<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 March 31, 1996.
- --- 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.
(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 SOUTH 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 March 31, 1996 was 11,695,691.
<PAGE> 2
Index
ROADRUNNER VIDEO GROUP, INC.
March 31, 1996
<TABLE>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Consolidated Financial Statements 2
Consolidated Balance Sheets as of March 31, 1996
(Unaudited) and December 31, 1995 2
Consolidated Statements of Operations (Unaudited)
for the Three Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
</TABLE>
<PAGE> 3
<TABLE>
PART II. OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
------------ --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 424,206
Accounts receivable
Related parties $ 81,880 64,580
Unrelated parties 29,362 62,090
Current portion note receivable 24,405 52,153
Merchandise inventory 127,160 124,276
Prepaid handling fees to related party 129,975 144,004
Prepaid rent 39,855 27,855
----------- -----------
TOTAL CURRENT ASSETS 432,637 899,164
NET VIDEOCASSETTE RENTAL INVENTORY 4,340,542 4,357,758
NET PROPERTY AND EQUIPMENT 1,797,877 1,721,346
OTHER ASSETS
Net intangible assets 253,317 255,613
Note receivable, less current portion 175,595 185,972
Deposits and other 105,762 105,432
----------- -----------
TOTAL ASSETS $ 7,105,730 $ 7,525,285
=========== ===========
</TABLE>
Continued
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<PAGE> 5
Consolidated Balance Sheets--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
------------ --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Related parties $ 391,414 $ 268,431
Unrelated parties 715,586 824,464
Accrued expenses and other 382,202 317,029
Liability for closed stores 367,000 454,000
Current portion of long-term debt
Related parties 127,556 92,500
Unrelated parties 827,758 835,592
----------- ----------
TOTAL CURRENT LIABILITIES 2,811,516 2,792,016
LONG-TERM DEBT, less current portion
Related parties 1,568,943 1,596,227
Unrelated parties 945,209 1,090,649
----------- ----------
TOTAL LIABILITIES 5,325,668 5,478,892
COMMITMENTS AND CONTINGENCIES (Notes B and J)
STOCKHOLDERS' EQUITY
Preferred Stock, 12% cumulative voting, $10 par value,
redeemable at par value at Company's option,
convertible into Common Stock at holders' option,
100,000 shares authorized:
Series A, convertible into 20 shares of Common
Stock, 1,000 shares issued and outstanding 10,000 10,000
Series B, convertible into 10 shares of Common
Stock, 75,000 shares issued and outstanding 750,000 750,000
Common Stock, one cent par value, 25 million
shares authorized, 11.696 million shares
issued and outstanding 116,960 116,960
Paid-in-capital 4,273,636 4,273,636
Accumulated deficit (3,370,534) (3,104,203)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,780,062 2,046,393
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,105,730 $ 7,525,285
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 6
Consolidated Statements of Operations (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months
Ended March 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES
Rental revenues $2,383,861 $2,628,570
Product sales 460,139 96,203
---------- ----------
TOTAL REVENUES 2,844,000 2,724,773
OPERATING COSTS AND EXPENSES
Amortization of videocassette rental inventory 526,403 444,522
Cost of revenue sharing with related party 321,607 392,256
Cost of product sales 330,043 71,566
Operating expenses (net of sublease income from
related party of approximately $9,000 and
$10,000, respectively) 1,555,928 1,612,460
Selling, general and administrative expenses
(including related party commissions of
$10,000 and $12,000, respectively) 278,849 184,602
---------- ----------
TOTAL OPERATING COSTS AND EXPENSES 3,012,830 2,705,406
---------- ----------
OPERATING INCOME (LOSS) (168,830) 19,367
Interest expense, net (including related party expense
of approximately $19,000 and $25,000,
respectively) 75,125 106,368
---------- ----------
NET LOSS $ (243,955) $ (87,001)
========== ==========
LOSS PER COMMON SHARE $(.02) $(.01)
===== =====
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 7
Consolidated Statements of Cash Flows (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months
Ended March 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (243,955) $ (87,001)
Adjustments
Disposal of stores (86,569)
Depreciation and amortization 619,747 521,403
Changes in operating assets and liabilities
Accounts receivable 15,428 1,617
Merchandise inventory (2,884)
Prepaid expenses 2,029 14,415
Other assets (330) (4,522)
Accounts payable 14,105 (335,109)
Accrued expenses and other 42,365 22,680
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 359,936 133,483
INVESTING ACTIVITIES
Purchases of videocassette rental inventory (509,187) (543,602)
Purchases of property and equipment (155,080) (28,200)
Proceeds from disposal of assets 10,000
Collection of note receivable 38,125
Investment in businesses (12,500)
--------- -----------
NET CASH USED IN INVESTING ACTIVITIES (638,642) (561,802)
FINANCING ACTIVITIES
Proceeds from borrowings 644,378 414,067
Principal payments on debt (789,878) (78,876)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (145,500) 335,191
--------- ---------
NET DECREASE IN CASH (424,206) (93,128)
CASH BEGINNING OF PERIOD 424,206 93,128
--------- ---------
CASH END OF PERIOD $ -0- $ -0-
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE> 8
Notes to Consolidated Financial Statements (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 1996
NOTE A--MANAGEMENT'S STATEMENT
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. The notes to the consolidated
financial statements which are contained in the Company's Form 10-K for the
year ended December 31, 1995 should be read in conjunction with these
consolidated financial statements.
NOTE B--TRANSACTION WITH BUSINESS DATA GROUP, INC. AND BASIS OF PRESENTATION
During May and June 1995, Business Data Group, Inc. ("Business Data") (a
publicly traded company with no significant operations) loaned Roadrunner Video
Enterprises, Inc. ("Roadrunner") $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 entered into a 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.
This transaction was accounted for as a "reverse acquisition" whereby
Roadrunner is deemed to have acquired Business Data for financial reporting
purposes. However, Business Data remains the continuing legal entity and
registrant for Securities and Exchange Commission filing purposes. Consistent
with the reverse acquisition accounting treatment, the accompanying historical
financial statements presented for 1995 are the consolidated financial
statements of Roadrunner. The operations of Business Data have been included
from the date of acquisition.
Following the transaction, the combined entity changed its name to Roadrunner
Video Group, Inc. (the "Company") and replaced its principal officers and
directors with those of Roadrunner. The $800,000 loan (mentioned above) was
canceled.
The Company also issued 75,000 shares of Series B 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.
The consolidated financial statements also include the accounts of H&H Video
Enterprises, Inc., a video store company acquired in 1994. All significant
intercompany accounts have been eliminated.
Loss per common share was based upon the weighted average common stock
outstanding of 11,695,691 for 1996 and 8,561,201 for 1995, as adjusted for the
reverse acquisition.
-6-
<PAGE> 9
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 1996
NOTE C--DESCRIPTION OF BUSINESS
The Company is primarily engaged in the business of renting and selling
prerecorded videocassette movies and video games. As of March 31, 1996, the
Company owned and operated (under the name Roadrunner Video) 39 stores
primarily located throughout metropolitan Louisville, Kentucky and southern
Indiana.
NOTE D--STATEMENT OF CASH FLOWS
Supplemental disclosures of non-cash activities are as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Merchandise inventory acquired with debt $368,000
Note payable converted to common stock 100,000
Dividends on preferred stock $22,000
</TABLE>
NOTE E--VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related accumulated amortization consisted
of the following:
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
------------ --------------
<S> <C> <C>
Videocassette rental inventory $12,041,503 $11,908,659
Less accumulated amortization 7,700,961 7,550,901
----------- -----------
$ 4,340,542 $4,357,758
=========== ==========
</TABLE>
-7-
<PAGE> 10
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 1996
NOTE F--PROPERTY AND EQUIPMENT
Property and equipment and related depreciation at March 31, 1996 and December
31, 1995 consisted of the following:
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
------------ --------------
<S> <C> <C>
Land $ 155,375 $ 155,375
Buildings 122,527 122,527
Equipment and fixtures 1,863,368 1,818,813
Leasehold improvements 447,335 357,616
Vehicles 291,720 270,915
---------- ----------
2,880,325 2,725,246
Accumulated depreciation 1,082,448 1,003,900
---------- ----------
$1,797,877 $1,721,346
========== ==========
</TABLE>
NOTE G--DEBT
Long-term debt consisted of the following at March 31, 1996 and December 31,
1995:
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
------------ --------------
<S> <C> <C>
Debt agreements with a stockholder/supplier:
Line of credit $ 599,551 $ 599,551
Note payable (See Note 1) 502,248 489,176
---------- ----------
1,101,799 1,088,727
Note payable to a supplier 796,596 859,420
Line of credit with a bank (See Note 2) -0- 600,000
Notes payable to certain stockholders (See Note 2) 592,000 -0-
Notes payable to two banks 218,190 231,232
Notes payable to various financial institutions 183,987 178,498
Note payable to seller of five southern Indiana stores 162,373 174,596
</TABLE>
Continued
-8-
<PAGE> 11
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 1996
NOTE G--DEBT--Continued
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
------------ --------------
<S> <C> <C>
Notes payable to sellers of Midwest Video 124,035 153,362
Notes payable to sellers of H&H Video
Enterprises, Inc. (See Note 3) 138,800 126,300
Various other 151,686 202,833
---------- -----------
$3,469,466 $3,614,968
========== ==========
</TABLE>
The above long-term debt is collateralized by substantially all assets of the
Company.
Note 1--On March 29, 1996, the stockholder/supplier agreed to extend the note
payable until at least January 1, 1997. They proposed payment terms which
provide for monthly payments of approximately $14,500, including interest at
9.5% beginning April 1, 1996, with a final maturity in March, 2000.
Note 2--On March 26, 1996, the bank loaned $900,000 to two stockholders of the
Company. The stockholders, in turn, loaned $600,000 to the Company under a
line of credit agreement. The Company repaid $600,000 to the bank. Subsequent
to March 31, 1996, the stockholders loaned an additional $180,000 to the
Company. Under the terms of the agreement with the stockholders, interest is
payable monthly at the prime rate. The principal is payable no earlier than
1998. As such, the $600,000 has been classified as non-current at December 31,
1995 since it was refinanced on a long-term basis. The agreement is
collateralized by virtually all assets of the Company.
Note 3--The holder of this note has given notice that the Company is in default
due to late payment of certain note payments. He has declared the full amount
due and payable. In April 1996, the Company agreed with the holder to pay this
note in three installments of $30,000 each through November 1996 plus a balloon
payment in January 1997.
NOTE H--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 months ended
March 31, 1996 and 1995, the Company 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-
<PAGE> 12
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 1996
NOTE I--STOCKHOLDERS' EQUITY
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 B). 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 B 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,
cumulative convertible Preferred Stock authorized, of which 1,000 shares were
issued and outstanding.
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 loss per
common share, the weighted average shares outstanding have been retroactively
restated to reflect the effect of the recapitalization for all periods
presented.
Other transactions during 1995 and 1996 are as follows:
In January 1995, the Company converted a $100,000 note payable to 10.6 shares
(64,132.6 shares as restated) of Common Stock.
In July 1995, the Company issued, sold and delivered 105 shares (635,275.5
shares as restated) of Common Stock to an existing stockholder for the cash
purchase price of $1 million.
NOTE J--COMMITMENTS AND CONTINGENCIES
Legal Matters--In May 1995, two former employees filed a suit against the
Company alleging sexual harassment and wrongful discharge. The plaintiffs are
alleging damages in excess of $5 million. Management of the Company 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.
The Company is subject to various lawsuits, claims and other legal matters in
the course of conducting its business. Management of 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.
Continued
-10-
<PAGE> 13
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 1996
NOTE J--COMMITMENTS AND CONTINGENCIES--Continued
Liability for Closed Stores--In June 1994, the Company acquired five video
stores in the states of Virginia, Maryland and New Jersey. These 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, the Company incurred significant operating losses attributable
to these stores. As a result, management decided in 1994 that they did not
want to operate these stores and adopted a plan to dispose of them (including
their lease arrangements). In the fourth quarter of 1994, the Company recorded
a $1.7 million charge to operations to reflect the estimated cost of the
disposal of these five stores. Such charge was to reduce the assets to their
estimated net realizable value (approximately $920,000) as well as to accrue
the estimated loss expected under lease arrangements (approximately $780,000).
During the third and fourth quarters of 1995, four of the five stores were
closed. Videocassettes and fixtures from these stores were transferred to the
main office and redistributed to other Company stores as needed. Rental
payments after the stores were closed were charged against the accrued
liability. The lease related to one of the closed stores was settled. The
fifth store sold to an unrelated party in the fourth quarter of 1995. The
Company is continuing to make payments related to the leases on the three
remaining closed store locations. The remaining balance of the liability was
approximately $367,000 at March 31, 1996 and $454,000 at December 31, 1995.
Management is actively seeking other tenants for the remaining locations. The
aggregate minimum lease payments for these remaining locations are
approximately $1.3 million at March 31, 1996.
NOTE K--RELATED PARTY TRANSACTIONS
The Company engages in various transactions with related parties which are
reflected on the accompanying consolidated balance sheets and statements of
operations. A description of these related party transactions follows:
- - A supplier, who is also a stockholder of the Company, provides new
release and various other videocassettes to the Company under a
revenue sharing agreement. Under this agreement, the Company 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. The Company is required to spend a minimum
quarterly amount of revenues with the supplier.
- - The Company subleases retail space to an entity owned by the
Company's majority stockholder.
- - The Company has borrowed funds from several stockholders and
pays/incurs interest expense on the funds borrowed.
Continued
-11-
<PAGE> 14
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 1996
NOTE K--RELATED PARTY TRANSACTIONS--Continued
- - During 1995, the Company began selling previously viewed
videocassettes to a regional grocery store chain for resale. The
Company has purchased previously viewed videocassettes from the
stockholder/supplier mentioned previously to sell to the grocery
store chain. In exchange for arranging this relationship, the
Company is currently paying a sales based commission to a company
owned by certain stockholders of the Company.
NOTE L--POTENTIAL FUTURE ACQUISITIONS
The Company has signed an agreement and plan of merger with a video specialty
store chain consisting of 12 stores in Mississippi. The sole stockholder of
the Mississippi company is to receive that number of shares of Common Stock of
the Company equal to $2,555,250 divided by (a) $1.50 if the average closing
trading price of the Company's Common Stock over the 20 days preceding the
closing date (the "Trading Price") is less than $1.50, (b) the Trading Price if
such amount is between $1.50 and $2.00, or (c) $2.00 if the Trading Price is
greater than $2.00. A closing date has not been scheduled for this potential
acquisition.
The Company also has a non-binding letter of intent to acquire a video
specialty store chain consisting of 12 stores in the Akron, Ohio market for
approximately $2.6 million. The majority stockholder of the Company owns a
controlling interest in the Akron chain. A closing date has not been scheduled
for this potential acquisition.
-12-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ROADRUNNER VIDEO GROUP, INC.
BACKGROUND
Roadrunner Video Group, Inc. (the "Company") is primarily engaged in the
business of renting prerecorded videocassette movies and video games. As of
March 31, 1996, the Company owned and operated (under the name Roadrunner
Video) 39 stores primarily located throughout metropolitan Louisville, Kentucky
and southern Indiana. During the three months ended March 31, 1996, the
Company opened two stores and closed one store.
REVENUES
Revenue, which includes rental revenue and product sales, increased $119,000,
or 4% ($2.7 million in 1995 to $2.8 million in 1996). Rental revenue decreased
by $245,000 from 1995 to 1996. This decrease was due primarily to the closing
of four east coast stores and the sale of one.
Same store sales increased from 1995 to 1996 by approximately 3%.
Product sales increased by $364,000 from 1995 to 1996, which was a result of an
increase in videocassette sales at the store level as well as videocassette
sales to a major supermarket chain and other corporate customers that was
present in the first quarter of 1996, but was not present in the first quarter
of 1995.
OPERATING COSTS AND EXPENSES
Cost of Product and Other Sales
Cost of product sales increased from $72,000, or 3% of total revenue for 1995
to $330,000, or 12% of total revenue for 1996. The cost of product sales as a
percentage of product sales revenue decreased from 74% to 72% from 1995 and
1996.
Operating Expenses
Operating expenses decreased from $1.61 million in 1995, or 59% of revenues, to
$1.56 million in 1996, or 55% of revenues. The decrease resulted primarily
from a decrease in the number of stores that were in operation for the quarter
in 1996 compared to 1995. The decrease as a percentage of revenue was a
result of management selling one and closing four unprofitable East Coast
locations in 1995.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory increased from $445,000, or 16%
of rental revenue in 1995, to $526,000, or 19% of rental revenue for 1996. The
increase was due to the Company having more videos in operation for a longer
period of time in 1996 compared to 1995.
-13-
<PAGE> 16
Cost of Revenue Sharing
Pursuant to a revenue sharing agreement, a supplier, who is also a stockholder
of the Company, provides the Company with new releases and various other
videocassettes released by certain movie studios. Under this agreement, the
company 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 company pays a percentage of the rental revenues to the supplier
and expenses the revenue sharing costs under this agreement as incurred.
Cost of revenue sharing decreased from $392,000, or 14% of rental revenue for
1995 to $322,000, or 11% of rental revenue for 1996. The decrease was the
result of fewer stores in operation for 1996 compared to 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased from $185,000, or 7% of
revenues for 1995 to $279,000, or 10% of revenues for 1996. The increase in
selling, general and administrative expenses was primarily due an increase of
$93,000 in legal and accounting fees for 1996 as compared to 1995. The
increase in professional fees was due a three year audit of the Company's
financial statements and the Company's filing of its first 10-K at December 31,
1995.
Other Income/Expense
Interest expense decreased $31,000, or 29%, from 1995 to 1996. This was due
primarily to higher outstanding debt balances during 1995 as compared to 1996.
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
more highly leveraged capital structure. As of March 31, 1996, the Company had
$5,326,000 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 has important consequences for the
Company, including the following: (i) dedication of a substantial portion of
the Company's cash flow from operations to pay interest and principal on its
debt obligations, which will reduce the funds available to the Company for its
operations and future business opportunities; (ii) reduction 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 was unable to meet 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 acceptable terms or that the Company could
refinance existing indebtedness or raise sufficient funds through asset sales.
Any inability of the Company to meet its debt service requirements would have a
significant adverse effect on the Company and the market value and
marketability of the Common Stock.
-14-
<PAGE> 17
At March 31, 1996, the Company had a working capital deficit of $2,379,000.
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
the Company'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 as a reduction of working capital. Consequently,
management believes that working capital is not an appropriate measure of its
liquidity and it anticipates that it will continue to operate with a working
capital deficit.
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 in the future,
however, there is no assurance such acquisition agreements will be finalized.
Financing of such potential acquisitions would most likely include equity
offerings.
The overall net decrease in cash was $424,000 for the three months ended March
31, 1996 as a result of net cash provided by operating and financing activities
and net cash used in investing activities.
Net cash provided by operating activities was $360,000 for the three months
ended March 31, 1996. Net cash used in investing activities was $639,000 for
the three months ended March 31, 1996. This included purchases of
videocassette rental inventory of $509,000 and purchases of property and
equipment of $155,000.
Net cash used in financing activities was $145,000 for the three months ended
March 31, 1996, which represented principal payments on debt, net of additional
borrowings.
As cash flows from operating activities have not been sufficient to meet the
Company's short-term working capital needs, including the acquisition of
videocassette rental inventory, the Company has borrowed funds, restructured
debt and received equity contributions to meet these needs.
The Company's principal supplier of videocassettes agreed to provide the
Company with financing during 1995 to purchase videocassette rental inventory.
At March 31, 1996, the Company owed $797,000 under this arrangement, which is
included in long-term debt, including a current portion of $279,000.
The Company has a revenue sharing agreement and various debt agreements with
another supplier, who is also a stockholder. At March 31, 1996, the Company
owed the supplier $1,102,000, which is included in long-term debt, including a
current portion of $125,000. On March 29, 1996, the stockholder/supplier
agreed to extend the note payable until at least January 1, 1997. They
proposed payment terms which provide for monthly payments of approximately
$14,500, including interest, at 9.5%, beginning April 1, 1996, with a final
maturity in March 2000.
Under the terms of the loan agreements with the above two suppliers, the
Company is required to obtain virtually all of its videocassettes from them.
At December 31, 1995, the Company had a $600,000 line of credit with a bank
with an outstanding balance of $600,000. The line of credit matured in the
first quarter of 1996.
-15-
<PAGE> 18
On March 26, 1996, the bank loaned $900,000 to two stockholders of the Company.
The stockholders, in turn, loaned $600,000 to the Company under a line of
credit agreement. The Company repaid $600,000 to the bank. Subsequent to
March 31, 1996, the stockholders loaned an additional $180,000 to the Company.
Under the terms of the agreement with the stockholders, interest is payable
monthly at the prime rate. The principal is payable no earlier than 1998. The
agreement is collateralized by virtually all assets of the Company.
The Company 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 $138,000. In April 1996, the Company agreed with the
note holder to pay this note in three installments through November 1996, plus
a balloon payment in January 1997. The other seller used the majority of his
note to acquire common stock from a stockholder, who, in turn, offset the debt
against indebtedness he owed the Company.
During May and September 1995, the Company 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
million from a common stock sale and converted $750,000 of debt to convertible
preferred stock.
The Company 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 that
they did not want to operate these east coast stores and adopted a plan to
dispose of them (including their lease arrangements). Four of these stores
have been closed. The fifth store was sold to an unrelated third party during
the fourth quarter of 1995. The Company is in the process of soliciting
tenants for the closed store locations. The aggregate minimum lease payments
for these remaining locations at March 31, 1996 was approximately $1.3 million.
During 1995 and 1996, the Company's cash flow from operations was not
sufficient to provide enough capital to purchase videocassette rental inventory
and property and equipment, and to repay maturities of debt. The Company will
attempt to improve liquidity in 1996 by taking the measures indicated
previously (i.e. east coast store disposal plan described previously) along
with additional steps including cost reduction measures, increasing rental
revenues and increasing sales to a regional grocery store chain. If such
measures are not successful, the Company will need to raise additional capital
or obtain other financing to restore adequate liquidity.
GENERAL ECONOMIC TRENDS AND 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.
-16-
<PAGE> 19
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.
-17-
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Brenda L. Patterson, et al. v. Roadrunner Video Enterprises. Inc., et al., in
the Jefferson Circuit Court, Commonwealth of Kentucky, Division Thirteen, Case
No. 95-CI-02432.
Brenda Patterson, a former employee, has filed a Complaint against the Company,
its President, Terry Schneider, its Vice President, Wayne Jung, and a
co-worker, Willie Worthington, alleging that she was sexually harassed by those
individuals during the course of her employment. James Breslin, the former
Chief Financial Officer of the Company, has joined Patterson as a plaintiff in
this action. Breslin alleges that his employment was wrongfully terminated by
the Company after he sought to oppose the Company's practice of tolerating
sexual harassment of Ms. Patterson.
Prior to instituting this action, Patterson had filed a charge of sexual
harassment against the Company with the Equal Employment Opportunity Commission
("EEOC"). The EEOC dismissed Patterson's charge and gave her a right to sue
letter in April 1995.
Patterson is claiming damages in excess of $585,000 based in large part on her
alleged lost salary of $50,000 for a period of 10 years. Breslin is claiming
damages of over $4 million in connection with his wrongful discharge claim
based upon his alleged lost salary for a four year period and certain stock
compensation that he failed to receive when the Company went public. Breslin
has also asserted a defamation claim against Schneider for which he is seeking
over $400,000 in damages. The plaintiff's complaint also contains a claim for
punitive damages in an unspecified amount.
The Company intends to vigorously defend Patterson's and Breslin's claims and
has filed a counterclaim against those individuals. The Company's counsel is
working towards the completion of discovery in the case. This case is set for
trial beginning on October 29, 1996.
Homer Quick v. Roadrunner Video Enterprises, Inc., Jefferson Circuit Court,
Commonwealth of Kentucky, Division 16, Case No. 95-CI-02432.
Plaintiff Homer Quick filed his complaint on June 23, 1995 to collect judgment
on a subordinated convertible note executed in his favor by the Company on
August 1, 1994. The complaint seeks judgment in the principal amount of
$138,800 plus interest of 7.25% per annum for January 15, 1995 until May 14,
1995 plus interest at a rate of 12% per annum from May 14, 1995 until paid. In
April 1996, the Company agreed with the plaintiff to pay this note in three
installments through November 1996 plus a balloon payment in January 1997.
Starlite Centre, Ltd. v. Roadrunner Video Enterprises, Inc., Jefferson Circuit
Court, Commonwealth of Kentucky, Division 16, Case No. 96-CI-00888.
Plaintiff Starlite Centre is the owner of certain rental property leased from
it by the Company in Elizabethtown, Hardin County, Kentucky. Starlite has sued
the Company under the lease agreement for rent totalling $17,592.
Starlite filed its complaint on February 9, 1996 and has since negotiated a
settlement agreement with the Company pursuant to which the Company has agreed
to pay a portion of the back rent. Starlite has granted the Company an
extension to file an answer to its complaint pending compliance with the
settlement agreement.
Saul Holdings v. Roadrunner Video Enterprises, Inc., Video Knights, Inc.,
Selvac Corporation, Circuit Court of Prince William County, Commonwealth of
Virginia, At Law No. 38842.
Plaintiff Saul Holdings is the owner of property leased by the Company in
Virginia. On April 5, 1996 a judgment was entered into against the Company for
a total (including attorney's fees and costs) of $19,006. The Company is
currently attempting to negotiate a payment plan by which to satisfy this
judgment and obtain its release from the subject lease.
-18-
<PAGE> 21
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
On March 29, 1996, the Company filed a Report dated March 13,
1996 on Form 8-K to report the change of its independent
accountant. On April 12, 1996 the Company filed an amended
version of the same Report on Form 8-K/A.
-19-
<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.
By: /s/ TERRY W. SCHNEIDER
----------------------
Terry W. Schneider
Chief Executive Officer,
Acting Principal Financial Officer
Dated: May 14, 1996
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ROADRUNNER VIDEO GROUP, INC. FOR THE THREE MONTHS
ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 111,242
<ALLOWANCES> 0
<INVENTORY> 127,160
<CURRENT-ASSETS> 432,637
<PP&E> 14,921,828
<DEPRECIATION> 8,783,409
<TOTAL-ASSETS> 7,105,730
<CURRENT-LIABILITIES> 2,811,516
<BONDS> 2,514,152
0
760,000
<COMMON> 116,960
<OTHER-SE> 903,102
<TOTAL-LIABILITY-AND-EQUITY> 7,105,730
<SALES> 460,139
<TOTAL-REVENUES> 2,844,000
<CGS> 330,043
<TOTAL-COSTS> 3,012,830
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,125
<INCOME-PRETAX> (243,955)
<INCOME-TAX> 0
<INCOME-CONTINUING> (243,955)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (243,955)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
