**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

| **(Mark  One)** |
|-----------------|
|            |
| **ý**      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|            |   |
|            | **For the quarterly period ended September 30, 2002** |
|            |
| **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: 0-6664**

 

**K-TEL INTERNATIONAL, INC.**

(Exact name of registrantas specified in its charter)

 

| **Minnesota**                                                    |   | **4****1-0946588**                   |
|------------------------------------------------------------------|--------|--------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.RS. Employer  Identification No.) |
|                                                             |   |                                 |
| **2655  Cheshire Lane North, Suite 100, Plymouth Minnesota**     |   | **55447**                            |
| (Address of  principal executive offices)                        |   | (Zip Code)                           |
|                                                             |   |                                 |
| **(763) 559-5566**                                               |
| (Registrant’s  telephone number, including area code)       |

 

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 the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes ý           No o

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of themost recent practical date. As of November 13, 2002, there were 13,653,738shares of the registrant’s common stock, par value $0.01 per share,outstanding.

 

 

----

 

**K-TEL INTERNATIONAL, INC. ANDSUBSIDIARIES**

**FORM 10-Q**

 

**FOR THE QUARTER ENDED SEPTEMBER 30,2002**

 

INDEX

 
| PART I.  | Financial Information  (Unaudited): |
|----------|-------------------------------------|
|     |                                |   |
|     | Item 1.                             | Condensed  Consolidated Balance Sheets as of  September 30, 2002 and June 30, 2002 |
|     |                                |   |
|     |                                | Condensed  Consolidated Statements of Operations  for the Three Month Periods Ended  September 30, 2002 and 2001 |
|     |                                |   |
|     |                                | Condensed  Consolidated Statements of Cash Flows  for the Three Month Periods Ended  September 30, 2002 and 2001 |
|     |                                |   |
|     |                                | Notes  to Consolidated Financial Statements |
|     |                                |   |
|     | Item  2.                            | Management’s  Discussion and Analysis of Financial  Condition and Results of Operations |
|     |                                |   |
|     | Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk |
|     |                                |   |
|     | Item  4.                            | Procedures  and Controls |
|     |
| PART II. | Other  Information                  |   |
|     |
|     | Item 1.                             | Legal  Proceedings |
|     |                                |   |
|     | Item 6.                             | Exhibits and Reports  on Form 8-K |
|          |                                     |  |  |

 

2

----

 

**K-TEL INTERNATIONAL, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS****- UNAUDITED**

**SEPTEMBER 30, 2002 AND JUNE 30, 2002**

*(in thousands*)

 
|                                                                                                  |   | **September  30,  2002** |   | **June 30,  2002** |   |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|--------------------|--------|
|                                                                                                  |   |                     |   |               |   |
| ASSETS                                                                                                |   |                     |   |               |   |
|                                                                                                  |   |                     |   |               |   |
| Current  Assets:                                                                                      |   |                     |   |               |   |
| Cash  and equivalents                                                                                 |   | $                        | 85     |               | $      | 75 |   |
| Accounts  receivable, net                                                                             |   | 1,792                    |   | 1,656              |   |
| Inventories                                                                                           |   | 763                      |   | 637                |   |
| Royalty  advances                                                                                     |   | 309                      |   | 282                |   |
| Prepaid  expenses and other                                                                           |   | 299                      |   | 378                |   |
| Total  Current Assets                                                                                 |   | 3,248                    |   | 3,028              |   |
|                                                                                                  |   |                     |   |               |   |
| Property  and equipment, net of accumulated depreciation and amortization of $1,442 and  $1,418       |   | 153                      |   | 162                |   |
|                                                                                                  |   |                     |   |               |   |
| Owned  catalog masters, net of accumulated amortization of $2,596 and $2,829                          |   | 974                      |   | 1,060              |   |
|                                                                                                  |   |                     |   |               |   |
|                                                                                                  |   | $                        | 4,375  |               | $      | 4,250 |   |
|                                                                                                  |   |                     |   |               |   |
| LIABILITIES  AND SHAREHOLDERS’ DEFICIT                                                           |   |                     |   |               |   |
|                                                                                                  |   |                     |   |               |   |
| Current  Liabilities:                                                                                 |   |                     |   |               |   |
| Loans  payable to affiliate and other                                                                 |   | $                        | 10,510 |               | $      | 10,253 |   |
| Accounts  payable                                                                                     |   | 1,425                    |   | 1,264              |   |
| Accrued  royalties                                                                                    |   | 2,272                    |   | 2,245              |   |
| Reserve  for returns                                                                                  |   | 89                       |   | 40                 |   |
| Net  liabilities of discontinued operations                                                           |   | 292                      |   | 92                 |   |
| Total  Current Liabilities                                                                            |   | 14,588                   |   | 13,894             |   |
|                                                                                                  |   |                     |   |               |   |
| Shareholders’  Deficit:                                                                          |   |                     |   |               |   |
| Common  stock – 50,000,000 shares authorized; par value $.01; 13,653,738 issued and  outstanding |   | 136                      |   | 136                |   |
| Additional  paid-in capital                                                                           |   | 21,292                   |   | 21,292             |   |
| Accumulated  deficit                                                                                  |   | (31,279                  | )      | (30,771            | )      |
| Cumulative  translation adjustment                                                                    |   | (362                     | )      | (301               | )      |
| Total  Shareholders’ Deficit                                                                     |   | (10,213                  | )      | (9,644             | )      |
|                                                                                                  |   |                     |   |               |   |
|                                                                                                  |   | $                        | 4,375  |               | $      | 4,250 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

----

 

**K-TEL INTERNATIONAL, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS****- UNAUDITED**

*(in thousands - except per sharedata)*

 
|                                                           |   | **Three  Months Ended  September 30,** |   |
|----------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                           |   | **2002**                               |   | **2001** |   |
| Net  Sales                                                     |   | $                                      | 1,498  |   | $ | 1,381 |   |
| Costs  and Expenses:                                           |   |                                   |   |   |   |
| Cost  of goods sold                                            |   | 599                                    |   | 522 |   |
| Advertising                                                    |   | 46                                     |   | 23 |   |
| Selling,  general & administrative                         |   | 951                                    |   | 1,233 |   |
| Total  Costs and Expenses                                      |   | 1,596                                  |   | 1,779 |   |
| Operating  Loss                                                |   | (98                                    | )      | (398 | ) |
|                                                           |   |                                   |   |   |   |
| Other  Income (Expense):                                       |   |                                   |   |   |   |
| Interest  expense                                              |   | (136                                   | )      | (81 | ) |
| Other  expense                                                 |   | (64                                    | )      | — |   |
| Total  Other Expense                                           |   | (200                                   | )      | (81 | ) |
|                                                           |   |                                   |   |   |   |
| Loss  from Continuing Operations                               |   |                                   |   |   |   |
| Before  Taxes                                                  |   | (298                                   | )      | (479 | ) |
|                                                           |   |                                   |   |   |   |
| Income  Taxes                                                  |   | —                                 |   | — |   |
| Loss  from Continuing Operations                               |   | (298                                   | )      | (479 | ) |
|                                                           |   |                                   |   |   |   |
| Discontinued  Operations:                                      |   |                                   |   |   |   |
| Loss  from Discontinued Operations                             |   | (210                                   | )      | (25 | ) |
| Net  Loss                                                      |   | $                                      | (508   | ) | $ | (504 | ) |
|                                                           |   |                                   |   |   |   |
| Loss  per Share – Basic and Diluted:                      |   |                                   |   |   |   |
| Continuing  Operations                                         |   | $                                      | (.02   | ) | $ | (.04 | ) |
| Discontinued  Operations                                       |   | (.02                                   | )      | — |   |
| Net  Loss                                                      |   | $                                      | (.04   | ) | $ | (.04 | ) |
|                                                           |   |                                   |   |   |   |
| Weighted  Average Shares Outstanding – Basic and Diluted: |   | 13,654                                 |   | 13,654 |   |
|                                                           |   |                                   |   |   |   |
| Comprehensive  Loss:                                           |   |                                   |   |   |   |
| Net  Loss                                                      |   | $                                      | (508   | ) | $ | (504 | ) |
| Foreign  Currency Loss                                         |   | (61                                    | )      | (92 | ) |
| Comprehensive  Loss                                            |   | $                                      | (569   | ) | $ | (596 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

----

 

**K-TEL INTERNATIONAL, INC. ANDSUBSIDIARIES**

##### **CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS** - UNAUDITED

* (in thousands)*

 
|                                               |   | **Three  Months Ended  September 30,** |   |
|----------------------------------------------------|--------|----------------------------------------|--------|
|                                               |   | **2002**                               |   | **2001** |   |
| Cash  flows from Operating Activities:             |   |                                   |   |   |   |
| Net  loss                                          |   | $                                      | (508   | ) | $ | (504 | ) |
| Adjustments  to reconcile net loss to cash used in |   |                                   |   |   |   |
| Operating  activities:                             |   |                                   |   |   |   |
| Depreciation  and amortization                     |   | 103                                    |   | 69 |   |
| Loss  on disposal of property and equipment        |   | —                                 |   | 4 |   |
| Discontinued  operations                           |   | 201                                    |   | 29 |   |
| Changes  in operating assets and liabilities:      |   |                                   |   |   |   |
| Accounts  receivable                               |   | (110                                   | )      | (314 | ) |
| Inventories                                        |   | (119                                   | )      | 28 |   |
| Royalty  and other advances                        |   | (19                                    | )      | 30 |   |
| Prepaid  expenses and other                        |   | 81                                     |   | 94 |   |
| Accounts  payable and other                        |   | 137                                    |   | 140 |   |
| Accrued  royalties                                 |   | 27                                     |   | 61 |   |
| Reserve  for returns                               |   | 50                                     |   | 9 |   |
| Cash  used in operating activities                 |   | (157                                   | )      | (354 | ) |
|                                               |   |                                   |   |   |   |
| Cash  flows from Investing Activities:             |   |                                   |   |   |   |
| Proceeds  from sale of property and equipment      |   | —                                 |   | 27 |   |
| Purchases  of property and equipment               |   | (4                                     | )      | — |   |
| Music  catalog additions                           |   | —                                 |   | (114 | ) |
| Cash  used in investing activities                 |   | (4                                     | )      | (87 | ) |
|                                               |   |                                   |   |   |   |
| Cash  flows from Financing Activities:             |   |                                   |   |   |   |
| Borrowings  on loans payable                       |   | 651                                    |   | 789 |   |
| Payments  on loans payable                         |   | (400                                   | )      | (191 | ) |
| Cash  provided by financing activities             |   | 251                                    |   | 598 |   |
|                                               |   |                                   |   |   |   |
| Effect  of exchange rates on cash                  |   | (80                                    | )      | (144 | ) |
|                                               |   |                                   |   |   |   |
| Net  increase in cash and equivalents              |   | 10                                     |   | 13 |   |
|                                               |   |                                   |   |   |   |
| Cash  and equivalents at beginning of period       |   | 75                                     |   | 173 |   |
|                                               |   |                                   |   |   |   |
| Cash  and equivalents at end of period             |   | $                                      | 85     |   | $ | 186 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

----

 

**K-TEL INTERNATIONAL, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.****                                      BUSINESSAND LIQUIDITY**

 

K-tel International, Inc.(the “Company,” “K-tel,” or the “Registrant”) was incorporated in 1968. Itscorporate offices are located at 2655 Cheshire Lane North, Suite 100, Plymouth,Minnesota, and its phone number is (763) 559-5566. Through its operatingsubsidiaries, K-tel licenses its music catalog internationally and marketsentertainment products mainly derived from its catalog through retail anddirect response marketing channels in the United States and Europe.Historically, K-tel subsidiaries had also distributed consumer products throughoperations which have been discontinued, and operated an Internet e-commercesite which has been suspended due to continuing losses. K-tel has begun aprogram of licensing its name and marks to other companies in businessesunrelated to K-tel’s current operations. Licenses are granted for a royalty orfee, with no cost to the Company.

 

DiscontinuedOperations

 

The Company’s consumerproducts business, which was concentrated in Europe, consisted primarily ofhousewares, consumer convenience items and exercise equipment. The Companydiscontinued its consumer products operations in Germany, the United Kingdomand the United States in June 2000, November 2000 and January 2001,respectively although the Company continues to pursue its claim against aformer supplier of defective goods to its German subsidiary. Accordingly, theseactivities have been presented in the accompanying financial statements asdiscontinued operations. The accompanying consolidated financial statementshave been prepared to reflect the consumer products division as a discontinuedoperation.

 

Going Concern

 

During the three monthsended September 30, 2002, the Company continued to sustain losses fromcontinuing operations, losing $298,000 during the period. Additionally, theCompany had a working capital deficit of $11,340,000 at September 30, 2002.

 

The Company’s ability tocontinue its present operations and implement future expansion planssuccessfully is contingent mainly upon its ability to maintain its line ofcredit arrangements with K-5 Leisure Products, Inc. (See Note 3.), increase itsrevenues, and ultimately attain and sustain profitable operations. Withoutincreased revenues and sustained profitability, the cash generated from theCompany’s current operations may not be adequate to fund operations and serviceits indebtedness on an ongoing basis. Management is concentrating its effortson returning the Company to profitability by focusing on music licensing andlimited music distribution. However, there can be no assurance that theCompany’s management will be successful in this effort. In the event theCompany is unable to fund its operations and implement its business planproperly, it may be unable to continue as a going concern. The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

**2.****                                      BASISOF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Basis ofPresentation – The accompanying condensed consolidatedunaudited financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“US GAAP”) forinterim financial information and with the instructions to Form 10-Q and Rule10-01 of Regulation S-X. Accordingly, they do not include all of theinformation and footnotes required by US GAAP for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded. Operating results for the three month period ended September 30, 2002are not necessarily indicative of the results that may be expected for the yearas a whole. The unaudited condensed consolidated balance sheet for June 30,2002 has been derived from audited consolidated financial statements as of thatdate. For further information, refer to the consolidated financial statementsand footnotes thereto included in the Company’s annual report on Form 10-K forthe year ended June 30, 2002.

 

6

----

 

Principles ofConsolidation – The accompanying consolidated financialstatements include the accounts of K-tel International, Inc. and its domesticand foreign subsidiaries, all of which are wholly owned. All significantintercompany accounts and transactions have been eliminated.

 

RevenueRecognition – The Company derives its revenue from severaldifferent sources: the sale of music compilations (predominately compact discs)produced by the Company, and license revenue from the licensing ofCompany-owned masters. Revenue from music sales is recognized at the time ofshipment to the customer, while license revenue is recognized when payment isreceived from customers or when known amounts are receivable, as prior to thatdate collection is not considered probable. Most music sales are made with aright of return of unsold goods. Estimated reserves for returns are establishedby management based upon historical experience and product mix and are subjectto ongoing review and adjustment by the Company. These reserves are recorded atthe time of sale and are reflected as a reduction in revenues.

 

Cost of Goods Sold– The Company expenses all product manufacturing, distribution and royaltycosts associated with music sales as cost of goods sold. The Company alsoexpenses royalties, commissions and amortization of its owned master recordingsassociated with its license revenue as costs of goods sold.

 

Shipping andHandling Costs – The Company expenses within cost of goodssold all shipping and handling costs incurred in the shipment of goods.

 

Cash andEquivalents – Cash and equivalents consist principally ofcash and short-term, highly liquid investments with original maturities of lessthan ninety days.

 

Inventories– Inventories, which consists of finished goods that include all direct productcosts, are valued at the lower of cost, determined on a first-in, first-outbasis, or net realizable value.  

 

Owned CatalogMasters – The Company capitalizes the costs to purchase ownedmaster recordings at the time of acquisition. These costs are amortized overthe estimated useful life of these master recordings, which is generally sevenyears and represents management’s best estimate of the average period of value.

 

Rights to UseMusic Product – Certain of the Company’s compilation productsare master recordings under license from record companies and publishers. Inmost instances, minimum guarantees or non-refundable advances are required toobtain the licenses and are realized through future sales of the product. Theamounts paid for minimum guarantees or non–refundable advances arecapitalized and charged to expense as sales are made. When anticipated salesappear to be insufficient to fully recover the minimum guarantees ornon-refundable advances, a provision against current operations is made foranticipated losses. The unrealized portion of guarantees and advances isincluded in royalty advances in the accompanying consolidated balance sheets.Licenses are subject to audit by licensors.

 

Property andEquipment – Property and equipment are stated at cost.Depreciation and amortization is provided using straight line or decliningbalance methods over the estimated useful lives of the assets, which range fromthree to nine years.

 

Long Lived-Assets– The Company evaluates its long-lived assets quarterly, or earlier if a triggeringevent occurs, to determine potential impairment by comparing the carrying valueof those assets to the related undiscounted future cash flows of the assets. Ifan asset is determined to be impaired, it is written down to its estimated fairvalue.

 

Royalties– The Company has entered into license agreements with various record companiesand publishers under which it pays royalties on units sold. The Company accruesroyalties using contractual rates and certain estimated rates on applicableunits sold. The contractual royalty liability is computed quarterly and theaccrued royalty balance is adjusted accordingly. The royalty agreements aresubject to audit by licensors.

 

Advertising– The Company expenses the costs of advertising when the advertising takesplace, except for direct response advertising, which is capitalized andamortized over its expected period of future benefits (usually the periodremaining under a related contract, which is generally less than one year).Direct response advertising consists primarily of television advertisingwhereby customers respond specifically to the advertising and where the Companycan identify the advertising that elicited the response.

 

7

----

 

Foreign Currency– The operations of all foreign entities are measured in local currencies.Assets and liabilities are translated into U.S. dollars at period-end exchangerates. Revenues and expenses are translated at the average exchange ratesprevailing during the period. Adjustments resulting from translating thefinancial statements of foreign entities into U.S. dollars are recorded as aseparate component of shareholders’ equity.

 

Stock–basedCompensation – The Company accounts for stock-based awards toemployees using the intrinsic value method and recognizes compensation expensefor certain stock based awards granted to employees.

 

Income Taxes– Deferred income taxes are provided for temporary differences between thefinancial reporting basis and tax basis of the Company’s assets and liabilitiesat currently enacted tax rates.

 

Net Income (Loss)Per Share – Basic and diluted net income (loss) per sharehave been computed by dividing net income (loss) by the weighted average numberof shares outstanding during the period. For all periods presented, commonstock equivalents were excluded from the per share calculation as the effectwould be antidilutive. For the three months ended September 30, 2002 and 2001,options to purchase 2,273,839 and 2,336,434 shares of common stock, withweighted average exercise prices of $5.88 and $5.88 were excluded from thecomputation of common share equivalents for the respective periods as they wereantidilutive.

 

Use of Estimates– Preparing consolidated financial statements in conformity with US GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Principal estimates includeallowances for bad debt, inventory valuation, return reserves, royaltyobligations, purchase commitments and product replacement costs. Actual resultscould differ from those estimates used by management.

 

**3.****                                      LOANSPAYABLE TO AFFILIATE**

 

K-tel has a Line of Credit Agreement with K-5 LeisureProducts, Inc., the Company’s largest shareholder controlled by Philip Kives,the Chairman 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 makeavailable up to $8,000,000 to K-tel on a revolving basis. The loan bearsinterest at a variable rate based upon the “base rate” of a nationallyrecognized lending institution (4.75% at September 30, 2002), expires July 20,2005, and is subordinated to the Foothill loan (see below). The K-5 Facilitycontains the same covenants as the Foothill loan agreement. K-tel has pledgedthe stock of its foreign subsidiaries as collateral for the loan, and the loancarries a subordinated position to the Foothill loan on all other assets of theCompany. K-tel had outstanding balances of $6,276,000 and $6,026,000 as ofSeptember 30, 2002 and June 30, 2002 respectively under the K-5 Facility.

 

In addition, K-tel has a secondloan agreement with K-5, under which K-5 assumed rights and obligations under aloan from the Company’s former banker (Foothill Capital Corporation) pursuantto an Assignment and Acceptance Agreement dated February 27, 2001. ThisFoothill loan, which has been extended through July 20, 2005, provides for a$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% (5.75% at September 30, 2002) andare collateralized 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 September 30, 2002 and June30, 2002, $4,000,000 was outstanding under the term loan and there were noborrowings under the revolving facility. At September 30, 2002, K-tel obtaineda waiver from K-5 for its default under the covenants, limitations andrestrictions of the credit agreement.

 

K-tel has an overdraftprivilege borrowing facility with The Royal Bank of Scotland in the UnitedKingdom. This facility is secured by a standby letter of credit for $260,000provided by K-tel International Ltd., a

 

8

----

 

Canadian companycontrolled by Philip Kives and is payable on demand in accordance with normalbanking practices. Borrowings bear interest of 2% per annum over the base rate(6.0% at September 30, 2002) and are subject to a minimum of 6% per annum.K-tel has an outstanding balance of $234,000 as of September 30, 2002.

 

**4.****                                      COMMITMENTSAND CONTINGENCIES**

 

Class ActionLawsuit

 

K-tel and certain of itscurrent and former officers and directors are defendants in *In re K-tel International, Inc. Securities Litigation*,No. 98-CV-2480. This action consolidates twenty-three purported class actionsthat were initially filed in various United States District Courts in November1998, and were subsequently transferred to, and consolidated in, the UnitedStates District Court for the District of Minnesota. On July 19, 1999, theplaintiffs filed an amended consolidated class action complaint that challengesthe accuracy of certain public disclosures made by K-tel regarding itsfinancial condition during the period from May 1998 through November 1998. Theplaintiffs assert claims under the federal securities laws and seek damages inan unspecified amount as well as costs, including attorneys’ fees and any otherrelief the Court deems just and proper. K-tel moved to dismiss the complaint,and on July 31, 2000, the United States District Court granted the Company’smotion to dismiss. The Court also barred further actions by the plaintiffs anddenied plaintiffs’ request to amend the complaint in order to refile thecomplaint in the future. The plaintiffs appealed to the United States Court ofAppeals for the Eighth Circuit, and the Court of Appeals heard the matter inOctober 2001. On August 7, 2002 the Court of Appeals, in a two to one decision,denied the plaintiffs appeal. On August 20, 2002 the plaintiffs applied for arehearing by the full Court of Appeals. K-tel filed a response on September 15,2002 to the plaintiff’s petition for rehearing at the request of the Court. OnOctober 2, 2002, the Court denied the petition for rehearing. K-tel has two insurancepolicies providing coverage of up to $20 million, which is subject to theinsurers’ reservations of legal rights under the applicable policies. Undertheir reservations of rights, the insurers could contest their obligations toindemnify the Company and its directors and officers. K-tel may have anobligation to indemnify the officers and directors named in this lawsuit.

 

RTL Shopping  S. A.

 

The Company has beennamed in a lawsuit filed in France brought by RTL9, a French cable TV station.Initially, RTL9 was named as a defendant in a suit brought by a competitor ofK-tel Marketing Ltd. alleging that RTL9 ran a commercial for K-tel Marketingwhich presented a product under brand names alleged to infringe on thecompetitor’s own trademarks and also translated an English language scriptindicating that the product was “just like” or “as good as” others into “betterthan” in French, contrary to French law. The suit alleged trademarkinfringement, unfair competition, illicit comparative advertising and passingoff. RTL9 then sued K-tel Marketing on October 4, 2000, pursuant to anindemnification provision the parties had entered into. Subsequently, K-telMarketing went into liquidation and RTL9 filed a suit in December 2000 againstK-tel International, Inc. under its agreement to guarantee payment for thecommercial time. On May 28, 2001, RTL9 presented documents in court identifyingK-tel International (USA), Inc. as a target of its claim. On September 3, 2001the Company filed documents disputing the claim and advising the court of K-tel(USA)’s Chapter 7 bankruptcy filing. At a procedural hearing on December 3,2001, RTL9 filed its brief in response to the Company’s filing. In response,the Company filed a further brief.

 

The initial lawsuitagainst RTL9 and the RTL9 claim against K-tel are proceeding together throughthe French courts, and the parties involved in the initial lawsuit continue tosubmit new briefs to the Court related to that action. At a hearing on May 6,2002, several companies involved in the initial suit against RTL9 filedadditional briefs or indicated that additional briefs would be filed. The Courtdirected that all additional briefs were to be filed by June 24, 2002. Severalparties filed additional briefs on September 11, 2002. The Company filed abrief in response. At a hearing on September 16, 2002, the Court received newsubmissions from three of the other parties and set a hearing date of January20, 2003, at which time it will declare an end to the written submissions. TheCourt has scheduled oral arguments for March 31, 2003. The action seeks theapproximate amount of 20 million French Francs, or approximately $2.8 million.The Company believes that RTL9 has no basis for a complaint against theCompany. 

 

9

----

 

K-telInternational, Inc. vs. Tristar Products, Inc.

 

K-tel and its subsidiaryin Germany have commenced an action for breach of express and impliedwarranties against Defendant Tristar Products, Inc. This action is venued inthe United States District Court for the District of Minnesota. This actionarises out of Tristar’s sale to Plaintiffs of a defective home exercise productcalled the “BunBlaster” for resale in Germany, Austria and Switzerland. Bywritten contract, Tristar has agreed to indemnify Plantiffs for injuries anddamages arising out of the resale of those goods. Plaintiffs are seekingapproximately $2 million in consequential damages. Tristar is vigorouslydefending this claim and the action is currently in discovery.

 

Tristar has also asserteda patent and trademark/ trade-dress action against K-tel for passing off aproduct called the “K-tel Hook and Hang” while allegedly a distributor of theoriginal patented 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. Discovery proceedings havecommenced.

 

Other Litigationand Disputes

 

K-tel and itssubsidiaries are also involved in other legal actions in the ordinary course ofits business. With all litigation matters, management considers theirlikelihood of loss based on the facts and circumstances. If managementdetermines that a loss is probable and the amount of loss can be reasonablyestimated, such amount is recorded as a liability. Although the outcome of anysuch legal actions cannot be predicted, in the opinion of management there iscurrently no legal proceeding pending or asserted against or involving K-telfor which the outcome is likely to have a material adverse effect upon theconsolidated financial position or results of operations of K-tel.

 

Subsidiaries’Bankruptcy and Liquidation

 

In March 2001, theCompany’s music distribution subsidiary in the United States, K-telInternational (USA), Inc. ceased operations and filed for protection underChapter 7 of the United States Bankruptcy Code. Although the bankruptcy courthas not yet confirmed the formal plan of liquidation, the Company has not beeninformed by the trustee or its counsel of any plan by the court to attempt tohold it or any of its subsidiaries liable for any of the commitments of K-tel(USA). Management believes the Company will have no ongoing material liabilityrelated to K-tel (USA) as a result of the filing and the outcome of thebankruptcy proceeding.

 

In November 2000, theCompany’s consumer products subsidiary in the United Kingdom, K-tel MarketingLtd., ceased operations and began voluntary liquidation proceedings. At theinitial meeting of the creditors on November 24, 2000, the creditors voted forthe liquidation to become a creditors’ liquidation under English law. TheCompany has not been informed by the liquidators or their counsel of any planto attempt to hold it or any of its subsidiaries liable for any of thecommitments of K-tel Marketing Ltd. Management believes the Company will haveno ongoing material liability related to K-tel Marketing Ltd. as a result ofthe liquidation proceeding.

 

**5.****                                      BUSINESSSEGMENT AND GEOGRAPHIC AREA DATA**

 

The Company markets anddistributes entertainment products internationally and through its operatingsubsidiaries. K–tel’s businesses are organized, managed and internallyreported as three segments: retail music sales, music licensing and other,which consists primarily of e-commerce (which was closed in the fourth quarterof fiscal 2002). These segments are based on differences in products, customertype and sales and distribution methods. The Company’s consumer productoperations have been discontinued and are presented in the accompanyingfinancial statements as discontinued operations and are therefore not includedin the segment information.

 

The retail music segmentconsists primarily of the sales of pre–recorded music both from theCompany’s music master catalog and under licenses obtained from other recordcompanies. The Company sells compact discs and DVD’s directly to retailers,wholesalers and rack service distributors which stock and manage inventorywithin music departments for retail stores.

 

10

----

 

In the licensing segment,the Company licenses the rights to its master music catalog, consisting oforiginal recordings and re-recordings of music from the 1950’s through today,to third parties world-wide for use in albums, films, television programs, andcommercials, for either a flat fee or a royalty based on the number of unitssold.

 

Operating profits orlosses of these segments include an allocation of general corporate expenses.Depreciation and amortization and capital additions are not significant andhave therefore been excluded from presentation.

 

Certain financialinformation on the Company’s continuing operating segments is as follows:

 
| **BUSINESS SEGMENT INFORMATION** |   | **Music**           |   | **Licensing** |   | **Other** |   | **Corporate/  Elimination** |   | **Total  Company** |   |
|----------------------------------|--------|---------------------|--------|---------------|--------|-----------|--------|-----------------------------|--------|--------------------|--------|
|                             |   | **(in  thousands)** |   |
|                             |   |
| Net Sales                        |   | 2002                |   | $             | 943    |      | $      | 555                         |   | $                  | — |   | — |   | 1,498 |   |
|                             |   | 2001                |   | 756           |   | 784       |   | —                      |   | (159               | )      | $ | 1,381 |   |
|                             |   |                |   |          |   |      |   |                        |   |               |   |   |   |
| Operating                        |   | 2002                |   | $             | (166   | )         | $      | 68                          |   | $                  | — |   | $ | — |   | $ | (98 | ) |
| Income (loss)                    |   | 2001                |   | (573          | )      | 175       |   | —                      |   | —             |   | (398 | ) |
|                             |   |                |   |          |   |      |   |                        |   |               |   |   |   |
| Assets                           |   | 2002                |   | $             | 2,905  |      | $      | 1,309                       |   | $                  | 87     |   | $ | 74 |   | $ | 4,375 |   |
|                             |   | 2001                |   | 2,466         |   | 1,363     |   | 81                          |   | 195                |   | 4,105 |   |

 
| **GEOGRAPHIC  INFORMATION** |   | **United  States** |   | **Europe** |   | **Total** |   |
|-----------------------------|--------|--------------------|--------|------------|--------|-----------|--------|
|                        |   |               |   |       |   |      |   |   |   |
| Net  Sales                  |   | 2002               |   | $          | 981    |      | $      | 517 |   | $ | 1,498 |   |
|                        |   | 2001               |   | 742        |   | 639       |   | 1,381 |   |
|                        |   |               |   |       |   |      |   |   |   |
| Assets                      |   | 2002               |   | $          | 2,956  |      | $      | 1,419 |   | $ | 4,375 |   |
|                        |   | 2001               |   | 2,200      |   | 1,905     |   | 4,105 |   |

 

**6.              NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2002, the FinancialAccounting Standards Board issued Statement of Financial Accounting StandardsNo. 146 (SFAS 146), *Accounting for CostsAssociated with Exit or Disposal Activities*. SFAS 146 providesfinancial accounting and reporting guidance for costs associated with exit ordisposal activities, including one-time termination benefits, contracttermination costs other than for a capital lease, and costs to consolidatefacilities or relocate employees. This statement is effective for exit ordisposal activities that are initiated after December 31, 2002. Management doesnot believe this pronouncement will have a material effect on the Company’sfinancial statements.

 

**7.              RECENTLYPASSED LEGISLATION**

 

On July 30, 2002,President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”),which immediately impacts Securities and Exchange Commission registrants,public accounting firms, lawyers and securities analysts. This legislation isthe most comprehensive since the passage of the Securities Acts of 1933 and1934. It has far reaching effects on the standards of integrity for corporatemanagement, board of directors, and executive management. Additionaldisclosures, certifications and procedures will be required of the Company. Wedo not expect any material adverse effect on the Company as a result of thepassage of this legislation; however, the full scope of the Act has not yetbeen determined. The Act provides for additional regulations and requirementsof publicly traded companies, which have yet to be issued.

 

Refer to management’scertifications contained elsewhere in this report regarding the Company’scompliance with Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

 

11

----

 

**ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**General**

 

Through its operatingsubsidiaries, K-tel International, Inc. licenses its music cataloginternationally and markets entertainment products mainly derived from itscatalog in the United States and Europe through retail and direct responsemarketing channels.

 

For this analysis, thefollowing changes in the Company’s business should be considered: K-tel closedthe operations of its German subsidiary, Dominion Vertriebs GmbH, in June 2000,one of its subsidiaries in the United Kingdom, K-tel Marketing Ltd., inNovember 2000 and a U.S. subsidiary, K-tel Consumer Products, Inc. in February2001. These three closings represent the discontinuation of the Company’sconsumer products division and accordingly have been presented in theaccompanying financial statements as discontinued operations. In addition, inMarch 2001, the Company’s music distribution subsidiary in the United States,K-tel International (USA), Inc., ceased operations and filed for protectionunder Chapter 7 of the U.S. bankruptcy code.

 

Through anothersubsidiary, K-tel Entertainment, Inc., K-tel is implementing a more focusedmethod of distribution that targets the strengths of fewer individual retailersand supplies products suited to each retailer’s specific needs. These newproducts are derived mainly from the Company’s master recordings music catalogand it is anticipated that this will allow the Company to realize morecompetitive profit margins. As well, the Company has begun licensing its nameand marks to other businesses for a royalty or fee.

 

**RESULTSOF OPERATIONS**

 

Net sales for the threemonths ended September 30, 2002 were $1,498,000 an increase of 8.5% from salesof $1,381,000 for the quarter ended September 30, 2001. This increase can beattributed to sales of music products. The loss for the three months endedSeptember 30, 2002 was $508,000, or $.04 per share, compared to a loss of$504,000, or $.04 per share, for the three months ended September 30, 2001.

 

General corporateexpenses of $114,000 and $364,000 for the three months ended September 30, 2002and 2001, respectively, have been allocated to the segments.

 

The following sectionsdiscuss the results of continuing operations by business segment.

 

#### **BUSINESS SEGMENT RESULTS**

 

#### **Music**

 

Sales in the musicsegment were $943,000 for the three months ended September 30, 2002 compared to$756,000 for the three months ended September 30, 2001, an increase of$187,000, or 24.7%. While domestic sales increased $323,000, European musicsales decreased $136,000 primarily because of reduced sales outside of England.

 

Cost of goods sold in themusic segment decreased to 48.6% of sales for the three months ended September30, 2002 compared to 66.4% of sales for the three months ended September 30,2001. This reflects the Company’s continuing efforts to reduce product costsand eliminate products that do not generate an acceptable gross profit.Advertising expenses within the segment, which consists primarily ofco-operative advertising payments, trade advertising and promotions, increasedto $46,000 and was approximately 3.6% of sales for the three months endedSeptember 30, 2002 compared to $23,000, or 3.1% of sales for the three monthsended September 30, 2001. Selling, general and administrative expenses were$536,000, or 56.8% of sales for the three months ended September 30, 2002compared to $803,000, or 106.2% of sales for the three months ended September30, 2001. The reduction of $267,000 is mainly because significant overhead costreductions in the European operations that were partially offset by the startup costs of implementing the Company’s new domestic music distributionstrategy. As a result, the music segment incurred an operating loss of $166,000for the three months ended September 30, 2002 compared to an operating loss of$573,000 for the three months ended September 30, 2001.

 

12

----

 

**Licensing**

 

Licensing revenue was$555,000 for the three months ended September 30, 2002 compared to $784,000 forthe three months ended September 30, 2001, a decrease of 29.2% reflecting ageneral reduction in licensing activity in the music industry. Included in thesegment revenue for the three months ended September 30, 2001 were approximately$159,000 of intercompany revenues, respectively, which are eliminated in theaccompanying financial statements. Operating income in the licensing segmentwas $68,000 for the three months ended September 30, 2002 compared to $175,000for the three months ended September 30, 2001, a decrease of 64%.

 

**NewAccounting Pronouncements**

 

In June 2002, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 146 (SFAS 146), *Accounting forCosts Associated with Exit or Disposal Activities*. SFAS 146 providesfinancial accounting and reporting guidance for costs associated with exit ordisposal activities, including one-time termination benefits, contracttermination costs other than for a capital lease, and costs to consolidate facilitiesor relocate employees. This statement is effective for exit or disposalactivities that are initiated after December 31, 2002. Management does notbelieve this pronouncement will have a material effect on the Company’sfinancial statements.

 

**Recentlypassed legislation**

 

On July 30, 2002,President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”),which immediately impacts Securities and Exchange Commission registrants,public accounting firms, lawyers and securities analysts. This legislation isthe most comprehensive since the passage of the Securities Acts of 1933 and1934.  It has far reaching effects on the standards of integrity forcorporate management, board of directors, and executive management. Additionaldisclosures, certifications and procedures will be required of the Company. Wedo not expect any material adverse effect on the Company as a result of thepassage of this legislation; however, the full scope of the Act has not yetbeen determined. The Act provides for additional regulations and requirementsof publicly traded companies, which have yet to be issued.

 

Refer to management’scertifications contained elsewhere in this report regarding the Company’scompliance with Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

 

**B.LIQUIDITY AND CAPITAL RESOURCES**

 

K-tel has a Line of Credit Agreement with K-5 Leisure Products, Inc.,an affiliate of the Company controlled by Philip Kives, the Chairman of theBoard, President and Chief Executive Officer of K-tel. Under the terms of theagreement (the “K-5 Facility”), K-5 has agreed to make available up to$8,000,000 to K-tel on a revolving basis. The loan bears interest at a variablerate based upon the “base rate” of a nationally recognized lending institution(4.75% at September 30, 2002), expires July 20, 2005, and is subordinated tothe Foothill loan (see below). The K-5 Facility contains the same covenants asthe Foothill loan agreement. K-tel has pledged the stock of its foreignsubsidiaries as collateral for the loan, and the loan carries a subordinatedposition to the Foothill loan on all other assets of the Company. K-tel hadoutstanding balances of $6,276,000 and $6,026,000 as of September 30, 2002 andJune 30, 2002 respectively under the K-5 Facility.

 

In addition, K-tel has a second loan agreementwith K-5, under which K-5 assumed rights and obligations under a loan from theCompany’s former banker (Foothill Capital Corporation) pursuant to anAssignment and Acceptance Agreement dated February 27, 2001. ThisFoothill loan, which has been extended through July 20, 2005, provides for a$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% (5.75% at September 30, 2002) andare collateralized 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 September 30, 2002 and June30, 2002, $4,000,000 was outstanding under the term loan and there were noborrowings under the revolving facility. At September 30, 2002, K-tel obtaineda waiver from K-5 for its default under the covenants, limitations andrestrictions of the credit agreement.

 

13

----

 

K-tel has an overdraftprivilege borrowing facility with The Royal Bank of Scotland in the UnitedKingdom. This facility is secured by a standby letter of credit for $260,000provided by K-tel International Ltd., a Canadian company controlled by PhilipKives, and is payable on demand in accordance with normal banking practices.Borrowings bear interest of 2% per annum over the base rate (6.0% at September30, 2002) and are subject to a minimum of 6% per annum. K-tel has anoutstanding balance of $234,000 as of September 30, 2002.

 

K-tel has primarilyfunded its operations to date through internally generated capital, proceedsfrom stock option exercises and secured loans from K-5. Management currentlybelieves that K-tel has sufficient cash and borrowing capacity to ensure theCompany will continue operations in the near term. In part, this is a result ofimprovement in operating results in fiscal 2002 as well as the two existinglines of credit with K-5. Although K-5 continues to advance funds sufficient tomeet the Company’s needs at this time, there can be no assurance that this willbe adequate or continue in the future or that K-tel will be able to obtainadditional financing upon favorable terms when required.

 

The Company’s ability tocontinue its present operations and implement future expansion planssuccessfully is contingent mainly upon its ability to maintain its line ofcredit arrangements with K-5, increase its revenues, and ultimately to attainand sustain profitable operations. Without increased revenues and sustainedprofitability, the cash generated from the Company’s current operations may notbe adequate to fund operations and service its indebtedness on an ongoingbasis. Management is concentrating its efforts on returning the Company toprofitability by focusing on music licensing and limited music distribution. Aswell, the Company has begun licensing its name and marks to other businessesfor a royalty or fee. However, there can be no assurance that the Company’smanagement will be successful in this effort. In the event the Company isunable to fund its operations and implement its current business plan properly,it may be unable to continue as a going concern. The Company’s financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

**Important Factors Relating to Forward Looking Statements**

 

Certain statements of anon-historical nature under the captions “Business,” “Legal Proceedings,”“Market for Registrant’s Common Equity and Related Stockholder Matters,”“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” and elsewhere in this Form 10-Q constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. 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 merchandise and recorded music; theoutcome of securities laws claims by a purported class action lawsuit;dependence on suppliers and distributors; the outcome of  the two subsidiaries’ bankruptcy andliquidation; success of marketing and promotion efforts; technological changesand difficulties; availability of financing; foreign currency variations;general economic, political and business conditions; and other matters. TheCompany undertakes no obligation to release publicly the result of anyrevisions to these forward-looking statements, except as required by law in thenormal course of its public disclosure practices.

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

There have been nomaterial changes in the company’s market risk during the three months endedSeptember 30, 2002. For additional information, refer to page 14 of theCompany’s annual report on Form 10-K for the fiscal year ended June 30, 2002.

 

14

----

 

**ITEM 4.  PROCEDURES AND CONTROLS**

 

Within the 90 days priorto the date of this report, K-tel carried out an evaluation, under thesupervision and with the participation of K-tel’s management, including K-tel’sChief Executive Officer and the Chief Financial Officer, of the effectivenessof the design and operation of K-tel’s disclosure controls and procedurespursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that K-tel’s disclosurecontrols and procedures are effective. There were no significant changes inK-tel’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of their evaluation.

 

**PART II**

 

#### **ITEM 1. LEGALPROCEEDINGS**

 

Class Action Lawsuit

 

K-tel and certain of itscurrent and former officers and directors are defendants in *In re K-tel International, Inc. Securities Litigation*,No. 98-CV-2480.  This actionconsolidates twenty-three purported class actions that were initially filed invarious United States District Courts in November 1998, and were subsequentlytransferred to, and consolidated in, the United States District Court for theDistrict of Minnesota. On July 19, 1999, the plaintiffs filed an amendedconsolidated class action complaint that challenges the accuracy of certainpublic disclosures made by K-tel regarding its financial condition during theperiod from May 1998 through November 1998. The plaintiffs assert claims underthe federal securities laws and seek damages in an unspecified amount as wellas costs, including attorneys’ fees and any other relief the Court deems justand proper. K-tel moved to dismiss the complaint, and on July 31, 2000, theUnited States District Court granted the Company’s motion to dismiss. The Courtalso barred further actions by the plaintiffs and denied plaintiffs’ request toamend the complaint in order to refile the complaint in the future. Theplaintiffs appealed to the United States Court of Appeals for the EighthCircuit, and the Court of Appeals heard the matter in October 2001. On August7, 2002 the Court of Appeals, in a two to one decision, denied the plaintiff’sappeal. On August 20, 2002 the plaintiff applied for a rehearing by the fullCourt of Appeals. K-tel filed a response on September 15, 2002 to theplaintiff’s petition for rehearing at the request of the Court. On October 2,2002, the Court denied the petition for rehearing. K-tel has two insurancepolicies providing coverage of up to $20 million, which is subject to theinsurers’ reservations of legal rights under the applicable policies. Undertheir reservations of rights, the insurers could contest their obligations toindemnify the Company and its directors and officers. K-tel may have anobligation to indemnify the officers and directors named in this lawsuit.

 

RTLShopping  S. A.

 

The Company has been named in a lawsuit filed in France brought byRTL9, a French cable TV station. Initially, RTL9 was named as a defendant in asuit brought by a competitor of K-tel Marketing Ltd. alleging that RTL9 ran acommercial for K-tel Marketing which presented a product under brand namesalleged to infringe on the competitor’s own trademarks and also translated anEnglish language script indicating that the product was “just like” or “as goodas” others into “better than” in French, contrary to French law. The suitalleged trademark infringement, unfair competition, illicit comparativeadvertising and passing off. RTL9 then sued K-tel Marketing on October 4, 2000,pursuant to an indemnification provision the parties had entered into.Subsequently, K-tel Marketing went into liquidation and RTL9 filed a suit inDecember 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 the claimand advising the court of K-tel (USA)’s Chapter 7 bankruptcy filing. At aprocedural hearing on December 3, 2001, RTL9 filed its brief in response to theCompany’s filing. In response, the Company filed a further brief.

 

The initial lawsuit against RTL9 and the RTL9 claim against K-tel areproceeding together through the French courts, and the parties involved in theinitial lawsuit continue to submit new briefs to the court related to thataction. At a hearing on May 6, 2002, several companies involved in the initialsuit against RTL9 filed additional briefs or indicated that additional briefswould be filed. The Court directed that all additional briefs were to be filedby June 24, 2002. Several parties filed additional briefs on September 11,2002. The Company filed a brief in response. At a hearing on September 16,2002, the Court received new submissions from three of the other parties andset a hearing date of January 20, 2003, at which time it will declare an end tothe written submissions. The Court has scheduled oral arguments for March 31,2003. The action seeks the approximate amount of 20 million French Francs, orapproximately $2.8 million. The Company believes that RTL9 has no basis for acomplaint against the Company.

 

15

----

 

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

 

K-tel and its subsidiaryin Germany have commenced an action for breach of express and impliedwarranties against Defendant Tristar Products, Inc. This action is venued inthe United States District Court for the District of Minnesota. This actionarises out of Tristar’s sale to Plaintiffs of a defective home exercise productcalled the “BunBlaster” for resale in Germany, Austria and Switzerland. Bywritten contract, Tristar has agreed to indemnify Plantiffs for injuries anddamages arising out of the resale of those goods. Plaintiffs are seekingapproximately $2 million in consequential damages. Tristar is vigorouslydefending this claim and the action is currently in discovery.

 

Tristar has also asserteda patent and trademark/ trade-dress action against K-tel for passing off aproduct called the “K-tel Hook and Hang” while allegedly a distributor of theoriginal patented Tristar Hook and Hang product. The Company denies theallegation because it never was a distributor of this or any similar productand intends to defend this action vigorously. Tristar has not identified theamount of damages it seeks with respect to this counterclaim. Discoveryproceedings have commenced.

 

#### **Other Litigation and Disputes**

 

K-tel and itssubsidiaries are also involved in other legal actions in the ordinary course ofits business. With all litigation matters, management considers theirlikelihood of loss based on the facts and circumstances. If managementdetermines that a loss is probable and the amount of loss can be reasonablyestimated, such amount is recorded as a liability. Although the outcome of anysuch legal actions cannot be predicted, in the opinion of management there iscurrently no legal proceeding pending or asserted against or involving K-telfor which the outcome is likely to have a material adverse effect upon theconsolidated financial position or results of operations of K-tel.

 

Subsidiaries’ Bankruptcyand Liquidation

 

In March 2001, theCompany’s music distribution subsidiary in the United States, K-telInternational (USA), Inc., ceased operations and filed for protection underChapter 7 of the United States Bankruptcy Code. Although the bankruptcy courthas not yet confirmed the formal plan of liquidation, the Company has not beeninformed by the trustee or its counsel of any plan by the court to attempt tohold it or any of its subsidiaries liable for any of the commitments of K-tel(USA). Management believes the Company will have no ongoing material liabilityrelated to K-tel (USA) as a result of the filing and the outcome of thebankruptcy proceeding.

 

In November 2000, theCompany’s consumer products subsidiary in the United Kingdom, K-tel MarketingLtd., ceased operations and began voluntary liquidation proceedings. At theinitial meeting of the creditors on November 24, 2000, the creditors voted forthe liquidation to become a creditors’ liquidation under English law. TheCompany has not been informed by the liquidators or their counsel of any planto attempt to hold it or any of its subsidiaries liable for any of thecommitments of K-tel Marketing Ltd. Management believes the Company will haveno ongoing material liability related to K-tel Marketing Ltd. as a result ofthe liquidation proceeding. 

 

**ITEM6.  EXHIBITSAND REPORTS ON FORM 8-K**

 

 

(a)                          EXHIBITINDEX

 

None.

 

(b)                         REPORTSON FORM 8-K

 

There were noreports filed under Form 8-K by the Company during the three month period endedSeptember 30, 2002.

 

16

----

 

SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                      | K-TEL INTERNATIONAL,  INC.            |   |
|---------------------------|---------------------------------------|--------|
|                      | REGISTRANT                            |
|                      |                                  |
|                      |                                  |
|                      |                                  |
| Dated: November 14,  2002 | /s/ PHILIP KIVES                      |   |
|                      | PHILIP KIVES                          |
|                      | CHAIRMAN AND CHIEF  EXECUTIVE OFFICER |
|                      |                                  |
|                      |                                  |
| Dated: November 14,  2002 | /s/ DENNIS WARD                       |   |
|                      | DENNIS WARD                           |
|                      | CHIEF FINANCIAL OFFICER               |
|                      | (principal accounting  officer)       |

 

17

----

 

**CERTIFICATIONS**

 

CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO RULE 13a-14

 

I, Philip Kives, President and Chief Executive Officerof K-tel International, Inc., certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of K-tel International, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Dated: | November 14, 2002 | By     | /s/ Philip Kives                       |   |
|--------|-------------------|--------|----------------------------------------|--------|
|   |              |   | Philip Kives                           |
|   |              |   | President and Chief  Executive Officer |

 

18

----

 

CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO RULE 13a-14

 

I, Dennis Ward, Chief Financial Officer of K-telInternational, Inc., certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of K-tel International, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Dated: | November 14, 2002 | By     | /s/ Dennis Ward         |   |
|--------|-------------------|--------|-------------------------|--------|
|   |              |   | Dennis Ward             |
|   |              |   | Chief Financial Officer |

 

19

----

 

CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION1350

 

In connection with the Quarterly Report of K-telInternational, Inc. (the “Company”) on Form 10-Q for the quarterly period endedSeptember 30, 2002, as filed with the Securities and Exchange Commission on thedate hereof (the “Report”), I, Philip Kives, President and Chief ExecutiveOfficer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.                                       theReport fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934; and

 

2.                                       theinformation contained in the Report fairly presents, in all material respects,the financial condition and results of operations of the Company.

 
| Dated: | November 14, 2002 | By     |   /s/ Philip  Kives          |   |
|--------|-------------------|--------|----------------------------------------|--------|
|   |              |   | Philip Kives                           |
|   |              |   | President and Chief  Executive Officer |

 

20

----

 

CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION1350

 

 

In connection with theQuarterly Report of K-tel International, Inc. (the “Company”) on Form 10-Q forthe quarterly period ended September 30, 2002, as filed with the Securities andExchange Commission on the date hereof (the “Report”), I, Dennis Ward, ChiefFinancial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.                                       theReport fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934; and

 

2.                                       theinformation contained in the Report fairly presents, in all material respects,the financial condition and results of operations of the Company.

 
| Dated: | November 14, 2002 | By     | /s/ Dennis Ward         |   |
|--------|-------------------|--------|-------------------------|--------|
|   |              |   | Dennis Ward             |
|   |              |   | Chief Financial Officer |

 

21

----