**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **(MARK ONE)**                                    |
|---------------------------------------------------|
| **ý**                                        | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **                                        | ** ** | ** ** |
| **For the fiscal year ended June 30,  2004** |
| ** **                                        |
| **OR**                                            |
| ** **                                        |
| **o**                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For the transition period from           to          **

 

**Commission file number 1-07115**

 

**K-TEL INTERNATIONAL, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Minnesota**                                                   | ** ** | **41-0946588**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **2655 Cheshire Lane North, Suite 100,  Plymouth, Minnesota**   | ** ** | **55447**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

 

Registrant’s telephone number, including areacode: **(763) 559-5566**

 

Securities registered pursuant toSection 12(b) of the Act:**None**

 

Securities registered pursuant toSection 12(g) of the Act:

Common Stock, par value $0.01

(Title of class)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý             Noo

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicate by check mark whether or not the registrant is an acceleratedfiler (as defined in Exchange Act Rule 12b-2)

 

Yes o             No ý

 

As of December 31, 2003, the aggregate market value of votingstock held by non-affiliates of the registrant based on the last sale price asreported by the Over-the-Counter Bulletin Board on such date was $526,871.

 

As of September 3, 2004, the registrant had 13,653,738 shares ofCommon Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

PORTIONS TO BE FILED BYAMENDMENT PURSUANT TO RULE 12B-25

 

Item 6.             Selected Financial Data

Item 7.             Management’s Discussion and Analysis of FinancialCondition and Results of Operations

Item 7a.       Quantitative and Qualitative Disclosures about MarketRisk

Item 8.             Financial Statements and Supplementary Data

 

 

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**TABLE OF CONTENTS**

 
| PART I        |                                                                                                                |   |
|---------------|---------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                |   |
| Item 1.       | Business                                                                                                            |   |
| Item 2.       | Properties                                                                                                          |   |
| Item 3.       | Legal  Proceedings                                                                                                  |   |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                |   |
|          |                                                                                                                |   |
| PART II       |                                                                                                                |   |
|          |                                                                                                                |   |
| Item 5.       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |   |
| Item 6.       | Selected  Financial Data                                                                                            |   |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   |
| Item 7a.      | Quantitative and Qualitative Disclosures about Market Risk                                                          |   |
| Item 8.       | Financial  Statements and Supplementary Data                                                                        |   |
| Item 9.       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               |   |
| Item  9a.     | Controls  and Procedures                                                                                            |   |
| Item  9b.     | Other  Information                                                                                                  |   |
|          |                                                                                                                |   |
| PART  III     |                                                                                                                |   |
|          |                                                                                                                |   |
| Item  10.     | Directors  and Executive Officers of the Registrant                                                                 |   |
| Item  11.     | Executive  Compensation                                                                                             |   |
| Item  12.     | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |   |
| Item  13.     | Certain  Relationships and Related Transactions                                                                     |   |
| Item  14.     | Principal  Accountant Fees and Services                                                                             |   |
|          |                                                                                                                |   |
| PART IV       |                                                                                                                |   |
|          |                                                                                                                |   |
| Item  15.     | Exhibits,  Financial Statement Schedules and Reports on Form 8-K                                                    |   |
|          |                                                                                                                |   |
| Signatures    |                                                                                                                |
| Exhibit Index |                                                                                                                |

 

**SAFE HARBOR STATEMENT UNDER THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995**

 

Certain statements of a non-historical nature under the caption“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and elsewhere in this Form 10-K constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Act of1995. Such forward-looking statements may be identified by the use ofterminology such as “may,” “will,” “expect,” “anticipate,” “estimate,”“should,” or “continue” or the negative thereof or other variations thereon orcomparable terminology. Such forward-looking statements are subject to certainrisks and uncertainties that could cause actual results to differ materiallyfrom historical results or from those results currently anticipated orprojected. Such factors include, among other things, the following: changes inconsumer purchasing; demand for and market acceptance of new and existingproducts; the impact from competition for recorded music; the outcome of legalproceedings; dependence on suppliers and distributors; success of marketing andpromotion efforts; technological changes and difficulties; availability offinancing; foreign currency variations; general economic, political andbusiness conditions; and other matters. We undertake no obligation to releasepublicly the result of any revisions to these forward-looking statements,except as required by law.

 

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**PART I**

 

**ITEM 1****:  BUSINESS**

 

K-tel International, Inc. (the “Company”, “K-tel” or the “registrant”)was incorporated in 1968 and currently has its corporate offices located inPlymouth, Minnesota. Through its operating subsidiaries, K-tel licenses itsmusic catalog internationally and markets entertainment products mainly derivedfrom its catalog through retail and direct response marketing channels in theUnited States and Europe. The Company has a focused method of distribution thattargets the strengths of selected individual retailers and supplies productssuited to each retailer’s needs. These products are derived mainly from theCompany’s master recordings music catalog with the objective of realizing morecompetitive profit margins. K-tel seeks to license its trademarks to othercompanies in businesses unrelated to K-tel’s current operations. Licenses aregranted for a royalty or fee, with no cost to the Company. The Company haslicensed certain marks to K-tel Drug Mart Ltd., a Canadian direct marketer ofprescription drugs beneficially owned by Philip Kives, the Chairman of theBoard, President and Chief Executive Officer of K-tel. K-tel is merely alicensor of its mark to K-tel Drug Mart. To date, K-tel Drug Mart’s operationshave not generated any significant licensing revenues for the Company.

 

Description of Current Businesses

 

Music Licensing and Sales

 

Currently K-tel’s primary activity is marketing and distributingpre-recorded compact discs utilizing the Company’s master recordings in itsmusic catalog, and DVD’s from its developing catalog of musical performances.Customers include retailers, wholesalers and rack service distributors. Theseproducts are also sold through subsidiaries and licensees in the United States,United Kingdom and elsewhere in Europe. The principal entertainment productsthat K-tel markets and sells consist primarily of pre-recorded thematic musicpackages in a compilation format featuring various artists. These thematicmusic selections, which cover nearly all music genres, are targeted to avariety of age groups. K-tel provides marketing support for its music salesthrough cooperative advertising with retailers, print media, radio andtelevision advertising, and in-store promotions and displays.

 

The Company also licenses music to other record companies and to othersegments of the entertainment industry. K-tel owns a proprietary master musiccatalog of approximately 6,000 titles consisting of original recordings andre-recordings of music from the 1950’s through today. The Company licenses therights to its master recordings to third parties worldwide for use in albums,which typically last three to five years, and is based on the number of unitssold. The Company also licenses its master recordings for films, televisionprograms and commercials for either a flat fee or on a perpetual basis. K-telcontinuously pursues opportunities to add to its music master catalog to ensuregrowth and product diversity. Licensing of its proprietary music rights tothird parties has historically been an important revenue source for K-tel.

 

Two customers, Handleman Company and Anderson Merchandising, Inc.accounted for approximately 19.1% and 10.1% respectively of K-tel’s revenue forthe year ended June 30, 2004. The loss of, or a substantial reduction in,business from either of these customers would have a material adverse effect onthe Company.

 

K-tel currently delivers music products (CDs and DVDs) throughtraditional wholesale and retail distribution channels. Prior toApril 2001, the Company was distributing its music products in the UnitedStates to most major music retailers (Transworld Entertainment, Musicland, BestBuy, Circuit City, Tower Records) and to major distributors (Handleman,Anderson Merchandising, Valley Media). The Company now has a customer base thatincludes only a few selected retailers and distributors, and offers productsthat are of more interest to these individual customers. This focused approachis intended to improve product sell-through, minimize returns of unsoldinventory and allow the Company to realize more competitive profit margins.This existing method of distributing music could be materially altered bytechnologies that enable users and customers of pre-recorded music toelectronically download pre-recorded music at home to various personal computermedia formats. The technology is developing and a number of competing companiesare seeking to have the industry and the public embrace their technologies.Participants in this technology competition include Microsoft Corporation,Liquid Audio, Inc., Apple Computer, Inc., MP3.com, Inc. and others. Digitalmusic distribution provides both significant risks and opportunities for K-tel.The risks include K-tel’s uncertain ability to compete with other musiccompanies from a marketing and a technological standpoint. The Company believesthere are opportunities to enhance its current distribution methods as well asincrease opportunities to license its owned library of master recordings.K-tel’s music sales and licensing subsidiaries are pursuing these alternativedistribution channels.

 

The Company’s ability to continue its present operations and implementfuture expansion plans successfully is contingent mainly upon its ability tomaintain its line of credit arrangements with K-5 Leisure Products, Inc., theCompany’s largest shareholder controlled by Philip Kives, the Chairman of theBoard, President and Chief Executive Officer of K-tel (see

 

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Note 3 to the consolidated financial statements), increase its revenuesand profit margins, and ultimately attain and sustain profitable operations.Without increased revenues and sustained profitability, the cash generated fromthe Company’s current operations will likely be inadequate to fund operationsand service its indebtedness on an ongoing basis. Management is focusing itsefforts on music distribution and music licensing. However, there can be noassurance that the Company will achieve profitable operations through theseefforts or be able to continue operations. The financial statements do notinclude any adjustments that might result from the outcome of theseuncertainties. The report of the Company’s independent registered publicaccounting firm as of June 30, 2004 and 2003 and for the three years inthe period ended June 30, 2004 included an explanatory paragraphexpressing doubt about the Company’s ability to continue as a going concern.

 

# E-Commerce

 

K-tel ceased operating its K-tel.com website, which marketed its ownand other suppliers’ products to retail customers, in the fourth quarter of2001 because this business segment was not cost effective. The web site hassince been redeveloped to support the Company’s sale of proprietary brand-namecompilations and newly developed CD and DVD products to customers in the UnitedStates and United Kingdom.

 

Competition

 

The music business is highly competitive and dominated by majorcompanies. K-tel faces competition for discretionary consumer purchases of itsproducts from other record companies and other entertainment sources, such asfilm and video companies. Several major record companies in the United States,including Bertelsmann AG, Sony Corp., Time Warner, Inc. and Universal MusicGroup, dominate the market for pre-recorded music. K-tel does not have thefinancial resources, nor does it have the depth or breadth of catalog,distribution capabilities or current repertoire of these companies. Its abilityto compete in this market depends upon:

 

•                  the skill andcreativity of its employees to expand and utilize its music catalog to createcompilation packages;

 

•                  itsability to distribute its products effectively and efficiently; and

 

•                  itsability to build upon and maintain its reputation for producing, licensing,marketing and distributing high quality music.

 

K-tel’s music business also involves licensing third party rights andutilizing its own catalog to create music compilations for retail distribution.The major pre-recorded music companies, either directly or throughsubsidiaries, now manufacture or distribute pre-recorded music compilations indirect competition with K-tel’s music compilation products. With this newcompetition, it is far more difficult for K-tel to access pre-recorded musicfrom these major companies at acceptable rates. Therefore, the Company reliesheavily on its own Dominion catalog and has accelerated the rate at which itproduces new master recordings.

 

Another form ofcompetition for the Company is the increasing ability for users and customersof pre-recorded music to download pre-recorded music electronically at home tovarious personal computer media formats. Although the technology and therelated legal issues are still emerging, and although K-tel is pursuingopportunities offered by this technology, the Company is uncertain how this newtechnology will impact its current operations.

 

Intellectual Property

 

TheCompany believes that the K-tel® name and mark are well recognized and aretherefore valuable assets of the Company. The Company pursues the registrationof its trademarks and service marks in the U.S. and internationally. Effectivetrademark, service mark and copyright protection may not be available in everycountry in which its products and services are made available on-line. TheCompany has registered the trademarks K-tel®, K-tel Drug Mart®, K-tel Meds®variations of the marks and other marks relating to its products in the U.S.and internationally in various product and service categories. K-tel alsoclaims rights in trademarks licensed by the Company in two pending U.S.trademark applications covering the marks “CANADA BEST BUY MEDS, INC.” and“CANADA BEST BUY DRUGS, INC.”. Federal and state trademark registrationscontinue indefinitely, so long as the trademarks are in use and periodicrenewals and other required filings are made.

 

TheCompany regards its copyrights, service marks, trademarks, trade dress, tradesecrets and similar intellectual property as critical to its success, andrelies on trademark and copyright law, trade secret protection andconfidentiality and/or

 

4

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licenseagreements with its employees, customers, partners and others to protect itsproprietary rights. K-tel believes strongly in protecting its intellectualproperty and will seek protection for new products and marks whenever theCompany believes it is advisable.****K-tel cannotassure you that any trademarks held by it will be valid, enforceable orotherwise of value to the Company in relation to its competitors or the marketin general, or that any trademark for which it has applied or may apply will begranted.

 

Inaddition to trademark protection, the Company generally obtains copyrights inmusic works, compilations and sound recordings.

 

Employees

 

On June 30, 2004, K-tel employed 17 full time people worldwide.

 

# Financial and GeographicInformation 

 

For financial informationabout the Company’s business segment and geographic area operations for each ofthe three fiscal years ended June 30, 2004 see Note 9 to the consolidatedfinancial statements.

 

**ITEM 2****:  PROPERTIES**

 

K-tel’s corporate offices and U.S. operations are located in leasedfacilities in Plymouth, a suburb of Minneapolis, Minnesota, consisting ofapproximately 4,000 square feet of office space and approximately 6,000 squarefeet of warehouse. K-tel’s foreign subsidiaries lease a total of approximately9,500 square feet of office and warehouse facilities. See Note 6 to theconsolidated financial statements for a summary of the lease agreements. TheCompany believes that these facilities are adequate for the foreseeable future.

 

**ITEM 3****:  LEGAL PROCEEDINGS**

 

RTL Shopping S. A.

 

The Company has been named in a lawsuit filed in France brought byRTL9, a French cable TV station. The action seeks damages in the approximateamount of 20 million French Francs, or approximately $2.8 million. Initially,RTL9 was named as a defendant in a suit brought by a competitor of K-telMarketing Ltd. alleging that RTL9 ran a commercial for K-tel Marketing whichpresented a product under brand names alleged to infringe on the competitor’sown trademarks and also translated an English language script indicating thatthe product was “just like” or “as good as” others into “better than” inFrench, contrary to French law. The suit alleged trademark infringement, unfaircompetition, illicit comparative advertising and passing off. RTL9 then suedK-tel Marketing on October 4, 2000 in the Paris Court of First Instance,pursuant to an indemnification provision the parties had entered into.Subsequently, K-tel Marketing went into liquidation and RTL9 filed a suit inMarch 2000 against K-tel International, Inc. under its agreement toguarantee payment for the commercial time. On May 28, 2001, RTL9 presenteddocuments in court identifying K-tel International (USA), Inc. as a target ofits claim. On September 3, 2001, the Company filed documents disputing theclaim and advising the court of K-tel (USA)’s Chapter 7 bankruptcy filing.

 

After the Company advised the Court that RTL9 had no basis for acomplaint against the Company, RTL9 proposed to drop their lawsuit. OnSeptember 23, 2003, RTL9 and the Company signed an agreement terminatingthe suit. The final disposition of the lawsuit will be confirmed by the Courtat a trial hearing involving only the two remaining parties to the lawsuit. Atrial date has been set by the Court for September 15, 2004.

 

K-tel International, Inc. vs. Tristar Products, Inc.

 

On March 14, 2000, K-tel and its subsidiary in Germany commencedan action for breach of express and implied warranties against DefendantTristar Products, Inc. This action is venued in the United States DistrictCourt for the District of Minnesota. This action arises out of Tristar’s saleto K-tel of a defective home exercise product called the “BunBlaster” forresale in Germany, Austria and Switzerland. By written contract, Tristar hasagreed to indemnify K-tel for injuries and damages arising out of the resale ofthose goods. K-tel is seeking approximately $2 million in consequentialdamages. Tristar is vigorously defending this claim. Discovery has beencompleted. Tristar filed a Motion for Summary Judgment, to which the Companyfiled a Memorandum in Opposition. This motion was heard in U.S. District Courtin Minneapolis on August 25, 2003. The Court issued its order denying themotion on January 29, 2004. The parties are now waiting for a trial dateto be set by the Court.

 

5

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On April 30, 2001, Tristar also asserted a patent and trademark/trade-dress counterclaim against K-tel for allegedly passing off a productcalled the “K-tel Hook and Hang” while allegedly a distributor of the originalpatented Tristar Hook and Hang product. The Company denies the allegationbecause it never was a distributor of this or any similar product and intendsto defend this action vigorously. Tristar has not identified the amount ofdamages it seeks with respect to this counterclaim. The United States DistrictCourt for the District of Minnesota issued an order on August 14, 2001severing this action from the Company’s action. This action is at an earlystage and no discovery or other actions have occurred.

 

#### Other Litigationand Disputes

 

K-tel and its subsidiaries are also involved in other legal proceedingsin the ordinary course of their business. With all litigation matters,management considers the likelihood of loss based on the facts and circumstances.If management determines that a loss is probable and the amount of loss can bereasonably estimated, such amount is recorded as a liability. Although theoutcome of any such legal proceedings cannot be predicted, in the opinion ofmanagement there is currently no legal proceeding pending or asserted againstor involving K-tel for which the outcome is likely to have a material adverseeffect upon the consolidated financial position or results of operations ofK-tel.

 

Subsidiary’s Liquidation

 

In November 2000, the Company’s consumer products subsidiary inthe United Kingdom, K-tel Marketing Ltd., ceased operations and began voluntaryliquidation proceedings. At the initial meeting of the creditors onNovember 24, 2000, the creditors voted for the liquidation to become acreditors’ liquidation under English law. The Company has not been informed bythe liquidators or their counsel of any plan to attempt to hold it or any ofits subsidiaries liable for any of the commitments of K-tel Marketing Ltd. Managementbelieves the Company will have no ongoing material liability related to K-telMarketing Ltd. as a result of the liquidation proceeding. As the only securedcreditor, the Company received distributions of approximately $138,000 onMarch 1, 2004 and $76,000 on May 14, 2004.

 

**ITEM 4****:  SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of K-tel’s security holders duringthe fourth quarter of fiscal 2004.

 

**Executive officers of the registrant**

 

The following table sets forth certain information with respect to theexecutive officers of K-tel at September 3, 2004.

 
| **Name  of Officer** | ** ** | **Age** | ** ** | **Positions and Offices Held**                                            |
|----------------------|------------|---------|------------|---------------------------------------------------------------------------|
|                 |       |    |       |                                                                      |
| Philip Kives         |       | 75      |       | Chairman of the Board, Chief Executive Officer, President and  Director   |
|                 |       |    |       |                                                                      |
| Kimmy Lockwood       |       | 48      |       | Controller, Principal Financial Officer and Principal Accounting  Officer |

 

**Philip Kives** has held various offices and/or managerial positionswith K-tel for more than thirty-five years. Mr. Kives is currently theCompany’s Chairman, Chief Executive Officer and President.

 

**Kimmy Lockwood** has been the Controller of the Company since 1997. She was appointedPrincipal Financial Officer and Principal Accounting Officer inSeptember 2004.

 

6

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**PART II**

 

**ITEM 5****:  MARKET FOR REGISTRANT’S COMMONSTOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

On June 30, 2004, there were 1,411 record holders of K-tel’scommon stock and 13,653,738 shares outstanding. The Company’s common stock istraded on the Over-the-Counter Bulletin Board under the symbol “KTEL”.

 

The following table shows the range of high and low closing prices pershare of K-tel’s common stock for the fiscal year periods indicated. Suchover-the-counter market quotations reflect inter-dealer prices, without retailmark-up, mark-down or commission, and may not necessarily represent actualtransactions.

 
| ** **  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| ** **  | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| 1st Quarter |       | $        | .13        |     | $          | .06 |   | $ | .10 |   | $ | .05 |   |
| 2nd Quarter |       | $        | .11        |     | $          | .06 |   | $ | .10 |   | $ | .04 |   |
| 3rd Quarter |       | $        | .29        |     | $          | .09 |   | $ | .06 |   | $ | .04 |   |
| 4th Quarter |       | $        | .24        |     | $          | .09 |   | $ | .18 |   | $ | .04 |   |

 

No cash dividends have been declared on K-tel’s common stock during thepast two fiscal years and K-tel does not expect to pay cash dividends in theforeseeable future. Management plans to use cash generated from operations forexpansion of its business. The declaration or payment by K-tel of dividends, ifany, on its common stock in the future is subject to the discretion of theBoard of Directors and will depend on K-tel’s earnings, financial condition,capital requirements and other relevant factors. The declaration or payment byK-tel of dividends is also subject to the terms of its credit facility.

 

**Equity Compensation Plan Information**

** **

The following table provides information as ofJune 30, 2004 with respect to compensation plans under which the Company’sequity securities are authorized for issuance.

 
| **Plan Category**                                           | ** ** | **Number of securities to  be  issued upon exercise of  outstanding options,  warrants and rights  (a****)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining  available for future issuance  under equity compensation plans  (excluding securities reflected in  column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                                                                                   | ** ** | ** **                                                                              | ** ** | ** **                                                                                                                                                | ** ** |
| Equity compensation  plans approved by security holders     |       | 136,900                                                                                                      | (1)        | $                                                                                       | 5.95       |                                                                                                                                                      | 2,896,878  | (2) |
|                                                        |       |                                                                                                         |       |                                                                                    |       |                                                                                                                                                      |       |
| Equity compensation  plans not approved by security holders |       | 2,437,939                                                                                                    | (3)        | $                                                                                       | 0.08       |                                                                                                                                                      | —     |   |
|                                                        |       |                                                                                                         |       |                                                                                    |       |                                                                                                                                                      |       |
| Total                                                       |       | 2,574,839                                                                                                    |       | $                                                                                       | 0.39       |                                                                                                                                                      | 2,896,878  |   |

 

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(1)                                  Consistsof 135,900 shares issuable pursuant to options granted under the Company’s 1997Stock Option Plan and 1,000 shares of common stock issuable pursuant to optionsgranted under the Company’s 1987 Stock Incentive Plan.

 

(2)                                  Representsshares of common stock remaining available for future issuance under theCompany’s 1997 Stock Option Plan, as amended.

 

(3)                                  Includesnon-qualified stock options to purchase 95,000 shares of our common stockissued outside of the Company’s 1997 Stock Option Plan to each of Jay WilliamSmalley, Richard R. Marklund and Wesley C. Hayne

 

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in connection with such non-employee directors’ appointment to theCompany’s Compensation/ Stock Option Committee and a non-qualified stock optionto purchase 15,000 shares of our common stock issued outside the Company’s 1997Stock Option Plan to Jay William Smalley in consideration of his past andcontinued service on the Company’s board of directors. See “DirectorCompensation”. Includes an aggregate of 2,137,939 shares of common stockissuable pursuant to a stock option exchange program approved on March 18,2003 by a committee of the Company’s board of directors comprised solely ofindependent directors. Under the program, four optionees agreed to the cancellationof previously awarded options under the Company’s 1997 Stock Option Plan andthe Company agreed to issue options to purchase an equal number of sharesoutside the Company’s stock option plan not earlier than six months and one dayafter the date of cancellation of the previously awarded options, such optionsto be issued at an exercise price per share equal to the then fair  market value of the Company’s common stockand to expire ten years after the new date of grant. On November 18, 2003,the replacements options were issued at a price per share of $.08. There was nocompensation expense recognized as a result of this exchange.

 

**ITEM 6****:  SELECTED FINANCIAL DATA**

 

To be filed by amendment pursuant to Rule 12b-25.

 

**I****TEM 7****:  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

To be filed by amendment pursuant to Rule 12b-25.

 

**ITEM 8****:  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

To be filed by amendment pursuant to Rule 12b-25.

 

**ITEM 9****:   CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

There were no changes in or disagreementswith accountants during the years ended June 30, 2004 and June 30,2003.

 

**ITEM 9A****:   CONTROLS AND PROCEDURES**

 

To be filed by amendment pursuant to Rule 12b-25.

 

**ITEM 9B****.   OTHER INFORMATION**

 

Not applicable.

 

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**PART III**

 

**ITEM 10****:  DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

The following describes the business, the business experience andbackground of each current director and executive officer of K-tel.

 

**Wesley C. Hayne**, age 57, was elected a director in November 2002. Since 2000, Mr.Hayne has been Chief Executive Officer of Biorefining, Inc., a company thatdevelops, commercializes and licenses patented technologies capable ofconverting residual plant material into high-end, value-added products. From1999 to 2000, Mr. Hayne was President of Cybrix Corporation, Inc., a companythat provides solutions and leases staffing for computer security and disasterplanning. From 1997 to 2000, Mr. Hayne was Chief Executive Officer ofInternational Concept Development, Inc., a company that develops fast foodrestaurants in Europe.

 

**Philip Kives**, age 75, founded K-tel in 1968 and has served as its Chairman ofthe Board since K-tel’s inception. In addition, Mr. Kives has been the ChiefExecutive Officer and President for more than five years.

 

**Kimmy Lockwood,**age48, has served as the Company’s Controller since 1997. In September 2004,she was appointed Principal Financial Officer and Principal Accounting Officer.

 

**Richard Marklund**,age 59, was elected a director in November 2002. Since 2002, Mr. Marklundhas been Chairman and Chief Executive Officer of Phoenix Newcastle Holdings,Inc., a management consulting company. From 2000 until 2002, Mr. Marklundserved as Executive Vice President of WAM!NET, Inc., a telecommunicationcompany. From 1998 until 2000, Mr. Marklund served as Chief Executive Officerof Hyperport International, Inc., a real estate development company.

 

**Jay William Smalley**, age 70, was elected a director in January 1999. From 1970until 1998, Mr. Smalley served as Chief Executive Officer of JWS, Inc., aprivately owned real estate development and sales company specializing inhotel, motel, industrial and residential properties. Since 1998, Mr. Smalleyhas been a broker and private contractor for Prudential California Realty.

 

**Section 16(a)Beneficial Ownership Reporting Compliance**

 

Section 16(a) of theSecurities Exchange Act of 1934, as amended, requires K-tel’s officers,directors and persons who own more than 10% of a registered class of K-tel’sequity securities to file reports of ownership on Form 3 and changes inownership on Form 4 or 5 with the Securities and Exchange Commission. Suchofficers, directors and 10% shareholders also are required by Securities andExchange Commission’s rules to furnish K-tel with copies of allSection 16(a) reports they file. Based solely on its review of the copiesof such forms received by it, or written representations from certain reportingpersons, the Company believes that during the last fiscal year, its officers,directors and 10% shareholders filed all reports on a timely basis.

 

**ITEM 11****: EXECUTIVE COMPENSATION**

 

The following table sets forth the aggregate cash compensation paid toor accrued by each of K-tel’s executive officers for services rendered to K-telduring the fiscal years ended June 30, 2004, 2003 and 2002. K-tel has nowritten employment agreements with its executive officers.

 

**Summary Compensation Table**

 
| ** **                       | ** ** | **Annual Compensation** | ** **     | **Long-Term  Compensation  Awards** | ** **    | ** ** | ** ** |
|----------------------------------|------------|-------------------------|----------------|-------------------------------------|---------------|------------|------------|
| ** **                       | ** ** | ** **              | **Securities** | ** **                          | ** **    | ** ** |
| ** **                       | ** ** | ** **              | **Underlying** | ** **                          | **All Other** | ** ** |
| **Name  and Principal Position** | ** ** | **Fiscal Year**         | ** **     | **Salary**                          | ** **    | **Bonus**  | ** ** | **Options** | ** ** | **Compensation** | ** ** |
|                             |       |                    |           |                                |          |       |       |   |   |   |   |
| Philip Kives                     |       | 2004                    |           | $                                   | —        |       | $          | — |   | — |   | $ | — |   |
| Chief Executive Officer          |       | 2003                    |           | $                                   | —        |       | $          | — |   | — |   | $ | — |   |
|                             |       | 2002                    |           | $                                   | —        |       | $          | — |   | — |   | $ | — |   |

 

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On March 18, 2003, a committee of the Company’s board of directorscomprised solely of independent directors, approved a “Stock Option ExchangeProgram.” The Program provided for a small number of optionees who werepreviously awarded options to purchase shares of common stock under theCompany’s 1997 Stock Option Plan to exchange them voluntarily for options topurchase an equal number of shares outside the Company’s Stock Option Plan. Mr.Kives exchanged 1,702,939 options with a weighted average price per share of$5.95 under this Stock Option Exchange Program. Replacement options wereproposed to be issued six months and one day after the date of cancellation ofthe existing options and were to be at an exercise price per share equal to thefair market value of the Company’s common stock as quoted on the OTC BulletinBoard on the date of grant and expire ten years after the date of grant. OnNovember 18, 2003, the replacement options were issued at a price pershare of $.08. There was no compensation expense recognized as a result of thisexchange.

 

**Director Compensation**

 

Directors who are employees of the Company receive nocompensation for their services as director. Non-employee directors receivecash compensation of $10,000 per year (paid quarterly) and are entitled toreceive non-qualified stock options for the purchase of 5,000 shares of theCompany’s common stock at an exercise price equal to the fair market value ofthe common stock on the date of initial election and upon each re-election bythe shareholders at an annual or special meeting. In connection with theirappointment to the Company’s Compensation/Stock Option Committee during thefiscal year ended June 30, 2003, Jay William Smalley, Richard R. Marklundand Wesley C. Hayne each also received a non-qualified stock option to purchase95,000 shares of our common stock issued outside the Company’s 1997 StockOption Plan. During the fiscal year ended June 30, 2003, Mr. Smalley alsoreceived a non-qualified stock option to purchase 15,000 shares of common stockoutside the Company’s 1997 Stock Option Plan in consideration of his past andcontinued service on the Company’s board of directors. All stock options issuedto non-employee directors during the fiscal year ended June 30, 2003 areexercisable for a period of ten years from the date of grant and bear anexercise price equal to the last sale price of our common stock as quoted bythe OTC Bulletin Board for the five trading days immediately ending after theclose of the market on November 27, 2002, the date the board of directorsresolved to grant such options.

 

**ITEM 12****:  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The following table contains certain information as ofSeptember 3, 2004, regarding the beneficial ownership of the Common Stockby (i) each person known to K-tel to own beneficially five percent or more ofthe Common Stock, (ii) each director of K-tel, (iii) each executive officer ofK-tel and (iv) the directors and executive officers as a group. The percentageof beneficial ownership is based on 13,653,738 shares of Common Stockoutstanding as of September 3, 2004. Any shares which are subject to anoption or a warrant exercisable within 60 days are reflected in the followingtable and are deemed to be outstanding for the purpose of computing thepercentage of Common Stock owned by the option or warrant holder but are notdeemed to be outstanding for the purpose of computing the percentage of CommonStock owned by any other person. Unless otherwise indicated, each person in thetable has sole voting and investment power as to the shares shown. Unlessotherwise indicated, the address for each listed shareholder is c/o K-telInternational, Inc., 2655 Cheshire Lane North, Suite 100, Plymouth, Minnesota55447.

 
| ** **                                                                     | ** ** | **Amount and Nature   of Beneficial Ownership(1)** | ** ** | **Percent of  Outstanding Stock** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                     | ** ** | ** **                                         | ** ** | ** **                        | ** ** |
| Philip Kives  220 Saulteaux Crescent  Winnipeg, Manitoba  R3J 3W3  Canada |       | 9,829,253                                          | (2)        | 59.5                              | %          |
|                                                                           |       |                                               |       |                              |       |
| Kimmy Lockwood                                                                 |       | 8,000                                              | (3)        | —                            |       |
|                                                                           |       |                                               |       |                              |       |
| Jay William Smalley                                                            |       | 120,000                                            | (3)        |                              | *          |
|                                                                           |       |                                               |       |                              |       |
| Wesley C. Hayne                                                                |       | 100,000                                            | (3)        |                              | *          |
|                                                                           |       |                                               |       |                              |       |
| Richard Marklund                                                               |       | 100,000                                            | (3)        |                              | *          |
|                                                                           |       |                                               |       |                              |       |
| All current directors and officers as a group (5 persons)                      |       | 10,157,253                                         | (4)        | 59.5                              | %          |

 

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*                       Indicatesownership of less than 1% of the outstanding shares of Common Stock.

(1)     The securities “beneficiallyowned” by a person are determined in accordance with the definition of“beneficial ownership” set forth in the regulations of the Securities andExchange Commission and accordingly, may include securities owned by or for,among others, the spouse, children or certain other relatives of such person aswell as other securities as to which the person has or shares voting orinvestment power or has the right to acquire within 60 days. More than oneperson may beneficially own the same shares.

(2)                Consists of7,800,978 shares held directly by K-5 Leisure Products Inc. (an affiliate ofthe Company controlled by Mr. Kives), 325,336 shares held by a wholly-ownedsubsidiary of K-5 and 1,702,939 shares purchasable upon the exercise ofoptions.

(3)                Represents sharespurchasable upon the exercise of options.

(4)                Includes 2,277,939shares purchasable upon the exercise of options.

 

**ITEM13: ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

K-tel has a Line of Credit Agreement with K-5 Leisure Products, Inc.(“K-5”), the Company’s largest shareholder controlled by Philip Kives, theChairman of the Board, President and Chief Executive Officer of K-tel. Underthe terms of the agreement (the “K-5 Facility”), K-5 has agreed to make availableup to $8,000,000 to K-tel on a revolving basis. The loan bears interest at avariable rate based upon the “base rate” of a nationally recognized lendinginstitution (4.0% at June 30, 2004), expires July 20, 2005, and issubordinated to the Foothill loan (see below). The K-5 Facility contains thesame covenants as the Foothill loan agreement. K-tel has pledged the stock ofits foreign subsidiaries as collateral for the loan, and the loan carries asubordinated position to the Foothill loan on all other assets of the Company.K-tel had outstanding balances of $7,498,000 and $7,282,000 as of June 30,2004 and 2003 respectively under the K-5 Facility. At June 30, 2004, K-telobtained a waiver from K-5 for its non-compliance under the covenants,limitations and restrictions of the credit agreement.

 

In addition, K-tel has asecond loan agreement with K-5, under which K-5 assumed rights and obligationsunder a loan from the Company’s former banker (Foothill Capital Corporation)pursuant to an Assignment and Acceptance Agreement dated February 27, 2001.This Foothill loan, which has been extended through July 20, 2005, provides fora $10,000,000 credit facility consisting of a $4,000,000 term loan due uponexpiration, and a $6,000,000 revolving facility under which borrowings arelimited to a percent of eligible receivables. Borrowings under the facilitybear interest at a variable rate based on a “base rate” of a nationallyrecognized lending institution plus 1% (5.0% at June 30, 2004) and arecollateralized by the assets of certain Company subsidiaries in the UnitedStates, including accounts receivable, inventories, equipment, music libraryand general intangibles. The loan agreement contains certain financial andother covenants or restrictions, including the maintenance of a minimumshareholders’ equity by K-tel, limitations on capital expenditures,restrictions on music library acquisitions, limitations on other indebtednessand restrictions on dividends paid by K-tel. As of June 30, 2004 and June 30,2003, $4,000,000 was outstanding under the term loan and there were noborrowings under the revolving facility. At June 30, 2004, K-tel obtained awaiver from K-5 for its non-compliance under the covenants, limitations andrestrictions of the credit agreement.

 

K-tel has an overdraft privilege borrowing facility with The Royal Bankof Scotland in the United Kingdom. This facility is secured by a standby letterof credit for $55,000 provided by K-tel International Ltd., a Canadian companycontrolled by Philip Kives, and is payable on demand in accordance with normalbanking practices. Borrowings bear interest at 2.0% per annum over the baserate (a total of 6.0% at June 30, 2004) but are subject to a minimum of6.0% per annum. K-tel had outstanding balances of $0 and $233,000 as ofJune 30, 2004 and June 30, 2003, respectively.

 

The Company purchased approximately $502,000 in the year endedJune 30, 2004, $463,000 in the year ended June 30, 2003 and $366,000in the year ended June 30, 2002 of music entertainment and consumerconvenience products from K-5, which represented 14.6%, 14.6% and 14.7% of costof goods sold, respectively. There were trade payables to K-5 of $390,000 atJune 30, 2004, $371,000 at June 30, 2003 and $291,000 atJune 30, 2002, or 32.2%, 31.9% and 23.0% of total trade payables,respectively.

 

The Company had no sales of consumer convenience products to K-5 duringfiscal years 2004, 2003 and 2002. There was a balance receivable from K-5 atJune 30, 2004 of $113,000, June 30, 2003 of $73,000 and June 30,2002 of $129,000. No interest was charged on the related outstanding balancesduring fiscal years 2004, 2003 and 2002.

 

During the fiscal years ended June 30, 2004 and 2003, the Companylicensed certain marks to K-tel Drug Mart Ltd., a Canadian direct marketer ofprescription drugs owned by Philip Kives, the Chairman of the Board, Presidentand Chief Executive Officer of K-tel. The terms of the license agreementbetween the Company and K-tel Drug Mart have not been finalized, but willinvolve payment of a royalty to the Company by K-tel Drug Mart for use of thetrademark. The

 

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agreement is currently under consideration by the Company, and will besubject to approval by the Company’s independent directors.

 

**ITEM 14.****   PRINCIPALACCOUNTANT FEES AND SERVICES**

 

To be filed by amendment pursuant to Rule 12b-25.

 

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**PART IV**

 

**ITEM 15****:  EXHIBITS, FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K**

 

(a)                                  FinancialStatements and Schedules

 

The consolidated statements and schedules listed in the accompanyingIndex to Consolidated Financial Statements hereof are filed as part of thisreport.

 

(b)                                 Reports on 8-K

 

There were no reports filed under Form 8-K by the Company for thequarter ended June 30, 2004.

 

(c)                                  Exhibits

 

Reference is made to the Exhibit Index.

 

(d)                                 ExcludedFinancial Statements

 

Not applicable.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Company has duly caused this report to besigned on its behalf on September 30, 2004, by the undersigned, thereuntoduly authorized.

 
|   | K-TEL INTERNATIONAL, INC.              |
|--------|----------------------------------------|
|   |                                   |
|   | By                                     | /s/ Philip Kives |   |
|   | (Philip Kives - Chairman of the Board, |
|   | Chief Executive Officer and President) |

 

 

Pursuant to the requirements of the Securities and Exchange Act of1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities indicated and on the dates indicated.

 
| **Signatures**          | ** ** | **Title** | ** **                                                      | **Date** | ** **              |
|-------------------------|------------|-----------|-----------------------------------------------------------------|----------|-------------------------|
|                    |       |      |                                                            |     |                    |
| /s/ Philip Kives        |       |      | Chairman, Chief Executive  Officer,                             |     | September 30, 2004 |   |
| Philip Kives            |       |      | (Principal Executive Officer)  President and Director           |     |                    |   |
|                    |       |      |                                                            |     |                    |   |
| /s/Kimmy Lockwood       |       |      | Controller                                                      |     | September 30, 2004 |   |
| Kimmy Lockwood          |       |      | (Principal Accounting Officer  and Principal Financial Officer) |     |                    |   |
|                    |       |      |                                                            |     |                    |   |
| /s/ Jay William Smalley |       |      | Director                                                        |     | September 30, 2004 |   |
| Jay William Smalley     |       |      |                                                            |     |                    |   |
|                    |       |      |                                                            |     |                    |   |
| /s/ Wesley C. Hayne     |       |      | Director                                                        |     | September 30, 2004 |   |
| Wesley C. Hayne         |       |      |                                                            |     |                    |   |
|                    |       |      |                                                            |     |                    |   |
| /s/ Richard Marklund    |       |      | Director                                                        |     | September 30, 2004 |   |
| Richard Marklund        |       |      |                                                            |     |                    |   |

 

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