Market Place: K-Tel Sliced and Sentimentalized, but Now Can It Surf?
By ANDREW POLLACK
It slices! It dices! But no matter which way you cut it, K-Tel International
has been keeping investors awake at night, much as its commercials for gadgets
and records once did for late-night television viewers.
Less than two weeks ago, K-Tel shares were soaring after the company
announced agreements to sell music over the Internet at Web sites run by
Playboy Enterprises and the Microsoft Corp. But last week the stock plunged on
news that Nasdaq was threatening to delist the company for lack of adequate
assets.
Even for Internet-related stocks, where investor enthusiasm is often out of
sync with business realities, the tale of K-Tel is an extreme one.
Until April, K-Tel was selling music compilations like "'70s Teen
Heartthrobs" through discount and record stores. On some days, only a few
hundred shares in the thinly traded company changed hands. No analyst at a
major brokerage firm followed the company.
But then K-Tel announced that it would open an Internet record store, and
its shares jumped to nearly $40 from about $4, adjusted for a subsequent
split. The share price fell to earth again, but had two more spikes earlier
this month when the company announced its Microsoft and Playboy agreements. On
some days, more than 20 million shares changed hands, a huge number for a
company that has only 8.3 million shares outstanding and 4 million of those
owned by its founder.
But if the company has been quick to announce its Internet intentions, it
has raised questions about its silence on less favorable developments.
Its president and chief operating officer, David Weiner, resigned in
September and was replaced the next month by Lawrence Kieves. But K-Tel did
not announce these changes until Nov. 3, when reporters, calling about the
Playboy announcement, discovered its change in presidents.
Then, K-Tel did not announce for about three weeks that it had received a
warning that it might be delisted from the Nasdaq National Market because it
does not have the required tangible net assets.
When that information became public on Tuesday in the company's quarterly
filing to the Securities and Exchange Commission, K-Tel's stock, which had
been as high as $39 the week before, plunged to $10. It closed at $12 on
Friday, down 31.25 cents.
Lawyers have pounced like lions on a slab of raw meat. At least seven
shareholder suits have been filed, accusing the company of concealing the
Nasdaq warning while orchestrating a public relations campaign to increase the
share price so it could raise money.
K-Tel executives said in interviews that the company was not legally
obligated to announce the Nasdaq letter. They said they did not consider it
significant because the company, which is now arranging financing, was
confident it could raise the capital required to stay listed.
"It's about the 12th letter I've gotten from Nasdaq in my career," said
Kieves, the new president, who previously worked at several small publicly
traded companies. "People have a microscope on this company and hyper-react to
it."
John Coffee Jr., a Columbia University Law School professor, said a company
was under no legal requirement to disclose information before its quarterly
SEC filing unless it was trying to sell stock or had made misleading
statements. Plaintiffs could contend that it was misleading to announce the
Playboy and Microsoft deals without also mentioning the Nasdaq letter, but K-
Tel could argue that those deals were not connected to the delisting warning,
he said. But Coffee said that even if K-Tel was not legally liable, it might
be violating Nasdaq rules by being "a little lax about keeping its
shareholders informed."
Staying listed will probably not be a problem. The company's founder and
chairman, Philip Kives, could restore its assets to the required $4 million,
from $900,000 now, with an equity infusion. The bigger problems are finding
the tens of millions of dollars that might be needed to compete in the
Internet business and fix its existing business.
K-Tel, with sales last year of $85 million, has lost money in three of the
last four years. In the quarter that ended Sept. 30, it lost $3.1 million as
revenue dropped 25 percent, to $18.8 million, partly because it discontinued
some businesses but also partly because of slumping record sales.
The company has exhausted its credit line and has borrowed $3.4 million from
Kives to finance operations, according to its latest SEC filing. Kives, who is
69 and is based in Winnipeg, Manitoba, owns 42.3 percent of K-Tel. He had
owned nearly 80 percent, but sold more than 2.6 million shares after the price
went up in April. He declined to comment on the situation.
A farm boy from Saskatchewan, Kives was peddling knife sets on the Atlantic
City boardwalk when he hit upon the idea of using television. In 1962, he
started K-Tel, which stands for Kives Television, advertising contraptions
like the Miracle Brush lint remover. (The Veg-O-Matic vegetable slicer and
dicer actually belonged to a competitor, but K-Tel acquired it.) The company
then branched into selling music compilations like "Hooked on Classics," in
which classical music was played to a disco beat.
K-Tel fell into bankruptcy in 1984 after disco slumped and its investments
in real estate and oil and gas turned sour. Its direct sales of gadgets on
television are now largely confined to Europe. In the United States, K-Tel
mainly sells music compilations through retailers.
The new president, Kieves, 50, is related to Kives (their grandfathers were
brothers), but the two men did not meet until 1986.
A Brooklyn native, Kieves spent the first part of his career in government
in Washington and New York City, his last post as commissioner of business
development under former New York Mayor Edward Koch. Though he was never
formally charged with any wrongdoing, Kieves was forced to resign in 1986 for
owning about $10,000 worth of stock in a company that was getting some
financial assistance from the city.
After that he was an executive at several small video-distribution companies
and started Network Event Theater, which went public.
Kieves said K-Tel's brand name and existing business would give it an
advantage in Internet retailing. "It's a smart extension of our core business,
and the market reacted very favorably to it," he said.
Market leaders like Amazon.com and CD Now are selling $10 million to $15
million of music over the Internet each quarter. If K-Tel could do that --
right now it does not report its Internet sales because they are not
significant -- it would practically double its revenue. And Internet music
sales are expected to soar.
But the market is already crowded. K-Tel's Web site, www.ktel.com, had only
121,000 people visiting in September compared with 2.2 million for CD Now,
according to Media Metrix, a New York company that tracks Web traffic.
Moreover, Internet competition will require a lot more money than K-Tel has.
CD Now paid Yahoo $4 million to appear on Yahoo's portal for two years, and
paid $18.5 million for a link with Lycos. CD Now is also merging with its
major rival, N2K, to give it more heft. K-Tel has agreed to pay Playboy at
least $900,000 over two years.
"Getting into being a category-killer online retailer may have stretched
them too thin," said Nicole Vanderbilt, senior analyst at Jupiter
Communications, a market research firm. She said K-Tel might have been wiser
to concentrate on selling its music compilations over the Internet, rather
than trying to be a broad-based music retailer.
The listing of K-Tel's service on the Microsoft Network's shopping channel
might not help much. K-Tel is only one of six retailers listed in the music
and video section, and Amazon.com has featured billing. The Playboy deal could
be more significant because K-Tel would be the exclusive record vendor on
Playboy.com, with 900,000 people visiting in September, according to Media
Metrix.
But K-Tel undoubtedly faced naysayers when it pioneered in selling records
on television. "For us not to take advantage of this new medium," Kieves said,
"would be a grave mistake."
Related Sites
These sites are not part of The New York Times on the Web, and The Times has
no control over their content or availability.
<A HREF="http://www.ktel.com/">K-Tel International</A>
Monday, November 23, 1998 |
