<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,
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 September 30, 1996 was 11,695,991.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 424,206
Accounts receivable
Related parties $ 63,891 64,580
Unrelated parties 113,128 62,090
Current portion note receivable 38,776 52,153
Merchandise inventory 61,820 124,276
Prepaid handling fees to related party 34,443 144,004
Prepaid expenses 31,788 27,855
----------- -----------
TOTAL CURRENT ASSETS 343,846 899,164
NET VIDEOCASSETTE RENTAL INVENTORY 4,176,103 4,357,758
NET PROPERTY AND EQUIPMENT 1,683,200 1,721,346
OTHER ASSETS
Net intangible assets 240,293 255,613
Note receivable, less current portion 154,210 185,972
Deposits and other 109,075 105,432
----------- -----------
TOTAL ASSETS $ 6,706,727 $ 7,525,285
=========== ===========
</TABLE>
Continued
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<PAGE> 3
Consolidated Balance Sheets--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks drawn in excess of cash on deposit $ 10,589
Accounts payable
Related parties 491,692 $ 268,431
Unrelated parties 970,591 824,464
Accrued expenses and other 442,513 317,029
Liability for closed stores 237,400 454,000
Current portion of long-term debt
Related parties 2,176,441 92,500
Unrelated parties 1,676,671 835,592
----------- -----------
TOTAL CURRENT LIABILITIES 6,005,897 2,792,016
LONG-TERM DEBT, less current portion
Related parties 1,596,227
Unrelated parties 1,090,649
------------- -----------
TOTAL LIABILITIES 6,005,897 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 (4,449,766) (3,104,203)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 700,830 2,046,393
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,706,727 $ 7,525,285
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 4
Consolidated Statements of Operations (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
-------------------------- ---------------------------
1996 1995 1996 1995
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES
Rental revenues $1,794,879 $2,417,576 $ 6,207,394 $7,336,753
Product sales 423,448 405,040 1,385,101 897,234
---------- ---------- ----------- ----------
TOTAL REVENUES 2,218,327 2,822,616 7,592,495 8,233,987
OPERATING COSTS AND EXPENSES
Amortization of videocassette
rental inventory 471,235 502,819 1,550,702 1,456,216
Cost of revenue sharing
with related party 89,397 155,769 530,724 876,550
Cost of product sales
(including amounts to related
parties of $109,000 for the
nine months ended
September 30, 1995) 298,967 353,629 1,006,108 730,342
Operating expenses (net of
sublease income from
related party of approximately
$-0-, $11,000, $20,000,
and $33,000, respectively) 1,491,773 1,766,382 4,591,642 4,963,468
Selling, general and
administrative expenses
(including related party
commissions of $53,000,
$14,000, $76,000 and $30,000,
respectively) 277,186 362,241 902,658 825,945
---------- ---------- ----------- ----------
TOTAL OPERATING
COSTS AND EXPENSES 2,628,558 3,140,840 8,581,834 8,852,521
---------- ---------- ----------- ----------
OPERATING LOSS (410,231) (318,224) (989,339) (618,534)
Interest expense, net (including
related party expense of
approximately $60,000,
$37,000, $76,000 and
$90,000, respectively) 103,941 110,980 288,848 310,586
Gain on sale of assets -0- 37,939 -0- 37,939
----------- ---------- ------------ ----------
NET LOSS $ (514,172) $ (391,265) $(1,278,187) $ (891,181)
=========== ========== =========== ==========
LOSS PER COMMON SHARE $(.05) $(.04) $(.12) $(.10)
===== ===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 5
Consolidated Statements of Cash Flows (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,278,187) $ (891,181)
Adjustments
Disposal of stores (216,600)
Depreciation and amortization 1,844,131 1,717,727
Loss on disposal of assets 372,569
Changes in operating assets and liabilities
Accounts receivable (50,349) (122,283)
Merchandise inventory 62,456 66,065
Prepaid expenses 105,628 57,661
Note receivable, related party (652,698)
Other assets (3,641) (10,329)
Accounts payable 369,388 352,873
Accrued expenses and other 58,101 55,893
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,263,496 573,728
INVESTING ACTIVITIES
Purchases of videocassette rental inventory (1,741,616) (1,531,551)
Purchases of property and equipment (205,975) (167,842)
Collection of note receivable 45,139
Investment in businesses (33,983) (15,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,936,435) (1,714,393)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 1,100,000
Proceeds from borrowings 1,463,984 1,020,184
Principal payments on debt (1,225,840) (1,067,377)
Net borrowings from stockholders 180,331
Checks drawn in excess of cash on deposit 10,589
----------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 248,733 1,233,138
----------- -----------
NET INCREASE (DECREASE) IN CASH (424,206) 92,473
CASH BEGINNING OF PERIOD 424,206 93,128
----------- -----------
CASH END OF PERIOD $ -0- $ 185,601
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 6
Notes to Consolidated Financial Statements (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 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.
-6-
<PAGE> 7
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 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 September 30, 1996,
the Company owned and operated (under the name Roadrunner Video) 40 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>
Nine Months
Ended September 30
---------------------------
1996 1995
----------- ----------
<S> <C> <C>
Merchandise inventory acquired with debt $ 60,000
December 31, 1994 accounts payable
converted to long-term debt in 1995 330,000
Business acquisitions financed with long-term
debt and/or accounts payable 220,000
December 31, 1994 note payable converted to
preferred stock in 1995 750,000
December 31, 1994 note payable used to
reduce note receivable 93,500
Note payable cancelled in connection
with reverse acquisition 800,000
Dividends on preferred stock $ 67,377
</TABLE>
NOTE E--VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related accumulated amortization consisted
of the following:
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ -----------
<S> <C> <C>
Videocassette rental inventory $10,740,555 $11,908,659
Less accumulated amortization 6,564,452 7,550,901
----------- -----------
$ 4,176,103 $ 4,357,758
=========== ===========
</TABLE>
-7-
<PAGE> 8
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1996
NOTE F--PROPERTY AND EQUIPMENT
Property and equipment and related depreciation at September 30, 1996 and
December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
----------- -----------
<S> <C> <C>
Land $ 155,375 $ 155,375
Buildings 122,527 122,527
Equipment and fixtures 1,901,141 1,818,813
Leasehold improvements 460,457 357,616
Vehicles 291,720 270,915
---------- ----------
2,931,220 2,725,246
Accumulated depreciation 1,248,020 1,003,900
---------- ----------
$1,683,200 $1,721,346
========== ==========
</TABLE>
NOTE G--DEBT
Long-term debt consisted of the following at September 30, 1996 and December
31, 1995:
<TABLE>
<CAPTION>
September 30 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) 492,288 489,176
---------- ----------
1,091,839 1,088,727
Note payable to a supplier 661,042 859,420
Line of credit with a bank (See Note 2) -0- 600,000
Notes payable to certain stockholders (See Note 2) 1,145,985 -0-
Mortgage note payable to bank 260,395 -0-
Notes payable to two banks 191,990 231,232
Notes payable to various financial institutions 157,267 178,498
</TABLE>
Continued
-8-
<PAGE> 9
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1996
NOTE G--DEBT--Continued
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ ------------
<S> <C> <C>
Note payable to seller of five southern Indiana stores 137,276 174,596
Notes payable to sellers of Midwest Video 71,959 153,362
Notes payable to sellers of H&H Video
Enterprises, Inc. (See Note 3) 85,182 126,300
Various other 50,177 202,833
---------- -----------
$3,853,112 $3,614,968
========== ==========
</TABLE>
The above long-term debt is collateralized by substantially all assets of the
Company.
On November 12, 1996, the Company filed a voluntary petition under Chapter 11
of the U. S. Bankruptcy Code. (See Note M.) Because such filing constitutes
an event of default under all or substantially all of the Company's long-term
debt instruments, such amounts have been classified as current liabilities as
of September 30, 1996.
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% with a final maturity in March, 2000. The agreement has not yet been
finalized and the monthly payments have not commenced.
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 $245,985 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. In August, 1996, the
stockholders loaned the company an additional $300,000 at substantially the
same terms.
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. The Company defaulted in its payment of the November,
1996 installment and this Seller is now a judgment creditor.
-9-
<PAGE> 10
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1996
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
and the nine months ended September 30, 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.
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.
-10-
<PAGE> 11
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1996
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. On June 20, 1996,
the Company and the former employees signed a "Mutual Release and Settlement
Agreement". Both parties are legally bound not to disclose the terms of the
settlement. Management believes that the settlement of this suit was in the
best interest of the Company and will not have a material adverse effect on the
Company's results of operations or financial position.
The Company is subject to various lawsuits, claims and other legal matters in
the course of conducting its business.
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 $237,000 at September 30, 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 $1.1 million at September 30, 1996.
-11-
<PAGE> 12
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 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.
. 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
On February 19, 1996, the Company signed an agreement and plan of merger with a
video specialty store chain consisting of 12 stores in Mississippi. This
agreement provided that the closing of the contemplated merger was to occur on
or before April 30, 1996, and that the Company or the video speciality store
chain has the right to terminate the agreement and plan of merger if the merger
is not effected on or before that date. The contemplated merger has not been
effected, no closing date has been set, and the agreement, though not yet
terminated, may be terminated at any time by either party.
Under the terms of the agreement and plan of merger, 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.
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 $5.2 million. The majority stockholder of the Company owns a
controlling interest in the Akron chain.
Continued
-12-
<PAGE> 13
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1996
NOTE L--POTENTIAL FUTURE ACQUISITIONS--Continued
The Company regards the prospects of either of these acquisitions, in view of
its current financial condition, as exceedingly remote.
NOTE M--SUBSEQUENT EVENTS
On November 12, 1996, the Company filed in the United States Bankruptcy Court
for the Western District of Kentucky a voluntary petition under Chapter 11 of
the U. S. Bankruptcy Code, Case No. 96-35212.
During October, 1996, the Company closed two stores.
-13-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ROADRUNNER VIDEO GROUP, INC.
INTRODUCTION
On November 12, 1996, the Company filed in the United States Bankruptcy Court
for the Western District of Kentucky a voluntary petition under Chapter 11 of
the U. S. Bankruptcy Code, Case No. 96-35212 (the "Chapter 11 Filing").
The Company made the Chapter 11 Filing after experiencing a significant
deterioration in its financial position during the three month period ended
September 30, 1996. During this period, the Company became subject to an
increasing number of collection lawsuits and lease eviction notices, and was
generally at least 60 days delinquent in the payment of its debts. The Company
had been undertaking efforts to accomplish a substantial restructuring of its
debt or a substantial infusion of equity capital, but such efforts were
unsuccessful and prospects for the accomplishment of either appeared remote.
Consequently, the Company determined to seek to reorganize its financial
affairs under the benefits of the federal bankruptcy laws.
REVENUES
Revenue, which includes rental revenue and product sales, decreased $604,000,
or 21% for the three months ended September 30, 1996 as compared to the three
months ended September 30, 1995 and $641,000, or 8% for the nine months ended
September 30, 1996 as compared to the nine months ended September 30, 1995.
Rental revenue decreased by $623,000 for the three months ended September 30,
1996 as compared to the three months ended September 30, 1995 and by $1,129,000
for the nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995. This decrease in rental revenue was due primarily to
the closing of four east coast stores and the sale of one as well as a
reduction in same store sales.
Same store revenues decreased by approximately 13% for the three months ended
September 30, 1996 as compared to the three months ended September 30, 1995 and
2% for the nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995. Management believes that this decrease was due
primarily to increased competition. Other contributing factors included
favorable summer weather conducive to outdoor activities and the broadcast of
the summer Olympics.
Product sales increased by $18,000 for the three months ended September 30,
1996 as compared to the three months ended September 30, 1995 and by $488,000
for the nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995. This increase in product sales for such nine months
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 occurred during the first three quarters of 1996, but only in
the second and third quarters of 1995.
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<PAGE> 15
OPERATING COSTS AND EXPENSES
Cost of Product and Other Sales
Cost of product sales decreased from $354,000, or 12% of total revenue, for the
three months ended September 30, 1995 to $299,000, or 13% of total revenue, for
the three months ended September 30, 1996. The cost of product sales as a
percentage of product sales revenue decreased from 88% for the three months
ended September 30, 1995 to 71% for the three months ended September 30, 1996.
Cost of product sales increased from $730,000, or 9% of total revenue, for the
nine months ended September 30, 1995 to $1,006,000, or 13% of total revenue,
for the nine months ended September 30, 1996. The cost of product sales as a
percentage of product sales revenue decreased from 82% for the nine months
ended September 30, 1995 to 73% for the nine months ended September 30, 1996.
Operating Expenses
Operating expenses decreased from $1,766,000 for the three months ended
September 30, 1995, or 63% of revenues, to $1,492,000 for the three months
ended September 30, 1996, or 70% of revenues. Operating expenses decreased
from $4,963,000 for the nine months ended September 30, 1995, or 60% of
revenues, to $4,592,000 million for the nine months ended September 30, 1996,
or 60% of revenues. Operating expenses have remained relatively flat but have
increased as a percentage of revenues. While revenues have declined, many
operating expenses have not because of their fixed nature.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory decreased from $503,000, or 18%
of rental revenue for the three months ended September 30, 1995, to $471,000,
or 21% of rental revenue for the three months ended September 30, 1996.
Amortization of videocassette rental inventory increased from $1,456,000, or
18% of rental revenue for the nine months ended September 30, 1995, to
$1,551,000, or 20% of rental revenue for the nine months ended September 30,
1996.
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 $156,000, or 6% of rental revenue, for
the three months ended September 30, 1995 to $89,000, or 4% of rental revenue
for the three months ended September 30, 1996. Cost of revenue sharing
decreased from $877,000, or 11% of rental revenue, for the nine months ended
September 30, 1995 to $531,000, or 7% of rental revenue for the nine months
ended September 30, 1996. The decrease was the result of fewer stores in
operation and less utilization of this arrangement for 1996 compared to 1995.
-15-
<PAGE> 16
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased from $362,000, or 13%
of revenues for the three months ended September 30, 1995 to $277,000, or 12%
of revenues for the three months September 30, 1996. The decrease in selling,
general and administrative expenses was primarily due to a decrease in
professional fees.
Selling, general, and administrative expenses increased from $826,000, or 10%
of revenues for the nine months ended September 30, 1995 to $903,000, or 12% of
revenues for the nine months September 30, 1996. The increase in selling,
general and administrative expenses was primarily due to a increase in
professional fees.
Other Income/Expense
Interest expense decreased $7,000, or 7% for the three months ended September
30, 1996 as compared to the three months ended September 30, 1995. Interest
expense decreased $22,000, or 7%, for the nine months ended September 30, 1996
as compared to the nine months ended September 30, 1995. This was due
primarily to higher outstanding debt balances during 1995 as compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is not sufficient to meet its business needs.
At September 30, 1996, the Company had a working capital deficit of $2,609,000.
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 overall net decrease in cash was $424,000 for the nine months ended
September 30, 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 $1,263,000 for the nine months
ended September 30, 1996. Net cash used in investing activities was $1,936,000
for the nine months ended September 30, 1996. This included purchases of
videocassette rental inventory of $1,742,000 and purchases of property and
equipment of $206,000.
Net cash provided in financing activities was $249,000 for the nine months
ended September 30, 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.
-16-
<PAGE> 17
The Company's principal supplier of videocassettes agreed to provide the
Company with financing during 1995 to purchase videocassette rental inventory.
At September 30, 1996, the Company owed $661,000 under this arrangement, which
is included in debt. Amortization of this debt involves a monthly payment of
principal and interest. Currently, the Company is two months delinquent in
these payments.
The Company has a revenue sharing agreement and various debt agreements with
another supplier, who is also a stockholder. At September 30, 1996, the
Company owed the supplier $1,092,000, which is included in debt. 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%, with a final
maturity in March 2000. The agreement has not yet been finalized and the
monthly payments have not commenced.
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.
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 $245,985 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. In August,
1996, the stockholders loaned the Company an additional $300,000 under the same
terms as the prior loans.
In July 1996, the Company refinanced certain real estate for $263,000 and
received net proceeds of approximately $220,000 after pay-off of the previous
loan.
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 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 Company defaulted in its payment of the
November 1996 installment and this seller is now a judgment creditor.
-17-
<PAGE> 18
GENERAL ECONOMIC TRENDS AND SEASONALITY
The Company's business is affected by general economic trends. The Company
endeavors 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.
-18-
<PAGE> 19
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. On June 20, 1996, the Company and former employees signed a
"Mutual Release and Settlement Agreement". Both parties are legally bound not
to disclose the terms of the settlement. Management believes that the
settlement of this suit was in the best interest of the Company and will not
have a material adverse effect on the Company's results of operations or
financial position.
Homer Quick v. Roadrunner Video Enterprises, Inc., Jefferson Circuit Court,
Commonwealth of Kentucky, Division 16, Case No. 95-CI-03512. 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. Starlite has made notice all payments have not been made and has
demanded an answer.
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.
Movies 4 Sale, Inc. v. Roadrunner Video Group, Inc., B-44th Judicial District,
Dallas County Texas, Case No. 96-06490. Plaintiff seeks payment of $100,400
due it arising out of the sale of video games to the Company. Punitive damages
of at least $1 million are also sought. The Company intends to seek to
negotiate a payment schedule with the plaintiff regarding the $100,400 sought.
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 position.
Wyvern LTD v. Roadrunner Video Enterprises, Inc. Wyvern brought this action in
Jefferson County Circuit Court seeking to recover $57,000 allegedly due for
advertising services rendered. Wyvern received a default judgement on October
2, 1996 which the Company has moved to set aside. The hearing on that motion
to set aside is set for Tuesday, November 19, 1996. In this action, the
Company has also filed a counterclaim against Wyvern for unfair trade practices
based on Wyvern's use of promotional ideas, developed in whole or in part by
the Company's employees, for subsequent promotion of one of the Company's
competitors in the video market.
-19-
<PAGE> 20
Schottenstein Stores v. Roadrunner Video Enterprises, Inc. On November 7,
1996, the Company received service of Schottenstein's complaint. The
complaint, filed in Clark County, Indiana, seeks to recover past due amounts on
rental property in the amount of $15,287. The complaint also seeks to recover
continuing monthly payments of $4,107.
Saul Holdings v. Roadrunner Video Enterprises, Inc. Saul Holdings filed an
action for recovery of rent due for property located in Prince William County,
Virginia. Saul Holdings filed the action against the Company, Video Knights,
Inc. and Selvac Corporation. On April 5, 1996, judgement was entered in Saul
Holding's favor of $17,619.
-20-
<PAGE> 21
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Because of the Company's Chapter 11 Filing on November 12,
1996, the Company generally is in default under all of its
debt instruments.
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.
None
-21-
<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: November 14, 1996
-22-
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