<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - - EXCHANGE ACT OF 1934 for the quarterly period ended September 30,
1995.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - - EXCHANGE ACT OF 1934 for the transition period.
COMMISSION FILE 2-83353
ROADRUNNER VIDEO GROUP, INC.
(FORMERLY BUSINESS DATA GROUP, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2431014
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
819 S. FLOYD STREET 40203
LOUISVILLE, KENTUCKY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (502) 585-1411
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
----- -----
The number of shares outstanding of the Registrant's common stock, no par
value, on September 30, 1995 was 11,412,000.
<PAGE> 2
ROADRUNNER VIDEO GROUP, INC.
(FORMERLY BUSINESS DATA GROUP, INC.)
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Consolidated Financial Statements 2
Consolidated Balance Sheets as of September 30, 1995
(Unaudited) and December 31, 1994 2
Consolidated Statements of Operations (Unaudited) for the
Three Months and Nine Months Ended September 30, 1995 and
1994 3
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended September 30, 1995 and 1994 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
-1-
<PAGE> 3
ROADRUNNER VIDEO GROUP, INC.
(FORMERLY BUSINESS DATA GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 185,601 $ 93,128
Accounts receivable (including related party amounts of approximately
$68,000 and $41,000, respectively) 165,398 43,115
Merchandise inventory 129,864 135,929
Prepaid expenses and other (including related party amounts of
approximately $143,000 and $146,000, respectively) 164,588 222,249
Note receivable, related party 559,198 0
------------- -------------
Total current assets 1,204,649 494,421
PROPERTY AND EQUIPMENT, NET 1,599,612 1,703,549
VIDEOCASSETTE RENTAL INVENTORY, NET 4,424,816 4,295,302
OTHER ASSETS 305,428 87,757
------------- -------------
Total assets $ 7,534,505 $ 6,581,029
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt (including related party amounts of
approximately $352,000 and $0, respectively) $ 1,715,288 $ 1,028,300
Accounts payable (including related party amounts of approximately
$400,000 and $544,000, respectively) 1,631,171 1,598,055
Accrued expenses and other 978,394 922,501
------------- -------------
Total current liabilities 4,324,853 3,548,856
LONG-TERM DEBT, LESS CURRENT PORTION (including related party amounts of
approximately $1,004,000 and $817,000, respectively) 1,621,220 3,202,560
------------- -------------
Total liabilities 5,946,073 6,751,416
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 6, 7, 9 and 10)
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 1, 6 and 9):
Preferred stock 760,000 0
Common stock 114,120 2,419,609
Paid-in capital in excess of par value 3,850,489 0
Less: Treasury stock 0 (345,000)
Accumulated deficit (3,136,177) (2,244,996)
------------- -------------
Total stockholders' equity (deficit) 1,588,432 (170,387)
------------- -------------
Total liabilities and stockholders' equity $ 7,534,505 $ 6,581,029
============= =============
</TABLE>
The accompanying notes to consolidated financial statments
are an intergral part of these balance sheets.
-2-
<PAGE> 4
ROADRUNNER VIDEO GROUP, INC.
(FORMERLY BUSINESS DATA GROUP, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
1995 1994 1995 1994
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues $ 2,417,576 $ 2,451,381 $ 7,336,753 $ 5,961,077
Product sales and other fees 405,040 96,907 897,234 231,896
------------- ------------ ------------ ------------
2,822,616 2,548,288 8,233,987 6,192,973
------------- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Amortization of videocassette rental inventory 502,819 570,687 1,456,216 1,395,486
Cost of revenue sharing to related party 155,769 223,631 876,550 546,103
Cost of product sales (including amounts to
related parties of $0, $0, $109,000 and $0,
respectively) 353,629 74,932 730,342 169,424
Operating expenses (net of sublease income
from related party of $11,100 for the three
months ended September 30, 1995 and 1994 and
$33,300 for the nine months ended September 1,766,382 1,421,023 4,963,468 3,654,315
30, 1995 and 1994)
Selling, general, and administrative expenses
(including commission expense to related
party of $14,000, $0, $30,000 and $0,
respectively) 362,241 380,102 825,945 1,024,066
------------- ------------ ------------ ------------
3,140,840 2,670,375 8,852,521 6,789,394
------------- ------------ ------------ ------------
Operating loss (318,224) (122,087) (618,534) (596,421)
OTHER INCOME (EXPENSE):
Interest income 11,858 0 11,858 0
Interest expense, net (including amounts to
related parties amounting to $37,000,
$9,500, $90,000 and $23,500, respectively) (122,838) (91,076) (322,444) (196,760)
Other, net 37,939 0 37,939 (3,284)
------------- ------------ ------------ ------------
Loss before income taxes (391,265) (213,163) (891,181) (796,465)
BENEFIT FOR INCOME TAXES 0 (85,264) 0 (318,585)
------------- ------------ ------------ ------------
Net loss $ (391,265) $ (127,899) $ (891,181) $ (477,880)
============= ============ ============ ============
Net loss per common share $ (0.038) $ (0.015) $ (0.097) $ (0.059)
============= ============ ============ ============
Weighted average shares outstanding 10,885,873 8,500,592 9,337,260 8,132,923
============= ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statments
are an intergral part of these statments.
-3-
<PAGE> 5
ROADRUNNER VIDEO GROUP, INC.
(FORMERLY BUSINESS DATA GROUP, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 3)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (891,181) $ (477,880)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,717,727 1,596,788
Benefit for deferred income taxes 0 (318,586)
Changes in operating assets and liabilities:
Accounts receivable (122,283) 24,793
Merchandise inventory 66,065 (85,856)
Prepaid expenses and other 57,661 (15,158)
Note receivable, related party (652,698) 0
Other assets (10,329) (36,123)
Accounts payable 352,873 427,616
Accrued expenses and other 55,893 228,004
------------- -------------
Total adjustments 1,464,909 1,821,478
------------- -------------
Net cash provided by operating activities 573,728 1,343,598
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette rental inventory (1,531,551) (1,491,429)
Purchases of property and equipment (167,842) (209,676)
Investment in businesses acquired, net of $0 and $110,000,
respectively, of working capital acquired (15,000) (429,133)
------------- -------------
Net cash used in investing activities (1,714,393) (2,130,238)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,100,000 1,000,000
Proceeds from borrowings 1,020,184 413,671
Principal payments on debt (1,067,377) (690,827)
Net borrowings from stockholders 180,331 0
Net repayments from affiliate 0 6,000
------------- -------------
Net cash provided by financing activities 1,233,138 728,844
------------- -------------
Net increase (decrease) in cash 92,473 (57,796)
Cash, beginning of period 93,128 101,022
------------- -------------
Cash, end of period $ 185,601 $ 43,226
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the year for:
Interest $ 317,865 $ 109,000
Income taxes $ 0 $ 0
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-4-
<PAGE> 6
ROADRUNNER VIDEO GROUP, INC.
(FORMERLY BUSINESS DATA GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Background
During May and June 1995, Business Data Group, Inc. (Business Data), a
Delaware corporation, loaned Roadrunner Video Enterprises, Inc.
(Roadrunner), a Kentucky corporation, $800,000 at an interest rate of 12%.
Roadrunner used the loan proceeds to pay down debt and for various
operating purposes.
On July 17, 1995, Business Data and Roadrunner merged in a stock-for-stock
transaction whereby Business Data acquired all of the outstanding shares of
Roadrunner and, in exchange, Roadrunner stockholders received 9,200,000
newly issued common shares of Business Data representing approximately 81%
of the outstanding shares of the combined entity (the Company).
Following the stock exchange, the Company changed its name to Roadrunner
Video Group, Inc. and replaced its principal officers and directors with
those of Roadrunner. The Company also issued 75,000 shares of Series
1995-A 12% cumulative Preferred Stock, which is convertible into 750,000
common shares (subject to certain anti-dilution adjustments), to Selvac
Corporation (Selvac) in exchange for the cancellation of Roadrunner's
obligation to issue preferred stock to Selvac (Note 6) and the $800,000
loan (mentioned above) was canceled.
This transaction was accounted for as a "reverse acquisition" with
Roadrunner being the acquirer. For accounting purposes the acquisition will
be treated as a recapitalization of Roadrunner, whereby the historical
financial statements of the Company prior to July 17, 1995 will be reported
as those of Roadrunner.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for interim financial information. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
entries) considered necessary for a fair presentation have been included.
Operating results for the three-and nine-months periods ended September 30,
1995 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1995.
As discussed in Note 1, in accordance with reverse acquisition accounting
rules, the accompanying financial statements presented are those of
Roadrunner. Therefore, it is suggested that the accompanying financial
statements be read in conjunction with the latest annual Roadrunner
financial statements and notes thereto included on Form 8.
-5-
<PAGE> 7
The consolidated financial statements include the accounts of Roadrunner
Video Enterprises, Inc. (Roadrunner) and H&H Video Enterprises, Inc. (H&H),
a video store company acquired in August 1994. All significant
intercompany accounts have been eliminated.
Net income per share is computed using the weighted average number of
shares of common stock during the periods presented after giving effect to
the stock-for-stock merger as described in Note 1 (also, see Note 9). The
potential dilution from the assumed conversion of certain convertible notes
payable and cumulative preferred stock is not included since its effect is
antidilutive.
3. Statements of Cash Flows
Supplemental disclosures of non-cash activities are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1995 1994
------------------------
<S> <C> <C>
Merchandise inventory acquired with debt 60,000 0
Videocassette rental inventory acquired with:
Long-term debt 0 236,000
Accounts payable 465,000 71,000
Property and equipment acquired with:
Long-term debt 16,000 69,000
Accounts payable 103,000 27,000
December 31, 1994 accounts payable converted to
long-term debt in 1995 330,000 0
Business acquisitions financed with long-term
debt and/or accounts payable 220,000 1,637,000
December 31, 1994 note payable converted to
preferred stock in 1995 750,000 0
December 31, 1994 note payable used to reduce
note receivable 93,500 0
Note payable canceled in connection with reverse
acquisition 800,000 0
</TABLE>
-6-
<PAGE> 8
4. Videocassette Rental Inventory
Videocassette rental inventory and related accumulated amortization
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- ---------------
<S> <C> <C>
Videocassette rental inventory $ 12,224,933 $ 10,732,699
Less accumulated amortization 7,800,117 6,437,397
-------------- ---------------
$ 4,424,816 $ 4,295,302
============== ===============
</TABLE>
5. Property and Equipment
Property and equipment and related depreciation at September 30, 1995 and
December 31, 1994, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- --------------
<S> <C> <C>
Land and building $ 277,902 $ 287,902
Equipment and fixtures 1,692,806 1,615,793
Leasehold improvements 328,282 301,079
Vehicles 336,098 302,302
----------- ------------
$ 2,635,088 2,507,076
Accumulated depreciation 1,035,476 803,527
----------- ------------
$ 1,599,612 $ 1,703,549
=========== ============
</TABLE>
6. Acquisitions
a. Video Knights and Business Data
In June 1994, Roadrunner acquired all the assets (primarily
videocassette rental inventory, equipment and leasehold improvements)
of the Company Owned Store Division of Video Knights, Inc. (Video
Knights), a subsidiary of Selvac, which owned and operated five video
stores in the states of Virginia, Maryland and New Jersey. The
purchase price paid by Roadrunner was $1,410,000 ($60,000 promissory
note, $1,000,000 promissory note convertible to Roadrunner common
stock and $350,000 paid in cash). In July 1995, the $1,000,000
promissory note (with an unpaid principal balance of $750,000) was
canceled in exchange for an agreement whereby Roadrunner would issue
convertible preferred stock to Selvac. Concurrent with the merger
described in Note 1, this agreement was canceled in exchange for an
agreement whereby Roadrunner issued 75,000 shares of Series 1995-A 12%
cumulative Preferred Stock, which is convertible into 750,000 common
shares (subject to certain anti-dilution adjustments) of the Company,
to Selvac.
Unaudited pro forma information for the three and nine months ended
September 30, 1995 and 1994 has been provided below to reflect the
impact on the Roadrunner's historical operations as if the Video
Knights' acquisition and the Business Data acquisition described in
Note 1 had occurred on January 1, 1994. The unaudited pro forma
information does not purport to be indicative of what would have
occurred had the Video Knights' and Business Data acquisitions been
made at the beginning of the period or of results which may occur in
the future.
-7-
<PAGE> 9
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
1995 1994 1995 1994
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 2,823,000 $ 2,735,000 $ 8,234,000 $ 6,776,000
Operating Loss (323,000) (297,000) (629,000) (906,000)
Net loss (384,000) (300,000) (887,000) (797,000)
Net loss per common share $ (0.036) $ (0.029) $ (0.081) $ (0.083)
</TABLE>
These Video Knights stores were acquired in contemplation of a
potential 1994 business acquisition transaction involving additional
video retail stores in the same geographic market. This potential
business transaction was not consummated and since the acquisition of
these stores, Roadrunner incurred significant operating losses
attributable to these stores. As a result, management has adopted a
plan to dispose of these stores (including their lease arrangements).
During the fourth quarter of 1994, Roadrunner recorded a $1.7 million
provision to reserve for the disposal of these stores. Such provision
was based on the estimated net realizable value of the assets as well
as the estimated loss expected under lease arrangements.
b. Midwest Video Wholesalers
In May 1995, Roadrunner acquired all the assets of Midwest Video
Wholesalers Limited Partnership, which was a videocassette wholesaler
located in Columbus, Ohio. The purchase price was $225,000,
consisting principally of intangible assets ($210,000 promissory notes
guaranteed by the majority stockholder and $15,000 paid in cash).
7. Debt
In January 1995, Rentrak Corporation, Inc. (Rentrak), an affiliate of a
stockholder, converted accounts payable of approximately $504,000 as of
December 31, 1994 to a note payable requiring monthly interest payments at
the prime rate plus one percent through January 1996. $152,000 of the
principal balance was paid by September 30, 1995 and the remaining $352,000
principal balance is payable in full in January 1996. Roadrunner also
borrowed approximately $106,000 from Rentrak in May 1995 with monthly
interest payments at 15% payable through January 1996. $80,000 of the
principal balance was paid by September 30, 1995 and the remaining $26,000
principal balance is payable in full in January 1996. Management is
currently negotiating an extension of these notes to consolidate all the
Rentrak debt into a long-term debt.
Roadrunner borrowed $100,000 from a bank in April 1995 with principal
payments plus interest at the prime rate plus one percent payable through
September 1995. The $100,000 was paid off before September 30, 1995.
During the nine months ended September 30, 1995, two stockholders loaned
Roadrunner approximately $181,000 on a long-term basis (due no earlier than
October 1, 1996) for operating purposes.
-8-
<PAGE> 10
On September 30, 1995, the holder of a $93,500 Convertible Promissory Note
issued in connection with the acquisition of H & H exchanged the Note for
55,000 shares of common stock previously owned by a stockholder that owes
the Company $559,198 at September 30, 1995. The result of the transaction
was a reduction in notes payable and a reduction in note receivable,
related party of $93,500.
8. Income Taxes
Deferred income taxes are recorded based upon temporary differences between
the financial statement and tax basis of assets and liabilities and net
operating loss carryforwards available for income tax purposes.
A valuation allowance is provided when it is more likely than not some
portion of the deferred tax asset will not be realized. During the three
and nine month periods ended September 30, 1995, Roadrunner has provided a
full valuation allowance against deferred tax assets recorded due to
uncertainties in realization using the "more likely than not" valuation
method.
9. Stockholders' Equity
At December 31, 1994, Roadrunner had 3,000 shares of no par common stock
authorized, of which 1,405 shares were issued and outstanding with 200
shares of treasury stock. In addition, Roadrunner had 1,000 shares of no
par preferred stock authorized, of which no shares were issued or
outstanding.
In January 1995, Roadrunner issued, sold and delivered 10.6 shares of
common stock to a new stockholder for the cash purchase price of $100,000.
In July 1995, Roadrunner issued, sold and delivered 105 shares of common
stock to an existing stockholder for the cash purchase price of $1 million.
On July 17, 1995, Business Data acquired all of the outstanding shares
(1520.6 common shares) of Roadrunner and, in exchange, Roadrunner
stockholders received 9,200,000 newly issued common shares of Business Data
representing approximately 81% of the outstanding shares of the Company
(Note 1). Pursuant to the merger, each share of Roadrunner common stock
was converted into 6,050.24 shares of Business Data common stock.
Concurrent with this acquisition, the Company issued 75,000 shares of
Series 1995-A 12% cumulative Preferred Stock to Selvac, which is
convertible into 750,000 common shares (subject to certain anti-dilution
adjustments).
At July 17, 1995, Business Data had 25 million shares of $.01 par value
common stock authorized, of which 2,212,000 shares were issued and
outstanding. In addition, Business Data had 100,000 shares of $10 par
value Series A, $10 cumulative convertible preferred stock authorized, of
which 1,000 shares were issued and outstanding.
-9-
<PAGE> 11
In connection with the reverse acquisition, the 9,200,000 shares of newly
issued common stock by Business Data to the Roadrunner shareholders are
considered in effect a recapitalization of the previously outstanding
Roadrunner common stock. Accordingly, for purposes of computing earnings
per common share, the weighted average shares outstanding are retroactively
restated to reflect the effect of the recapitalization for all periods
presented.
10. Commitments and Contingencies
In May 1995, two former employees filed a suit against Roadrunner for
unspecified damages alleging sexual harassment and wrongful discharge.
Management believes these allegations are without merit and the ultimate
outcome of this matter will not have a material adverse effect on the
Company's results of operations or financial condition.
Roadrunner is also involved in a dispute with Rentrak concerning the
accuracy of the system in place at certain of Roadrunner's stores which
tracks revenue sharing. Roadrunner and Rentrak have agreed to have an
audit of this system performed to determine the amount of the net
overcharge or undercharge. As a result of this audit, any net overcharge
will be applied against Roadrunner's accounts payable to Rentrak. Any net
undercharge must be paid by Roadrunner to Rentrak in monthly increments of
$15,000 beginning ten days after completion of the audit. If the audit is
not completed prior to the end of November 1995, Roadrunner is subject to a
penalty of $1,000 per day until the audit is completed. Management is
currently in negotiations with Rentrak and feels a favorable settlement
will be reached by November 30, 1995.
Roadrunner has become subject to various lawsuits, claims and other legal
matters in the course of conducting its business. The Company believes
that such lawsuits, claims and other legal matters will not have a material
adverse effect on its results of operations or financial condition.
11. Related Party Transactions
Roadrunner engages in various transactions with related parties and the
amounts of these related party transactions and balances are reflected on
the accompanying consolidated balance sheets and statements of operations.
A description of these related party transactions follows:
- Rentrak, a shareholder of the Company, provides new release and
various other videocassettes to Roadrunner under a revenue sharing
agreement. Under this agreement, Roadrunner incurs an up-front
handling fee which is amortized on a straight-line basis over the
estimated average revenue sharing period (approximates twelve months).
The revenue sharing costs under this agreement are expensed as
incurred. Roadrunner is required to spend a minimum quarterly amount
of revenues with Rentrak.
- Roadrunner subleases retail space to an entity owned by Roadrunner's
majority stockholder.
- Roadrunner has borrowed funds from several stockholders and
pays/incurs interest expense on the funds borrowed.
-10-
<PAGE> 12
- During 1995, Roadrunner began selling previously viewed videocassettes
to a regional grocery store chain for resale. Roadrunner has
purchased previously viewed videocassettes from Rentrak to sell to the
grocery store chain. In exchange for arranging this relationship,
Roadrunner is currently paying a sales based commission to a company
owned by certain stockholders of the Company.
- In August, 1995, the Company loaned $1,000,000 to a stockholder,
pursuant to a 10.5% Promissory Note maturing on September 30, 1995.
As of November 13, 1995, the balance of this note receivable was
$178,000. Roadrunner anticipates that the balance of the note will be
paid no later than December 15, 1995.
-11-
<PAGE> 13
ROADRUNNER VIDEO GROUP, INC.
(FORMERLY BUSINESS DATA GROUP, INC.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
BACKGROUND
Roadrunner is primarily engaged in the business of renting prerecorded
videocassette movies and video games. As of September 30, 1995, Roadrunner
owned and operated (under the name Roadrunner Video) 40 stores primarily
located throughout metropolitan Louisville, Kentucky and Southern Indiana. In
1994, Roadrunner acquired fifteen stores operating in Southern Indiana,
metropolitan Louisville, New Jersey, Maryland and Virginia.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data expressed as a percentage of total revenue, the percentage
increase or decrease from the comparable period and the number of stores open
at the end of each period.
<TABLE>
<CAPTION>
----------------------------------------- ------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------- ------------------------------------
Increase Increase
1995 1994 (Decrease) 1995 1994 (Decrease)
------- --------- ---------- ------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rentals 85.6 % 96.2 % (1.4) % 89.1 % 96.3 % 23.1 %
Product sales 14.4 3.8 318.0 10.9 3.7 286.9
----- ----- ----- ----- ----- -----
100.0 100.0 10.8 100.0 100.0 33.0
Operating costs and expenses:
Amortization of videocassette
rental inventory 17.8 22.4 (11.9) 17.7 22.5 4.4
Cost of revenue sharing 5.5 8.8 (30.3) 10.6 8.8 60.5
Cost of product sales 12.5 2.9 371.9 8.9 2.7 331.1
Operating expenses 62.6 55.8 24.3 60.3 59.0 35.8
Selling, general and admin. 12.9 14.9 (4.7) 10.0 16.6 (19.3)
----- ----- ----- ----- ----- -----
Total 111.3 104.8 17.6 107.5 109.6 30.4
----- ----- ----- ----- ----- -----
Operating loss (11.3) (4.8) 160.7 (7.5) (9.6) 3.7
Other income (expense), net (2.6) (3.6) (19.8) (3.3) (3.2) 36.3
----- ----- ----- ----- ----- -----
Loss before income taxes (13.9) (8.4) 83.6 (10.8) (12.8) 11.9
Benefit for income taxes - 3.4 n/a - 5.1 n/a
----- ----- ----- ----- ----- -----
Net loss (13.9) (5.0) 205.9 (10.8) (7.7) 86.5
===== ===== ===== ===== ===== =====
Number of stores open at
end of period 40 41 40 41
----- ----- ----- -----
</TABLE>
-12-
<PAGE> 14
Revenues
Rental revenues decreased 1.4% for the three months ended September 30, 1995 as
compared to the three months ended September 30, 1994 and increased 23.1% for
the nine months ended September 30, 1995 as compared to the nine months ended
September 30, 1994. The decrease in rental revenue for the three months ended
September 30, 1995 was the result of the closing three non profitable
locations, which accounted for $34,000 or 100% of the decrease. Management
intends to open three other video stores in more profitable locations. The
increase in rental revenues for the nine months ended September 30, 1995 was
the result of the rental revenues derived from 15 video stores acquired between
March 1994 and August 1994 and the opening of a store specializing in sales and
weekly rentals of non-new releases, which accounted for approximately
$1,400,000 or all of the increase.
Product sales and other fees increased $308,000 or 318% for the three months
ended September 30, 1995 as compared to the three months ended September 30,
1994 and increased $665,000 or 287% for the nine months ended September 30,
1995 as compared to the nine months ended September 30, 1994. The increase in
product sales and other fees for the three months and nine months ended
September 30, 1995 was primarily the result of sales to a regional grocery
store chain with approximately 1,100 stores. In April 1995, Roadrunner began
selling previously viewed videocassettes to the grocery store chain for resale.
After each store's initial order, Roadrunner fills re-orders initiated by the
grocery store chain. Roadrunner determines the videocassettes to be sold to
the grocery store chain based on its knowledge of trends in the industry and
the grocery store chain has no right to return videocassettes to Roadrunner.
In exchange for arranging this relationship, Roadrunner is currently paying a
sales based commission to a related party.
As of September 30, 1995, Roadrunner had filled initial orders for
approximately 84 stores and had filled some re- orders. Roadrunner anticipates
that the number of grocery stores purchasing videocassettes and the number of
re-orders from the grocery store chain will continue to grow. However, there
is no assurance that more stores will purchase videocassettes from Roadrunner
or that re-orders will comprise a significant portion of future sales to the
grocery store chain as the grocery store chain is under no commitment or
obligation to continue this arrangement.
Operating Costs and Expenses
Operating costs and expenses increased 17.6% for the three months ended
September 30, 1995 and 30.4% for the nine months ended September 30, 1995
compared to the three months ended September 30, 1994 and nine months ended
September 30, 1995 primarily due to the increase in stores via acquisitions and
openings. Components of operating costs and expenses and related explanations
for significant changes between periods, beside the increase in stores, are as
follows:
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory decreased from 22.4% and 22.5%
of revenues, respectively, for the three months and nine months ended September
30, 1994 to 17.8% and 17.7% of revenues for the three months and nine months
ended September 30, 1995. This decrease is a result of an increase in product
sales, increased use of revenue sharing and the 1994 write-down to estimated
net realizable value of videocassette rental inventory for the stores on the
east coast.
-13-
<PAGE> 15
Cost of Revenue Sharing
Pursuant to a revenue sharing agreement, a stockholder of the Company provides
Roadrunner with new release and various other videocassettes released by
certain movie studios. Under this agreement, Roadrunner incurs an up-front
handling fee which is amortized on a straight-line basis over the estimated
average revenue sharing period (approximates twelve months). The revenue
sharing costs under this agreement are expensed as incurred. Roadrunner is
required to spend a minimum amount of revenues under this agreement.
Cost of revenue sharing changed from 8.8% and 8.8% of revenues, respectively,
for the three months and nine months ended September 30, 1994 to 5.5% and 10.6%
of revenues for the three months and nine months ended September 30, 1995. The
increase for the nine months ended September 30, 1995 was due to increased use
of revenue sharing in 1995 compared to 1994. During the nine months ended
September 30, 1994, Roadrunner predominantly purchased tapes for rental, offset
by the increase in product sales. The decrease for the three months ended
September 30, 1995 was due to the Company's decision to reduce its purchasing
from Rentrak, because the minimum required under the contract on annualized
basis had been exceeded.
Cost of Product Sales
Cost of product sales increased from $75,000 to $353,000 for the three months
ended September 30, 1994 and 1995, respectively, and from $169,000 to $730,000
for the nine months ended September 30, 1994 and 1995, respectively. The cost
of product sales as a percentage of product sales and other fees increased from
77.3% to 87.3% for the three months ended September 30, 1994 and 1995,
respectively, and from 73.1% to 81.4% for the nine months ended September 30,
1995 and 1994, respectively. The increase in cost of product sales and
decrease in the gross margin on product sales and other fees was primarily a
result of selling previously viewed videocassette rental inventory beginning in
April 1995 to a regional grocery store chain for resale.
Operating Expenses
Operating expenses increased 6.8% and 1.3% as a percentage of revenues for the
three and nine months ended September 30, 1995 compared to the three and nine
months ended September 30, 1994, respectively. Operating expenses consist
primarily of compensation and related expenses and occupancy expenses.
Compensation and related expenses were 27.5% and 26.8% of revenues for the
three and nine months ended September 30, 1995, respectively, compared to 26.9%
and 26.8% for the three and nine months ended September 30, 1994, respectively.
Compensation and related expenses as a percentage of revenues for the nine
months ended September 30, 1995 and 1994 was 26.8% for both years. Although
product sales increased in the nine months ended September 30, 1995, these
increases were offset by an increase in compensation and related expenses
attributable to stores opened and acquired in 1994.
Occupancy expenses increased from 19.8% and 18.7% of revenues for the three and
nine months ended September 30, 1994, respectively, compared to 20.2% and 19.9%
for the three and nine months ended September 30, 1995, respectively. This
increase is due primarily to higher occupancy expenses relating to stores
acquired on the east coast in June 1994.
-14-
<PAGE> 16
Selling, General and Administrative
Selling, general and administrative expenses decreased 4.7% for the three
months ended September 30, 1995 compared to the three months ended September
30, 1994 and decreased 19.3% for the nine months ended September 30, 1995
compared to the nine months ended September 30, 1994. The Company has incurred
significant professional fees during both the nine months ended September 30,
1995 and 1994 relating to acquisitions, potential acquisitions not consummated
and exploring alternatives of becoming a public company. The decreases in
selling, general and administrative expenses from 1994 to 1995 are attributable
to incurring higher professional fees in 1994. Legal and professional fees
increased $68,000 to $142,000 and decreased from $361,000 to $220,000 for the
three months and nine months ended September 30, 1994 and 1995, respectively.
Additionally the Company incurred higher advertising costs in 1994 to promote
stores opened and acquired in 1994.
Other income (expense), net
Other income (expense), net decreased $20,000 and increased $73,000,
respectively, for the three months and nine months ended September 30, 1995 as
compared to September 30, 1994. The increase for the nine months ended
September 30, 1995 is due to increased interest expense as a result of
additional borrowings used for acquisitions and restructured debt. The
decrease for the three months ended September 30, 1995 was due to a gain of
$38,000 on the sale of property and equipment.
Benefit for Income Taxes
Benefit for income taxes decreased $85,000 and $318,000 for the three and nine
months ended September 30, 1995 compared to September 30, 1994. No benefit for
income taxes was recorded during the three and nine month periods ended
September 30, 1995 since Roadrunner has provided a full valuation allowance
against deferred tax assets recorded due to uncertainties in realization using
the "more likely than not" valuation method.
Balance Sheet
Other assets increased approximately $217,000 since December 31, 1994 as a
result of acquiring the assets of Midwest Video Wholesalers Limited
Partnership, a videocassette wholesaler located in Columbus, Ohio (see Note 6b
to the consolidated financial statements).
The current portion of long-term debt increased approximately $687,000 since
December 31, 1994 due to a $600,000 line of credit that matures in January 1996
and various debt agreements with vendors and related parties that mature in
January 1996.
Note receivable to a related party of $559,198 as of September 30, 1995
reflects a $1,000,000 loan to a stockholder made in August, 1995, pursuant to a
10.5% Promissory Note maturing on September 30, 1995. As of November 13, 1995,
$686,000 of the note has been repaid and $93,500 of notes payable had been
cancelled to reduce the balance to $178,000. Based on the creditworthiness of
the stockholder, the Company believes that the note will be repaid by December
15, 1995. However if the note is not repaid by such date, the Company could
experience additional cash flow difficulties which could materially impact its
ability to meet its debt service requirements.
-15-
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
In connection with acquisitions made in 1994 and operating losses incurred
since 1992, the Company has incurred substantial indebtedness resulting in a
highly leverage capital structure. As of September 30, 1995, the Company had
approximately $5.9 million of liabilities outstanding. In addition, the
Company may incur further indebtedness (including secured indebtedness) from
time to time to finance acquisitions and for other purposes.
The Company's high degree of leverage will have important consequences to
holders of shares of Common Stock, including the following: (i) dedication of
a substantial portion of the Company's cash flow from operations to pay
interest on its debt obligations, which will reduce the funds available to the
Company for its operations and future business opportunities; (ii) impairment
of the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or general corporate or
other purposes; and (iii) vulnerability of the Company to a downturn in its
business or the economy generally.
If the Company were unable to meets its debt service requirements in the
future, it may, depending upon the circumstances which then exist, seek
additional equity and/or debt financing, refinance its existing indebtedness or
sell all or part of its business and utilize the proceeds to repay
indebtedness. There can be no assurance that such equity or debt financing, if
needed, would be available to the Company on acceptance terms or that the
Company could refinance existing indebtedness or raise sufficient funds through
asset sales. Any inability of the Company to service such debt service
requirements would have a significant adverse effect on the Company and the
market value and marketability of the Common Stock.
At September 30, 1995 and December 31, 1994, Roadrunner had a working capital
deficit of $2.7 million and $3.1 million, respectively. Videocassette rental
inventory is treated as a non-current asset under generally accepted accounting
principles because they are not assets which are reasonably expected to be
completely realized or sold in the normal business cycle. Although the rental
of this inventory generates the major portion of Roadrunner's revenues, the
classification of these assets as non-current results in their exclusion from
working capital. The aggregate amount payable for this inventory, however, is
reported as a current liability until paid and, accordingly, is included in
working capital. Consequently, management believes that working capital is not
an appropriate measure of its liquidity and it anticipates that it will operate
with a working capital deficit. However, management believes the Company's
September 30, 1995 working capital deficit is unusually high. Management
intends to reduce such deficit by refinancing certain obligations presently
classified in current liabilities. However, there is no assurance such
refinancing efforts will be successful.
The Company's principal long-term capital requirements are for opening new
stores and acquiring stores. The Company continues to actively investigate
potential merger and acquisition targets in the same line of business. It is
management's intention to enter into such acquisition agreements during the
remainder of 1995, however, there is no assurance such acquisition agreements
will be finalized. Possible financing of such potential acquisitions would
include equity offerings.
The overall net change in cash was an increase of $92,000 and a decrease of
$58,000 for the nine months ended September 30, 1995 and 1994, respectively as
a result of net cash provided by operating and financing activities and net
cash used in investing activities.
-16-
<PAGE> 18
Net cash provided by operating activities was $574,000 and $1,343,000 for the
nine months ended September 30, 1995 and 1994, respectively. The decrease
between years is primarily due to the $653,000 increase in a note receivable
from a current shareholder and a $413,000 increase in net loss partially offset
by increased depreciation due to the increase in the number of stores and
accompanying purchases of videocassette rental inventory made during 1995 and
the provision of a full valuation allowance against deferred tax assets
recorded during the nine months ended September 30, 1995 due to uncertainties
in realization using the "more likely than not" valuation method.
Net cash used in investing activities was $1,714,000 and $2,130,000 for the
nine months ended September 30, 1995 and 1994, respectively. Purchases of
videocassette rental inventory increased $40,000 due to the increase in the
number of stores operated by Roadrunner. Investments in businesses acquired was
$15,000 and $429,000 for the nine months ended September 30, 1995 and 1994,
respectively, a decrease of $414,000. This decrease is a result of using cash
to acquire ten stores during the first nine months of 1994 compared to
acquiring one videocassette wholesaler during the first nine months of 1995.
Net cash provided by financing activities was $1,233,000 and $729,000 for the
nine months ended September 30, 1995 and 1994, respectively. Roadrunner
received $1,100,000 and $1,000,000 from stock offerings during the nine months
ended September 30, 1995 and 1994, respectively. Proceeds from borrowings
increased from $414,000 to $1,020,000 for the nine months ended September 30,
1995 and 1994, respectively. Net borrowings from shareholders increased
$180,000. Principal payments on debt were $1,067,000 and $691,000 for the nine
months ended September 30, 1995 and 1994, respectively. Proceeds from stock
offerings and borrowings were used to meet various operating, financing and
investing needs of Roadrunner.
As cash flows from operating activities have not been sufficient to meet
Roadrunner's short-term working capital needs, including the acquisition of
videocassette rental inventory, Roadrunner has borrowed funds, restructured
debt and received equity contributions to meet these needs.
Roadrunner's principal supplier of videocassettes agreed to provide Roadrunner
with revolving trade credit during 1995 ranging from $692,000 to $937,000 to
finance the purchase of videocassette rental inventory. At September 30, 1995
Roadrunner owed approximately $848,000, which is included in accounts payable
and the current portion of long-term debt.
Roadrunner has a revenue sharing agreement and various debt agreements with
Rentrak Corporation, Inc. (Rentrak), a stockholder. Roadrunner revised its
agreement during 1995 so that Roadrunner is required to expend a minimum
quarterly amount of video retail revenues with Rentrak. During 1995, Rentrak
converted accounts payable of approximately $504,000 as of December 31, 1994 to
a note payable requiring monthly interest payments at the prime rate plus one
percent through January 1996. $152,000 of the principal balance was paid by
September 30, 1995 and the remaining $326,000 principal balance is payable in
full in January 1996. In May 1995, Roadrunner also borrowed approximately
$106,000 from Rentrak to fund 1995 revenue sharing transactions with monthly
interest payments at 15% payable through January 1996. $80,000 of the
principal balance was paid by September 30, 1995 and the remaining $26,000
principal balance is payable in full in January 1996. Management is currently
negotiating an extension of these notes to consolidate all the Rentrak debt
into a long-term debt. At September 30, 1995, Roadrunner owed Rentrak $1.3
million, which is included in accounts payable and long-term debt.
-17-
<PAGE> 19
Roadrunner intends to continue their relationship with Rentrak and their
principal supplier in the near future. However, there is no assurance that a
credit arrangement will continue to be available or that its terms will not be
modified as Roadrunner's financing arrangement with the principal supplier
expires in January 1996 and Rentrak is under no obligation or commitment to
provide additional financing.
Roadrunner has a $600,000 line of credit with a bank with an outstanding
balance of $600,000 as of September 30, 1995 and December 31, 1994. The line
of credit matures in January 1996. Management intends to seeks an extension of
the maturity date as Roadrunner has extended the maturity date of this line of
credit with the bank in prior years. However, there is no assurance that the
bank will extend the maturity date or that alternative financing will be
available as the bank is under no obligation or commitment to provide
additional financing.
Roadrunner issued promissory notes to the sellers of H&H Video Enterprises,
Inc. (H&H) in connection with the acquisition of H&H. Under the terms of the
notes, principal and interest payments are due quarterly through December 1996
and the sellers may elect to convert the promissory notes into common stock.
If converted, the number of shares to be issued will be negotiated at that
time. One of the sellers has filed a lawsuit demanding immediate payment in
full of approximately $140,000. The Company is attempting to restructure the
payment terms. However, there is no assurance that the payment terms will be
restructured or alternative financing will be available to the Company. The
other seller used the majority of his note, $93,500, to acquire common stock
from a stockholder that owes the Company certain amounts under a note
receivable.
Roadrunner borrowed $100,000 from a bank in April 1995 to acquire merchandise
inventory (videocassettes) to sell to a regional grocery store chain.
Principal payments plus interest at the prime rate plus one percent are due
through September 1995. The note was paid off at September 30, 1995.
During the nine months ended September 30, 1995, two stockholders loaned
Roadrunner approximately $181,000 on a long-term basis (due no earlier than
July 1, 1996) for operating purposes.
During May and September 1995, Roadrunner received $800,000 in loan proceeds
from Business Data which, in effect, became equity in connection with the July
17, 1995 merger. In addition, on July 17, 1995, Roadrunner received cash of
$1.0 million from a common stock sale and converted $750,000 of debt to
convertible preferred stock.
Roadrunner acquired five stores located on the east coast in June 1994 in
contemplation of a potential 1994 business acquisition involving additional
video retail stores on the east coast. This potential business transaction was
not consummated and since their acquisition, these stores have incurred
significant operating losses. As a result, management decided in 1994 they did
not want to operate these east coast stores and adopted a plan to dispose of
these stores (including their lease arrangements). The aggregate minimum lease
payments for these stores at September 30, 1995 was approximately $1.7 million.
Two of these stores have been closed. The Company is in the process of
soliciting offers from prospective buyers for the other three stores. The
disposal of these stores according to management's plans will improve
liquidity. However, there is no assurance that the Company will be successful
in their efforts to sell these stores or dispose of their lease commitments.
During 1995, Roadrunner experienced poor liquidity primarily due to operating
losses and the nature and timing of financing arrangements. Roadrunner will
attempt to maintain liquidity by taking the measures indicated above (i.e. east
coast store disposal plan described above) along with additional
-18-
<PAGE> 20
steps including cost reduction measures, increasing rental revenues and
increasing sales to the regional grocery store chain. However, there is no
assurance that these efforts will allow the Company to generate sufficient cash
flows to maintain liquidity and to fund its future videocassette rental
inventory purchases as well as other working capital and financing needs.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS, SEASONALITY
The Company anticipates that its business will be affected by general economic
trends. The Company believes it would generally be able to pass on increased
costs resulting from inflation to its customers. Future operating results may
be affected by other factors, including variations in the number and timing of
new store openings, the quality and number of new release titles available for
rental and sale and the expense associated with the acquisition of new release
titles, acquisition by the Company of existing video stores, additional and
existing competition, marketing programs, weather, special or unusual events
and other factors that may affect retailers in general. Any concentration of
new store openings and the related new store pre-opening costs near the end of
a fiscal quarter could have an adverse effect on the financial results for the
quarter and could, in certain circumstances, lead to fluctuations in quarterly
financial results.
The video retail industry generally experiences relative revenue declines in
April and May, due in part to the change to Daylight Savings Time and to
improved weather, and in September and October, due in part to the start of
school and introduction of new television programs. The Company believes these
seasonality trends will continue.
-19-
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In May 1995, two former employees filed a suit against Roadrunner
for unspecified damages alleging sexual harassment and wrongful discharge.
Management believes these allegations are without merit and the ultimate
outcome of this matter will not have a material adverse effect on the Company's
results of operations or financial condition.
Roadrunner has become subject to various lawsuits, claims and
other legal matters in the course of conducting its business. The Company
believes that such lawsuits, claims and other legal matters will not have a
material adverse effect on its results of operations or financial condition.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. During the third quarter of 1995, two stockholders of the company
who own in excess of fifty-percent (50%) of the outstanding
shares of the company executed a written consent amending the
Company's certificate of Incorporation to change the Company's
name to "Roadrunner Video Group, Inc."
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
On June 5, 1995, the Company filed a Report on Form 8-K to report
the execution of a letter of intent relating to the acquisition of
Roadrunner.
-20-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duty caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROADRUNNER VIDEO GROUP, INC.
(formerly BUSINESS DATA GROUP, INC.)
By: /s/ TERRY W. SCHNEIDER
----------------------------------
Terry W. Schneider
Chief Executive Officer,
Acting Principal Financial Officer
Dated: November 14, 1995
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 186
<SECURITIES> 0
<RECEIVABLES> 724
<ALLOWANCES> 0
<INVENTORY> 130
<CURRENT-ASSETS> 1,604<F1>
<PP&E> 2,635
<DEPRECIATION> 1,035
<TOTAL-ASSETS> 7,535
<CURRENT-LIABILITIES> 4,325
<BONDS> 1,621
<COMMON> 114
0
760
<OTHER-SE> 714
<TOTAL-LIABILITY-AND-EQUITY> 7,535
<SALES> 8,234
<TOTAL-REVENUES> 8,284
<CGS> 730
<TOTAL-COSTS> 8,853
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 322
<INCOME-PRETAX> (891)
<INCOME-TAX> 0
<INCOME-CONTINUING> (891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (891)
<EPS-PRIMARY> (0.097)
<EPS-DILUTED> 0
<FN>
<F1>Video Cassette Rental Inventory costing $12,225 less accumulated
depreciation of $7,800 at September 30, 1995 is classified as a non-current
asset.
</FN>
</TABLE>
