<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
_ EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 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 March 31, 1997 was 11,713,000.
<PAGE> 2
Index
ROADRUNNER VIDEO GROUP, INC.
March 31, 1997
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Consolidated Financial Statements 2
Consolidated Balance Sheets as of March 31, 1997
(Unaudited) and December 31, 1996 2
Consolidated Statements of Operations (Unaudited)
for the Three Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 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 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
------------ --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 183,656 $ 212,024
Accounts receivable
Related parties 57,878 60,936
Unrelated parties 12,704 12,345
Current portion note receivable 43,639 42,778
Merchandise inventory 31,237 36,237
Prepaid handling fees to related party 8,242
Prepaid rent 25,604 29,801
---------- -----------
TOTAL CURRENT ASSETS 354,718 402,363
NET VIDEOCASSETTE RENTAL INVENTORY 3,668,903 3,839,147
NET PROPERTY AND EQUIPMENT 1,464,210 1,557,619
OTHER ASSETS
Net intangible assets 38,339 41,672
Note receivable, less current portion 131,956 143,194
Deposits 129,079 95,265
---------- -----------
TOTAL ASSETS $5,787,205 $ 6,079,260
========== ===========
</TABLE>
Continued
-2-
<PAGE> 4
Consolidated Balance Sheets--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
------------ ---------------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Related parties $ 47,513 $ 22,902
Unrelated parties 283,668 33,891
Rent payable under agreed orders 340,971 376,031
Accrued expenses and other 139,500 160,392
----------- -----------
TOTAL CURRENT LIABILITIES 811,652 593,216
LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION
Related parties 2,943,156 2,957,631
Unrelated parties 2,689,121 2,760,060
----------- -----------
TOTAL LIABILITIES 6,443,929 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 (5,821,320) (5,396,243)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (656,724) (231,647)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,787,205 $ 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
Ended March 31
----------------------------
1997 1996
--------- -----------
<S> <C> <C>
REVENUES
Rental revenues $1,594,649 $2,383,861
Product sales 452,858 460,139
---------- ----------
TOTAL REVENUES 2,047,507 2,844,000
OPERATING COSTS AND EXPENSES
Amortization of videocassette rental inventory 486,067 526,403
Cost of revenue sharing with related party 32,853 321,607
Cost of product sales 258,775 330,043
Operating expenses (net of sublease income from
related party of approximately $9,300 and
$9,000, respectively) 1,330,083 1,555,928
Selling, general and administrative expenses
(including related party commissions of
$8,300 and $10,000, respectively) 232,938 278,849
---------- ----------
TOTAL OPERATING COSTS AND EXPENSES 2,340,716 3,012,830
---------- ----------
OPERATING LOSS (293,209) (168,830)
Interest income 2,111
Interest expense, net (including related party expense
of approximately $79,800 and $19,000,
respectively) (116,290) (75,125)
Loss on disposal of property and equipment (12,689)
---------- ----------
LOSS BEFORE REORGANIZATION ITEMS (420,077) (243,955)
REORGANIZATION EXPENSES 5,000
---------- ----------
NET LOSS $ (425,077) $ (243,955)
========== ==========
LOSS PER COMMON SHARE $(.04) $(.02)
===== =====
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 6
Consolidated Statements of Cash Flows (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months
Ended March 31
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(425,077) $(243,955)
Adjustments
Disposal of stores (86,569)
Depreciation and amortization 571,515 619,747
Changes in operating assets and liabilities
Accounts receivable 2,699 15,428
Merchandise inventory 5,000 (2,884)
Prepaid expenses 12,439 2,029
Other assets (30,481) (330)
Accounts payable 274,388 14,105
Rent payable under agreed order (35,060) -0-
Liabilities subject to settlement under reorganization (61,099) -0-
Accrued expenses and other (20,894) 42,365
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 293,430 359,936
INVESTING ACTIVITIES
Purchases of videocassette rental inventory (444,639) (509,187)
Purchases of property and equipment (13,098) (155,080)
Proceeds from disposal of assets 149,873
Collection of note receivable 10,377 38,125
Investment in businesses (12,500)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (297,487) (638,642)
FINANCING ACTIVITIES
Proceeds from borrowings 644,378
Principal payments on debt (24,311) (789,878)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (24,311) (145,500)
--------- ---------
NET DECREASE IN CASH (28,368) (424,206)
CASH BEGINNING OF PERIOD 212,024 424,206
--------- ---------
CASH END OF PERIOD $ 183,656 $ -0-
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE> 7
Notes to Consolidated Financial Statements (Unaudited)
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 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 March 31, 1997, the Company owned
and operated (under the name Roadrunner Video and Discount Video) 33 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. All significant intercompany accounts have been eliminated.
-6-
<PAGE> 8
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 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 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.
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
March 31, 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 March 31, 1997.
<TABLE>
<CAPTION>
Related Unrelated
Parties Parties Total
------------- ------------- ------------
<S> <C> <C> <C>
Debt Instruments
Line of credit and note payable to
a stockholder/supplier $1,168,406 $1,168,406
Notes payable to stockholders 1,145,985 1,145,985
Notes payable to supplier $ 684,200 684,200
Mortgage note payable 252,069 252,069
Notes payable to two banks,
net of discount of $36,332 202,426 202,426
Notes payable to various financial
institutions related to vehicles 124,000 124,000
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 1,611,567 3,925,958
</TABLE>
Continued
-8-
<PAGE> 10
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 1997
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 528,735 528,735
---------- --------- ----------
507,669 528,735 1,036,404
Accrued liabilities
Liability for closed stores 506,287 506,287
Interest 121,096 38,032 159,128
Various other 4,500 4,500
---------- ---------- ----------
121,096 548,819 669,915
---------- ---------- ----------
Total $2,943,156 $2,689,121 $5,632,277
========== ========== ==========
</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>
Three Months
Ended March 31
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Dividends on preferred stock -0- $22,000
</TABLE>
-9-
<PAGE> 11
Notes to Consolidated Financial Statements (Unaudited)--Continued
ROADRUNNER VIDEO GROUP, INC. AND SUBSIDIARIES
March 31, 1997
NOTE E--VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory and related accumulated amortization consisted
of the following:
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
----------- -----------
<S> <C> <C>
Videocassette rental inventory $ 9,212,612 $ 9,879,660
Less accumulated amortization (5,543,709) (6,040,513)
----------- -----------
$ 3,668,903 $ 3,839,147
=========== ===========
</TABLE>
NOTE F--PROPERTY AND EQUIPMENT
Property and equipment and related depreciation at March 31, 1997 and December
31, 1996 consisted of the following:
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
------------ -------------
<S> <C> <C>
Land $ 155,375 $ 155,375
Buildings 122,527 122,527
Equipment and fixtures 1,666,457 1,908,593
Leasehold improvements 373,052 396,681
Vehicles 262,206 291,720
----------- -----------
2,579,617 2,874,896
Accumulated depreciation (1,115,407) (1,317,277)
----------- -----------
$ 1,464,210 $ 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 ended
March 31, 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
March 31, 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
March 31, 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
March 31, 1997, the Company owned and operated (under the name Roadrunner
Video) 33 stores primarily located throughout metropolitan Louisville, Kentucky
and southern Indiana. During the three months ended March 31, 1997, the
Company closed 5 stores.
REVENUES
Revenue, which includes rental revenue and product sales, decreased $796,000,
or 28%. This decrease was due primarily to a 33% decrease in rental revenue
which management believes is due to increased competition.
Same store revenues decreased from 1996 to 1997 by approximately 22%.
OPERATING COSTS AND EXPENSES
Cost of Product and Other Sales
Cost of product sales decreased from $330,000, or 12% of total revenue for 1996
to $259,000, or 13% of total revenue for 1997. The cost of product sales as a
percentage of product sales revenue decreased from 72% to 58% from 1996 to 1997.
Operating Expenses
Operating expenses decreased from $1,556,000 in 1996, or 55% of revenues, to
$1,330,000 in 1997, or 65% of revenues. The decrease resulted primarily from
a decrease in the number of stores that were in operation for the quarter in
1997 compared to 1996.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory decreased from $526,000, or 23%
of rental revenue in 1996, to $486,000, or 24% of rental revenue for 1997. The
decrease was due to the Company having fewer videos in operation in 1997
compared to 1996.
-13-
<PAGE> 15
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 $322,000, or 14% of rental revenue for
1996 to $33,000, or 2% of rental revenue for 1997. 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 from $279,000, or 10%
of revenues for 1996 to $233,000, or 11% of revenues for 1997. The decrease in
selling, general and administrative expenses was primarily due to a decrease of
$20,000 in legal and accounting fees, and a decrease of $26,000 in officers'
salaries for 1997 as compared to 1996.
Other Income/Expense
Interest expense increased $41,000, or 55%, from 1996 to 1997. This was due
primarily to higher outstanding debt balances during 1997 as compared to 1996.
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 March 31, 1997, the Company had a working capital deficit of $457,000.
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 $28,000 for the three months ended March
31, 1997, as a result of net cash provided by operating and financing
activities and net cash used in investing and financing activities.
Continued
-14-
<PAGE> 16
Net cash provided by operating activities was $293,000 for the three months
ended March 31, 1997. Net cash used in investing activities was $297,000 for
the period. This included purchases of videocassette rental inventory of
$445,000 and purchases of property and equipment of $13,000.
Net cash used in financing activities was $24,000 for the three months ended
March 31, 1997, which represented principal payments on debt.
As cash flows from operating activities have not been sufficient to meet the
Company's short-term working capital needs, including the acquisition of
videocassette rental inventory, the Company has borrowed funds, restructured
debt and received equity contributions to meet these needs.
The Company's principal supplier of videocassettes agreed to provide the
Company with financing during 1995 to purchase videocassette rental inventory.
At March 31, 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 March 31, 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.
-15-
<PAGE> 17
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-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ROADRUNNER VIDEO ENTERPRISES, INC. FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 183,656
<SECURITIES> 0
<RECEIVABLES> 70,582
<ALLOWANCES> 0
<INVENTORY> 31,237
<CURRENT-ASSETS> 354,718
<PP&E> 11,792,229
<DEPRECIATION> 6,659,116
<TOTAL-ASSETS> 5,787,205
<CURRENT-LIABILITIES> 811,652
<BONDS> 3,925,958
0
760,000
<COMMON> 117,130
<OTHER-SE> (1,533,854)
<TOTAL-LIABILITY-AND-EQUITY> 5,787,205
<SALES> 452,858
<TOTAL-REVENUES> 2,047,507
<CGS> 258,775
<TOTAL-COSTS> 2,340,716
<OTHER-EXPENSES> 5,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,290
<INCOME-PRETAX> (425,077)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (425,077)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
