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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _______________________
Commission file number - 2-83353
ROADRUNNER VIDEO GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 22-2431014
- ---------------------------------------------------- ------------------------------------------
(State of other jurisdiction of incorporation (IRS Employer Identification Number)
or organization)
</TABLE>
819 South Floyd Street, Louisville, Kentucky 40203
(Address of principal executive offices)
(502) 585-1411
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than 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]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [X]
On March 28, 1997, the registrant had 11,713,000 outstanding shares of Common
Stock, and on such date, the aggregate market value (based on the per share
market value as quoted in the Louisville Courier Journal on that date) of the
shares of Common Stock held was $1,756,950.
DOCUMENTS INCORPORATED BY REFERENCE
Part IV Certain exhibits to the registrant's prior filings with the
Securities and Exchange Commission as listed on page 56.
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<PAGE> 2
<TABLE>
<CAPTION>
INDEX
Page
Number
<S> <C> <C>
PART I
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ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 12
PART II
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ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . 22
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 49
PART III
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ITEM 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . 50
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ITEM 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . 51
ITEM 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 52
PART IV
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ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . 54
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Roadrunner Video Group, Inc. and its subsidiaries (collectively, the "Company")
operates 38 video specialty stores primarily located throughout metropolitan
Louisville, Kentucky and southern Indiana. The Company also sells previously-
viewed videocassettes on a wholesale basis to supermarkets in several states.
The Company's stores rent and sell a wide range of videos and video games, and
a variety of other products.
On July 17, 1995, Business Data Group, Inc. ("Business Data") (a publicly
traded company with no significant operations) and Roadrunner Video
Enterprises, Inc. ("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.
Following the transaction, the combined entity changed its name to Roadrunner
Video Group, Inc. and replaced its principal officers and directors with those
of Roadrunner.
REORGANIZATION
On November 12, 1996, the Company filed in the United States Bankruptcy Court
for the Western District of Kentucky a voluntary petition for reorganization
under Chapter 11 of the U. S. Bankruptcy Code, Case No. 96-35212 (the "Chapter
11 Filing") and was authorized to continue managing and operating the business
as a debtor in possession subject to the control and supervision of the Court.
The Company is in the process of developing a plan of reorganization to be
submitted to the Court and the creditors for their approval. The Company is
unable to predict when the development of its plan of reorganization will be
completed and submitted. The Company is not aware of any creditors who intend
to file their own plan of reorganization for the Company or who intend to file
a motion to dismiss or take any other action materially adverse to the
Company's ability to continue to reorganize its business affairs under its
Chapter 11 Filing, however, certain conditions exist which indicate that this
could occur.
For leases not rejected in connection with its Chapter 11 filing, the Company
has agreed to pay the total amount of back rental payments outstanding as of
the Chapter 11 filing date, plus court costs and certain other expenses, on a
monthly basis. For these leases, the Company has also agreed to make the
normal monthly payments on a timely basis. The Company has not paid all of the
normal monthly payments by the required due dates. As such, the applicable
landlords may be able to have the lease terminated and require the Company to
vacate the store or stores in question. Such actions could have a significant
adverse affect on the ability of the Company to continue as a going concern.
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OPERATING STRATEGY
The key elements of the Company's operating strategy include the following:
Smaller Markets. Most of the Company's stores which are not located in its
home market of Louisville, Kentucky are located in small towns where its
principal competition usually consists of single-store operators and small
chains that generally have smaller stores, less buying power, smaller
advertising budgets and fewer current release titles than the Company's stores.
Customer Service. The Company seeks to provide a high level of customer
service at each of its stores. The Company offers a broad selection of new
releases and catalog products, and provides customers with personalized
attention.
Geographic Concentration. The Company has traditionally concentrated its
openings and activities in areas in or near Louisville, Kentucky to maximize
operating efficiencies. The Company believes that geographic concentration
allows the Company to more easily monitor store operations through its
Louisville-based management offices and to achieve operating efficiencies in
inventory management, marketing, distribution, training and store supervision.
Since the Company operates multiple stores, it is able to receive cooperative
advertising credits from its distributors. The Company receives cooperative
advertising credits based on the volume of purchases and, by operating multiple
stores in a single geographic market, the Company can more effectively use
cooperative advertising credits to maximize the impact of its advertising. The
Company may expand its operations to other parts of the United States in the
future, but still intends to concentrate multiple stores in a particular
geographic area.
Inventory Management. In each of its markets, management seeks to maintain a
selection of new releases that balances customer demand and rental trends with
maximization of store profitability. Buying decisions are made centrally and
are based on box office results, industry newsletters, management's knowledge
of the popularity of certain types of movies in its markets and input from
store managers. Centralized buying allows the Company to obtain volume
discounts and cooperative advertising credits that are often not utilized by
its smaller competitors. Distribution costs are reduced and control of new
releases is maintained by generally having the product shipped to and processed
at the main office.
Selective Development. The Company anticipates developing one or two
stores during 1997. These stores likely will be operated as Discount Video
stores (see New Business Concepts). In some markets with multiple shopping
areas and a sufficient population base to support more than one operator, it is
often more cost-effective for the Company to develop a store rather than to buy
an existing operation. In choosing specific store sites, the Company considers
such factors as lease costs, visibility, access, traffic volume, consumer
demographics and convenience to residential neighborhoods, regardless of the
proximity of competing video specialty stores. The stores are generally
located in strip shopping centers, preferably in an end location and are easily
identified by a large sign. The Company leases the space for all but one of
its video stores from unaffiliated third parties. Competition for the best
sites can be intense. In many of its markets, there is only one main shopping
area, so it is critical to get space within that area. The Company believes
that these two new stores can be opened for approximately $45,000 per store,
because of the Company's ability to use videocassettes, equipment and fixtures
from closed stores. The Company usually acts as the general contractor with
respect to the construction of its new stores and, in that regard, employs a
construction manager who has significant video specialty store construction
experience.
Videocassette Sales. During the year ended December 31, 1996, the sale of
videocassettes accounted for approximately 18% of the Company's revenues.
Management believes videocassette sales may increase in the future.
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Acquisitions. The Company currently is unable to consider the acquisition of
other video specialty stores as a material part of its business strategy. The
acquisition of clusters of stores in targeted market areas can be a very cost
effective means of entering a new market, particularly when the stores are in
desirable locations.
NEW BUSINESS CONCEPTS
Pizza Tonight. The Company has developed a business concept called Pizza
Tonight that centers around the takeout and delivery of freshly made pizzas
made to order at a combined video/pizza store. Currently, the Company only
operates two combined video/pizza stores, but the Company regards this concept
as very attractive to consumers. It intends to expand this concept to many of
its other video stores if it is able to obtain the necessary working capital.
Discount Video. The Company is pursuing the development of new stores that
operate under the name "Discount Video". These stores, unlike other stores of
the Company, do not offer customers new videocassette releases until at least
60 days after their initial release date. They also offer catalog titles for
an extended seven-day, six-night rental term at low discount prices conducive
to a customer renting several videos for this weekly period.
STORES
The Company's stores generally are located in stand-alone sites or strip
shopping centers for heightened visibility, with a preference for end-cap
locations. The Company's stores range in size from approximately 2,800 to
10,000 square feet, with an average size of approximately 5,500 square feet.
Most of the stores are leased pursuant to leases with terms ranging from one to
ten years and varying renewal options. The Company is responsible for taxes,
insurance and utilities under most of these leases. The Company's stores are
generally open seven days a week, from 10:00 a.m. to 12:00 a.m. on weekends and
from 10:00 a.m. to 11:00 p.m. on weekdays.
The Company has developed a uniform system of design and operation that allows
for predictable costs in the opening and operation of its stores. The format
and layout of each store allow customers to conveniently locate movie titles,
facilitate browsing and provide customers with an unobstructed view across the
store. Movies are arranged in display boxes organized into categories by
topic, except for new releases, which are assembled in their own section, for
ease of selection by customers.
Each store operates under substantially the same plan of operation. Video
rentals generally range from $2.50 to $3.50 for new releases to $2.00 for
catalog titles. Stores are generally open 365 days a year. In order to
maximize profits, the Company varies the quantity of its new release inventory
from location to location to meet competition in the area. The Company
generally has a one-night rental term for new releases, which tends to keep new
releases more readily available and requires the purchase of fewer copies of
new releases than a three-day, two-night rental policy. For catalog titles,
the Company has a seven-day, six-night rental term. The policy also includes
offering the majority of catalog titles for sale in addition to rental. The
stores use a self-service system, whereby customers select products from the
shelves and bring them to the checkout counter. The stores use a computerized
system that simplifies rental and return transactions and maintains inventory
and customer information. Employees in each store can provide customers with
computerized information regarding the availability of a movie title in that
store and other information about that title.
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For the convenience of its customers, the Company operates a drop-box return
procedure at all of its locations, allowing for returns off-hours. Customers
utilizing the drop-box must return to the store to pay any unpaid rental fee
within seven days of returning the videocassette or video game. To generate
goodwill with its customers, the Company's stores will, upon customer request,
temporarily reserve titles and will special-order any title not currently in
stock for overnight delivery.
Set forth below is a historical summary showing the store openings,
acquisitions and closings by the Company since inception.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1985/1989 1990 1991 1992 1993 1994 1995 1996
--------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New Stores Opened 6 1 2 0 1 3 3 4
Stores Acquired 0 0 0 0 0 15 0 0
Stores Closed 0 0 0 0 1 0 7 4
Total Stores at End of Period 21 22 24 24 24 42 38 38
</TABLE>
The Company closed five stores in January through March 1997.
PRODUCTS
During the year ended December 31, 1996, approximately 82% of the Company's
revenues were derived from the rental of videocassettes and 18% from the sale
of videocassettes, and other products.
The Company's stores generally offer from 8,000 to 10,000 videocassettes (from
2,500 to 8,000 titles) and from 500 to 900 video games (from 400 to 800 titles)
for rental and sale, depending upon the location. The Company rents and sells
adult videocassettes in all of its stores. A typical store's inventory is made
up of 7,500 catalog selections (chosen from a core selection of about 7,000
titles), with the balance representing new release titles. Each store has a
few special interest titles, covering subjects such as hunting, golf and
education, selected by management to appeal to the customer base in the store's
market area.
Management believes that a typical store's revenues are affected by its new
release title selection and the number of copies of each new release available
for rental as compared to the competition. The Company is committed to
offering as many copies of new releases as necessary to be competitive within a
market, while at the same time keeping its costs as low as possible.
Videocassettes offered for sale in video stores are generally special interest
titles, children's or other titles promoted by the studios for sell-through and
seasonal titles connected to particular holidays.
MARKETING AND ADVERTISING
The Company historically has marketed its stores and merchandise through radio
and direct mail and to a lesser extent through newspaper advertising, discount
coupons, celebrity appearances and promotional materials. Because of the
Company's financial position, its marketing and advertising efforts have
significantly decreased and currently generally consist of coupons and limited
radio time that is provided in exchange for the Company supporting a
promotional activity of the radio station.
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INVENTORY AND INFORMATION MANAGEMENT
The videocassette and video game inventory in each store consists of its
catalog titles (generally, those in release for more than one year) and new
release titles. Videocassettes and video games utilized as initial inventory
in the Company's new stores consist of excess copies of catalog titles and new
release titles from existing stores, supplemented as necessary by purchases
directly from suppliers. This inventory for new stores is packaged at a 28,500
square foot warehouse, adjacent to its headquarters facility in Louisville,
Kentucky. Each videocassette and video game is removed from its original
packaging and an optical bar code label, used in the Company's computerized
inventory system, is applied to both the packaging and the plastic rental case.
The cassette is placed in the rental case, and a display carton is created by
inserting foam or cardboard into the original packing and shrink-wrapping the
carton. The re-packaged videocassettes, video games and display cartons are
then shipped to the store ready for use. The Company believes that its
existing distribution facilities will be adequate for the foreseeable future.
In each of its markets, management seeks to maintain a selection of new
releases and catalog products consistent with maximization of store
profitability. Buying decisions are made centrally and are based on the size
of the active customer base, new release dates, box office results, industry
newsletters and management's knowledge of the popularity of certain types of
movies in its markets. The Company believes that centralized buying allows it
to obtain volume discounts.
The Company maintains two distinct business systems: a store sales system and a
corporate information system. All rental and sales transactions are recorded
by the store sales system at the time of customer checkout. The systems track
all rental and sales products from the warehouse to each store. The systems
also maintain detailed rental history of each customer and title. This
information produces the reports used by the Company, including those used in
making purchasing decisions on new releases. All of the Company's stores,
including all of the acquired stores, use the Company's store sales system.
SUPPLIERS
The video inventory in each of the Company's stores consists of catalog and new
release titles, which it either purchases or rents. The Company acquires
generally all of its new release videos and substantially all of its catalog
videos by purchase directly from one video wholesale supplier. The Company
purchases from such wholesaler rather than directly from movie studios because
the Company believes that the cost savings of direct purchases would not offset
the expense to the Company of establishing its own distribution system.
Currently, the typical cost of new release videos purchased by the Company is
approximately $60 to $68 except for videos merchandized primarily for immediate
sale, for which the cost is typically $5 to $20.
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<PAGE> 8
The Company has an agreement with a stockholder/supplier to rent new release
titles under a revenue sharing agreement which expires in 1999. Under this
agreement, the Company is obligated to obtain a minimum annual dollar amount of
new release titles from the supplier, and to the extent that the Company elects
to obtain a new release title from the supplier, it must obtain all copies of
that title from the supplier. Approximately 45% of new release titles
available through normal distribution channels in any given period are also
available through the supplier as a result of its relationship with certain
movie studios. During the revenue sharing period, which is generally one year
(but does not exceed two years) per title, the movie studio retains ownership
of the video and the Company shares the rental revenue with the supplier rather
than purchasing the video for a fixed cost. In addition, the Company must make
an initial payment of approximately $8 per video obtained pursuant to this
agreement. The initial payment is amortized on a straight-line basis over the
estimated average revenue sharing period (approximates twelve months). The
Company expenses revenue sharing costs as incurred. At the end of the revenue
sharing period for a title, the Company has the option to purchase the copies
of that title, generally for less than $5 per copy. The Company has not
utilized this arrangement during 1996 to the extent required, for various
business reasons, and may be regarded to be in breach of this agreement by the
stockholder/supplier.
Both of the above suppliers have provided loans to the Company. Under the
terms of the loan agreements, the Company is required to obtain virtually all
of its videocassettes from these two suppliers.
COMPETITION
The video retail industry is highly competitive. Management believes the
competition faced by the Company is the primary reason behind the Company's
deteriorating financial position and its subsequent Chapter 11 Filing. The
Company competes against Blockbuster, Hollywood Video and West Coast Video, all
of whom have significantly greater financial and marketing resources than the
Company. Each of these named companies have been active in increasing their
presence in metropolitan Louisville, Kentucky.
The Company also competes with other businesses offering videos and video
games, such as supermarkets, pharmacies, convenience stores, bookstores, mass
merchants, mail order operations and other retailers. In addition, the
Company's stores compete with other leisure-time activities, including movie
theaters, network and cable television, live theater, sporting events and
family entertainment centers. However, many of these have a higher per-person
cost than the rental of a video.
The Company believes the principal competitive factors among participants in
the video retail industry are store location and visibility, title selection,
the number of copies of each new release available and customer service. While
the Company does not believe that price is a significant competitive factor
among video retailers, it is a significant factor relative to competition with
movie theaters and other forms of entertainment.
The Company's stores also compete with Pay-Per-View cable television systems,
in which home subscribers pay a fee to see a movie selected by the subscriber.
Existing Pay-Per-View services offer a limited number of channels and movies
and are generally available only to households with a converter to unscramble
incoming signals. Recently developed technologies, however, permit certain
cable companies, direct broadcast satellite companies, telephone companies and
other telecommunications companies to transmit a much greater number of movies
to homes in more markets as frequently as every five minutes, referred to as
Near Video-on-Demand. Ultimately, further improvement in these technologies
could lead to the availability of a broad selection of movies to consumers on
demand, referred to as Video-on-Demand, at a price which is competitive with
the price of video rentals.
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<PAGE> 9
The Company believes movie studios have a significant interest in maintaining a
viable movie rental business because the sale of videocassettes to video retail
stores currently represents the studios' largest source of revenue. As a
result, the Company anticipates that movie studios will continue to make movie
titles available to cable television or other distribution channels only after
revenues have been derived from the sale of videocassettes to video stores. In
addition, the Company believes substantial technological developments will be
necessary to allow Pay-Per-View television to match the low price, viewing
convenience and selection available through video rental, and substantial
capital expenditures will be necessary to implement Video-on-Demand systems.
Technological advances or changes in the manner in which movies are marketed,
including the earlier release of movie titles to cable television or other
distribution channels, could make these technologies more attractive and
economical, which could have an adverse effect on the business of the Company.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 200 employees, of
whom approximately 100 are employed on a full-time basis. Of these employees,
approximately 30 were employed in the Company's corporate offices and
distribution operations. None of the Company's employees are represented by a
labor union, and the Company believes that its relations with its employees are
good.
Each of the Company's stores employ approximately three to eight persons,
including one manager and one assistant manager. Area managers supervise the
operations of a group of four to five stores each. They report directly to the
management personnel in the Company's corporate offices.
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<PAGE> 10
ITEM 2. PROPERTIES
PROPERTIES
Most of the Company's stores are leased pursuant to leases with terms ranging
from one to ten years, with varying option renewal periods. The Company
anticipates that future stores will also be located on leased premises.
STORE LOCATIONS
The following table sets forth the locations of the Company's stores as of
December 31, 1996:
<TABLE>
<CAPTION>
KENTUCKY INDIANA
- -------- -------
<S> <C>
Bardstown (closed March 1997) Bedford
Crestwood Charlestown
Elizabethtown (closed February 1997) Clarksville
Hillview Corydon
LaGrange Indianapolis (2 locations)
Louisville (18 locations) (2 locations Jeffersonville (closed January 1997)
closed in January and February 1997) Madison
Mt. Washington New Albany
Shelbyville North Vernon
Shepherdsville Scottsburg
Sellersburg
</TABLE>
The Company's corporate headquarters are located at 819 South Floyd Street,
Louisville, Kentucky 40203 and consists of approximately 10,000 square feet of
office space and 18,500 square feet of storage space. This facility is
presently leased by the Company on a month-to-month basis for approximately
$4,600 per month.
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<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in the following civil actions, each of which has
been stayed as a result of the Company's Chapter 11 Filing (see Item 1.
Business - Reorganization):
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. The
Company defaulted in its payment of the November 1996 installment and this
seller is now a judgment creditor.
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 that all payments have not been made and
has demanded an answer.
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 from the sale of video games to the Company. Punitive damages of
at least $1 million are also sought.
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 judgment on October
2, 1996 which the Company has moved to set aside. 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.
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, judgment was entered in Saul
Holding's favor of $17,619.
Michelle Scott v. Roadrunner Video D/B/A Discount Video Michelle Scott is
prosecuting a claim through the Indiana Civil Rights Commission for alleged
sexual harassment. The complaint was filed in June 1996. Management believes
this claim is without merit.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, one cent par value, is presently traded
over-the-counter but not in any established market nor on any national
securities exchange. The Common Stock presently is not subject to quotation by
the National Association of Securities Dealers Automated Quotation Systems
("NASDAQ"). To date, trading in shares of the Company's Common Stock has been
sporadic and infrequent, and generally have involved a relatively small number
of shares. No cash dividends have been paid, nor does the company expect to
pay any dividends in the foreseeable future. Currently, certain debt
agreements prohibit the payment of dividends without the prior approval of the
lender.
The following table presents the high and low bid prices as reported by the
National Quotation Bureau, Inc., a registered securities association:
<TABLE>
<CAPTION>
Quarterly Common Stock Price Ranges
-----------------------------------------------
1996 High Low
------------ ------ -------
<S> <C> <C>
1st Quarter $2.375 $1.000
2nd Quarter 2.438 .875
3rd Quarter 1.375 .688
4th Quarter 1.250 .125
1995 High Low
------------ ------ -------
1st Quarter $ .500 $ .250
2nd Quarter 2.375 .250
3rd Quarter 2.875 1.375
4th Quarter 3.313 1.250
</TABLE>
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(In thousands, except per share and
other operating data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
REVENUES
Rental revenues $6,329 $6,499 $ 8,307 $ 9,554 $ 7,940
Product sales 389 569 399 1,781 1,771
Other 122 119 24 1 14
------ ------ -------- ------- --------
TOTAL REVENUES 6,840 7,187 8,730 11,336 9,725
OPERATING COSTS AND EXPENSES
Amortization of videocassette
rental inventory 1,457 1,409 1,857 2,027 2,039
Cost of revenue sharing 112 923 764 1,108 673
Cost of product sales 276 399 278 1,617 1,577
Operating expenses 3,484 3,657 5,288 6,359 6,097
Selling, general and
administrative expenses 645 1,049 1,407 1,099 1,034
Impairment of long-lived assets 155
Disposal of stores 1,700 (217)
Reorganization expenses 38
------ ------ -------- ------- --------
TOTAL OPERATING COSTS
AND EXPENSES 5,974 7,437 11,294 11,993 11,613
------ ------ -------- ------- --------
OPERATING INCOME (LOSS) 866 (250) (2,564) (657) (1,888)
NONOPERATING INCOME (EXPENSE)
Interest expense, net (137) (105) (297) (394) (389)
Other, net 14 (3) 233 (15)
------ ------ ------- ------ -------
TOTAL NONOPERATING INCOME
(EXPENSE) (137) (91) (300) (161) (404)
----- ----- ------- ------ -------
INCOME (LOSS) BEFORE
INCOME TAXES 729 (341) (2,864) (818) (2,292)
PROVISION (BENEFIT) FOR
INCOME TAXES 294 (134) (336)
------ ----- ------- ------ --------
NET INCOME (LOSS) $ 435 $(207) $(2,528) $ (818) $(2,292)
====== ===== ======= ====== =======
OPERATING INCOME (LOSS)
PER SHARE $.09 $(.03) $(.31) $(.07) $(.16)
==== ===== ===== ===== =====
NET INCOME (LOSS)
PER SHARE $.04 $(.02) $(.31) $(.09) $(.20)
==== ===== ===== ===== =====
SHARES USED IN COMPUTING
PER SHARE AMOUNTS 9,680 9,621 8,201 9,868 11,702
===== ===== ===== ===== ======
</TABLE>
-14-
<PAGE> 15
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(In thousands, except per share and
other operating data)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA
Number of stores at
end of year 24 24 42 38 38
BALANCE SHEET DATA
Cash 102 101 93 424 212
Net videocassette rental
inventory 2,821 3,036 4,455 4,358 3,839
Net property and equipment 1,100 1,268 1,842 1,721 1,558
TOTAL ASSETS 4,279 4,790 6,879 7,525 6,079
LIABILITIES SUBJECT TO SETTLEMENT
UNDER REORGANIZATION 5,718
LONG-TERM DEBT 1,728 2,420 4,231 3,615 0
TOTAL LIABILITIES 2,488 3,432 7,049 5,479 6,311
PREFERRED STOCK 760 760
STOCKHOLDERS' EQUITY (DEFICIT) 1,791 1,358 (170) 2,046 (232)
</TABLE>
NOTES -
. Includes the operations of Midwest Wholesalers Limited Partnership,
Roadrunner Video, Inc. and H&H Video Enterprises, Inc. since their
acquisitions in May 1995, March 1994 and August 1994, respectively.
. Includes the operations of five video stores acquired from Video
Knights, Inc. from their acquisition in June 1994 through the
closing and/or sale of such stores in the fourth quarter of 1995.
. Shares used in computing net income or loss per share have been
retroactively restated to reflect the transaction with Business
Data Group, Inc.
-15-
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain of the information set forth in this section, Management's Discussion
and Analysis of Financial Condition and Results of Operations, include
forward-looking statements which reflect management's expectations. Such
forward-looking statements may be significantly impacted by certain risks and
uncertainties described herein.
REORGANIZATION
On November 12, 1996, the Company filed in the United States Bankruptcy Court
for the Western District of Kentucky a voluntary petition for reorganization
under Chapter 11 of the U. S. Bankruptcy Code, Case No. 96-35212 (the "Chapter
11 Filing") and was authorized to continue managing and operating the business
as a debtor in possession subject to the control and supervision of the Court.
The Company is in the process of developing a plan of reorganization to be
submitted to the Bankruptcy Court and creditors for their approval. The
Company is unable to predict when the development of its plan of reorganization
will be completed and submitted. The Company is not aware of any creditors who
intend to file their own plan of reorganization for the Company or who intend
to file a motion to dismiss or take any other action materially adverse to the
Company's ability to continue to reorganize its business affairs under its
Chapter 11 filing, however, certain conditions exist which indicate that this
could occur.
For leases not rejected in connection with its Chapter 11 filing, the Company
has agreed to pay the total amount of back rental payments outstanding as of
the Chapter 11 filing date, plus court costs and certain other expenses, on a
monthly basis. For these leases, the Company has also agreed to make the
normal monthly payments on a timely basis. The Company has not paid all of the
normal monthly payments by the required due dates. As such, the applicable
landlords may be able to have the lease terminated and require the Company to
vacate the store or stores in question. Such actions could have a significant
adverse affect on the ability of the Company to continue as a going concern.
1996 COMPARED TO 1995
REVENUES
Revenues, which includes rental revenues and product sales, decreased $1.6
million, or 14% ($11.3 million in 1995 to $9.7 million in 1996). Approximately
$700,000 or 4% of the above decrease resulted from the closing of five East
Coast stores in the third and fourth quarters of 1995. The remaining decreases
were due in part to a 9% decrease in same store rental revenues (for stores
in operation for a full 12 months for both 1996 and 1995) which management
believes is due to increased competition.
Product sales were 18% and 16% of total revenues for years ended December 31,
1996 and 1995, respectively. The company believes videocassette sales may
increase and videocassette rentals may remain the same or decrease, in the
future.
OPERATING COSTS AND EXPENSES
Cost of Product and Other Sales
Cost of product sales were constant from 1995 to 1996 due to sales being
relatively flat.
-16-
<PAGE> 17
Operating Expenses
Operating expenses decreased from $6.4 million in 1995, or 57% of revenues, to
$6.1 million in 1996, or 63% of revenues. The decrease resulted primarily from
a decrease in the number of stores that were in operation for a full year in
1995 compared to 1996.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory remained constant at $2 million
for 1995 and 1996, representing 22% and 26% of rental revenue, respectively.
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 $1.1 million, or 12% of rental revenue
for 1995 to $673,000, or 8% of rental revenue for 1996. The decrease was due
to the fact that the Company discontinued utilizing this revenue sharing
arrangement in April 1996.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased slightly from 1995 to
1996. This was due primarily to a decrease in advertising expense in 1996
compared to 1995. The decrease in advertising expense was due to increased
dependency on cooperative advertising.
Other Income/Expense
Interest expense was relatively constant from 1995 to 1996, as was the balance
of debt outstanding. The gain on sale of assets in 1995 resulted from the sale
of the assets of the Silver Springs, Maryland location and the sale of other
fixed assets.
Benefit for Income Taxes
There was not a benefit for income taxes in either 1996 or 1995. This was the
result of no income taxes being recorded since 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.
-17-
<PAGE> 18
1995 COMPARED TO 1994
REVENUES
Revenues, which includes rental revenues and product sales, increased $2.6
million, or 30% ($8.7 million in 1994 to $11.3 million in 1995). Approximately
27% of the above increase resulted from the full year's operating results in
1995 from five new stores opened in 1994. These five additional stores helped
generate over $700,000 in revenues for 1995. Approximately 38% of the increase
was due to the acquisition of 15 video stores during 1994. These stores were
not in operation for a full year in 1994, and by being open for a full year in
1995, helped contribute over $1 million in additional revenue during the year.
The above increases were offset in part by an 8% decrease in same store sales
(for stores in operation for a full 12 months for both 1995 and 1994). The
remaining balance of the net increase was from the sale of new and previously
viewed videocassettes to a major grocery store chain.
Product sales were 16% and 5% of total revenues for years ended December 31,
1995 and 1994, respectively. Part of the increase was the result of over
$900,000 in videocassette sales to a major grocery store chain during 1995.
OPERATING COSTS AND EXPENSES
Cost of Product and Other Sales
Cost of product sales increased from $278,000, or 3% of total revenue for 1994
to $1.6 million, or 14% of total revenue for 1995. The cost of product sales
as a percentage of product sales revenue increased from 70% to 90% for 1994 and
1995. The decrease in the gross margin was due in large part to volume
discounts to the grocery store chain. Prior to 1995, product sales were only
at the retail store level.
Operating Expenses
Operating expenses increased from $5.3 million in 1994, or 61% of revenues, to
$6.4 million in 1995, or 57% of revenues. The increase resulted primarily from
an increase in the number of stores that were in operation for a full year in
1995 compared to 1994. 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 $1.9 million, or
22% of rental revenue in 1994, to $2 million, or 22% of rental revenue for
1995. The increase was due to the company having more stores in operation for
a longer period of time in 1995 compared to 1994. This created additional
purchases of videocassettes for rental, causing an increase in amortization.
-18-
<PAGE> 19
Cost of Revenue Sharing
Cost of revenue sharing increased from $800,000, or 9% of rental revenue for
1994 to $1.1 million, or 12% of rental revenue for 1995. The increase was the
result of more stores in operation and more usage of this supplier for 1995
compared to 1994. The additional stores in operation for 1995 generated the
$300,000 increase in revenue sharing from 1994 to 1995.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from $1.4 million, or
16% of revenues for 1994 to $1.1 million, or 9% of revenues for 1995. The
decrease in selling, general and administrative expenses was primarily due to
the decrease in advertising expense and professional fees for 1995 as compared
to 1994. The decrease in advertising expense was due to increased usage of
cooperative advertising. The decrease in professional fees was due to less
acquisition and development activity.
Other Income/Expense
Interest expense increased $97,000, or 32%, from 1994 to 1995. This was due
primarily to higher outstanding debt balances during 1995 as compared to 1994.
The gain on sale of assets in 1995 resulted from the sale of the assets of the
Silver Springs, Maryland location and the sale of other fixed assets.
Benefit for Income Taxes
Benefit for income taxes decreased from $336,000 in 1994 to zero in 1995. The
decrease was the result of no income taxes being recorded during 1995 since 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.
-19-
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is not sufficient to meet its business needs.
While under the protection of the federal bankruptcy laws, the Company is
endeavoring to improve its liquidity and increase its capital resources which
may include a possible private placement of its securities or an acquisition of
the Company. The Company may also, in the future, seek to borrow funds under
arrangements acceptable to the Bankruptcy Court.
At December 31, 1996, the Company had a working capital deficit of $191,000.
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 reflect low working
capital or a working capital deficit.
The overall net decrease in cash was $212,000 for the year ended December 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 $1,176,000 for the year ended
December 31, 1996. Net cash used in investing activities was $1,737,000 for
the year ended December 31, 1996. This included purchases of videocassette
rental inventory of $1,521,000 and purchases of property and equipment of
$217,000.
Net cash provided in financing activities was $349,000 for the year ended
December 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 December 31, 1996, the Company owed $684,000 under this arrangement, which
is included in Liabilities Subject To Settlement Under Reorganization on the
Company's balance sheet.
The Company has a revenue sharing agreement and various debt agreements with
another supplier, who is also a stockholder. At December 31, 1996, the Company
owed the supplier $1,168,000, which is included in Liabilities Subject To
Settlement Under Reorganization on the Company's balance sheet.
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.
-20-
<PAGE> 21
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.
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 another 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
1995.
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.
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.
-21-
<PAGE> 22
ITEM 8--FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
ROADRUNNER VIDEO GROUP, INC.
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Financial Statements
Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
-22-
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Roadrunner Video Group, Inc.
We have audited the accompanying consolidated balance sheets of Roadrunner
Video Group, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Roadrunner Video
Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note C, on November
12, 1996, the Company filed a voluntary petition for reorganization under
Chapter 11 of the Federal Bankruptcy Code and was authorized to continue
managing and operating the business as a debtor in possession subject to the
control and supervision of the Bankruptcy Court. Those conditions raise
substantial doubt about the Company's ability to continue as a going concern
and an uncertainty as to the recoverability and classification of recorded
asset amounts, and the amounts and classification of liabilities. The
financial statements do not include any adjustments related to the
recoverability and classification of asset carrying amounts or to the amount
and classification of liabilities should the Company be unable to continue as a
going concern.
Louisville, Kentucky
March 27, 1997
-23-
<PAGE> 24
Consolidated Balance Sheets
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 212,024 $ 424,206
Accounts receivable
Related parties 60,936 64,580
Unrelated parties 12,345 62,090
Current portion note receivable 42,778 52,153
Merchandise inventory 36,237 124,276
Prepaid handling fees to related party 8,242 144,004
Prepaid rent 29,801 27,855
---------- -----------
TOTAL CURRENT ASSETS 402,363 899,164
NET VIDEOCASSETTE RENTAL INVENTORY 3,839,147 4,357,758
NET PROPERTY AND EQUIPMENT 1,557,619 1,721,346
OTHER ASSETS
Net intangible assets 41,672 255,613
Note receivable, less current portion 143,194 185,972
Deposits 95,265 105,432
---------- -----------
TOTAL ASSETS $6,079,260 $ 7,525,285
========== ===========
</TABLE>
Continued
-24-
<PAGE> 25
Consolidated Balance Sheets--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable
Related parties $ 22,902 $ 268,431
Unrelated parties 33,891 824,464
Rent payable under agreed orders 376,031
Accrued expenses and other 160,392 317,029
Liability for closed stores 454,000
Current portion of long-term debt
Related parties 92,500
Unrelated parties 835,592
----------- ----------
TOTAL CURRENT LIABILITIES 593,216 2,792,016
LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION
Related parties 2,957,631
Unrelated parties 2,760,060
LONG-TERM DEBT, less current portion
Related parties 1,596,227
Unrelated parties 1,090,649
----------- ----------
TOTAL LIABILITIES 6,310,907 5,478,892
COMMITMENTS AND CONTINGENCIES (Notes B, C, J and K)
STOCKHOLDERS' EQUITY (DEFICIT)
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, 11.713 and 11.696 million shares,
respectively, issued and outstanding 117,130 116,960
Paid-in-capital 4,287,466 4,273,636
Accumulated deficit (5,396,243) (3,104,203)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (231,647) 2,046,393
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,079,260 $7,525,285
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
-25-
<PAGE> 26
Consolidated Statements of Operations
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Rental revenues $ 7,940,376 $ 9,553,615 $ 8,306,546
Product sales 1,770,432 1,781,258 398,915
Other 14,028 1,497 23,603
----------- ----------- -----------
TOTAL REVENUES 9,724,836 11,336,370 8,729,064
OPERATING COSTS AND EXPENSES
Amortization of videocassette
rental inventory 2,039,000 2,027,000 1,857,000
Cost of revenue sharing
with related party 672,829 1,108,016 763,849
Cost of product sales 1,576,922 1,617,315 277,968
Operating expenses (net of sublease
income from related party of
approximately $9,000, $39,000,
and $40,000, respectively) 6,097,208 6,358,723 5,287,544
Selling, general and
administrative expenses
(including related party
commissions of $90,000
in 1996 and $48,000 in 1995) 1,034,944 1,099,002 1,406,927
Impairment of long-lived assets 154,756
Disposal of stores (216,577) 1,700,000
----------- ----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 11,575,659 11,993,479 11,293,288
----------- ----------- -----------
OPERATING LOSS (1,850,823) (657,109) (2,564,224)
OTHER INCOME (EXPENSE)
Interest expense, net (including
related party expense of
approximately $183,000,
$100,000, and $47,000, respectively) (388,728) (394,426) (297,085)
Gain (loss) on disposal of
property and equipment (32,801) 233,753
Other, net 18,000 (3,218)
----------- ----------- ----------
LOSS BEFORE REORGANIZATION ITEMS AND INCOME TAXES (2,254,352) (817,782) (2,864,527)
Reorganization expenses (37,688)
------------ ---------- ----------
Loss before income taxes (2,292,040) (817,782) (2,864,527)
BENEFIT OF INCOME TAXES (336,000)
----------- ----------- -----------
NET LOSS $(2,292,040) $ (817,782) $(2,528,527)
=========== =========== ===========
LOSS PER COMMON SHARE $(.20) $(.09) $(.31)
===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
-26-
<PAGE> 27
Consolidated Statements of Stockholders' Equity (Deficit)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
For the Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------
Series A Series B
---------------------------- ----------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1994
Issuance of Common Stock
1994 net loss
BALANCES, DECEMBER 31, 1994
Issuance of Common Stock
January 1995
July 1995
Merger with Business Data
Group, Inc. on July 17,
1995 1,000 $10,000
Conversion of Selvac debt to
Preferred Stock 75,000 $750,000
Issuance of Common Stock
December 1995
Dividends on Series B
Preferred Stock -
$.55 per share
1995 net loss
------- --------- -------- ----------
BALANCES, DECEMBER 31, 1995 1,000 10,000 75,000 750,000
Conversion of debt to
Common Stock
1996 net loss
------- --------- -------- ----------
BALANCES, DECEMBER 31, 1996 1,000 $10,000 75,000 $750,000
======= ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
One Cent Par Value
Shares Amount
---------- ----------
<S> <C> <C>
BALANCES, JANUARY 1, 1994
Issuance of Common Stock
1994 net loss
BALANCES, DECEMBER 31, 1994
Issuance of Common Stock
January 1995
July 1995
Merger with Business Data
Group, Inc. on July 17,
1995 11,412,000 $114,120
Conversion of Selvac debt to
Preferred Stock
Issuance of Common Stock
December 1995 283,991 2,840
Dividends on Series B
Preferred Stock -
$.55 per share
1995 net loss
------------ ----------
BALANCES, DECEMBER 31, 1995 11,695,991 116,960
Conversion of debt to
Common Stock 17,009 170
1996 net loss
------------ ----------
BALANCES, DECEMBER 31, 1996 11,713,000 $117,130
========== ========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
No Par Value
---------------------------
Treasury Stock Paid-in
--------------------------
Shares Amount Shares Amount Capital
---------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1994 1,300.0 $1,419,609 200 $(345,000)
Issuance of Common Stock 105.0 1,000,000
1994 net loss
---------- ---------- -------- ---------- -------------
BALANCES, DECEMBER 31, 1994 1,405.0 2,419,609 200 (345,000)
Issuance of Common Stock
January 1995 10.6 100,000
July 1995 105.0 1,000,000
Merger with Business Data
Group, Inc. on July 17,
1995 (1,520.6) (3,519,609) (200) 345,000 $3,850,489
Conversion of Selvac debt to
Preferred Stock
Issuance of Common Stock
December 1995 423,147
Dividends on Series B
Preferred Stock -
$.55 per share
1995 net loss
---------- ---------- -------- ---------- ------------
BALANCES, DECEMBER 31, 1995 0.0 -0- -0- -0- 4,273,636
Conversion of debt to
Common Stock 13,830
1996 net loss
---------- ---------- -------- ---------- ------------
BALANCES, DECEMBER 31, 1996 0.0 $ -0- -0- $ -0- $ 4,287,466
========== ========== ======== ========== ============
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
--------------- ----------------
<S> <C> <C>
BALANCES, JANUARY 1, 1994 $ 283,531 $ 1,358,140
Issuance of Common Stock 1,000,000
1994 net loss (2,528,527) (2,528,527)
----------- -----------
BALANCES, DECEMBER 31, 1994 (2,244,996) (170,387)
Issuance of Common Stock
January 1995 100,000
July 1995 1,000,000
Merger with Business Data
Group, Inc. on July 17,
1995 800,000
Conversion of Selvac debt to
Preferred Stock 750,000
Issuance of Common Stock
December 1995 425,987
Dividends on Series B
Preferred Stock -
$.55 per share (41,425) (41,425)
1995 net loss (817,782) (817,782)
----------- -----------
BALANCES, DECEMBER 31, 1995 (3,104,203) 2,046,393
Conversion of debt to
Common Stock 14,000
1996 net loss (2,292,040) (2,292,040)
----------- -----------
BALANCES, DECEMBER 31, 1996 $(5,396,243) $ (231,647)
=========== ============
</TABLE>
<PAGE> 28
Consolidated Statements of Cash Flows
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $(2,292,040) $ (817,782) $(2,528,527)
Adjustments
Disposal of stores (216,577) 1,700,000
Depreciation and amortization 2,446,119 2,400,014 2,229,650
Deferred income taxes (336,000)
Loss (gain) on disposal of assets 32,801 (233,753) 3,284
Impairment of long-lived assets 154,756
Changes in operating assets and liabilities
Accounts receivable 105,542 (71,680) 53,400
Merchandise inventory 88,039 11,653 (40,140)
Prepaid expenses 133,816 50,390 (148,826)
Other assets 10,167 (56,278) (24,883)
Accounts payable 371,312 578,000 708,741
Rent payable under agreed orders 376,031
Rent payments related to closed stores (272,103)
Accrued expenses and other 21,466 (235,006) 144,774
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,175,906 1,408,981 1,761,473
INVESTING ACTIVITIES
Purchases of videocassette rental inventory (1,520,710) (1,970,532) (1,874,507)
Purchases of property and equipment (216,687) (272,733) (248,449)
Investment in businesses acquired,
net of $110,000 of cash and
inventories acquired in 1994 (45,000) (578,089)
Proceeds from disposal of
property and equipment 76,593
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,737,397) (2,211,672) (2,701,045)
FINANCING ACTIVITIES
Proceeds from borrowings 1,538,017 1,327,632 753,252
Principal payments on debt (1,188,708) (1,193,863) (836,158)
Issuance of Common Stock 1,000,000 1,000,000
Net repayments from affiliate 14,584
----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 349,309 1,133,769 931,678
----------- ----------- -----------
Net Increase (Decrease) in Cash (212,182) 331,078 (7,894)
CASH BEGINNING OF YEAR 424,206 93,128 101,022
----------- ----------- -----------
CASH END OF YEAR $ 212,024 $ 424,206 $ 93,128
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-28-
<PAGE> 29
Notes to Consolidated Financial Statements
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE A--ORGANIZATION AND BASIS OF PRESENTATION
Description of Business--Roadrunner Video Group, Inc (the "Company") is
primarily engaged in the business of renting and selling prerecorded
videocassette movies and video games. As of December 31, 1996, the Company
owned and operated (under the name Roadrunner Video and Discount Video) 38
stores primarily located throughout metropolitan Louisville, Kentucky and
southern Indiana.
Transaction with Business Data Group, Inc.--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 1996, 1995, and 1994 are the consolidated
financial statements of Roadrunner. The operations of Business Data have been
included in the accompanying financial statements from the date of acquisition.
Following the transaction, the combined entity changed its name to Roadrunner
Video Group, Inc. and replaced its principal officers and directors with those
of Roadrunner. The $800,000 loan (mentioned above) was canceled.
Consolidated Companies--The consolidated financial statements also include the
accounts of H&H Video Enterprises, Inc., a video store company acquired in 1994
(Note K). All significant intercompany accounts have been eliminated.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merchandise Inventory--Merchandise inventory consists primarily of
videocassettes and games for resale, popcorn, candy and related items that are
stated at the lower of cost (determined on a first-in, first-out basis) or
market value.
Continued
-29-
<PAGE> 30
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Videocassette Rental Inventory--Videocassette rental inventory, which also
includes video games, is recorded at cost and amortized over its estimated
economic life. Videocassettes which are considered base stock are amortized
over thirty- six months on a straight-line basis with a residual value of $4
per videocassette. New release videocassettes are amortized as follows: the
first ten videocassettes per store are amortized as base stock and any
succeeding copies are amortized over twelve months on an accelerated basis.
The Company does not capitalize any direct or indirect processing costs to
prepare videocassettes for rental.
Videocassette rental inventory and related accumulated amortization at December
31, 1996 and 1995 consisted of the following:
1996 1995
----------- -----------
Videocassette rental inventory $ 9,879,660 $11,908,659
Less accumulated amortization (6,040,513) (7,550,901)
----------- -----------
NET VIDEOCASSETTE RENTAL INVENTORY $ 3,839,147 $ 4,357,758
=========== ===========
Amortization expense related to videocassette rental inventory was $2,039,000,
$2,027,000 and $1,857,000 in 1996, 1995, and 1994, respectively. As
videocassette rental inventory is sold or retired, the applicable cost and
accumulated amortization are eliminated from the accounts and expensed.
Property and Equipment--Property and equipment are stated at cost.
Depreciation of property and equipment is provided using the straight-line and
accelerated methods at rates based on the estimated useful lives of the
respective assets. Property and equipment and related accumulated depreciation
at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
Lives 1996 1995
------------- ----------- ------------
<S> <C> <C> <C> <C>
Land $ 155,375 $ 155,375
Buildings 31-39 years 122,527 122,527
Equipment and store fixtures 5-7 years 1,908,593 1,818,813
Leasehold improvements 7-10 years 396,681 357,616
Vehicles 3-5 years 291,720 270,915
---------- ----------
2,874,896 2,725,246
Less accumulated depreciation (1,317,277) (1,003,900)
----------- -----------
NET PROPERTY AND EQUIPMENT $ 1,557,619 $ 1,721,346
=========== ===========
</TABLE>
Depreciation expense related to property and equipment was approximately
$347,000, $335,000 and $260,000 in 1996, 1995 and 1994, respectively.
Continued
-30-
<PAGE> 31
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Intangible Assets--Intangible assets, principally the excess of purchase price
over the fair value of identifiable net assets of acquired businesses
(goodwill), are stated at cost less accumulated amortization. These assets are
amortized using the straight-line method over their estimated useful lives.
Amortization expense charged to operations for 1996, 1995 and 1994 amounted to
$59,000, $38,000 and $8,000, respectively.
Intangible assets and related accumulated amortization at December 31, 1996 and
1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C> <C>
Goodwill $141,169 $295,925
Less accumulated amortization (99,497) (40,312)
-------- --------
NET INTANGIBLE ASSETS $ 41,672 $255,613
======== ========
</TABLE>
Subsequent to its acquisition, the Company continually evaluates whether events
and changes in circumstances have occurred that indicate the remaining
estimated useful life of an intangible asset may warrant revision or that the
remaining balance of an intangible asset may not be fully recoverable. When
factors indicate that an intangible asset should be evaluated for possible
impairment, the Company uses an estimate of the related business' undiscounted
future cash flows over the remaining life of the asset in measuring whether the
intangible asset has been impaired.
During 1996, it was determined that approximately $155,000 of unamortized
goodwill arising in connection with the acquisition of Midwest Video
Wholesalers Limited Partnership Assets (Note K) should be expensed. This was
because the carrying value of the goodwill was in excess of management's
estimate of the future undiscounted cash flows of this operation.
Revenue Recognition--Revenue from videocassettes and merchandise is recognized
at the time of rental or sale.
Store Opening Costs--Store opening costs, which consist primarily of payroll,
advertising, occupancy and supplies, are expensed as incurred.
Estimates--The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loss Per Common Share--Loss per common share was based upon the weighted
average common shares outstanding of 11,701,909 in 1996, 9,868,312 in 1995 and
8,201,229 in 1994, as adjusted for the reverse acquisition (see Notes A and G).
Continued
-31-
<PAGE> 32
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Statement of Cash Flows--Cash includes demand deposits with banks and all
highly liquid investments with original maturities of three months or less.
Cash paid for interest was $253,000, $397,000 and $243,000 for 1996, 1995 and
1994, respectively.
Supplemental disclosures of non-cash activities for the years ended December
31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Videocassette rental inventory
acquired with debt $1,083,000 $ 900,000
Business acquisitions financed with debt 210,000 1,522,000
Loan canceled in conjunction with
Business Data merger 800,000
Note payable converted to Preferred
Stock 750,000
Related party notes payable and related
accrued interest converted to
Common Stock 426,000
Note receivable received related to
sale of store 250,000
Note payable converted to Common Stock 14,000 100,000
</TABLE>
Revenue Sharing Agreement--The Company may obtain new release and various other
titles from a supplier who is also a stockholder pursuant to a revenue sharing
agreement. Under this agreement, the supplier provides to the Company
videocassettes released by certain movie studios. The Company pays an up-front
handling fee of approximately $8.00 for each videocassette. This handling fee
is amortized on a straight-line basis over the estimated average revenue
sharing period (approximately twelve months). During the revenue sharing
period, which does not exceed two years, the studio retains ownership of the
videocassettes and the Company shares the rental revenue with the studio rather
than initially purchasing the videocassette for a fixed cost. The Company is
required to spend a minimum quarterly amount of rental revenues with the
supplier. The Company has an option to purchase the videocassette (based on
fair value) at specified intervals and at the end of the revenue sharing
period. The Company expenses revenue sharing costs as incurred (Note H). The
Company did not utilize this arrangement during 1996 to the extent required,
for various business reasons, and may be regarded to be in breach of this
agreement by the stockholder/supplier.
Continued
-32-
<PAGE> 33
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Income Taxes--Deferred tax assets and liabilities are recognized for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
basis of assets and liabilities using tax rates in effect for the year in which
the differences are expected to reverse. In accordance with this statement,
the Company recognized deferred tax assets reflecting the benefit expected to
be realized from the utilization of net operating loss carryforwards, and
deferred tax liabilities for tax depreciation in excess of book depreciation.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized.
NOTE C--REORGANIZATION
On November 12, 1996, the Company filed in the United States Bankruptcy Court
for the Western District of Kentucky (the "Court") a voluntary petition under
Chapter 11 of the U. S. Bankruptcy Code, Case No 96-35212 (the "Chapter 11
Filing") and was authorized to continue managing and operating the business as
a debtor in possession subject to control and supervision of the court.
The Company is in the process of developing a plan of reorganization to be
submitted to the Court and creditors for their approval. The Company is unable
to predict when the development of its plan of reorganization will be completed
and submitted. The Company is not aware of any creditors who intend to file
their own plan of reorganization for the Company or who intend to file a motion
to dismiss or take any other action materially adverse to the Company's ability
to continue to reorganize its business affairs under its Chapter 11 Filing,
however, certain conditions exist which indicate that this could occur.
For leases not rejected in connection with its Chapter 11 filing, the Company
has agreed to pay the total amount of back rental payments outstanding as of
the Chapter 11 filing date, plus court costs and certain other expenses, on a
monthly basis. For these leases, the Company has also agreed to make the
normal monthly payments on a timely basis. The Company has not paid all of the
normal monthly payments by the required due dates. As such, the applicable
landlords may be able to have the lease terminated and require the Company to
vacate the store or stores in question. Such actions could have a significant
adverse affect on the ability of the Company to continue as a going concern.
As of November 12, 1996, actions to collect pre-petition indebtedness have been
automatically stayed, subject to the jurisdiction of the Court, and, in certain
circumstances, other pre-petition contractual obligations may not be enforced
against the Company. In addition, the Company has rejected certain lease
obligations and may reject any pre-petition executory contracts. Parties
affected by these rejections may file claims with the Court in accordance with
the reorganization process. Substantially all liabilities as of the petition
date are subject to being paid or compromised under a plan of reorganization to
be voted on by all applicable classes or creditors and equity security holders
approved by the Court.
Continued
-33-
<PAGE> 34
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE C--REORGANIZATION--Continued
The accompanying consolidated financial statements have been prepared on a
going concern basis, which assumes the continuity of operations, and
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Chapter 11 Filing and circumstances
relating to these events, such realization of assets and liquidation of
liabilities is subject to significant uncertainty.
Because of the its Chapter 11 Filing, the Company may sell, or otherwise
dispose of assets and liquidate or settle liabilities for amounts which are
more or less than those reflected in the consolidated financial statements,
with court approval. The amounts reported in the consolidated financial
statements do not give effect to any adjustments to the carrying value of
assets or liabilities that may result as a consequence of the actions taken
pursuant to a plan of reorganization. If the company is unable to obtain
confirmation of a plan of reorganization, its creditors, equity security
holders or the United States Trustee may seek a liquidation of the Company by
conversion to a Chapter 7 bankruptcy proceeding. In that event, it is likely
that additional liabilities and claims would be asserted which are not
presently reflected in the consolidated financial statements. In the event of
a liquidation, the amounts reflected in the consolidated financial statements
would be subject to adverse adjustment which, while not presently determinable,
could be material.
Financial accounting and reporting during a Chapter 11 proceeding is prescribed
in Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (SOP 90-7), issued by the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants. Accordingly, pre-petition liabilities, which may be impaired,
have been classified as Liabilities Subject To Settlement Under Reorganization
on the accompanying consolidated balance sheet and include the following
estimated amounts as of December 31, 1996.
<TABLE>
<CAPTION>
Related Unrelated
Parties Parties Total
------------- ------------- ------------
<S> <C> <C> <C>
Debt Instruments
Line of credit and note payable to
a stockholder/supplier $1,168,406 $1,168,406
Notes payable to stockholders 1,145,985 1,145,985
Notes payable to supplier $ 684,200 684,200
Mortgage note payable 256,280 256,280
Notes payable to two banks,
net of discount of $36,332 202,426 202,426
Notes payable to various financial
institutions related to vehicles 144,108 144,108
Notes payable related to acquisitions
Seller of five southern Indiana stores,
net of discount of $24,724 145,739 145,739
Sellers of Midwest Video Wholesalers 71,959 71,959
Sellers of H&H Video Enterprises 85,182 85,182
Various other 45,992 45,992
----------- ---------- -----------
2,314,391 1,635,886 3,950,277
</TABLE>
Continued
-34-
<PAGE> 35
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE C--REORGANIZATION--Continued
<TABLE>
<CAPTION>
Related Unrelated
Parties Parties Total
------------- ------------- ------------
<S> <C> <C> <C> <C>
Accounts payable
Stockholder/supplier 507,669 507,669
Various other 575,355 575,355
----------- ---------- ----------
507,669 575,355 1,083,024
Accrued liabilities
Liability for closed stores 506,287 506,287
Interest 135,571 38,032 173,603
Various other 4,500 4,500
----------- --------- ----------
135,571 548,819 684,390
----------- ---------- ----------
Total $2,957,631 $2,760,060 $5,717,691
=========== ========== ==========
</TABLE>
Pursuant to SOP 90-7, the Company had discontinued, effective as of the
petition date, the accrual of interest on pre- petition debt that is unsecured
or estimated to be unsecured.
NOTE D--NOTE RECEIVABLE
In December 1995, the Company sold its Silver Springs, Maryland store to an
unrelated party. The total stated purchase price was $350,000; however,
$100,000 of that amount is contingent upon the new owner achieving a level of
sales which is significantly higher than the historical amounts. As such, this
contingent portion has not been recorded by the Company.
In conjunction with the above sale, the Company received $50,000 at closing,
less rent due of approximately $12,000. The balance is payable beginning July
1, 1996 in monthly installments of $2,338 through December 31, 1996 and in
monthly installments of $4,676 thereafter, including interest at 8%. The
assets of the Silver Springs store serve as collateral for the note receivable.
-35-
<PAGE> 36
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE E--LONG-TERM DEBT
Long-term debt as of December 31, 1996 is presented under the caption
Liabilities Subject To Settlement Under Reorganization on the accompanying
balance sheet (see Note C).
<TABLE>
<S> <C>
Long-term debt consisted of the following at December 31, 1995:
Debt agreements with a stockholder/supplier, interest payable monthly
at the prime rate plus 1%, collateralized by virtually all assets
of the Company and guaranteed by certain stockholders:
Line of credit (weighted average interest rate was 9.9% for
1995), due in June 1999 $ 599,551
Note payable (See Note 1) 489,176
----------
1,088,727
Notes payable to a supplier, due in 33 monthly installments of
$30,000, beginning January 1996, including interest at 12%
with a final payment of all outstanding principal and
interest in October 1998, collateralized by virtually all
assets of the Company and guaranteed by the majority
stockholder 859,420
Line of credit with a bank, with an interest rate ranging from prime
plus 1%-1.5%, (weighted average interest rate was 10.2% for 1995,
collateralized by virtually all assets of the Company and guaranteed
by certain stockholders) (See Note 2) 600,000
Notes payable to two banks, due in aggregate monthly installments of
$5,360, net of unamortized discount of $43,936 effective interest
rate of 8.3%, with interest payable monthly at approximately 1%,
maturing March 1997, guaranteed by the majority stockholder 231,232
Notes payable to various financial institutions, due in varying monthly
installments, including interest from 7.9% to 13.75%, varying
maturities through 1998 and collateralized by vehicles 178,498
Note payable to seller of five southern Indiana stores, net of
unamortized discount of $31,352, due in aggregate monthly
installments of $5,069, including effective interest at 7%,
maturing in November 1999 (Note K) 174,596
Notes payable to sellers of Midwest Video Wholesalers, due
in quarterly installments of $30,000, including interest
at 9% (Note K) 153,362
</TABLE>
Continued
-36-
<PAGE> 37
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE E--LONG-TERM DEBT--Continued
<TABLE>
<S> <C>
Notes payable to sellers of H&H Video Enterprises, Inc. (H&H),
due December 1996, bearing interest at 7.25%, payable
quarterly, collateralized by H&H stock (Note K) 126,300
Various other 202,833
----------
$3,614,968
==========
Current portion:
Related parties $ 92,500
Unrelated parties 835,592
----------
928,092
----------
Long-term portion:
Related parties 1,596,227
Unrelated parties 1,090,649
----------
2,686,876
----------
$3,614,968
==========
</TABLE>
The above long-term debt is collateralized by substantially all assets of the
Company.
Contained in the above debt agreements are certain other restrictive covenants
including, among others, restrictions on acquisitions, prohibition on payment
of dividends without approval of the lender, and restrictions on disposition of
assets. The Company is in violation of certain of these covenants as of
December 31, 1996. In addition, the Chapter 11 Filing (Note C) was an event of
default on substantially all of the Company's debt agreements.
Note 1--During 1996, a new note agreement was executed which provided for
monthly payments of $14,542, including interest at 9.5%, with the entire
balance of principal and interest due 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 $900,000 to the Company under a
line of credit agreement. The Company repaid $600,000 to the bank. 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 was 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.
-37-
<PAGE> 38
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE F--INCOME TAXES
Income tax benefit for the years ended December 31, 1996, 1995 and 1994
consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C> <C>
Current $ -0- $ -0- $ -0-
Deferred -0- -0- (336,000)
--------- --------- ----------
Total $ -0- $ -0- $ (336,000)
======== ========= ==========
</TABLE>
The benefit for income taxes differs from that computed at the federal
statutory corporate tax rate for the years ended December 31, 1996, 1995 and
1994 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Benefit at statutory 34% rate $(779,000) $(278,000) $(974,000)
State taxes, net of federal benefit (138,000) (49,000) (172,000)
Addition to valuation allowance 917,000 327,000 810,000
--------- --------- ---------
Income tax benefit $ -0- $ -0- $(336,000)
========== ========== =========
</TABLE>
As of December 31, 1996, the Company has net operating loss carryforwards of
approximately $7.2 million for federal income tax purposes, which expire during
the years 2004 through 2011. Utilization of the Company's net operating loss
carryforwards may be limited in future years due to ownership changes in the
Company.
Significant components of the Company's net deferred tax liability at December
31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Non deductible financial accruals $ 364,000 $ 501,000
Net operating loss carryforwards 2,899,000 1,457,000
Valuation allowance (2,047,000) (1,137,000)
------------- -------------
Total deferred tax assets 1,216,000 821,000
------------- -------------
Deferred tax liabilities:
Excess tax depreciation over book 1,216,000 821,000
------------- -------------
Total deferred tax liabilities 1,216,000 821,000
------------- -------------
Net deferred tax liabilities $ -0- $ -0-
============= =============
</TABLE>
Continued
-38-
<PAGE> 39
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE F--INCOME TAXES--Continued
The Company has provided a valuation allowance against deferred tax assets
recorded as of December 31, 1996 and 1995 of $2,047,000 and $1,137,000,
respectively, due to uncertainties in realization using the "more likely than
not" valuation method.
NOTE G--STOCKHOLDERS' EQUITY
On July 17, 1995, Business Data acquired all of the outstanding shares (1,520.6
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 A). 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 the periods presented 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 H).
Effective December 31, 1995, two stockholders of the Company converted notes
payable and related accrued interest of $425,987 into 283,991 shares of Common
Stock.
Continued
-39-
<PAGE> 40
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE G--STOCKHOLDERS' EQUITY--Continued
In June 1994, the Company entered into a stock purchase agreement with the
parent corporation of a supplier. As stated in the agreement, the Company
issued, sold and delivered to the purchaser an aggregate of 105 shares
(635,275.5 shares as restated) of Common Stock for the cash purchase price of
$1 million. In addition, the purchaser has certain stock participatory and
registration rights in the Company. The stock purchase agreement contained
several restrictive covenants including, among others, restrictions on the
acquisition of other business and on the issuance of additional stock of any
class besides Common Stock. The Company has violated several covenants;
however, the stock purchase agreement does not provide any specific remedies
for such violations. Management of the Company believes that such violations
will not result in action against the Company by the purchaser.
At December 31, 1996, the Company had unpaid dividends of approximately $92,000
on its Cumulative Preferred Stock.
NOTE H--RELATED PARTY TRANSACTIONS
As of December 31, 1996, the Company had borrowings from stockholders of
$1,145,985, which are included within Liabilities Subject To Settlement Under
Reorganization on the accompanying balance sheet. At the end of December 1995,
the Company had borrowings from stockholders of $392,821, which along with the
related accrued interest, were converted to Common Stock effective December 31,
1995. For the years ended December 31, 1996, 1995 and 1994, the Company
recorded interest expense on borrowings from stockholders of $86,000, $40,000
and $6,500, respectively.
In July 1995, Roadrunner issued, sold and delivered 105 shares (635,272.5
shares as restated -See Note G) of Common Stock to an existing stockholder for
a cash purchase price of $1 million. In August 1995, the Company loaned
approximately $1 million to this stockholder. The stockholder subsequently
sold the 105 shares to other parties and repaid the loan with 10.5% interest
prior to December 31, 1995. Interest earned on this loan was $17,213 in 1995.
A supplier, who is also a stockholder of the Company, provided videocassettes
to the Company under a revenue sharing agreement (Note B). As a result of
these transactions, approximately $531,000 and $268,000 is included in accounts
payable as of December 31, 1996 and 1995, respectively, and the Company
incurred revenue-sharing expense to this supplier in 1996, 1995 and 1994 of
approximately $673,000, $1,108,000, and $764,000, respectively.
During 1994, the Company entered into a line of credit agreement with the above
supplier (Note E). The Company had borrowings outstanding of $1,168,407 and
$1,088,727 under this agreement as of December 31, 1996 and 1995, respectively.
The Company incurred interest expense of approximately $97,000, $59,000, and
$41,000 for the years ending December 31, 1996, 1995 and 1994, respectively,
and accrued interest was approximately $121,000 and $29,000 as of December 31,
1996 and 1995, respectively.
Continued
-40-
<PAGE> 41
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE H--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 above supplier 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 the majority stockholder
of the Company. Sales commissions under this arrangement were $37,000 in 1996
and $48,000 in 1995.
During 1996, the Company incurred commissions of $53,000 with a real estate
agent who is a stockholder. At December 31, 1996, the Company had commissions
payable to this person of $50,000.
The Company has purchased materials from a company which is partially owned by
a stockholder of the Company. For the years ended December 31, 1996, 1995, and
1994, the Company made purchases totaling $1,000, $4,000 and $12,000,
respectively.
The Company buys and sells merchandise at cost from/to Coyote Enterprises, Inc.
(Coyote), which is partially owned by a stockholder of the Company. As of
December 31, 1994, the Company had advanced merchandise (net of repayments) to
Coyote with a cost of $2,399, respectively.
The Company had an agreement with H&H Video Enterprises, Inc. (H&H), an
enterprise owned partially by an employee of the Company, whereby H&H paid a
fee to operate five stores in metropolitan Louisville using the Company's name.
The agreement terminated in 1994 when the Company acquired the assets of H&H
(Note K).
The Company occasionally makes purchases for Squeeze Play Cards, Comics and
Collectibles, Inc. (Squeeze Play), a retail concern that sells sports cards and
related materials and is owned by a stockholder of the Company. In addition,
Squeeze Play subleased retail space from the Company for $9,000, $39,000, and
$40,000 for the years ending December 31, 1996, 1995 and 1994, respectively.
As of December 31, 1996 and 1995, Squeeze Play owed $53,000 and $65,000,
respectively, for rent and purchases.
NOTE I--PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all employees who
meet certain service and other eligibility requirements. Contributions to the
plan are made by the Company at the discretion of the Board of Directors and
are allocated to plan participants on a proportionate compensation basis.
Participants become 100% vested in their account balances upon completion of
five years of service. The Company did not contribute to the plan for the
years ended December 31, 1996, 1995 and 1994.
-41-
<PAGE> 42
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE J--COMMITMENTS AND CONTINGENCIES
Leasing Arrangements--The Company conducts its operations from facilities that
are leased under various operating lease agreements. There are options to
renew leases at varied terms at increased monthly rentals. The leases
generally obligate the Company for the cost of property taxes, insurance and
maintenance. Several of these leases are personally guaranteed by the majority
stockholder of the Company. Rental expense was approximately $1,785,000,
$1,860,000, and $1,709,000 in 1996, 1995 and 1994, respectively.
The following is a schedule of approximate future minimum rental payments
required under noncancellable operating leases as of December 31, 1996.
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ----------
<S> <C>
1997 $1,366,000
1998 1,076,000
1999 746,000
2000 381,000
2001 and thereafter 593,000
</TABLE>
The Company currently has the right to accept or reject certain remaining
unexpired lease contracts in connection with its Chapter 11 Filing. Future
minimum lease payments exclude payments reported above for leases that have
been rejected pursuant to court orders. Certain lessors of rejected leases may
file claims for damages. A provision for estimated potential claims has been
made in the consolidated financial statements. See the following discussion of
the Liability For Closed Stores.
For leases not rejected, the Company has agreed to pay the total amount of back
rental payments outstanding as of the Chapter 11 Filing date, plus court costs
and certain other expenses, on a monthly basis through February 1998. Such
amounts are included on the accompanying balance sheet under the caption Rent
Payable Under Agreed Orders. For these leases, the Company has also agreed to
make the normal monthly payments on a timely basis.
The Company has not paid all of the normal monthly payments by the required due
dates. As such, the applicable landlords may be able to have the lease
terminated and require the Company to vacate the store or stores in question,
and any such landlords may file a claim. Such actions could have a significant
adverse effect on the ability of the Company to continue as a going concern.
Continued
-42-
<PAGE> 43
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE J--COMMITMENTS AND CONTINGENCIES--Continued
Liability For Closed Stores--The Company records a liability for the estimated
costs related to closed stores. Such liability includes the estimated costs
associated with the closing of the stores acquired from Video Knights, Inc.
(see Note K) as well as stores closed in the normal course of business and in
connection with the Chapter 11 Filing (see Note C). The activity in this
account was as follows for 1995 and 1996.
<TABLE>
<S> <C>
Balance at December 31, 1994 related to former
Video Knights, Inc. stores $ 780,000
Rental payments and settlements (109,423)
Reduction for assumption of lease (216,577)
---------
BALANCE AT DECEMBER 31, 1995 454,000
Rental payments and settlements (272,103)
Reclassification of certain amounts included in
accounts payable as of the Chapter 11 Filing date 324,390
---------
BALANCE AT DECEMBER 31, 1996 $ 506,287
=========
</TABLE>
Legal Matters--The Company is a defendant in several civil actions which relate
to the collection of amounts alleged to be owed to various parties.
Additionally, a woman is prosecuting a claim through the Indiana Civil Rights
Commission for alleged sexual harassment which management believes is without
merit. These actions have been stayed as a result of the Company's Chapter 11
Filing.
The Company is subject to various lawsuits, claims and other legal matters in
the course of conducting its business. While the outcome of such lawsuits,
claims or other proceedings against the Company cannot be predicted with
certainty, management expects that such liability, to the extent not provided
for in the financial statements, will not have a material adverse effect on the
operating results or financial position of the Company.
Employment Contract--The Company has an employment contract with a member of
management which expires in April 1997.
NOTE K--BUSINESS ACQUISITIONS
During 1995 and 1994, the Company acquired several businesses previously
operated by others. The purchase method of accounting was used to record these
acquisitions and the results of operations of the acquired businesses have been
included in the results of operations of the Company since the dates of
acquisition. Details of these acquisitions are as follows:
Continued
-43-
<PAGE> 44
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE K--BUSINESS ACQUISITIONS--Continued
Midwest Video Wholesalers Limited Partnership--In May 1995, the Company
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.)
Roadrunner Video, Inc.--In March 1994, the Company acquired essentially all the
assets of Roadrunner Video, Inc. (owned by eight stockholders, one of which was
a former stockholder of the Company) which owned and operated five video stores
in southern Indiana. The purchase price consisted of a non-interest bearing
note payable by the Company in the amount of $350,000 (discounted to $281,000
using a 7% interest rate) and an additional $60,000 (the "Additional Amount")
if the gross revenues of the five stores equal or exceed $1,500,000 during any
of the next five years beginning April 1, 1994. Under the purchase method of
accounting, the Company did not record the Additional Amount. Management does
not anticipate having to pay the Additional Amount. At the option of the
Company, this note payable may be converted into shares of any
publically-traded stock, including the Company's, if approved by the noteholder
within fifteen days after notification. The number of shares to be issued will
be determined at the time of conversion.
The estimated fair market value at the date of acquisition of the assets and
liabilities of the acquired stores was as follows:
<TABLE>
<S> <C> <C>
Videocassette rental inventory $127,000
Equipment and leasehold improvements 96,000
Land and building 58,000
--------
Total $281,000
========
</TABLE>
Video Knights, Inc.--In June 1994, the Company acquired all the assets of Video
Knights, Inc., which owned and operated five video stores in the states of
Virginia, Maryland and New Jersey. The purchase price paid by the Company was
$1,410,000 ($60,000 promissory note, $1,000,000 promissory note convertible to
common stock and $350,000 paid in cash).
The estimated fair market value at the date of acquisition of the assets and
liabilities of the acquired stores was as follows:
<TABLE>
<S> <C> <C>
Current assets (includes cash and merchandise
inventory) $ 110,000
Videocassette rental inventory 693,000
Equipment and leasehold improvements 547,000
Other assets 60,000
----------
Total $1,410,000
==========
</TABLE>
Continued
-44-
<PAGE> 45
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE K--BUSINESS ACQUISITIONS--Continued
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 Corporation, the owner of Video
Knights, Inc. Following the merger described in Note A, this agreement was
canceled in exchange for an agreement whereby the Company issued 75,000 shares
of Series B cumulative Preferred Stock, which is convertible into 750,000
common shares (subject to certain anti-dilution adjustments) of the Company to
Selvac Corporation.
These stores were acquired in contemplation of another 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). During 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 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. The lease related to one of
the closed stores was settled for approximately $60,000. The fifth store
(Silver Springs, Maryland) was sold to an unrelated party (see Note D).
H&H Video Enterprises, Inc.--In August 1994, the Company acquired the stock of
H&H Video Enterprises, Inc. (H&H), which operated five video stores in
metropolitan Louisville. The purchase price consisted of notes payable to the
sellers of $231,600, forgiveness of $27,000 receivable from seller, and the
assumption of various liabilities totaling $118,400. These notes payable are
convertible into Common Stock by the sellers. The number of shares to be
issued is to be determined at the time of conversion.
The estimated fair market value at the date of acquisition of the assets and
liabilities of the acquired stores was as follows:
<TABLE>
<S> <C> <C>
Videocassette rental inventory $270,000
Equipment and leasehold improvements 60,000
Goodwill 47,000
---------
Total $377,000
========
</TABLE>
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 of the Company.
Continued
-45-
<PAGE> 46
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE K--BUSINESS ACQUISITIONS--Continued
Unaudited Proforma Information--Unaudited pro forma information for the years
ended December 31, 1995, and 1994 has been provided below to reflect the impact
on the Company's historical operations as if the above acquisitions and the
Business Data acquisition described in Note A had occurred on January 1, 1994.
The unaudited pro forma information does not purport to be indicative of what
would have occurred had these acquisitions been made at the beginning of the
respective periods or of results which may occur in the future.
<TABLE>
<CAPTION>
Unaudited Pro Forma
Year Ended December 31
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Revenues $11,350,000 $ 9,312,000
Operating Loss (721,000) (2,889,000)
Net Loss (868,000) (2,853,000)
Net Loss per Common Share $(.09) $(.35)
</TABLE>
Acquisition Agreements--In February, 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 specialty 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. 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.
The majority stockholder of the Company owns a controlling interest in the
Akron chain. The Company regards the prospects of either of these
acquisitions, in view of its current financial condition, as remote.
-46-
<PAGE> 47
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE L--FINANCIAL INSTRUMENTS
Carrying Amount and Fair Value of Financial Instruments--The carrying amount of
cash and cash equivalents approximates fair value due to the short-term
maturities of these instruments. The value of long-term debt is estimated
using discounted cash flows based on the Company's incremental borrowing rates
for similar types of borrowings. A comparison of the carrying value and
approximate fair value of these instruments is as follows:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------
December 31, 1995
---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 212,024 $ 212,024 $ 424,206 $ 424,206
Note receivable 185,972 185,000 238,125 238,000
Long-term debt 3,950,277 3,950,000 3,614,968 3,615,000
</TABLE>
Concentrations of Credit Risk--At December 31, 1996, the Company had cash in
banks in excess of Federal Deposit Insurance Corporation insured limits of
approximately $124,000.
The Company has a note receivable from the purchaser of one of its stores (see
Note D). At December 31, 1996, the balance of that note was $185,972.
NOTE M--STOCK OPTION PLAN
The Company has a Non-Qualified Stock Option Plan established April 27, 1987.
Under the terms of the plan, options to purchase shares of the Company's Common
Stock are granted at a price equal to or greater than its market price at the
date of grant. Options expire seven years from the date of grant and may be
exercised at the minimum rate of 1,000 shares. The Company has allocated
500,000 shares to the Plan. All outstanding options expired in 1994 and none
have been granted since.
NOTE N--MAJOR SUPPLIERS
The Company is contractually obligated to obtain virtually all of its
videotapes and games from two suppliers. Both of these suppliers have made
loans to the company and one is also a stockholder (See Notes C, E, G and H).
-47-
<PAGE> 48
Notes to Consolidated Financial Statements--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
NOTE O--NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting For Impairment of Long-Lived Assets and Assets To Be Disposed Of"
during 1996. The statement requires that long-lived assets and certain
identifiable intangible assets be reviewed for impairment value, based upon
estimated undiscounted future cash flows. Appropriate losses are to be
recognized whenever such analysis indicates that the carrying value of an asset
exceeds the estimated undiscounted future cash flows. The adoption of SFAS No.
121 had no impact on the Company's financial statements since the methodology
described in that statement was not significantly different from the Company's
existing policies (see Note B).
The Company adopted SFAS No. 107, "Disclosures About The Fair Value Of
Financial Instruments", during 1995. The statement required certain
disclosures about the fair value of financial instruments (see Note L).
-48-
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-49-
<PAGE> 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company that served during 1996
and their ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------- --- ----------------------------------------
<S> <C> <C>
Terry W. Schneider 49 Chief Executive Officer and Director
Wayne J. Jung 38 President, Secretary and Director(1)
Eldon Arave 69 Director(2)
</TABLE>
Terry W. Schneider has been the Chief Executive Officer of the Company since
its founding in August 1984.
Wayne J. Jung served as the President and Chief Operating Officer of the
Company since 1993. Previously, Mr. Jung was employed as a National Grocery
Accounts Manager and Branch Manager for Sight and Sound Distributors, Inc., a
distributor of videocassettes from 1987 to 1993.
Eldon Arave served as a director of the Company since July 1995. Mr. Arave has
been president of Tao, Inc. which has operated a wholesale groceries business
since June 1992. From June 1990 to December 1992, Mr. Arave was the president
of Unified Trades, a plastics business.
(1) Mr. Jung resigned as President, Secretary and Director in December 1996, but
is still an employee of the Company.
(2) Mr. Arave resigned as a Director in October 1996.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid to the executive
officers of the Company that earn more than $100,000 in respect to services
rendered to the Company:
<TABLE>
<CAPTION>
Annual Compensation All Other
---------------------
Name of Individual Year Salary Bonus Compensation (1)
- ------------------------------------ ------ --------- ------- ------------
<S> <C> <C> <C> <C>
Terry W. Schneider
-Chief Executive Officer
of the Company 1996 $123,600
1995 $156,000 0 0
1994 $146,000 0 0
Wayne J. Jung
-President of the Company (2) 1996 $132,200
1995 $134,999 0 0
1994 $109,824 0 0
</TABLE>
(1) Does not include the value of a company automobile or country club
membership costs or other benefits available to employees of the
Company generally.
(2) The Company pays Mr. Jung pursuant to an employment agreement. See
"Employment Contract" below. Mr. Jung resigned as president in
December 1996, but is still an employee of the Company.
-50-
<PAGE> 51
DIRECTOR COMPENSATION
To date, directors of the Company have not received separate compensation for
their services as directors. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
the Delaware Code.
EMPLOYMENT CONTRACT
Effective April 7, 1995, the Company entered into a two-year employment
agreement with Mr. Wayne J. Jung pursuant to which Mr. Jung serves as President
and Chief Operating Officer at an annual base salary of $134,999 during the
first 12 months and $144,999 during the second 12 months. Under the agreement,
Mr. Jung is entitled to receive unspecified stock option incentives upon
completion by the Company of a successful public offering, and is eligible for
bonuses at the discretion of the Board of Directors. The agreement is
automatically renewable by both parties on a month-to-month basis, but it may
be terminated at any time by Mr. Jung or the Company upon 30 days prior written
notice. Upon the expiration or termination of the agreement, except for
voluntary termination of employment by Mr. Jung or termination for just cause
by the Company, Mr. Jung shall be paid severance compensation equal to the 12
months salary at the effective salary rate at the time of termination. The
above employment agreement contains a covenant not to compete within a 30 mile
radius of any business location of the Company in operation while Mr. Jung was
employed by the Company for a period of five years following such termination
of employment.
Because of Mr. Jung's resignation as president and chief executive officer in
December 1996, the Company regards this agreement as terminated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The table sets forth certain information regarding the beneficial ownership of
the Company's Common Stock by (i) each person who is known to the Company to be
the beneficial owner of more than 5% of the Common Stock, (ii) each director
and each person who will become a director of the Company, (iii) each executive
officer of the Company, and (iv) all executive officers and directors of the
Company as a group. Except as set forth below, the stockholders listed below
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
Shares of
Common Stock
Beneficially Percentage
Name Owned of Class (1)
- -------------------------------------- --------------- ------------
<S> <C> <C>
Terry W. Schneider 5,672,500 45.5%
Kenneth E. Stilger 2,683,715 21.2%
Selvac Corporation 774,368 (1) 6.2%
Mortco, Inc. (a Rentrak
Corporation subsidiary) 635,276 5.1%
Eldon C. Arave
Wayne J. Jung -0- 0.0%
All executive officers and directors
as a group 5,922,500 47.5%
</TABLE>
(1) Includes 750,000 shares of Common Stock issuable upon conversion of
75,000 shares of Class B Preferred Stock.
-51-
<PAGE> 52
CLASS A PREFERRED STOCK
The following table sets forth information regarding the sole owner of the
Company's Class A Preferred Stock.
<TABLE>
<CAPTION>
Shares of Stock
Beneficially Percentage
Name Owned of Class
- -------------------------------------- --------------- ------------
<S> <C> <C>
Robert W. Matthies 10,000 100.0%
</TABLE>
CLASS B PREFERRED STOCK
The following table set forth information regarding the sole owner of the
Company's Class B Preferred Stock.
<TABLE>
<CAPTION>
Shares of Stock
Beneficially Percentage
Name Owned of Class
- -------------------------------------- --------------- ------------
<S> <C> <C>
Selvac Corporation 750,000 100.0%
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Kenneth E. Stilger beneficially owns 21.2% of the Company. Mr. Stilger
acquired 635,276 shares of Common Stock of the Company in July 1995 for $1.57
per share or an aggregate consideration of $1,000,000 in exchange for a
promissory note for the same amount.
Mortco, Inc. ("Mortco") beneficially owns 5.1% of the Company. Mortco is a
wholly owned subsidiary of Rentrak that has an agreement to lease
videocassettes to the Company. For 1995, the Company incurred revenue sharing
expense to Rentrak of approximately $1,108,000. Pursuant to a revolving credit
agreement, in June 1994, Rentrak provided Roadrunner Enterprises a revolving
line of credit initially having aggregate borrowing availability of $1,000,000,
which was subsequently decreased to $600,000 in June 1994. Borrowing under
this facility bears interest at the prime rate plus one percent per annum. On
January 10, 1995, the Company issued a promissory note to Rentrak in the amount
of $504,449 for past due receivables. This note bears interest at the prime
rate, plus one percent per annum. During 1996, a new note agreement was
executed which provided for monthly payments of $14,542, including interest at
9.5%, with the entire balance of principal and interest due March, 2000.
At December 31, 1996, the Company had borrowings from Terry W. Schneider and
Kenneth E. Stilger of $1,145,985. At the end of December 1995, the Company had
borrowings from these stockholders of $392,821 which, along with the related
accrued interest, were converted to Common Stock effective December 31, 1995.
For the years ended December 31, 1996, 1995, and 1994, the Company recorded
interest expense on borrowings from stockholders of $86,000, $40,000 and
$6,500, respectively.
During 1996 and 1995, a company owned by Terry W. Schneider received
commissions in connection with the sale of previously-viewed videocassettes by
the Company to a grocery store chain for resale.
-52-
<PAGE> 53
The Company currently leases one video-store from TSKS, Inc., a Company owned
by Terry W. Schneider and Kenneth E. Stilger.
The Company has purchased materials from Star Drywall of Louisville, Inc.
("Star Drywall") which is partially owned by Kenneth E. Stilger. For the years
ended December 31, 1996 and 1995, the Company made purchases totaling $1,000
and $4,000, respectively.
During 1996, the Company incurred commissions of $53,000 with a real estate
agent, who is also a stockholder. At December 31, 1996, the Company had
commissions payable to this person of $50,000.
The Company buys and sells merchandise at cost from/to Coyote Enterprises, Inc.
("Coyote"), which is partially owned by a stockholder of the Company.
The Company occasionally makes purchases for Squeeze Play Cards, Comics, and
Collectibles, Inc. ("Squeeze Play"), a retail concern that sells sports cards
and related materials and is owned by Terry W. Schneider. In addition, Squeeze
Play subleased retail space from the Company for the years ending December 31,
1996 and 1995. As of December 31, 1996 and 1995, Squeeze Play owed the Company
$53,000 and $65,000, respectively, for rent and purchases made by the Company.
With the exception of transactions between the Company and Mortco and its
affiliates, the transactions described above may not have been on terms as
favorable to the Company as those that might have been obtained from
unaffiliated parties.
-53-
<PAGE> 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
The financial statements appear at Item 8 of this Form 10-K.
Financial statement schedules not included in this Form 10-K have
been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(i) Financial Statements:
Report of Independent Accountants
Consolidated Financial Statements
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994 Statements of Stockholders' Equity
for the Years Ended December 31, 1996, 1995
and 1994
Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994 Notes to Consolidated Financial
Statements
(iii) Exhibits
Exhibits filed as part of this report are listed on the
following "Exhibits" listing. Certain exhibits have been
previously filed and are incorporated herein by reference.
(b) REPORT ON FORM 8-K
No reports were filed on Form 8-K during the three months ended
December 31, 1996.
-54-
<PAGE> 55
EXHIBITS
<TABLE>
<CAPTION>
S.E.C. Exhibit
- --------------
Reference No. Description
- ------------- ---------------------------------------------------------------------------
<S> <C>
2.1* Stock Exchange Agreement dated July 17, 1995 by and among Business Data Group,
Inc., Roadrunner Video Enterprises, Inc., Terry W. Schneider, Kenneth Stilger,
Mortco, Inc., and Tommy Hower
2.2* Stock Purchase Agreement dated June 30, 1995 between Roadrunner Video
Enterprises, Inc. and Selvac Corporation
2.3* Agreement dated July 17, 1995 by and among Roadrunner Video Enterprises, Business
Data Group, Inc. and Selvac Corporation
3.1* Certificate of Incorporation of Roadrunner Video Group, Inc. (formerly Business
Data Group, Inc.) and various amendments thereto
3.2* By-Laws of Roadrunner Video Group, Inc. (formerly Business Data Group, Inc.)
4.1* Article Fourth of the Amended Certificate of Incorporation of the Company
included in Exhibit 3.1 is incorporated herein by reference.
4.2* Promissory Note of Roadrunner Video Enterprises, Inc. dated December 13, 1995 to
Wax Works, Inc.
Other debt instruments - Copies of debt instruments for which the related debt is
less than 10% of the Company's total assets will be furnished to the Commission
upon request.
10.1* Employment Agreement dated April 7, 1995 between Roadrunner Video Enterprises,
Inc. and Wayne J. Jung
10.2* Promissory Note of Kenneth E. Stilger dated August 18, 1995 of Kenneth E. Stilger
to Roadrunner Video Enterprises, Inc.
10.3* Agreement dated May 7, 1992 between Roadrunner Video Enterprises, Inc. and
Rentrak Corporation
10.4* Rentrak National Account Agreement dated May 7, 1992 by and between Rentrak
Corporation and Roadrunner Video Enterprises, Inc.
10.5* First Addendum to Rentrak National Account Agreement dated June, 1994 by and
between Rentrak Corporation and Roadrunner Video Enterprises, Inc.
10.6* First Amendment to First Addendum to Rentrak National Account Agreement dated
December 27, 1995 by and among Rentrak Corporation and Roadrunner Video
Enterprises, Inc.
</TABLE>
Continued
-55-
<PAGE> 56
<TABLE>
<CAPTION>
S.E.C. Exhibit
- --------------
Reference No. Description
- ------------- ---------------------------------------------------------------------------
<S> <C>
10.7* Agreement dated November 9, 1993 by and between Roadrunner and Wax Works, Inc.
10.8* Agreement dated May 31, 1994 by and between Roadrunner Video Enterprises, Inc.
and Wax Works, Inc.
10.9* Purchase and Sale Agreement dated June 1, 1994 by and among Video Knights, Inc.,
Selvac Corporation and Roadrunner Video Enterprises, Inc.
10.10* Stock Exchange Agreement dated July 17, 1995 by and among Business Data Group,
Inc., Roadrunner Video Enterprises, Inc., Terry W. Schneider, Kenneth Stilger,
Mortco, Inc., and Tommy Hower included in Exhibit 2.1 is incorporated herein by
reference.
16.1* Agreement Letter of Bond Andiola & Company dated March 19, 1996. Exhibit A to
Company's Report on Form 8-K dated March 13, 1996 is incorporated herein by
reference.
21.1 List of the Company's subsidiaries
27 Financial Data Schedule (for SEC use only)
</TABLE>
-56-
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Roadrunner Video Group, Inc.
/s/ Terry W. Schneider
------------------------------
Date: March 31, 1997 By: Terry W. Schneider
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on March 31, 1997 as indicated:
/s/ Terry W. Schneider
- --------------------------------------
By: Terry W. Schneider
Director, Chairman of the Board
and Chief Executive Officer
(Acting Principal Financial and
Accounting Officer)
-57-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ROADRUNNER VIEDO INTERPRISE, INC. FOR THE YEAR ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 212,024
<SECURITIES> 0
<RECEIVABLES> 73,281
<ALLOWANCES> 0
<INVENTORY> 36,237
<CURRENT-ASSETS> 402,363
<PP&E> 12,754,556
<DEPRECIATION> 7,357,790
<TOTAL-ASSETS> 6,079,260
<CURRENT-LIABILITIES> 593,216
<BONDS> 0
0
760,000
<COMMON> 117,130
<OTHER-SE> (1,108,777)
<TOTAL-LIABILITY-AND-EQUITY> 6,079,260
<SALES> 1,770,432
<TOTAL-REVENUES> 9,724,836
<CGS> 1,576,922
<TOTAL-COSTS> 11,575,659
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 388,728
<INCOME-PRETAX> (2,292,040)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,292,040)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,292,040)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> 0
</TABLE>
