<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1997.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 for the transition period.
COMMISSION FILE 2-83353
ROADRUNNER VIDEO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2431014
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
819 SOUTH FLOYD STREET 40203
LOUISVILLE, KENTUCKY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (502) 585-1411
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
---- ---
The number of shares outstanding of the Registrant's common stock, no par value,
on September 30, 1997 was 11,713,000.
<PAGE> 2
Index
ROADRUNNER VIDEO GROUP, INC.
September 30, 1997
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996 2
Consolidated Statements of Operations (Unaudited)
for the Three Months and Nine Months Ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 22
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 69,410 $ 212,024
Accounts receivable
Related parties 55,858 60,936
Unrelated parties 0 12,345
Current portion note receivable 0 42,778
Merchandise inventory 7,237 36,237
Prepaid handling fees to related party 0 8,242
Prepaid rent 25,604 29,801
---------- ----------
TOTAL CURRENT ASSETS 158,109 402,363
NET VIDEOCASSETTE RENTAL INVENTORY 2,989,664 3,839,147
NET PROPERTY AND EQUIPMENT 897,132 1,557,619
OTHER ASSETS
Net intangible assets 21,404 41,672
Note receivable, less current portion 0 143,194
Deposits 122,141 95,265
---------- ----------
TOTAL ASSETS $4,188,450 $6,079,260
========== ==========
</TABLE>
-2-
<PAGE> 4
Consolidated Balance Sheets--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Related parties $ 47,513 $ 22,902
Unrelated parties 605,845 33,891
Rent payable under agreed orders 147,272 376,031
Accrued expenses and other 130,608 160,392
----------- -----------
TOTAL CURRENT LIABILITIES 931,238 593,216
LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION
Related parties 2,924,420 2,957,631
Unrelated parties 3,005,106 2,760,060
----------- -----------
TOTAL LIABILITIES 6,860,764 6,310,907
COMMITMENTS AND CONTINGENCIES (Notes C and H)
STOCKHOLDERS' 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 million shares
issued and outstanding 117,130 117,130
Paid-in-capital 4,287,466 4,287,466
Accumulated deficit (7,836,910) (5,396,243)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (2,672,314) (231,647)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,188,450 $ 6,079,260
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE> 5
Consolidated Statements of Operations (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Rental revenues $ 1,276,776 $ 1,794,879 $ 4,303,962 $ 6,207,394
Product sales 276,797 423,448 1,113,355 1,385,101
----------- ----------- ----------- -----------
TOTAL REVENUES 1,553,573 2,218,327 5,417,317 7,592,495
OPERATING COSTS AND EXPENSES
Amortization of videocassette
rental inventory 562,049 471,235 1,689,270 1,550,702
Cost of revenue sharing
with related party 0 89,397 32,853 530,724
Cost of product sales 378,260 298,967 992,405 1,006,108
Operating expenses (net of
sublease income from
related party of
approximately $-0-,
$-0-, $1,400, and
$11,000, respectively) 1,204,685 1,491,773 3,774,385 4,591,642
Selling, general and
administrative expenses
(including related party
commissions of $12,000,
$53,000, $28,000, and
$76,000, respectively) 152,675 277,186 562,044 902,658
----------- ----------- ----------- -----------
TOTAL OPERATING
COSTS AND EXPENSES 2,297,669 2,628,558 7,050,957 8,581,834
----------- ----------- ----------- -----------
OPERATING LOSS (744,096) (410,231) (1,633,640) (989,339)
Interest income 0 0 2,111 0
Interest expense, net (including
related party expense of
approximately $-0-, $60,000,
$102,000 and $76,000,
respectively) (34,590) (103,941) (281,995) (288,848)
Loss on disposal of
videocassettes, games,
property and equipment (409,010) 0 (512,144) 0
----------- ----------- ----------- -----------
LOSS BEFORE
REORGANIZATION EXPENSES (1,187,696) (514,172) (2,425,668) (1,278,187)
REORGANIZATION EXPENSES (5,000) 0 (15,000) 0
----------- ----------- ----------- -----------
NET LOSS $(1,192,696) $ (514,172) $(2,440,668) $(1,278,187)
=========== =========== =========== ===========
LOSS PER COMMON SHARE $ (.10) $ (.05) $ (.21) $ (.12)
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 6
Consolidated Statements of Cash Flows (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,440,668) $(1,278,187)
Adjustments
Reduction of receivable 75,595 0
Disposal of stores 0 (216,600)
Depreciation and amortization 1,949,846 1,844,131
Loss on disposal of assets 585,672 372,569
Changes in operating assets and liabilities
Accounts receivable 17,423 (50,349)
Merchandise inventory 29,000 62,456
Prepaid expenses 12,439 105,628
Other assets (16,607) (3,641)
Accounts payable 596,565 369,388
Rent payable under Agreed Order (228,759) 0
Liabilities subject to settlement under reorganization 269,642 0
Accrued expenses and other (29,784) 58,101
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 820,364 1,263,496
INVESTING ACTIVITIES
Purchases of videocassette rental inventory (998,250) (1,741,616)
Purchases of property and equipment (17,299) (205,975)
Collection of note receivable 110,377 45,139
Investment in businesses 0 (33,983)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (905,172) (1,936,435)
FINANCING ACTIVITIES
Proceeds from borrowings 1,463,984
Principal payments on debt (57,806) (1,225,840)
Checks drawn in excess of cash on deposit 0 10,589
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (57,806) 248,733
----------- -----------
NET DECREASE IN CASH (142,614) (424,206)
CASH BEGINNING OF PERIOD 212,024 424,206
----------- -----------
CASH END OF PERIOD $ 69,410 $ -0-
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE> 7
Notes to Consolidated Financial Statements (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1997
NOTE A--MANAGEMENT'S STATEMENT
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring entries) considered necessary for a
fair presentation have been included. The notes to the consolidated financial
statements which are contained in the Company's Form 10-K for the year ended
December 31, 1996 should be read in conjunction with these consolidated
financial statements.
NOTE B--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 September 30, 1997, the Company
owned and operated (under the name Roadrunner Video and Discount Video) 21
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 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.
All significant intercompany accounts have been eliminated.
-6-
<PAGE> 8
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1997
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 required
by the Court to submit a disclosure statement and plan by December 5, 1997. 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. 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. Some stores have been closed after
leases have been assumed.
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.
Continued
-7-
<PAGE> 9
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1997
NOTE C--REORGANIZATION--Continued
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 September 30, 1997.
<TABLE>
<CAPTION>
Related Unrelated
Parties Parties Total
---------- ---------- ----------
<S> <C> <C> <C>
Debt Instruments
Line of credit and note payable to
a stockholder/supplier $1,168,407 $1,168,407
Notes payable to stockholders 1,145,984 1,145,984
Notes payable to supplier $ 684,200 684,200
Mortgage note payable 243,350 243,350
Notes payable to two banks,
net of discount of $36,332 202,426 202,426
Notes payable to various financial
institutions related to vehicles 99,223 99,223
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 1,578,071 3,892,462
</TABLE>
Continued
-8-
<PAGE> 10
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1997
NOTE C--REORGANIZATION--Continued
<TABLE>
Related Unrelated
Parties Parties Total
---------- ---------- ----------
<S> <C> <C> <C>
Accounts payable
Stockholder/supplier 507,669 507,669
Various other 651,449 651,449
---------- ---------- ----------
507,669 651,449 1,159,118
Accrued liabilities
Liability for closed stores 465,208 465,208
Interest 102,360 259,378 361,738
Various other 51,000 51,000
---------- ---------- ----------
102,360 775,586 877,946
---------- ---------- ----------
Total $2,924,420 $3,005,106 $5,929,526
========== ========== ==========
</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--STATEMENT OF CASH FLOWS
Supplemental disclosures of non-cash activities are as follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30
----------------------
1997 1996
-------- --------
<S> <C> <C>
Dividends on preferred stock $0 $67,377
== =======
</TABLE>
-9-
<PAGE> 11
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1997
NOTE E--VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related accumulated amortization consisted of
the following:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
---------- -----------
<S> <C> <C>
Videocassette rental inventory $8,568,880 $ 9,879,660
Less accumulated amortization (5,579,216) (6,040,513)
---------- -----------
$2,989,664 $ 3,839,147
========== ===========
</TABLE>
NOTE F--PROPERTY AND EQUIPMENT
Property and equipment and related depreciation at September 30, 1997 and
December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
---------- -----------
<S> <C> <C>
Land $ 155,375 $ 155,375
Buildings 122,527 122,527
Equipment and fixtures 1,014,636 1,908,593
Leasehold improvements 217,160 396,681
Vehicles 262,206 291,720
---------- -----------
1,771,904 2,874,896
Accumulated depreciation (874,772) (1,317,277)
---------- -----------
$ 897,132 $ 1,557,619
========== ===========
</TABLE>
NOTE G--INCOME TAXES
Deferred income taxes are recorded based upon temporary differences between the
financial statement and tax basis of assets and liabilities and net operating
loss carryforwards available for income tax purposes.
A valuation allowance is provided when it is more likely than not some portion
of the deferred tax asset will not be realized. During the three months and the
nine months ended September 30, 1997 and 1996, 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.
-10-
<PAGE> 12
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1997
NOTE H--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 various 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.
The Company currently has the right to accept or reject certain remaining
unexpired lease contracts in connection with its Chapter 11 Filing. 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 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.
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. as
well as stores closed in the normal course of business and in connection with
the Chapter 11 Filing.
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.
-11-
<PAGE> 13
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
September 30, 1997
NOTE I--RELATED PARTY TRANSACTIONS
The Company engages in various transactions with related parties which are
reflected on the accompanying consolidated balance sheets and statements of
operations. A description of these related party transactions follows:
- - A supplier, who is also a stockholder of the Company, provides new
release and various other videocassettes to the Company under a revenue
sharing agreement. Under this agreement, the Company incurs an up-front
handling fee which is amortized on a straight-line basis over the
estimated average revenue sharing period (approximates twelve months).
The revenue sharing costs under this agreement are expensed as
incurred. The Company is required to spend a minimum quarterly amount
of revenues with the supplier. The Company did not utilize this
arrangement during 1996 and 1997 to the extent required for various
business reasons and may be regarded to be in breach of this agreement
by the stockholder/supplier.
- - The Company subleases retail space to an entity owned by the Company's
majority stockholder.
- - The Company has borrowed funds from several stockholders and
pays/incurs interest expense on the funds borrowed.
- - The Company sells previously viewed videocassettes to a regional
grocery store chain for resale. The Company has purchased previously
viewed videocassettes from the stockholder/supplier mentioned
previously to sell to the grocery store chain. In exchange for
arranging this relationship, the Company is currently paying a sales
based commission to a company owned by certain stockholders of the
Company.
-12-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ROADRUNNER VIDEO GROUP, INC.
BACKGROUND
Roadrunner Video Group, Inc. (the "Company") is primarily engaged in the
business of renting prerecorded videocassette movies and video games. As of
September 30, 1997, the Company owned and operated (under the name Roadrunner
Video) 21 stores primarily located throughout metropolitan Louisville, Kentucky
and southern Indiana. During the nine months ended September 30, 1997, the
Company closed 18 stores. Since September 30, 1997, one additional store has
been sold.
REVENUES
Revenue, which includes rental revenue and product sales, decreased $700,000, or
30% for the three months ended September 30, 1997 as compared to the three
months ended September 30, 1996 and $2,175,177, or 29% for the nine months ended
September 30, 1997 as compared to the nine months ended September 30, 1996.
Rental revenue decreased by $518,000 for the three months ended September 30,
1997 as compared to the three months ended September 30, 1996 and by $1,903,431
for the nine months ended September 30, 1997 as compared to the nine months
ended September 30, 1996. This decrease in rental revenue was due primarily to
the closing of twelve stores.
Same store revenues decreased by approximately 11% for the three months ended
September 30, 1997 as compared to the three months ended September 30, 1996 and
21% for the nine months ended September 30, 1997 as compared to the nine months
ended September 30, 1996. Management believes that this decrease was due
primarily to increased competition and the closing of twelve stores.
Product sales decreased by $146,651 for the three months ended September 30,
1997 as compared to the three months ended September 30, 1996 and by $271,746
for the nine months ended September 30, 1997 as compared to the nine months
ended September 30, 1996. This decrease in product sales for such nine months
was a result of a decrease in videocassette sales at the store level and to
a supermarket chain.
-13-
<PAGE> 15
OPERATING COSTS AND EXPENSES
Cost of Product and Other Sales
Cost of product sales increased from $299,000, or 13% of total revenue, for the
three months ended September 30, 1996 to $378,000, or 24% of total revenue, for
the three months ended September 30, 1997. The cost of product sales as a
percentage of product sales revenue increased from 71% for the three months
ended September 30, 1996 to 137% for the three months ended September 30, 1997.
The increase was due to sale of tapes from closed stores.
Cost of product sales decreased from $1,006,000, or 13% of total revenue, for
the nine months ended September 30, 1996 to $992,000, or 18% of total revenue,
for the nine months ended September 30, 1997. The cost of product sales as a
percentage of product sales revenue increased from 73% for the nine months ended
September 30, 1996 to 89% for the nine months ended September 30, 1997.
Operating Expenses
Operating expenses decreased from $1.5 million for the three months ended
September 30, 1996, or 67% of revenues, to $1.2 million for the three months
ended September 30, 1997, or 78% of revenues. Operating expenses decreased from
$4.6 million for the nine months ended September 30, 1996, or 60% of revenues,
to $3.8 million for the nine months ended September 30, 1997, or 70% of
revenues. Operating expenses are decreasing as stores are closed but have
increased as a percentage of revenues. While revenues have declined, many
operating expenses have not because of their fixed nature.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory increased from $471,000, or 26%
of rental revenue for the three months ended September 30, 1996, to $562,000, or
44% of rental revenue for the three months ended September 30, 1997.
Amortization of videocassette rental inventory increased from $1.6 million, or
25% of rental revenue for the nine months ended September 30, 1996, to $1.7
million, or 39% of rental revenue for the nine months ended September 30, 1997.
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 $89,000, or 4% of rental revenue, for the
three months ended September 30, 1996 to $0, or 0% of rental revenue for the
three months ended September 30, 1997. Cost of revenue sharing decreased from
$531,000, or 9% of rental revenue, for the nine months ended September 30, 1996
to $33,000, or 1% of rental revenue for the nine months ended September 30,
1997. The decrease was the result of fewer stores in operation and less
utilization of this arrangement for 1997 compared to 1996.
-14-
<PAGE> 16
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased from $277,000, or 12% of
revenues for the three months ended September 30, 1996 to $153,000, or 10% of
revenues for the three months September 30, 1997. The decrease in selling,
general and administrative expenses was primarily due to a decrease in
professional fees, officers' salaries and administrative costs.
Selling, general, and administrative expenses decreased from $903,000, or 12% of
revenues for the nine months ended September 30, 1996 to $562,000, or 10% of
revenues for the nine months September 30, 1997. The decrease in selling,
general and administrative expenses was primarily due to a decrease in
professional fees, officers' salaries and administrative costs.
Other Income/Expense
Interest expense decreased $69,000, or 67% for the three months ended September
30, 1997 as compared to the three months ended September 30, 1996. Interest
expense decreased $7,000, or 2%, for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996. This was due primarily to
higher outstanding debt balances during 1996 as compared to 1997.
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 September 30, 1997, the Company had a working capital deficit of $773,000.
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 $143,000 for the nine months ended
September 30, 1997, as a result of net cash provided by operating and net cash
used in investing and financing activities.
Net cash provided by operating activities was $820,000 for the nine months ended
September 30, 1997. Net cash used in investing activities was $905,000 for the
period. This included purchases of videocassette rental inventory of $998,000
and purchases of property and equipment of $17,000.
Net cash used in financing activities was $58,000 for the nine months ended
September 30, 1997, which represented principal payments on debt.
-15-
<PAGE> 17
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 restructured debt and liquidated
assets 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
September 30, 1997, 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 September 30, 1997, 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.
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.
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.
-16-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. 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:
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.
-17-
<PAGE> 19
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (for SEC use
only).
(b) Reports on Form 8-K.
None
-18-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROADRUNNER VIDEO GROUP, INC.
By: /s/ Terry W. Schneider
-------------------------------------
Terry W. Schneider
Chief Executive Officer,
Acting Principal Financial Officer
Dated: November 14, 1997
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ROADRUNNER VIDEO ENTERPRISES, INC. FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 69,410
<SECURITIES> 0
<RECEIVABLES> 55,858
<ALLOWANCES> 0
<INVENTORY> 7,237
<CURRENT-ASSETS> 158,109
<PP&E> 10,340,784
<DEPRECIATION> 6,453,988
<TOTAL-ASSETS> 4,188,450
<CURRENT-LIABILITIES> 931,238
<BONDS> 0
0
760,000
<COMMON> 117,130
<OTHER-SE> (3,549,444)
<TOTAL-LIABILITY-AND-EQUITY> 4,188,450
<SALES> 1,113,355
<TOTAL-REVENUES> 5,417,317
<CGS> 992,405
<TOTAL-COSTS> 7,050,957
<OTHER-EXPENSES> 512,144
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 281,995
<INCOME-PRETAX> (2,440,668)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,440,668)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,440,668)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
