Updated 18-Nov-98
K-Tel and Listing Requirements
Yesterday, K-Tel (KTEL) reported that they are facing delisting from the Nasdaq National Market for failure to meet the
minimum net tangible asset requirements. Today's Brief describes what the Nasdaq listing requirements are, and what options
K-Tel faces.
Nasdaq Continued Listing Requirements
Once a stock is listed on the Nasdaq National Market system, the company must maintain a minimum level of financial
requirements. Here are the minimum requirements for continuing listed on the Nasdaq. All of these requirements must be met at
all times.
Requirement
Amount
Net Tangible Assets
$4 million
Public Float
750,000 shares
Float Market Value
$ 5 million
Minimum Bid
$1
Shareholders
More than 400
Market Makers
At least 2
K-Tel failed to meet the minimum net tangible asset requirement. Net tangible assets are defined as:
Total Assets -- Total Liabilities = Net Tangible Assets
For K-Tel, here are the numbers for the past two quarters (in thousands):
6/30/98: 39,035 -- 31,087 = 7,948
9/30/98: 38,373 -- 37,273 = 1,100
K-Tel's net assets are only $1.1 million. What happened between June and September?
If you look at the balance sheet for September 30, 1998, the answer becomes immediately clear. The standout line is the "Current
portion of notes payable" line, which rose to $9,146,000 from just $3,738,000 the quarter before.
K-Tel's Debt Problem
K-Tel's problem is debt. First of all, they have pretty much maxed out their existing credit, one a term loan, one a line of credit.
From the November 17 10-Q:
As of September 30, 1998, $4,000,000 was outstanding under the term loan and $5,146,000 was outstanding under
the line of credit and the maximum additional available under the borrowing limitations at that date was $72,742.
In addition, K-Tel has run into problems with its lender (unnamed in the 10-Q). Also from the 11-17-98 10-Q:
The Company has amended certain financial covenants with the lender for fiscal 1999 and beyond, and expects to be
out of compliance with the tangible net requirement until the Company achieves the necessary level of profitable
operations, obtains an equity infusion or further modifies the covenants. As such, the Company has reclassified its
$4 million term loan to current as of September 30, 1998.
The "tangible net requirement" above refers to those required by the lender, not the Nasdaq. Translated, what this means is the
lender for the $4 million term loan has called the loan, making it payable immediately. Unfortunately, K-Tel doesn't have the cash
to do this, since they only have $3.9 million in cash right now.
In short: K-Tel either isn't paying its lender, or fell below the lender's minimum credit-worthiness requirements, the notes got
called, the loans got moved to current liabilities and current assets aren't enough to pay it. Total assets aren't significantly higher
either, and hence the problem with listing requirement.
So what happens now?
Nasdaq Small Cap Listing Requirements
The requirements for listing on the Nasdaq Small Cap market are less stringent than for the Nasdaq market. Here are the
requirements for an initial listing on the Small Cap market.
Requirement
Amount
Net Tangible Assets
$4 million
OR Market Capitalization
$ 50 million
OR Net Income
$ 750,000
Public Float
1,00,000 shares
Float Market Value
$ 5 million
Minimum Bid
$4
Shareholders
More than 300
Market Makers
At least 3
Operating History
1 year
Only one of the first three requirements needs to be met. K-Tel's market capitalization is the only one that meets it, but only if the
stock price is above $6 per share.
K-Tel's Future
KTEL must stay above $6 per share to make the transition to the Nasdaq Small Cap Market. Once on it, it will have to keep the
share price about $4.25 a share to avoid delisting on the Small Cap market, and becoming a "pink-sheet" stock.
In the past, K-Tel never had to meet, or worry about, these market capitalization requirements because it met all of the tangible
net asset requirements.
Now, however, it is dependent on the stock price to maintain its listing. But K-Tel traded below $6 a share as recently as October,
and was below $4 a share for most of the time prior to April when it first announced its Internet plans. This fact will undoubtedly
be on the minds of the Nasdaq directors when they meet with K-Tel to discuss K-Tel's future as a listed company.
Did the Internet Kill K-Tel?
K-Tel used to be a profitable company. What happened?
All we can deduce, at this point, (at the time of this writing, no one at K-Tel is available for comment), is that the increased focus
on the Internet has just about killed K-Tel. The "K-Tel Express" has been a big failure. K-Tel states in the 10-Q "Revenue
generated from K-Tel Express through September 30, 1998 has not been material." Translation: Probably close to zero sales.
We don't know how much the company spent developing the K-Tel Express site, although the press release stated that the
ecommerce effort lost $600,000 in the most recent quarter.
Revenues fell in this quarter to $18 million from $25 million a year ago, as advertising and G&A combined increased to $11.5
million from $8.9 million. The company blamed the shortfall on closing unprofitable infomercial and retail video efforts. But the
Internet was supposed to more than make up for this, and it hasn't. If K-Tel had any kind of significant revenues from the
Internet, you can bet they would be trumpeting them. The silence tells it all.
Delisting looks like the least of K-Tel's problems, however.
Although they have accounts receivable of $14 million, and inventory of $7 million, both are pledged to lenders as collateral.
How they will pay their loans, or otherwise satisfy the lenders, is totally unknown. Especially since they just added a $900,000
additional liability to their balance sheet (a guaranteed minimum royalty to Playboy Enterprises for co-branded music CDs; to be
paid over two years.)
K-Tel needs more than $4 million in tangible assets quickly to stay listed on the Nasdaq. They can't borrow it, because any
increase in assets would be offset by the corresponding liability. But Briefing estimates they need almost this much simply to stay
liquid as an ongoing concern, as their cash flow statement shows a burn rate of $1.9 million a quarter.
Maybe they can get Chairman Philip Kives to buy some stock. After all, he sold over $37 million worth of K-Tel stock between
May 11 and June 9, of this year, at prices ranging from $32 to $11. |
