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. |
