Stock of the Day
Nov 23, 1998
K-tel International: It's Baaaack!
Just when it looks as though K-Tel International (Nasdaq:KTEL - news) is finally
down and out, it comes back to prove everyone wrong. Since announcing that it was
going to start selling its greatest-hit record compilations over the Internet back
in April, in addition to continuing its late-night music-selling on television, K-Tel has risen to astronomical
heights, plunged to rock-bottom levels, risen yet again to lofty levels, and then again fallen to the nadir of its
trading range. Welcome to the roller-coaster ride known as K-Tel. In the latest round of twists and turns,
however, it looks like K-Tel will have to pull off a Houdini-like miracle. No one is saying the company is dead,
but K-Tel is facing its toughest test yet.
Last week investors learned that K-Tel shares are dangerously close to being delisted from the Nasdaq
National Market. In its quarterly filing with the SEC, the company disclosed that it is not in compliance with
Nasdaq's net tangible asset requirement, which calls for net assets exceeding $4 million. The company currently
has about $1 million in net assets, meaning that it needs to raise some cash if it hopes to get into compliance
anytime soon. The company is exploring its options, which includes the possibility of floating a secondary
offering.
In the filing the company said “there's no assurance the company will be successful in its attempt to remain
listed on the Nasdaq stock market.” If delisted from the national market, “the company may apply to the
Nasdaq small-cap market.” The small-cap market also requires a company to meet the $4 million requirement,
but it can sidestep the requirement by having a market capitalization of $50 million, something that K-Tel
currently has. If, however, its shares fall below $6 a share, it would no longer satisfy that requirement either.
Perhaps most troubling about the filing is that Larry Kieves, president at K-Tel, knew about the delisting about
four weeks ago. The reason for not releasing the information to the public four weeks ago? Kieves believed
that it was not “material” information for shareholders. Shareholders disagreed, and have since launched
several class-action lawsuits.
Of course, disclosing information -- pertinent or not -- seems to be a difficult chore for K-Tel management.
Earlier this month investors learned that David Weiner, president, was no longer with the company, effective
September 4. Even though K-Tel disclosed the information through the necessary SEC channels, it failed to
issue a release to shareholders of the company. Information about the number two person leaving the company
would seem important. K-Tel management, however, didn't think so.
The new president, Larry Kieves, cousin of CEO Philip Kieves, said the company simply hadn't gotten around to
issuing a release about Weiner leaving the company. “We should have put it out... but we weren't trying to hide
anything,” he told Dow Jones new service, stressing that he joined the company only recently. "It just took a
little bit of time to get it out." Just two months.
Analysts who follow the company were less than charitable when the news broke. "K-Tel's management is a
horror story," said analyst Axxel Knutson of Axxel Investment Services, who has changed his "hold" rating on
K-Tel to a "sell.""This company is in trouble.”
Others simply think it doesn't matter who is in place at K-Tel. After K-Tel announced that it had penned a deal
with Playboy Enterprises to sell music on Playboy's Web site, Mark Hardie, an entertainment analyst with
Forrester Research, said that it is too little too late for K-Tel. "K-Tel will never be a leader in online retail.
They're too (far) behind the big guys," he told Dow Jones.
In addition to the Playboy announcement, which vaulted K-Tel shares nearly 100 percent, K-Tel also recently
announced that it had entered into an agreement with Microsoft (Nasdaq:MSFT - news) , whereby Microsoft
will provide links from several of its sites to K-Tel's. Investors bid shares up 98 percent on that bit of news.
Trading volume reached nearly 20 million shares after each announcement, or more than twice the amount of the
existing number of shares available. Since then, however, shares have fallen to nearly the same level at which
they traded before the announcement, probably due to the “non-material” information surrounding the delisting
of its stock.
Uncertainty about the delisting notwithstanding, K-Tel is showing signs of cracking in other areas as well. In its
most recent quarter the company showed a loss for the quarter of $3.1 million, reversing a profit of $1.2
million a year ago. It also showed a 25 percent decline in revenues, to $18.8 million.
The hoopla surrounding K-Tel's announcement back in April that it was going to sell its wares via the Internet
has long since subsided. Sure, some companies are going to reap tremendous benefits from the Internet, but
there are also going to be those that don't. K-Tel's troubling disclosures about its delisting and financials, may
signify that its stock is better off in the hands of speculators and traders who move in and out of the stock
frequently, than investors looking to hold the stock for the longer term, say a whole week.
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