IS K-TEL GETTING WHAT IT DESERVES?
By Peter D. Henig
Red Herring Online
November 20, 1998
They say what goes around, comes around.
If so, K-Tel (KTEL) might have a lot more
coming to it.
The disco-era music retailer, which
conveniently reinvented itself as an Internet
company at the first sign of Net-stock
madness, has just disclosed in an SEC filing
that it may soon be delisted from Nasdaq due
to asset requirements. Delisting would force
it to trade on the less-prestigious and
less-liquid Nasdaq small-cap market.
And that's not all. San Diego law firm
Milberg Weiss -- the bane of many a
high-tech company -- announced on Thursday
that it has commenced a class-action lawsuit
on behalf of people who purchased K-Tel
stock between October 27 and November 17.
The suit alleges that while K-Tel's shares
surged in November from less than $7 to
more than $39 a share on news that the
company made plans to sell music over the
Internet, it also concealed information about
its potential Nasdaq delisting.
K-Tel had received notification from Nasdaq
of the possible delisting more than three
weeks ago, but did not disclose the news until
its November 17 quarterly filing -- a big
no-no in the eyes of the Securities and
Exchange Commission, which requires any
"material event" to be fully disclosed.
K-Tel president Larry Kieves stated that he
did not consider the delisting to be a material
event. But the market thought differently,
slicing K-Tel's stock in half.
An Internet player?
This is quite a comeuppance for a company
that saw its stock soar after declaring itself
an Internet play -- on the strength of a press
release stating its e-commerce intentions.
"K-Tel deserves almost no valuation or
listing, in my view," said Keith Benjamin,
Internet analyst with BancBoston Robertson
Stephens.
Mr. Benjamin should know: The Internet
analyst is used to seeing -- and believing in --
high-growth Internet plays with little to no
net profit, like Lycos (LCOS), Amazon.com
(AMZN), and Sportsline USA (SPLN). But
even by their standards, K-Tel's financials
look downright poor.
For the three months ended September 30,
1998, sales fell 25 percent to $18.8 million
and net losses totaled $3.1 million -- a stark
contrast to year-ago net income of $1.2
million. When was the last time anyone heard
of an Internet company without top-line
growth?
"It's got a Zapata-like tone to it," said Dana
Serman, Internet analyst with Schroder &
Co. The Texas fish-oil company Mr. Serman
referred to also declared itself an Internet
play, going so far as to make a takeover bid
for Excite (XCIT); since then, it's abandoned
its portal ambitions and cancelled plans to
buy 30-some Web sites.
"It's hard to imagine whether [K-Tel] was
ever worth where the share prices got to,"
said Mr. Serman.
More trouble
The company also came under fire for not
disclosing management changes.
Mr. Kieves was hired as president in
October, replacing David Weiner who had
left the company a month before. But K-Tel
did not issue a press release concerning the
management shift until November 3, leading
Nasdaq to criticize the oversight.
"I've never owned K-Tel, never even
considered it," said Ryan Jacob, portfolio
manager of the Internet Fund. "It was all
just hype which took on a life of its own."
The company now maintains that it can easily
raise the cash to meet Nasdaq's minimum $4
million tangible net asset requirement for
listing. Tangible net assets are defined as
total assets, excluding goodwill, minus
liabilities.
But the damage to K-Tel's reputation and
share price may be too extensive for any
future revival: In a catch-22, the decline in
its stock may prevent the raising of needed
capital.
K-Tel's plight may reveal that even in the
ether of the Internet, some companies still
have to prove their fundamental worth.
"The stock price was completely removed
from their financial position," concluded Mr.
Serman.
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