KTEL<---------Sunday Paper in Minnesota!!!!!!!
Published Sunday, March 14, 1999
Greatest Hit: In K-tel, Internet mania has highwater mark
Eric Wieffering and Terry Fiedler / Star Tribune
Philip Kives has proven he can sell just about anything.
In the 1960s, it was the Miracle Brush and the Veg-O-Matic. A decade later the company he founded, K-tel International, was a fixture on late-night television, hawking kitschy radio hits like "Billie Don't Be a Hero" and "The Night Chicago Died."
K-tel headquarters
But the most remarkable sale of Kives' career came last year, when he reaped $40 million by selling his K-tel stock to a public that believed K-tel was the next big thing on the Internet.
In just five weeks, Kives made a bigger profit from his K-tel stock than the company had earned in the previous 20 years.
Other insiders cashed out, too, with their total sales topping $16 million. K-tel's stock spiked twice and collapsed in 1998, burning investors who piled in at the wrong time.
Now the Plymouth-based company, Kives and its president face more than 20 lawsuits accusing them of artificially boosting the stock, by deliberately withholding damaging information that securities regulations required them to promptly release. The suits seek class-action status, estimate the number of claimants in the thousands, and focus on two days in November when the stock lost more than 40 percent.
Philip Kives
K-tel executives deny the charges and say the litigation prevents them from discussing last year's events in detail.
Whatever the outcome of the court case, the K-tel story is seen nationwide as an archetype of a new, violent breed of stock speculation that securities regulators fear could someday spark a broader market panic. Other stocks soared and crashed last year due to the rise of the Internet as an all-in-one trading medium, investment concept and rumor mill. But no case was more spectacular, or unlikely, than K-tel's.
"K-tel is one of the outstanding examples of Internet hype, a particularly goofy one," said Michael Murphy, editor of the Overpriced Stock Service newsletter and author of books on investing in technology stocks. "You knew it was going to be a joke."
In March 1998, K-tel was a company and stock ignored by investment professionals. Its most profitable year had been 1981. It twice had failed to sell its main music business for less than $35 million.
Lawrence Kieves
Within a month, investors would be valuing the company at $325 million.
What changed?
The "dot.com" mania had arrived.
The stock of online bookseller Amazon.com had increased 300 percent in seven months in 1997, and another six-fold in 1998. Yahoo!, owner of the most heavily visited Web site, was about to post results well above expectations.
"Everyone began looking for Internet stocks that might be industry leaders," said Patrick O'Neil, a Minneapolis investment manager.
In that fevered environment, the nearly 30-year-old, struggling K-tel suddenly could become -- in the minds of small investors -- the leading edge of e-commerce, thanks to one Web site: ktel.com .
The Internet, it turned out, made K-tel stock a much easier and far more lucrative sale than the Bacon Krisper or "24 Great Truck Drivin' Songs."
Not the first time
Philip Kives had gotten rich before by using a new sales medium.
He was one of the first to embrace the hard-sell TV commercial. TV put K-tel on the map and Kives in a house in the ritzy Tuxedo area of Winnipeg, Manitoba.
It's a long way from the wheat farm near Oungre, Saskatchewan, where the Kives family landed in the '20s after moving first from Russia to Turkey.
Kives (pronounced Kee-vus) learned his craft selling cookware and housewares on the streets of Winnipeg. He later worked Atlantic City's boardwalk and the fair circuit in Canada and the northern United States. In one routine, Kives would ask a customer a few questions, push some buttons on a machine, then ad-lib a personality analysis from the card it spit out.
Kives at 69 remains an imposing figure, about 6 feet tall, with broad shoulders and large hands. His hair is mostly black, with a shock of silver through the middle. He speaks in a rolling accent, part Eastern Europe, part western Canada. Outside of K-tel, he owns a prominent hotel in downtown Winnipeg and is a passionate horseman with his own racing stable.
He first went on television in Winnipeg in 1962, pitching household gadgets.
"I was the first person ever to do a live, five-minute spot on TV," Kives recalled in a recent interview. "When I did these things, people would laugh and say, 'He won't be in business very long.' But we have proved them wrong."
Kives wrote and produced the ads. He never spoke, but his hands used the Feather Touch Knife, and it was his lap into which the dog jumped and left the hair to be removed by the Miracle Brush. K-tel stands for Kives Television.
He didn't actually invent or name the gadgets.
"Sometimes," says Lawrence Kieves, K-Tel's current president and Kives' first cousin once removed, "the magic is in the marketing."
In 1965, Kives extended the TV sales concept to record albums, particularly compilations. It was a variation of a concept honed on the boardwalk, in which one "low price" included some things people wanted and some they didn't, but all of which Kives needed to unload.
By 1968, he had opened business in the Twin Cities, the nearest U.S. metro area to Winnipeg. U.S. television soon made the Veg-O-Matic a camp icon. K-tel branched out, scoring with albums such as the 5-million-seller "Hooked on Classics," with the Royal Philharmonic playing medleys of classical themes to a disco beat.
K-tel went public in 1971, raising $4 million and making Kives his first small fortune in K-tel stock. By 1981, K-tel was spending $50 million a year on advertising and making annual profits of $5 million on sales of nearly $180 million.
Things would never be better.
K-Tel soon was posting losses, thanks in part to investments in oil exploration and other risky fields made with money needed to pay music royalties.
In 1984, K-Tel lost $33.2 million and was forced into bankruptcy reorganization.
Kives slashed the payroll, even firing two cousins from senior positions. A nephew, Mickey Elfenbein, took over much of the day-to-day management and restored some stability, but K-tel entered a period of drift. It hardly looked like the next hot stock.
In 1995, K-tel made an abortive deal to sell its music business to Elfenbein, who has since left the company, for $25 million. A similar sale for $35 million also fell through.
The company increasingly relied on personal loans from Kives to stay alive.
In the first three months of 1998, K-tel's sales fell by $3 million. On March 31, 1998, K-tel borrowed another $1 million from Kives, bringing the total owed its chairman to more than $4 million.
The Chubby Checker, Bobby Sherman and Leslie Gore songs in the K-tel catalog weren't getting any fresher, and cash-poor K-tel couldn't even afford much TV time to hawk them anymore.
But Kives had seen the Internet.
"The first time I saw it, it reminded me of the early days of television," he said.
He and K-tel's then-new president, David Weiner, a former entertainment consultant for Deloitte & Touche, had a plan. Soon, K-tel executives would promise bold moves to exploit the new medium and use the old mediums, TV and newswires, to help generate excitement for the stock.
The magic, they would find, was indeed in the marketing.
Surprise announcement
K-tel announced its new Web site just after the stock markets closed April 9.
The news surprised Dan Grigsby. He'd been hired in 1995 to develop an electronic commerce site for K-tel, but the project was scrapped.
"They said they basically were not interested in e-commerce," Grisby said.
The news caught the investment community flat, too. The next day was Good Friday, and most of Wall Street was heading home for the long weekend. Even if they had been at their desks, no analysts followed K-tel.
K-tel's stock was something of an orphan. Kives and other executives owned more than 75 percent of the shares. The "float," or the maximum number tradable in a day, was about 900,000 shares -- puny by Wall Street standards. Three hundred shares traded April 8; on April 7 and 9, trading volume was zero.
The small number of shares available was about to become the best thing going for K-tel.
The Web site wouldn't open until May 1, but the news was an event on the online message boards that had become the preferred forums for fans of Internet stocks.
In the two months preceding the Internet announcement, K-tel drew just two postings on its Yahoo! message board. Suddenly, hundreds were appearing. (There are now more than 20,000.)
"Found gold underneath the rainbow," read the first one after the Internet announcement. "Is your seat belt fastened, for the ride UP?"
It was followed a few hours later by one from "Mr.-Jason-98":
"It certainly seems that anything that even touches the net rockets. Do you think it will happen here, perhaps along the lines of [N2K] and [CDnow] (maybe even [Yahoo!])?"
On Monday, April 13, investors pounced. The stock, last traded at $6.62½ on April 8, climbed to more than $16 and closed at $14.93¾, a single-day gain of 125 percent. Almost 1.8 million shares traded.
A government report released the next day, April 14, predicted that Internet commerce could surpass $300 billion by 2002.
No stock rose as sharply in response as K-tel, which surged nearly 50 percent higher. About 5.4 million shares traded, meaning the entire daily float turned over six times. Most of the trades were in blocks of 300 to 600 shares, a sure sign that small investors were driving events.
Institutional investors didn't want K-tel.
"We're looking for companies that have a real strategy, not ones that are just looking to get their stock moving," said Brian Salerno, a manager for the mutual fund Munder Netnet, which specializes in Internet stocks. "K-tel seemed to us to be a fake story."
But small shareholders were giddy and wanted more K-tel. Those who'd "shorted" the stock, selling borrowed shares on the expectation that the price would fall, scrambled to buy it back.
So both the skeptics and the believers were competing for K-tel's scarce shares.
Yahoo! board contributor "Vlandu" caught the mood in a May 5 message: "This is the greatest country in the world, where I can make huge $$$$ and not even know what is going on."
Meanwhile, Weiner, K-tel's president -- and, by some accounts, the architect of the Internet strategy -- told the Bloomberg wire service April 14 that K-tel would have sales of $100 million in the year ending June 30 (actual sales hit $85 million). He went on CNBC April 15 and said that K-tel had become a growth company and that it was about time Wall Street recognized K-tel's true value.
The company's then-chief financial officer, Corey Fischer, told Dow Jones the same thing later that afternoon: "Management has always believed the company is undervalued."
The ensuing mainline media coverage was often disbelieving or jocular, long on references to disco albums, short on details of the company's wobbly finances.
'Sage' wisdom
Self-styled online investment gurus filled the information vacuum.
Anthony Elgindy, who had shorted 20,000 K-tel shares, issued a press release April 16 urging people to sell. "When the hysteria dies down the stock should settle to a more appropriate range between $5 and $7," he wrote.
The next morning, Elgindy, who owns a trading firm in San Diego and runs a popular investment discussion area on the Silicon Investor Web site, reversed himself. Before the market opened, he said K-tel's stock could trade between $30 and $50 "and still remain a good value for long-term holders."
Both releases were carried by Bloomberg and the PR Newswire, as well as the Motley Fool, Yahoo! and other online message boards.
With about 27 percent of all stock trading now occurring through online brokerages, the message board buzz can make or break an Internet stock, said Tim Klein, an online brokerage analyst for Piper Jaffray Inc.
"It all becomes self-fulfilling," he said.
Elgindy's comments and those of Louis Riley, another self-styled analyst who put a target price of $100 on K-tel stock, helped catapult the shares up another 30 percent April 17. By May 5, the stock topped $78 before closing at $67.87½, a 925 percent increase over 17 trading days.
Elgindy said his sudden switch came after he studied K-tel more closely and examined the valuations of CDnow and N2K Inc., other online music retailers.
"I thought that even if they were a lousy company, the public in the short term will perceive this to be a great stock," Elgindy said in a recent interview.
Unexpected 'insanity'
Riley, a hedge fund manager for Stock Investor Trading News, an online investment newsletter, went so far as to project that if K-tel's stock traded at the same multiple as CDnow's, it would be worth $850.
His analysis borrowed heavily from K-tel's own press release. But Riley, who vigorously promoted the stock on Yahoo! and Silicon Investor while acknowledging he owned shares, suddenly was cited online as an expert who had shown K-tel's real value.
Some investors would accuse Riley on message boards of "pumping and dumping" -- stoking investor interest so he could sell his K-tel stake at a tidy profit. The practice is legal; touting a stock in return for payment is not.
Riley said via an e-mail message that he has no financial ties to K-tel, its officers or directors. "I never asked for or received any form of compensation from the company," he wrote.
The end result of the stampede into K-tel: in less than a month, the value of its stock had gone from $27 million to $325 million.
"No one anticipated that it would be as insane as it was," Elgindy said. When K-tel shares hit $70, he urged investors to sell.
Kives and other K-tel execs were doing just that.
Jeffrey Koblick, then a member of K-tel's board, was the first -- 10,000 shares May 1 for $335,000. On May 8 he sold another 128,769 shares for $4.2 million. Most of the stock, granted through options, cost him 75 cents to $3.37½.
By the end of the month David Weiner had sold all his 372,000 shares, for which he'd paid $2 each.
Kives sold 680,000 shares, for about $17.5 million, over six days in mid-May.
He was just getting going.
The insider sales, combined with the stock split May 8 that doubled the number of shares, significantly increased the amount of K-tel stock available for trade. Any new wave of buying would be less likely to goose the stock higher. The insider selling also spooked some of the K-tel bulls. The source of all the excitment, the company's Web site, opened May 1. K-tel stock dropped sharply May 14, then began a steady descent.
Kives increased his selling. Over 10 days in late May and early June, he sold 1.5 million shares for almost $24 million. In the weeks after, he paid $125,000 for one of the top 2-year-old racehorses in Canada, Rare Sortof Devil, to add to his K-5 Stable.
Kives had watched a significant amount of his net worth evaporate when K-tel filed for bankruptcy in the mid-'80s. K-tel had paid him back in spades.
Jim Sullivan, a Minneapolis management consultant who helped K-tel in its bankruptcy, wasn't surprised that Kives had found a way to make new millions from K-tel.
"This is the way Phil Kives makes all of his money," Sullivan said. "He knows people and plays them like a fine instrument."
Falling fortunes
K-tel had a store on the Internet, but the company wouldn't say whether anyone was visiting it.
By early October, the stock was back under $6.
K-tel filed its annual report to the SEC -- a month late -- Oct. 12. The news was not good:
Internet sales were minimal; the site had lost $400,000.
A new media buying and infomercial division, which accounted for all of K-tel's revenue growth in the previous 18 months, had lost $2.3 million and had been shut down.
The music division lost $1.2 million in the fourth quarter alone.
The company owed Kives $4.5 million.
The losses and K-tel's low stock price brought a warning letter from officials of Nasdaq, or the National Association of Securities Dealers Automated Quotations system. K-tel had fallen below the minimum requirements to stay listed on the main Nasdaq exchange.
A delisting would end any hope K-tel had to attract institutional investors and would make it harder for individuals to sell their holdings.
The Nasdaq letter came in October. The company did not disclose it until Nov. 16 and has since declined to say why investors weren't told sooner.
But K-tel was prompt in announcing two new Internet deals that month.
On Nov. 3, K-tel said it would have a co-branded music store with Playboy Online.
It would be a few weeks before investors learned that the Playboy contract was only for two years and would cost cash-strapped K-tel $900,000.
Reporters called to discuss the deal with David Weiner, K-tel's president, only to learn he'd left in early September.
Lou Scheimer, a former K-tel board member, said Weiner clashed with Kives over strategy.
Weiner, who lives in Los Angeles, did not return calls seeking comment for this article.
Kives said Weiner had gotten K-tel into money-losing businesses. He said his lawyer told him there was no need to alert investors that Weiner had departed.
The chat rooms didn't care. A day earlier, a prominent Internet analyst had estimated that online holiday sales would top $2.3 billion.
K-tel's stock shot up again, from $6.87½ to $13.25, with 16.5 million shares traded.
On Nov. 10, management said that K-Tel Express, its online music and home video service, would be featured on the Microsoft Network's Shopping Channel.
It was a non-event. K-tel was paying $5,000 a month -- a fact it never disclosed -- for what amounted to a digital Yellow Pages ad. Other music retailers were listed too.
By this time, Riley and Elgindy were openly skeptical about K-tel and told message board regulars that they were shorting the stock. Riley referred to the company as a "pig" on the Silicon Investor.
Elgindy now says K-tel focused on "manufacturing press releases instead of being an online retailer."
But the K-tel story had gone on autopilot in the chat rooms. Buyers briefly sent the stock back to $33 on the Microsoft announcement and an appearance by Kieves, who replaced Weiner as president, on CNBC in which he said K-tel was "looking at several strategic opportunities."
On Nov. 16 the company released its quarterly earnings, disclosed the Nasdaq warning and the cost of the Playboy deal. K-tel shares began sinking the next day.
The first lawsuit came Nov. 18.
Formulating a plan
Kieves concedes K-tel's operating troubles, saying he was hired last fall to "turn the company around."
In fact, new competition in the U.S. music business means K-tel's "profit margins are declining" and "market share will decline," Kieves said.
The company's online strategy is unclear.
Kives, who still owns 42 percent of the stock and says he is committed to K-tel, wants to broaden its site to other products, such as exercise equipment.
"Marketing music on the Internet -- you can't exist on just that," he said.
Kives is less enthusiastic about Internet growth and sees music sales remaining "our bread and butter."
E-commerce analyst Marc Johnson of the research firm Jupiter Communications in New York doesn't see K-tel becoming a leader in Internet commerce.
"The Internet changes the rules of the game," Johnson said, "but it doesn't divorce you from all other challenges."
It also doesn't insulate investors from losses, and both the SEC and individual securities firms recently have begun discussing curbs for online trading to prevent small investors from driving stocks, and themselves, over the cliff.
Still, on the Internet, risk can be forgotten on the next rumor.
"KTEL is flying on possible WALMART pact!!!!!!!!!" screamed an erroneous Yahoo! message board posting from "Analystxxxk" Feb. 25. "Here we go again!!!"
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