exhibit 10.20 of 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 incorporated herein by reference to Agreement of K-tel International, Inc. Exhibit 10.25 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.26 Amended and Restated Security incorporated herein by reference to Agreement of K-tel International, Inc. Exhibit 10.26 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.27 First Amendment to Revolving Credit incorporated herein by reference to Agreement with K-tel USA, Dominion Exhibit 10.27 of the Registrant's and TCF Bank Minnesota FSB Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 10.28 Replacement Revolving Note for up to incorporated herein by reference to $2,000,000 with K-tel USA and Exhibit 10.28 of the Registrant's Dominion 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 and to Revolving Note attached to this report as Exhibit 10.30 10.31 Second Amendment to Revolving Credit Agreement and to Revolving Note attached to this report as Exhibit 10.31 10.32 Debt Subordination Agreement attached to this report as Exhibit 10.32 10.33 Second Amendment to Revolving Credit Agreement-K-tel, Inc. attached to this report as Exhibit 10.33 10.34 Third Amendment to Revolving Credit Agreement-K-tel USA and Dominion attached to this report as Exhibit 10.34 10.35 Replacement Revolving Note for up to $3,500,000 with K-tel USA and Dominion attached to this report as Exhibit 10.35 11 Statement Regarding Computation of Earnings Per Share attached to this report as Exhibit 11 21 Subsidiaries of the Registrant attached to this report as Exhibit 21 23 Consent of Independent Public attached to this report as Exhibit 23 Accountants 27 Financial Data Schedule (SEC use)
EX-10.30 2 EXHIBIT 10.30 FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT AND TO REVOLVING NOTE This Amendment is made as of this 20th day of July, 1995, by and between K-TEL, INC., a Minnesota corporation, having its principal place of business in Plymouth, Minnesota ("Borrower") and TCF BANK MINNESOTA FSB, a federally chartered stock savings bank (the "Bank"). RECITALS A. The Borrower and the Bank have entered into a Revolving Credit Agreement dated as of January 30, 1995 (the "Credit Agreement"), pursuant to which the Bank, subject to the terms and conditions set forth therein, agreed to make revolving advances to the Borrower in the aggregate amount of up to $3,000,000. B. The Borrower's obligation to repay the revolving advances made by the Bank under the Credit Agreement is evidenced by the Borrower's Revolving Note dated January 30, 1995, payable to the Bank's order in the original principal amount of $3,000,000 (the "Note"). As of July 20, 1995, the outstanding principal balance of the Note is $1,416,262.84 and interest thereon has been paid through July 1, 1995. C. The Borrower has requested that the Bank, among other things, (i) extend the Commitment Termination Date and the Maturity Date from July 22, 1995 to November 30, 1995, and (ii) revise Sections 5.7, 5.8 and 5.9 of the Credit Agreement. D. The Bank is willing to grant the Borrower's requests subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, the parties hereto agree as follows: 1. All capitalized terms used in this Amendment, unless specifically defined herein, shall have the meanings given to such terms in the Credit Agreement. 2. The definitions of "Commitment Termination Date" and "Maturity Date" in Section 1.1 of the Credit Agreement are each hereby amended by deleting the date "July 22, 1995" as it appears therein and by substituting therefor the date "November 30, 1995". 3. Section 1.1 of the Credit Agreement is hereby further amended by adding the following new definition of "Subordinated Debt" in the appropriate alphabetical location in Section 1.1: "`Subordinated Debt' means the Debt of the Borrower from K-Tel USA which is subordinated in right of payment to all indebtedness and obligations of the Borrower to the Bank, pursuant to a Debt Subordination Agreement, duly executed by K-Tel USA and the Borrower, in substantially the form attached as Exhibit A to the First Amendment to Revolving Credit Agreement and to Revolving Note." 4. Section 5.7 of the Credit Agreement is hereby amended to read as follows: "Section 5.7 Current Ratio. The Borrower will maintain at all times the ratio of its Current Assets to Current Liabilities at not less than 1.2 to 1." 5. Section 5.8 of the Credit Agreement is hereby amended to read as follows: "Section 5.8 Ratio of Debt to Tangible Net Worth plus Subordinated Debt. The Borrower will maintain at all times the ratio of its Debt to Tangible Net Worth at not more than 4.4 to 1." 6. Section 5.9 of the Credit Agreement is hereby amended to read as follows: "Section 5.9 Tangible Net Worth plus Subordinated Debt. The Borrower will maintain at all times the sum of its Tangible Net Worth plus Subordinated Debt in an amount not less than $800,000." 7. The Note is hereby amended by deleting the date "July 22, 1995" as it appears in the first paragraph thereof and by substituting therefor the date "November 30, 1995". 8. From and after the date of this Amendment all references in the Loan Documents to "the Credit Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment and all references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment. 9. From and after the date of this Amendment all references in the Loan Documents to "the Note" shall be deemed to refer to the Note as amended by this Amendment and all references in the Note to "this Note" shall be deemed to refer to the Note as amended by this Amendment. 10. Except as explicitly amended by this Amendment, all of the original terms and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect. 11. The execution of this Amendment and acceptance of any documents related thereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or any other Loan Document, whether or not known to the Bank and whether or not such Default or Event of Default exists on the date of this Amendment. 12. The Borrower, and K-Tel International, K-Tel USA and Dominion, by signing the Acknowledgement and Agreement of Guarantors set forth below, each hereby absolutely and unconditionally releases and forever discharges the Bank, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower or either of the Guarantors has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 13. The Borrower hereby reaffirms its agreement under Section 8.5 of the Credit Agreement. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Bank for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental thereto. 14. This Amendment and the Acknowledgment and Agreement of Guarantors may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. K-TEL, INC. By /S/ Mark Dixon Its Vice President TCF BANK MINNESOTA FSB By /S/ Richard D. Larson Its Vice President And By /S/ Milli Navara Its Commercial Banking Officer ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS The undersigned, a guarantor of the indebtedness of the Borrower to the Bank pursuant to its Guaranty dated as of January 30, 1995 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 12 of the foregoing Amendment) and execution thereof; (iii) reaffirms its obligations to the Bank pursuant to the terms of its Guaranty; and (iv) acknowledges and agrees that the Bank may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under its Guaranty for all of the present and future indebtedness of the Borrower to the Bank. K-TEL INTERNATIONAL, INC. By /S/ Mark Dixon Its Vice President The undersigned, a guarantor of the indebtedness of the Borrower to the Bank pursuant to its Guaranty dated as of January 30, 1995 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 12 of the foregoing Amendment) and execution thereof; (iii) reaffirms its obligations to the Bank pursuant to the terms of its Guaranty; and (iv) acknowledges and agrees that the Bank may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under its Guaranty for all of the present and future indebtedness of the Borrower to the Bank. K-TEL INTERNATIONAL (USA), INC. By /S/ Mark Dixon Its Vice President The undersigned, a guarantor of the indebtedness of the Borrower to the Bank pursuant to its Guaranty dated as of January 30, 1995 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 12 of the foregoing Amendment) and execution thereof; (iii) reaffirms its obligations to the Bank pursuant to the terms of its Guaranty; and (iv) acknowledges and agrees that the Bank may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under its Guaranty for all of the present and future indebtedness of the Borrower to the Bank. DOMINION ENTERTAINMENT, INC. By /S/ Mark Dixon Its Vice President EX-10.31 3 EXHIBIT 10.31 SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT AND TO REVOLVING NOTE This Amendment is made as of this 20th day of July, 1995, by and between K-TEL INTERNATIONAL (USA), INC., a Minnesota corporation, having its principal place of business in Plymouth, Minnesota ("K-Tel USA") and DOMINION ENTERTAINMENT, INC., a Minnesota corporation, having its principal place of business in Plymouth, Minnesota ("Dominion"; K-Tel USA and Dominion are sometimes herein collectively referred to as the "Borrowers" and each is sometimes individually referred to as a "Borrower"), and TCF BANK MINNESOTA FSB, a federally chartered stock savings bank (the "Bank"). RECITALS A. The Borrowers and the Bank have entered into a Revolving Credit Agreement dated as of July 22, 1994, as amended by a First Amendment to Revolving Credit Agreement dated as of January 30, 1995 (as amended, the "Credit Agreement"), pursuant to which the Bank, subject to the terms and conditions set forth therein, agreed to make revolving advances to the Borrowers in the aggregate amount of up to $2,000,000. B. The Borrowers' joint and several obligation to repay the revolving advances made by the Bank under the Credit Agreement is evidenced by the Borrowers' Revolving Note dated January 30, 1995, payable to the Bank's order in the original principal amount of $2,000,000 (the "Note"). As of July 20, 1995, the outstanding principal balance of the Note is $1,262,508.92 and interest thereon has been paid through July 1, 1995. C. The Borrower has requested that the Bank, among other things, (i) extend the Commitment Termination Date and the Maturity Date from July 22, 1995 to November 30, 1995, and (ii) revise Section 5.11 of the Credit Agreement. D. The Bank is willing to grant the Borrowers' requests subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, the parties hereto agree as follows: 1. All capitalized terms used in this Amendment, unless specifically defined herein, shall have the meanings given to such terms in the Credit Agreement. 2. The definitions of "Commitment Termination Date" and "Maturity Date" in Section 1.1 of the Credit Agreement are each hereby amended by deleting the date "July 22, 1995" as it appears therein and by substituting therefor the date "November 30, 1995". 3. Section 5.11 of the Credit Agreement is hereby amended to read as follows: "Section 5.11 Tangible Net Worth of Dominion. Dominion will maintain at all times its Tangible Net Worth in an amount not less than $2,000,000." 4. The Note is hereby amended by deleting the date "July 22, 1995" as it appears in the first paragraph thereof and by substituting therefor the date "November 30, 1995". 5. From and after the date of this Amendment all references in the Loan Documents to "the Credit Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment and all references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment. 6. From and after the date of this Amendment all references in the Loan Documents to "the Note" shall be deemed to refer to the Note as amended by this Amendment and all references in the Note to "this Note" shall be deemed to refer to the Note as amended by this Amendment. 7. Except as explicitly amended by this Amendment, all of the original terms and conditions of the Credit Agreement shall remain in full force and effect. 8. The execution of this Amendment and acceptance of any documents related thereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or any other Loan Document, whether or not known to the Bank and whether or not such Default or Event of Default exists on the date of this Amendment. 9. The Borrowers, and K-Tel International and K-Tel, Inc. by signing the Acknowledgement and Agreement of Guarantors set forth below, each hereby absolutely and unconditionally releases and forever discharges the Bank, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrowers or either of the Guarantors has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 10. The Borrowers hereby reaffirm their agreement under Section 8.5 of the Credit Agreement. Without limiting the generality of the foregoing, the Borrowers specifically agree to pay all fees and disbursements of counsel to the Bank for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental thereto. 11. This Amendment and the Acknowledgment and Agreement of Guarantors may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. K-TEL INTERNATIONAL (USA), INC. By /S/ Mark Dixon Its Vice President DOMINION ENTERTAINMENT, INC. By /S/ Mark Dixon Its Vice President TCF BANK MINNESOTA FSB By /S/ Richard D. Larson Its Vice President And By /S/ Milli Navara Its Commercial Banking Officer ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS The undersigned, a guarantor of the indebtedness of the Borrowers to the Bank pursuant to its Guaranty dated as of July 22, 1994 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 9 of the foregoing Amendment) and execution thereof; (iii) reaffirms its obligations to the Bank pursuant to the terms of its Guaranty; and (iv) acknowledges and agrees that the Bank may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrowers, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under its Guaranty for all of the present and future indebtedness of the Borrowers to the Bank. K-TEL INTERNATIONAL, INC. By /S/ Mark Dixon Its Vice President The undersigned, a guarantor of the indebtedness of the Borrowers to the Bank pursuant to its Guaranty dated as of January 30, 1995 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 9 of the foregoing Amendment) and execution thereof; (iii) reaffirms its obligations to the Bank pursuant to the terms of its Guaranty; and (iv) acknowledges and agrees that the Bank may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrowers, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under its Guaranty for all of the present and future indebtedness of the Borrowers to the Bank. K-TEL, INC. By /S/ Mark Dixon Its Vice President EX-10.32 4 EXHIBIT 10.32 DEBT SUBORDINATION AGREEMENT This Agreement is entered into as of the 20th day of July, 1995, by K-TEL INTERNATIONAL (USA), INC. (the "Creditor"), for the benefit of TCF BANK MINNESOTA FSB, a federally chartered stock savings bank (the "Bank"). K-Tel, Inc., a Minnesota corporation (the "Borrower"), is now or hereafter may be indebted to the Bank on account of loans or the other extensions of credit or financial accommodations from the Bank to the Borrower. The Creditor has made or may make loans or grant other financial accommodations to the Borrower. As a condition to making any loan or extension of credit to the Borrower, the Bank has required that the Creditor subordinate the payment of the Creditor's loans and other financial accommodations to the payment of any and all indebtedness of the Borrower to the Bank. Assisting the Borrower in obtaining credit accommodations from the Bank and subordination pursuant to the terms of this Agreement are in the Creditor's best interest. ACCORDINGLY, in consideration of the loans and other financial accommodations that have been made and may hereafter be made by the Bank for the benefit of the Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Creditor hereby agrees as follows: 1. Definitions. As used herein, the following terms have the meanings set forth below: "Bank Indebtedness" means each and every debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Bank, whether such debt, liability or obligation now exists or is hereafter created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several, all interest thereon, all renewals, extensions and modifications thereof and any notes issued in whole or partial substitution therefor. "Borrower Default" means a Default or Event of Default as defined in any agreement or instrument evidencing, governing, or issued in connection with Bank Indebtedness, including, but not limited to, the Revolving Credit Agreement dated as of January 30, 1995, as the same may be amended or restated from time to time, by and between the Borrower and the Bank (the "Credit Agreement"), or any default under or breach of any such agreement or instrument. "Subordinated Indebtedness" means each and every debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Creditor, whether such debt, liability or obligation now exists or is hereafter created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several. 2. Subordination. The payment of all of the Subordinated Indebtedness is hereby expressly subordinated to the extent and in the manner hereinafter set forth to the payment in full of the Bank Indebtedness; and regardless of any priority otherwise available to the Creditor by law or by agreement, the Bank shall hold a first security interest in all collateral securing payment of the Bank Indebtedness (the "Collateral"), and any security interest claimed therein (including any proceeds thereof) by the Creditor shall be and remain fully subordinate for all purposes to the security interest of the Bank therein for all purposes whatsoever. 3. Payments. Until all of the Bank Indebtedness has been paid in full, the Creditor shall not, without the Bank's prior written consent, demand, receive or accept any payment (whether of principal, interest or otherwise) from the Borrower in respect of the Subordinated Indebtedness, or exercise any right of or permit any setoff in respect of the Subordinated Indebtedness. 4. Receipt of Prohibited Payments. If the Creditor receives any payment on the Subordinated Indebtedness that the Creditor is not entitled to receive under the provisions of this Agreement, the Creditor will hold the amount so received in trust for the Bank and will forthwith turn over such payment to the Bank in the form received (except for the endorsement of the Creditor where necessary) for application to then-existing Bank Indebtedness (whether or not due), in such manner of application as the Bank may deem appropriate. In the event that the Creditor shall exercise any right of setoff which the Creditor is not permitted to exercise under the provisions of this Agreement, the Creditor will promptly pay over to the Bank, in immediately available funds, an amount equal to the amount of the claims or obligations offset. If the Creditor fails to make any endorsement required under this Agreement, the Bank, or any of its officers or employees or agents on behalf of the Bank, is hereby irrevocably appointed as the attorney-in-fact (which appointment is coupled with an interest) for the Creditor to make such endorsement in the Creditor's name. 5. Action on Subordinated Debt. The Creditor will not commence any action or proceeding against the Borrower to recover all or any part of the Subordinated Indebtedness, or join with any creditor (unless the Bank shall so join) in bringing any proceeding against the Borrower under any bankruptcy, reorganization, readjustment of debt, arrangement of debt receivership, liquidation or insolvency law or statute of the federal or any state government, or take possession of, sell, or dispose of any Collateral, or exercise or enforce any right or remedy available to the Creditor with respect to any such Collateral, unless and until the Bank Indebtedness has been paid in full. 6. Foreclosure of Collateral. Notwithstanding any security interest now held or hereafter acquired by the Creditor, the Bank may take possession of, sell, dispose of, and otherwise deal with all or any part of the Collateral, and may enforce any right or remedy available to it with respect to the Collateral, all without notice to or consent of the Creditor except as specifically required by applicable law. The Bank shall have no duty to preserve, protect, care for, insure, take possession of, collect, dispose of, or otherwise realize upon any of the Collateral, and in no event shall the Bank be deemed the Creditor's agent with respect to the Collateral. All proceeds received by the Bank with respect to any Collateral may be applied, first, to pay or reimburse the Bank for all costs and expenses (including reasonable attorneys' fees) incurred by the Bank in connection with the collection of such proceeds, and, second, to any indebtedness secured by the Bank's security interest in that Collateral in any order that it may choose. 7. Bankruptcy and Insolvency. In the event of any receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization or arrangement with creditors, whether or not pursuant to bankruptcy law, the sale of all or substantially all of the assets of the Borrower, dissolution, liquidation or any other marshalling of the assets or liabilities of the Borrower, the Creditor will file all claims, proofs of claim or other instruments of similar character necessary to enforce the obligations of the Borrower in respect of the Subordinated Indebtedness and will hold in trust for the Bank and promptly pay over to the Bank in the form received (except for the endorsement of the Creditor where necessary) for application to the then-existing Bank Indebtedness, any and all moneys, dividends or other assets received in any such proceedings on account of the Subordinated Indebtedness, unless and until the Bank Indebtedness has been paid in full. If the Creditor shall fail to take any such action, the Bank, as attorney-in-fact for the Creditor, may take such action on the Creditor's behalf. The Creditor hereby irrevocably appoints the Bank, or any of its officers or employees on behalf of the Bank, as the attorney-in-fact for the Creditor (which appointment is coupled with an interest) with the power but not the duty to demand, sue for, collect and receive any and all such moneys, dividends or other assets and give acquittance therefor and to file any claim, proof of claim or other instrument of similar character, to vote claims comprising Subordinated Indebtedness to accept or reject any plan of partial or complete liquidation, reorganization, arrangement, composition or extension and to take such other action in the Bank's own name or in the name of the Creditor as the Bank may deem necessary or advisable for the enforcement of the agreements contained herein; and the Creditor will execute and deliver to the Bank such other and further powers-of-attorney or instruments as the Bank may request in order to accomplish the foregoing. 8. Restrictive Legend; Transfer of Subordinated Indebtedness. The Creditor will cause all notes, bonds, debentures or other instruments evidencing the Subordinated Indebtedness or any part thereof to contain a specific statement thereon to the effect that the indebtedness thereby evidenced is subject to the provisions of this Agreement, and the Creditor will mark its books conspicuously to evidence the subordination effected hereby. At the request of the Bank, the Creditor shall deposit with the Bank all of the notes, bonds, debentures or other instruments evidencing the Subordinated Indebtedness, which notes, bonds, debentures or other instruments may be held by the Bank so long as any Bank Indebtedness remains outstanding. Without the prior written consent of the Bank, the Creditor will not assign, transfer or pledge to any other person any of the Subordinated Indebtedness or agree to a discharge or forgiveness of the same so long as there remains outstanding any of the Bank Indebtedness. 9. Continuing Effect. This Agreement shall constitute a continuing agreement of subordination, and the Bank may, without notice to or consent by the Creditor, modify any term of the Bank Indebtedness in reliance upon this Agreement. Without limiting the generality of the foregoing, the Bank may, at any time and from time to time, either before or after receipt of any such notice of revocation, without the consent of or notice to the Creditor and without incurring responsibility to the Creditor or impairing or releasing any of the Bank's rights or any of the Creditor's obligations hereunder: (a) change the interest rate or change the amount of payment or extend the time for payment or renew or otherwise alter the terms of any Bank Indebtedness or any instrument evidencing the same in any manner; (b) sell, exchange, release or otherwise deal with any property at any time securing payment of the Bank Indebtedness or any part thereof; (c) release anyone liable in any manner for the payment or collection of the Bank Indebtedness or any part thereof; (d) exercise or refrain from exercising any right against the Borrower or any other person (including the Creditor); and (e) apply any sums received by the Bank, by whomsoever paid and however realized, to the Bank Indebtedness in such manner as the Bank shall deem appropriate. 10. No Commitment. None of the provisions of this Agreement shall be deemed or construed to constitute or imply any commitment or obligation on the part of the Bank to make any future loans or other extensions of credit or financial accommodations to the Borrower. 11. Notice. All notices and other communications hereunder shall be in writing and shall be (i) personally delivered, (ii) transmitted by registered mail, postage prepaid, or (iii) transmitted by telecopy, in each case addressed to the party to whom notice is being given at its address as set forth below: If to the Bank: TCF Bank Minnesota fsb 801 Marquette Avenue Minneapolis, Minnesota 55402 Attention: Ric Larson Telecopier: (612) 661-8504 If to the Creditor: K-Tel International (USA), Inc. c/o K-Tel International, Inc. 15525 Medina Road Plymouth, Minnesota 55447 Attention: Chief Financial Officer Telecopier: (612) 559-6815 or at such other address as may hereafter be designated in writing by that party. All such notices or other communications shall be deemed to have been given on (i) the date received if delivered personally, (ii) the date of posting if delivered by mail, or (iii) the date of transmission if delivered by telecopy. 12. Conflict in Agreements. If the subordination provisions of any instrument evidencing Subordinated Indebtedness conflict with the terms of this Agreement, the terms of this Agreement shall govern the relationship between the Bank and the Creditor. 13. No Waiver. No waiver shall be deemed to be made by the Bank of any of its rights hereunder unless the same shall be in writing signed on behalf of the Bank, and each such waiver, if any, shall be a waiver only with respect to the specific matter or matters to which the waiver relates and shall in no way impair the rights of the Bank or the obligations of the Creditor to the Bank in any other respect at any time. 14. Miscellaneous. The paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the Creditor has executed this Agreement as of the date and year first above-written. K-TEL INTERNATIONAL (USA), INC. By /S/ Mark Dixon Its Vice President Acknowledgment by Borrower (i) acknowledges receipt of a copy thereof, (ii) agrees to all of the terms and provisions thereof, (iii) agrees to and with the Bank that it shall make no payment on the Subordinated Indebtedness that the Creditor would not be entitled to receive under the provisions of the Agreement, (iv) agrees that any such payment will constitute a default under the Bank Indebtedness, and (v) agrees to mark its books conspicuously to evidence the subordination of the Subordinated Indebtedness effected hereby. K-TEL, INC. By /S/ Mark Dixon Its Vice President EX-10.33 5 EXHIBIT 10.33 SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT This Second Amendment is made as of this 2nd day of October, 1995, by and between K-TEL, INC., a Minnesota corporation, having its principal place of business in Plymouth, Minnesota ("Borrower"), and TCF BANK MINNESOTA FSB, a federally chartered stock savings bank (the "Bank"). RECITALS A. The Borrower and the Bank have entered into a Revolving Credit Agreement dated as of January 30, 1995, as amended by a First Amendment to Revolving Credit Agreement and to Revolving Note dated as of July 20, 1995 (as amended, the "Credit Agreement"), pursuant to which the Bank, subject to the terms and conditions set forth therein, agreed to make revolving advances to the Borrower in the aggregate amount of up to $3,000,000. B. The Borrower's obligation to repay the revolving advances made by the Bank under the Credit Agreement is evidenced by the Borrower's Revolving Note dated January 30, 1995, payable to the Bank's order in the original principal amount of $3,000,000, as amended (the "Note"). As of September 25, 1995, the outstanding principal balance of the Note was $1,926,713.29 and interest thereon has been paid through September 1, 1995. C. K-Tel International (USA), Inc. ("K-Tel USA") and Dominion Entertainment, Inc. ("Dominion") and the Bank have entered into a Revolving Credit Agreement dated as of July 22, 1994, as amended (the "K-Tel USA/Dominion Credit Agreement"). D. K-Tel USA and Dominion have requested that the Bank increase the Commitment Amount of the Bank under the K-Tel USA/Dominion Credit Agreement from $2,000,000 to $3,500,000. E. The Bank is willing to grant the request of K-Tel USA and Dominion, provided that the Borrower enter into this Second Amendment. NOW, THEREFORE, the parties hereto agree as follows: 1. Definitions. All capitalized terms used in this Second Amendment, unless specifically defined herein, shall have the meanings given to such terms in the Credit Agreement. 2. Advances. Section 2.1 of the Credit Agreement is hereby amended to read as follows: "Section 2.1 The Advances. The Bank agrees, on the terms and conditions here set forth, to make Advances to the Borrower from time to time during the period from the date when all of the conditions set forth in Section 3.1 hereof are met (the "Closing Date") to and including the Commitment Termination Date in an aggregate amount not to exceed at any time outstanding the Borrowing Base less the L/C Amount; provided, however, in no event shall the Borrower request, nor shall the Bank be obligated to make, any Advance if, after giving effect to such Advance, the sum of the aggregate outstanding Advances and the L/C Amount under this Agreement plus the aggregate outstanding Advances under that certain Revolving Credit Agreement dated as of July 22, 1994, as amended, between K-Tel USA, Dominion and the Bank, would exceed $5,500,000. Within the above limits, the Borrower may borrow, prepay pursuant to Section 2.7 and re-borrow under this Section 2.1. The Advances made by the Bank shall be evidenced by a single promissory note of the Borrower, dated the Closing Date, payable to the order of the Bank appropriately completed in substantially the form of Exhibit A attached hereto as the same may be renewed, extended, amended or any note shall be issued in substitution therefor from time to time (the "Note"). The Note shall bear interest in accordance with Section 2.3 hereof and principal of and interest on the Note shall be due and payable as provided in Section 2.5 hereof." 3. Standby Letters of Credit. Section 2.11(a) of the Credit Agreement is hereby amended to read as follows: "(a) Subject to the terms and conditions set forth in this Section 2.11 and in Article III, the Bank shall issue one or more irrevocable standby letters of credit for the account of the Borrower (each a "Standby Letter of Credit") from time to time during the period from the date hereof to and including the Commitment Termination Date, in an aggregate amount at any time outstanding not to exceed the lesser of (i) $2,000,000 or (ii) the Borrowing Base less the sum of (A) all outstanding Advances under this Agreement and (B) the L/C Amount; provided, however in no event shall the Borrower request, nor shall the Bank be obligated to issue, any Letter of Credit if, after giving effect to such Letter of Credit, the sum of the aggregate outstanding Advances and the L/C Amount under this Agreement plus the aggregate outstanding Advances under that certain Revolving Credit Agreement dated as of July 22, 1994, as amended between K-Tel USA, Dominion and the Bank, would exceed $5,500,000." 4. Conditions Precedent. The effectiveness of this Second Amendment shall be subject to the condition precedent that the Bank shall have received each of the following in form and substance acceptable to the Bank: (a) A certified copy of the resolutions of the Board of Directors of the Borrower evidencing approval of this Second Amendment and other matters contemplated hereby, certified by the Secretary or Assistant Secretary of the Borrower as being a true, correct and complete copy thereof which has been duly adopted and is in full force and effect, together with a certificate of such Secretary or Assistant of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Second Amendment and the other documents to be delivered by the Borrower hereunder. (b) A Certificate of the Secretary of the Borrower certifying as to (1) the fact that the articles of incorporation and bylaws of the Borrower, which were previously certified and delivered to the Lender continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered. Acknowledgment and Agreement of Guarantors attached below. (d) Such other items as the Bank may require. 5. References. From and after the date of this Second Amendment all references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended by this Second Amendment. 6. No Other Changes. Except as explicitly amended by this Second Amendment, all of the original terms and conditions of the Credit Agreement shall remain in full force and effect. 7. No Waiver. The execution of this Second Amendment and acceptance of any documents related thereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or any other Loan Document, whether or not known to the Bank and whether or not such Default or Event of Default exists on the date of this Second Amendment. 8. Release. The Borrower, and K-Tel International, Inc., K-Tel USA and Dominion, by signing the Acknowledgement and Agreement of Guarantors set forth below, each hereby absolutely and unconditionally releases and forever discharges the Bank, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower or any Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Second Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 9. Expenses. The Borrower hereby reaffirms its agreement under Section 8.5 of the Credit Agreement. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Bank for the services performed by such counsel in connection with the preparation of this Second Amendment and the documents and instruments incidental thereto. 10. Counterparts. This Second Amendment and the Acknowledgment and Agreement of Guarantors may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the date first above written. K-TEL, INC. By /S/ Mark Dixon Its Vice President TCF BANK MINNESOTA FSB By /S/ Robert S. Scott Its Sr. Vice President And By /S/ Richard D. Larson Its Vice President ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS The undersigned, K-Tel International, Inc., and K-Tel International (USA), Inc., and Dominion Entertainment, Inc. each a guarantor of the indebtedness of K-Tel, Inc. (the "Borrower") to the Bank pursuant to their Guaranties dated as of January 30, 1995, respectively, (the "Guaranties"), each hereby (i) acknowledges receipt of the foregoing Second Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 8 of the foregoing Second Amendment) and execution thereof; (iii) reaffirms its obligations to the Bank pursuant to the terms of its Guaranty; and (iv) acknowledges and agrees that the Bank may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under its Guaranty for all of the present and future indebtedness of the Borrower to the Bank. K-TEL INTERNATIONAL, INC. By /S/ Mark Dixon Its Vice President K-TEL INTERNATIONAL (USA), INC. By /S/ Mark Dixon Its Vice President DOMINION ENTERTAINMENT, INC. By /S/ Mark Dixon Its Vice President EX-10.34 6 EXHIBIT 10.34 THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT This Third Amendment is made as of this 2nd day of October, 1995, by and between K-TEL INTERNATIONAL (USA), INC., a Minnesota corporation, having its principal place of business in Plymouth, Minnesota ("K-Tel USA"), and DOMINION ENTERTAINMENT, INC., a Minnesota corporation, having its principal place of business in Plymouth, Minnesota ("Dominion"; K-Tel USA and Dominion are sometimes herein collectively referred to as the "Borrowers" and each is sometimes individually referred to as a "Borrower"), and TCF BANK MINNESOTA FSB, a federally chartered stock savings bank (the "Bank"). RECITALS A. The Borrowers and the Bank have entered into a Revolving Credit Agreement dated as of July 22, 1994, as amended by a First Amendment to Revolving Credit Agreement dated as of January 30, 1995 and by a Second Amendment to Revolving Credit Agreement and to Revolving Note dated as of July 20, 1995 (as amended, the "Credit Agreement"), pursuant to which the Bank, subject to the terms and conditions set forth therein, agreed to make revolving advances to the Borrowers in the aggregate amount of up to $2,000,000. B. The Borrowers' joint and several obligation to repay the revolving advances made by the Bank under the Credit Agreement is evidenced by the Borrowers' Revolving Note dated January 30, 1995, payable to the Bank's order in the original principal amount of $2,000,000 (the "First Replacement Revolving Note"), issued in substitution for, and in replacement of, but not in payment of, the Borrowers' revolving note dated July 22, 1994, payable to the Bank's order in the original principal amount of $5,000,000. As of September 25, 1995, the outstanding principal balance of the First Replacement Revolving Note was $1,744,495.68 and interest thereon has been paid through September 1, 1995. C. The Borrowers have requested that the Bank increase the Commitment Amount of the Bank under the Credit Agreement from $2,000,000 to $3,500,000. D. The Bank is willing to grant the Borrowers' request subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, the parties hereto agree as follows: 1. Definitions. All capitalized terms used in this Third Amendment, unless specifically defined herein, shall have the meanings given to such terms in the Credit Agreement. 2. Amendment of Existing Definitions. Section 1.1 of the Credit Agreement is hereby amended by deleting the existing definition of "Commitment Amount" and by substituting therefor the following new definition: "`Commitment Amount' means $3,500,000." 3. Additional Definitions. Section 1.1 of the Credit Agreement is hereby amended by adding the following new definitions of "First Replacement Revolving Note" and "Third Amendment" in the appropriate alphabetical location: "`First Replacement Revolving Note' means that certain promissory note issued by the Borrowers, payable to the order of the Bank, in the principal amount of $2,000,000, dated as of January 30, 1995, which was issued in substitution for, and in replacement of, not in payment of the Borrowers' revolving note dated as of July 22, 1994, payable to the Bank's order in the original principal amount of $5,000,000." "`Third Amendment' means that certain Third Amendment to Revolving Credit Agreement dated as of October 2, 1995, between the Bank and the Borrowers." 4. Advances. Section 2.1 of the Credit Agreement is hereby amended to read as follows: "Section 2.1 The Advances. The Bank agrees, on the terms and conditions here set forth, to make Advances to the Borrowers from time to time during the period from the date when all of the conditions set forth in Section 3.1 hereof are met (the "Closing Date") to and including the Commitment Termination Date in an aggregate amount not to exceed at any time outstanding the Borrowing Base; provided, however, in no event shall the Borrowers request, nor shall the Bank be obligated to make, any Advance if, after giving effect to such Advance, the sum of the aggregate outstanding Advances under this Agreement plus the aggregate outstanding Advances and the L/C Amount (as defined therein) under that certain Revolving Credit Agreement dated as of January 30, 1995, as amended, between the K-Tel, Inc. and the Bank, would exceed $5,500,000. Within the above limits, the Borrowers may borrow, prepay pursuant to Section 2.7 and re-borrow under this Section 2.1. The Borrowers' obligation to pay the Advances made by the Bank shall be evidenced by a single promissory note of the Borrowers, dated as of the date of the Third Amendment, payable to the order of the Bank appropriately completed in substantially the form of Exhibit A attached to the Third Amendment, as the same may be renewed, extended, amended or any note shall be issued in substitution therefor from time to time (the "Note"). The Note has been issued in substitution for, and in replacement of, but not in payment of, the First Replacement Revolving Note. The Note shall bear interest in accordance with Section 2.3 hereof and principal of and interest on the Note shall be due and payable as provided in Section 2.5 hereof." 5. Conditions Precedent. The effectiveness of this Third Amendment shall be subject to the condition precedent that the Bank shall have received each of the following in form and substance acceptable to the Bank: (a) The Note, duly executed on behalf of the Borrowers. (b) A certified copy of the resolutions of the Board of Directors of K-Tel USA evidencing approval of this Third Amendment and the Note and other matters contemplated hereby, certified by the Secretary or Assistant Secretary of K-Tel USA as being a true, correct and complete copy thereof which has been duly adopted and is in full force and effect, together with a certificate of such Secretary or Assistant of K-Tel USA certifying the names and true signatures of the officers of K-Tel USA authorized to sign this Third Amendment and the Note and the other documents to be delivered by K-Tel USA hereunder. (c) A certified copy of the resolutions of the Board of Directors of Dominion evidencing approval of this Third Amendment and the Note and other matters contemplated hereby, certified by the Secretary or Assistant Secretary of Dominion as being a true, correct and complete copy thereof which has been duly adopted and is in full force and effect, together with a certificate of such Secretary or Assistant of Dominion certifying the names and true signatures of the officers of Dominion authorized to sign this Third Amendment and the Note and the other documents to be delivered by Dominion hereunder. (d) A Certificate of the Secretary of K-Tel USA certifying as to (1) the fact that the articles of incorporation and bylaws of K-Tel USA, which were previously certified and delivered to the Lender continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered. (e) A Certificate of the Secretary of Dominion certifying as to (1) the fact that the articles of incorporation and bylaws of Dominion, which were previously certified and delivered to the Lender continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered. (f) Acknowledgment and Agreement of Guarantors attached below. (g) Such other items as the Bank may require. 6. References. From and after the date of this Third Amendment: (i) all references in the Loan Documents to "the Note" shall be deemed to refer to the Note as defined in, and delivered under, this Third Amendment; and (ii) all references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended by this Third Amendment. 7. No Other Changes. Except as explicitly amended by this Third Amendment, all of the original terms and conditions of the Credit Agreement shall remain in full force and effect. 8. No Waiver. The execution of this Third Amendment and acceptance of any documents related thereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or any other Loan Document, whether or not known to the Bank and whether or not such Default or Event of Default exists on the date of this Third Amendment. 9. Release. The Borrowers, and K-Tel International, Inc. and K-Tel, Inc. by signing the Acknowledgement and Agreement of Guarantors set forth below, each hereby absolutely and unconditionally releases and forever discharges the Bank, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower or any Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Third Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 10. Expenses. The Borrowers hereby reaffirm their agreement under Section 8.5 of the Credit Agreement. Without limiting the generality of the foregoing, the Borrowers specifically agree to pay all fees and disbursements of counsel to the Bank for the services performed by such counsel in connection with the preparation of this Third Amendment and the documents and instruments incidental thereto. 11. Counterparts. This Third Amendment and the Acknowledgment and Agreement of Guarantors may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be duly executed as of the date first above written. K-TEL INTERNATIONAL (USA), INC. By /S/ Mark Dixon Its Vice President DOMINION ENTERTAINMENT, INC. By /S/ Mark Dixon Its Vice President TCF BANK MINNESOTA FSB By /S/ Robert S. Scott Its Sr. Vice President And By /S/ Richard D. Larson Its Vice President ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS The undersigned, K-Tel International, Inc., and K-Tel, Inc., each a guarantor of the indebtedness of K-Tel International (USA), Inc. and Dominion Entertainment, Inc. (together, the "Borrowers") to the Bank pursuant to their Guaranties dated as of July 22, 1994 and January 30, 1995, respectively, (the "Guaranties"), each hereby (i) acknowledges receipt of the foregoing Third Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 9 of the foregoing Third Amendment) and execution thereof; (iii) reaffirms its obligations to the Bank pursuant to the terms of its Guaranty; and (iv) acknowledges and agrees that the Bank may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrowers, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under its Guaranty for all of the present and future indebtedness of the Borrowers to the Bank. K-TEL INTERNATIONAL, INC. By /S/ Mark Dixon Its Vice President K-TEL, INC. By /S/ Mark Dixon Its Vice President EX-10.35 7 EXHIBIT 10.35 REVOLVING NOTE (K-TEL INTERNATIONAL (USA), INC. AND DOMINION ENTERTAINMENT, INC.) $3,500,000.00 October 2, 1995 FOR VALUE RECEIVED, the undersigned, K-TEL INTERNATIONAL (USA), INC., a Minnesota corporation ("K-Tel USA"), and DOMINION ENTERTAINMENT, INC., a Minnesota corporation ("Dominion"; collectively K-Tel USA and Dominion are called the "Borrowers"), hereby jointly and severally promise to pay to the order of TCF BANK MINNESOTA fsb (the "Bank"), on November 30, 1995, the principal sum of Three Million Five Hundred Thousand Dollars ($3,500,000.00) or, if less, the aggregate unpaid principal amount of all Advances (as defined in the Credit Agreement) made by the Bank to the Borrowers under the Credit Agreement (defined below), together with interest on the unpaid principal amount of the Advances from the date hereof until such principal amount is paid in full at the interest rate and on the dates specified in the Credit Agreement. This Note is the Note referred to in, and is entitled to the benefits of, and is subject to the terms of, the Revolving Credit Agreement dated as of July 22, 1994, by and between the Borrowers and the Bank, as amended by a First Amendment to Revolving Credit Agreement dated as of January 30, 1995, a Second Amendment to Revolving Credit Agreement and to Revolving Note dated as of July 20, 1995, and a Third Amendment to Revolving Credit Agreement of even date herewith, (such Credit Agreement, as amended, supplemented, modified or restated from time to time herein called the "Credit Agreement"), which Credit Agreement, among other things (i) provides for the making of Advances by the Bank to the Borrowers subject to the terms of the Credit Agreement and (ii) contains provisions for the mandatory prepayment hereof and for acceleration of the maturity hereof upon the happening of certain stated events. This Note is issued in substitution for, and in replacement of, but not in payment of, the Borrowers' Revolving Note dated January 30, 1995, payable to the order of the Bank in the original principal amount of $2,000,000. K-TEL INTERNATIONAL (USA), INC. By /S/ Mark Dixon Its Vice President DOMINION ENTERTAINMENT, INC. By /S/ Mark Dixon Its Vice President EX-11 8 Exhibit 11 K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (In Thousands, Except Per Share Amounts) For the years ended June 30, 1995, 1994 and 1993
1995 1994 1993 Primary earnings per share -- Weighted average number of issued shares outstanding 3,711 3,680 3,627 Effect of: Stock Incentive Plan -- 142 106 Shares outstanding used to compute primary earnings per share 3,711 3,822 3,733 Net Income(Loss) $(2,483) $ 376 $2,701 Primary earnings per share $ (.67) $ .10 $ .72 Fully diluted earnings per share -- Weighted average number of shares used for primary earnings per share 3,711 3,822 3,733 Effect of: Stock Incentive Plan -- -- 20 Shares outstanding used to compute fully diluted earnings per share 3,711 3,822 3,753 Net Income $(2,483) $ 376 $2,701 Fully diluted earnings per share $ (.67) $ .10 $ .72
EX-21 9 K-tel International, Inc. 1995 Form 10-K Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Subsidiaries of the Company and the jurisdiction in which each company was incorporated are listed below. Unless otherwise indicated, all of the voting securities of each subsidiary are owned by K-tel International, Inc. or one of its subsidiaries. A number of subsidiaries not important to an understanding of K-tel's business have been omitted. Such subsidiaries in the aggregate would not constitute a significant subsidiary. K-tel International (USA), Inc. Plymouth, Minnesota (a Minnesota corporation) Dominion Entertainment, Inc. Plymouth, Minnesota (a Minnesota corporation) K-tel Ireland Limited Dublin, Ireland (an Ireland corporation) K-tel International Finland OY Helsinki, Finland (a Finland corporation) K-tel International (N.Z.) Ltd. Auckland, New Zealand (a New Zealand corporation) K-tel Entertainment (CAN) Inc. (formerly ERA International, Ltd.) Winnipeg, Manitoba (a Canada corporation) Dominion Vertriebs GmbH Karben, Germany (a Germany corporation) K-tel Entertainment (U.K.) Ltd. London, England (an England corporation) K-tel International (Spain) S.L. Madrid, Spain (a Spain corporation) K-tel International (France) S.R.L. Paris, France (a France corporation) K-tel (Australia) Pty. Limited Southport, Queensland, Australia (an Australian corporation) U.S. Distribution Services, Inc. Plymouth, Minnesota (a Minnesota corporation) K-tel, Inc. Plymouth, Minnesota (a Minnesota corporation) K-tel Direct, Inc. Plymouth, Minnesota (a Minnesota corporation) EX-23 10 K-tel International, Inc. 1995 Form 10-K Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8 relating to the 1987 Stock Incentive Plan (Registration No. 33-18723). ARTHUR ANDERSEN LLP Minneapolis, Minnesota, October 12, 1995 EX-27 11
5 1,000 YEAR JUN-30-1995 JUN-30-1995 2,154 0 11,971 0 7,382 26,867 2,820 (1,797) 28,637 26,184 0 3,806 0 0 0 28,637 65,917 0 35,660 68,105 80 0 (220) (2,108) 375 0 0 0 0 (2,483) (.67) (.67)
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