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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended January 28, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ______ to ______
Commission file number 0-16007
The Village Green Bookstore, Inc.
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(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C>
New York 16-1181167
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
1357 Monroe Avenue
Rochester, New York 14618
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code (716) 442-1151
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
- ------------------- Name of Each Exchange
on Which Registered
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Common Stock, par Boston Stock Exchange
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value $.001 per share
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Redeemable Common Stock
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Boston Stock Exchange
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Purchase Warrants
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share (Title of Class)
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Redeemable Common Stock Purchase Warrants (Title of Class)
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Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such 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 X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $11,040,372.
The approximate aggregate market value of the registrant's common stock held by
non-affiliates, computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of May 3, 1996 was
$3,560,496. The number of shares outstanding of the registrant's common stock
on April 29, 1996, was 3,741,155 shares.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Definitive Proxy Statement dated April 13, 1987
Definitive Proxy Statement dated June 25, 1990
Definitive Proxy Statement dated September 28, 1993
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT
The Village Green Bookstore, Inc. (the "Company" or "Village Green")
was organized under the name Monroe Book Corporation in 1982 to acquire the
business of the Village Green Bookstore, a Rochester based proprietorship which
had been engaged in the bookstore business since 1973. The Company's corporate
name was changed in February 1986 to The Village Green Bookstore, Inc. During
late fiscal year 1996, the Company introduced Kideology(TM), with the opening
of two stores. Kideology(TM) is an educational retail system which the Company
has developed to sell educational toys and products to children from ages 14
and under. The Company currently owns and operates eight retail bookstores and
two Kideology(TM) stores in the Northeastern United States.
The Company competes with a diverse group of national book retailers,
including WaldenBooks, Borders Bookshop, Barnes & Noble, B. Dalton, Crown
Books, Encore Books and Books-A-Million. In recent years, many competing
national chains have expanded in size and number of outlets, and have developed
and begun to open superstores within many of the Company's existing markets.
The Company has altered its strategic objectives to address these competitive
conditions by introducing the Kideology(TM) retail concept. As a result, the
Company's strategic objective is to continue to operate retail bookstores in
the areas in which it currently competes while adding additional Kideology(TM)
stores in new and existing locations. To this end, the Company is currently
seeking working capital with which to implement this new strategy. The Company
recently entered into a letter of intent with GBFC, Inc., a finance company
("GBFC"). GBFC is discussing, subject to further due diligence investigation,
the possibility of lending up to $2 million to the Company pursuant to a
Secured Revolving Credit Facility (the "Revolving Credit Facility") for which
amount the Company will be required to provide a security interest in all of
its inventory. The Company intends to use a portion of the proceeds to pay off
a portion or all of its $1.2 million subordinated debentures. Additional
proceeds from the Revolving Credit Facility will be used to implement the
Company's new strategic objectives described above. The Company is also
considering raising additional working capital through alternative means, such
as a private placement of debt or equity. No assurances can be given that the
Company will be successful in obtaining financing from GBFC or other sources or
that the Company will be successful in implementing its new Kideology(TM)
retail concept.
Each Village Green bookstore is situated and merchandised to
specifically address the tastes and demand characteristics of its clientele.
The Company's stores feature a diversified retail mix in stores ranging from
approximately 6,000 to 10,500 square feet. The Company's basic store format
includes (i) an inventory of approximately 50,000 book titles and 4,000
magazine, periodical and newspaper titles per store per year; (ii) a stationery
department which carries between 20 and 50 different lines of greeting cards,
boxed stationery and writing papers; (iii) a gift department, which offers
unusual, humorous and traditional gift items; (iv) a gourmet and packaged food
department selling fresh and packaged desserts, gourmet chocolates, coffees and
ice creams as well as other food items; and (v) special services such as
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special orders of books and newspapers. The Company also offers books-on-tape,
selective video tape rentals and multimedia products in several of its
locations.
The Company's two Kideology(TM) stores offer customers a warm and
inviting shopping environment with brightly lit colorful spaces, wide aisles
for strollers and child-level seating and product shelving. All of the
products carried in the Company's Kideology(TM) stores are designed to be
attractive, and most importantly, educational. The Company's two Kideology(TM)
stores are located in Perinton, New York and Williamsville, New York. Assuming
the Company is successful in obtaining additional financing, the Company
intends to open additional Kideology(TM) stores in fiscal 1997.
On March 23, 1995, the Company consummated a public offering of
2,000,000 Units at $3.00 per Unit (the "Public Offering") through Thomas James
Associates, Inc., now known as H.J. Meyers & Co., Inc., as Representative of
the Underwriters ("H.J. Meyers"). Each Unit consisted of one share of the
Company's Common Stock, par value $.001 per share, and one Redeemable Common
Stock Purchase Warrant ("Redeemable Warrants"), exercisable for a five year
period at an initial exercise price of $3.60 (the "Initial Notice Price"). The
Redeemable Warrants are subject to redemption by the Company at $.05 per
Redeemable Warrant on 30 days prior written notice if the closing bid price for
the Common Stock, as reported on the Small-Cap Market of the automated
quotation system of the National Association of Securities Dealers, Inc.
("NASDAQ Small-Cap Market") for 20 consecutive trading days ending within 15
days of the date on which the notice of redemption is given, is equal to or in
excess of $5.40 (the "Initial Notice Price"). Both the Initial Exercise Price
and the Initial Notice Price are subject to adjustment under certain
circumstances.
The net proceeds received by the Company at the closing from the sale
of the 2,000,000 Units were $4,629,041. The Company has utilized a portion of
net proceeds of the Public Offering to retire $1.8 million in long-term debt,
and accrued interest, incurred in connection with the Company's 1993 private
placement, and to exercise an option to acquire 186,500 shares of Common Stock
from Mr. Paul Adams, a former officer and director of the Company.
The following table sets forth the number of stores at the start of
the fiscal year, the number of Bookstores opened during the fiscal year, the
number of Bookstores closed during the fiscal year and the number of stores
open at the end of the fiscal year:
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<TABLE>
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Stores at New Stores
Beginning of Opened During Stores Closed Stores at End
Fiscal Year Year Year During Year of Year
<S> <C> <C> <C> <C>
1987 1 1 -- 2
1988 2 -- -- 2
1989 2 1 -- 3
1990 3 1 -- 4
1991 4 -- -- 4
1992 4 -- -- 4
1993 4 4 1 7
1994 7 2 2 7
1995 7 1 -- 8
1996 8 4 -- 12
</TABLE>
In February and March 1996 the Company closed two of its
underperforming bookstores, one in Philadelphia, Pennsylvania and the other in
Blasdell, New York.
INDUSTRY OVERVIEW
RETAIL BOOKSTORES. The retail book industry is comprised of two
principal segments: independent bookstores and chain stores.
The independent bookstores generally have been established as free
standing stores or in strip shopping centers catering to a well-educated,
affluent customer. Such stores generally are well stocked, and staffed by
attentive, service-oriented salespersons. The books generally are sold at
publishers' prices with only occasional discounts. These independents build
their business by way of book fairs, media attention, author interviews and
advertising, sponsorship of local literary programs, author signing sessions,
teaching and other similar programs.
Chain stores have grown through discounting best selling books and
other books in regional mall developments (such as B. Dalton and WaldenBooks),
and more recently, through the development of discount "superstores."
Superstores are considerably larger in size and offer a substantially greater
number of titles than typical bookstores. These superstores generally are
"destination" stores offering a wide selection of discounted books. The
Company believes that competition within the Bookstore industry is significant
and with the continued development of the superstores the Company's perceived
market niche has been adversely affected.
EDUCATIONAL RETAIL. The educational retail industry is also comprised
of independent and chain stores. However, the Company believes that this
market remains under-developed as to be contrasted with the retail book
industry which the Company believes is rapidly becoming dominated by the
"superstores". The Company believes that the educational retail marketplace
presents an opportunity for growth, although no assurances can be given that
the Company will be able to capitalize on this opportunity. The U.S.
Department of Education projects that over the next decade, K-12 enrollment in
schools will rise to 55.7 million from
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the current 49.8 million. The Company believes that while some specialty
retailers are addressing the growth in the number of school age children
consumers and their families many of these stores focus not only on the pre-K
through age 14 population which the Company intends to focus its efforts but
also on adults and hobby enthusiasts. The Company believes that by limiting
its customer focus, it can develop a loyal customer base of children 14 years
and under.
BUSINESS STRATEGY
GENERAL. As a result of recent increased and substantial openings of
retail book superstores within the Company's new and existing markets, the
Company has adjusted its strategic objectives based on increased development of
its Kideology(TM) retail concept and a perceived market opportunity in the
educational retail market place for fiscal 1997. Management has determined to
maintain as many bookstore sites as market conditions will allow, while
leveraging its bookstore assets to expand its Kideology(TM) retail concept.
This strategy is subject to certain inherent risks such as the need for
additional capital; Kideology's(TM) limited operating history; the ability to
realize Kideology(TM) expansion plans; dependence on senior management;
competition within the educational retail business; and general economic
conditions. All of these factors separately or in the aggregate could have a
negative impact on the Company's new business objectives.
RETAIL BOOKSTORES. The Company's retail bookstore strategy is to own
and continue to operate upscale retail bookstores in the areas in which it
currently competes. The following are the key elements to this strategy.
Optimization of Retail Product Mix. The Company is seeking to
differentiate itself from its competition by, among other things, offering a
retail mix that is highly focused and optimized to address the tastes and
demands of an affluent clientele. By offering a variety of upscale items such
as educational CD-ROMS, foreign film rentals and classical music, the Company
believes that it may distinguish itself from other less specialized bookstores
and create significant customer traffic and repeat business. The Company
intends to implement management information systems to closely track the buying
patterns of its clientele so that the Company may respond accordingly.
Emphasis on Social and Cultural Meeting Places; Establishment
of Strong Community Ties. The Company has recently introduced coffee cafes at
certain of its stores. The Company believes that these additions enhance its
upscale image and encourage customers to linger and contemplate additional
purchases. By incorporating this concept, the Company expects to take
advantage of the changing social patterns evidenced by the proliferation of
coffee cafes and reemphasize Village Green stores as community meeting places
and leisure oriented establishments. Accordingly, the Company has sought to
integrate each of its bookstores into their respective communities through the
sponsorship of, and participation in, community activities such as book and
poetry readings, children's programs, book fairs and literature discussion
groups.
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KIDEOLOGY(TM) STRATEGY
The Company's Kideology(TM) strategy is to become a regional retailer
of educational childrens toys. Although a number of companies are competing
for segments of this market, the Company believes its business strategy and
format for Kideology(TM) gives it an advantage within this marketplace. Key
components of the Company's Kideology(TM) strategy are:
Need for Additional Capital. The Company's strategy for
expansion of its Kideology(TM) stores will require significant additional
capital. The Company is currently negotiating for a combination of debt and
equity financing to provide this capital. The following discussion of the
Company's strategy relating to Kideology(TM) is subject to the Company
successfully completing a financing of both debt and equity in excess of $2.5
million. No assurances can be given that the Company will be able to raise
such capital. If the Company is unable to raise sufficient additional capital,
its ability to implement the Kideology(TM) strategy will be materially and
adversely affected.
Direct Mail. The Kideology(TM) business strategy is to open
regional stores that are supported with an aggressive direct mail catalogue
effort that both serves as a profit center as well as promoting the regional
store. The Company believes this will allow it to move across regions by
selectively opening one or two stores rather than 5 to 7 stores which it would
normally take to control any given regional area. Making use of both the store
data base and commercially available mailing lists, Kideology(TM) will develop
a two tiered direct mail program. First, direct mail pieces concentrating on
store events and sales will be used to build continual store traffic; second, a
separate direct mail specialty catalog will be developed for grade level,
interest area and seasonal purchasing.
Catalogs will be designed not only for product sales, but with
family educational activities in mind so that mailings from the Company can be
retained in the home for a longer period than most retail catalogs. Cost
savings realized by this strategy from any single regional effort may pay for
any multi-regional direct mail effort. Kideology(TM) catalogs will only be
distributed in regions which have a Kideology(TM) store. The projected costs
for a catalog start-up are estimated at $250,000. Many catalog functions such
as fulfillment can be jobbed out, diminishing need for additional Company
personnel.
Interaction With Local Educators. As the Company's two
existing stores are showing, teachers and schools are quite willing to use
Kideology(TM) as a resource for supplemental materials. The Company believes
that in response to budgetary constraints, school districts are transferring
purchasing responsibilities to individual schools and teachers. As such
focusing on teachers should serve to increased awareness of the stores within
each region.
Establish Retail Stores as Target Marketing Centers. The
Company has taken into consideration the current retail environment and
believes it has developed a comprehensive sales program which establishes
retail stores as beachheads to expose the consumer to the philosophy of
Kideology(TM). Current Kideology(TM) locations run programs concurrent with
the school year and special summer programs when school is not in session.
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Because of this, the stores can enjoy customer traffic every month of the year.
The Company believes that the product and the presentation programs make the
stores appealing to stay-at-home mothers, teachers with children on field
trips, educators and parents attending seminars sponsored by the store in the
store (e.g., How to Buy Children's Software) and special events and
appearances. In addition, all children who come into the store are registered
and issued Kideology(TM) Passports which then become vehicles to encourage
frequent repeat visits and a data base for focused direct mail solicitations.
Educational Fairs. The Company also intends to pursue retail
sales outside the retail stores. The Company's Kideology(TM) strategy includes
educational product fairs similar to book fairs which schools traditionally
hold as fund raisers. These fairs can be sponsored by schools, by educational
associations such as the PTA, by vendors or by independent contractors. The
Company believes the educational fairs establish retail store and catalog
credibility.
Focus on Customer Service. Customer service is key to
maintaining an ongoing trust with the customers. Educators are hired at retail
stores to assist customers in their product selections. Where possible,
interactivity is encouraged in a user-friendly environment enabling customers
to review products before they purchase. Customer satisfaction is stressed to
all kideologists who receive training in new products, enabling hand selling to
customers. The shopping experience at Kideology(TM) should be fun and friendly
with children not wanting to leave the store.
Daily In-Store Events. In-store events are held daily with
different activities taking place depending on the age of the children. These
events could take the form of basic readings and author appearances to science,
math and writing clubs, computer classes, art activities, etc. A calendar of
events is published monthly and is available in the stores as well as being
sent to all members on the mailing lists.
Rigorous Site Selection Criteria. The Company believes that
most people shop and engage in leisure activities near where they live as
opposed to where they work. Accordingly, management strives to identify
affluent communities populated by culturally aware "baby boomers" as its target
markets for new store development.
THE VILLAGE GREEN MODEL
Although Village Green maintains a high degree of flexibility with
respect to its retail product mix, the Company intends to limit new store
openings in response to competitive market conditions while remaining focused
on development of the Kideology(TM) retail concept.
PRODUCT LINE
BOOKS. Village Green carries up to 50,000 titles per year per store.
The selection emphasizes bestsellers, backlist titles, publisher closeouts,
computer books, cookbooks, science fiction, novels, mysteries, a large
selection of children's books, art books and books of
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an academic nature. The Company will also special order books from a database
comprising approximately 100,000 titles. For the year ended January 28, 1996,
approximately 56.1% of the Company's net sales were derived from the sale of
books.
MAGAZINES AND NEWSPAPERS. Each store carries up to 4,000 different
magazine titles, per store, per year, ranging from broad general interest
titles to specialized magazines. These encompass a wide variety of subjects,
including general news, business, home and decorating, the arts, sports,
women's issues, academic journals and foreign magazines. Each store also
carries up to 80 different newspapers, ranging from local dailies and weeklies
to major market and foreign newspapers. For the year ended January 28, 1996,
approximately 18% of the Company's net sales were derived from the sale of
magazines and newspapers.
STATIONERY. Each store typically carries between 20 and 50 different
stationery lines, encompassing greeting cards, seasonal cards, boxed stationery
and writing papers. The Company also specializes in distinctive lines of
stationery from around the world, which it obtains through trade shows, trade
journals, boutique shopping and customer recommendations. For the year ended
January 28, 1996, approximately 13.4% of the Company's net sales were derived
from the sale of stationery.
FOOD. Each store contains a gourmet and packaged food department which
offers fresh and packaged desserts, gourmet chocolates and coffees as well as
other food items. Impulse food items include local baked goods, cheesecakes,
bagels and gourmet ice creams. For the year ended January 28, 1996,
approximately 4.5% of the Company's net sales were derived from the sale of
food.
GIFTS. Each store offers fashionable and distinctive presents and a
wide variety of traditional and seasonal gift items. Moreover, the Company
also stocks an assortment of unusual, humorous and surprising gift items which
cater to each store's clientele. For the year ended January 28, 1996,
approximately 3.9% of the Company's net sales were derived from the sale of
gifts.
COFFEE CAFES. The Company has recently introduced coffee cafes in
several of its stores. The Company believes that coffee cafes represent the
new meeting places of the 1990's and intends to take advantage of the
opportunity to increase customer traffic in its stores. Coffee cafes accounted
for approximately 2.7% of net sales in the year ended January 28, 1996.
MULTIMEDIA. The Company has added new multimedia categories to its
existing retail mix at several of its locations and intends to provide such
merchandise at selected locations. These categories include (i) video cassette
rentals, (ii) books-on-tape for sale, (iii) music departments and (iv) select
computer software and CD-ROM's. The Company believes that by
cross-merchandising several different product categories in addition to its
core book business, it can encourage more frequent visits by its customers and
appeal to a wider demographic cross section of consumers. Although it is the
Company's intent to incorporate as many of the foregoing multimedia categories
as possible into its various locations, at present only certain of
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these categories have been so included and only at certain of the Company's
stores. Sales of multimedia products were approximately 1.4% of net sales from
the sale of multimedia products in the year ended January 28, 1996.
THE KIDEOLOGY(TM) MODEL
Kideology(TM) is a retail system which is being developed to sell
educational toys and product for children from infancy to eighth grade. The
Kideology(TM) retail system is in the early stages and as such, the
Kideology(TM) system will require an outlay of additional capital which the
Company is currently seeking. No assurance can be given, however, that the
Company will be able to secure such additional capital. (See, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.")
The components of the Kideology(TM) model are as follows:
RETAIL STORES. Kideology(TM) will be presented to the public most
prominently in a chain of retail stores showcased by New York designer Joshua
Scharf. Two prototype stores are in operation in western New York -- one at
587 Mosley Road, Fairport, New York (approximately 5,000 square feet) and
another at 5495 Main Street, Williamsville, New York (approximately 3,000
square feet). The stores utilize colorful design elements and patterns,
moveable fixturing, computer and video stations and engaging customer service
outposts to entertain children while they are in the store and to make the
retail environment attractive and amusing to adult shoppers. New retail stores
will be 5,000-7,000 square feet.
PRODUCT LINE. The merchandise philosophy is geared towards assisting
the customers in purchase decisions by providing them with directed help in the
form of "slim jim" suggestion cards. These cards, which are available on a
self-service basis, advise customers as to recommended product and price points
for gift selections by age or grade level, grade level reading lists, subject
specific suggestions, etc. These cards can be used by "kideologists" in their
sales efforts. These cards are being developed to include lesson plans to
assist parents in their home schooling efforts. Merchandise is arranged by
grade level around the perimeter of the store with cross merchandising into
subject specific areas designated by colorful icons in the main body of the
store. These subject specific areas include MATH, SCIENCE, ARTS & CRAFTS,
WORLD, COMPUTING, IMAGINARIUM, PRE-SCHOOL AND MOVIE THEATER areas.
STORE LAYOUT
BOOKSTORES. The Company's bookstores are designed to promote customer
convenience, stimulate customer interest and reinforce the Company's image as
an upscale book retailer. Books on the New York Times best-seller list and
bargain books are prominently displayed at the front of the Company's stores.
Books within the store are organized by subject and categories and are
distinctly identified. Gifts are displayed with greeting cards and stationery
throughout the stores and near the stores' cash registers. Magazines are
located at the back of the store to attract customers through the store's other
departments. Coffee cafes also are generally located towards the rear of the
store, while multimedia products are usually placed throughout the store. In
order to incorporate the addition of multimedia products and
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install coffee cafes, the Company has recognized the need for larger stores.
As such, new Village Green locations are expected to comprise approximately
10,000 square feet each, which is approximately 25% larger than most of the
Company's existing stores.
KIDEOLOGY(TM). The Company's prototype store is approximately 5,000
square feet and accommodates selections of merchandise for children ages 14 and
under. All of the Company's stores offer a warm and appealing shopping
environment with brightly lit colorful spaces, wide aisles for strollers and
kid-level seating and product shelving. Products are conveniently displayed in
separate merchandise departments, such as "Science & Nature" and "Arts &
Crafts," which are identified by colorful eye-catching icons that are visual as
well as verbal so that children can understand them. Kideology(TM) stores
contain designated play areas where children and their parents are encourage to
explore toys and games in keeping with the Company's "try before you buy"
philosophy.
NEW AND EXISTING STORES AND STORE CLOSINGS
The Company periodically reviews the profitability trends and
prospects of each of its stores and evaluates whether or not any
underperforming stores should be closed or relocated to more desirable
locations in existing markets.
Adding to its existing base, the Company established two new stores
during fiscal year ending January 30, 1994, and one new store during fiscal
year ending January 29, 1995. During the fiscal year ended January 28, 1996,
the Company opened four stores, including two Kideology(TM) stores. Two other
under performing stores closed in February and March, 1996.
PURCHASING AND MERCHANDISING
The Company purchases merchandise from over 500 vendors. The
Company's purchasing decisions are centralized and are made by the Company's
merchandise department. The Company has buyers who negotiate terms, discounts,
and cooperative advertising allowances for all of the Company's stores and
decide which products to purchase, in what quantity and for which stores. New
book titles are purchased directly from publishers for all of the Company's
bookstores. Although the majority of purchases are made by the Company's
merchandise department, store managers have the flexibility to influence
purchasing decisions in order to respond to local demand for fast selling
titles. The volume of the Company's purchases typically enable it to obtain
favorable volume discounts from its vendors.
All major merchandising decisions concerning pricing, advertising and
promotional campaigns, as well as the initial ordering of inventory for each
store, are centrally controlled at the Company's headquarters in Rochester, New
York. Accounting and general financial functions for all Company stores also
are conducted at the corporate headquarters.
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Merchandise purchased by the Company is shipped directly to the
individual stores. This process permits rapid distribution, which is
particularly important for timely merchandise such as magazines and
best-selling books. In general, unsold books and magazines can be returned to
the vendors for full credit. Although in the fiscal year ended January 28,
1996 the Company purchased an aggregate of approximately 9.2% of its inventory
of books and periodicals from Ingram Books, Inc. and Ingram Periodicals, Inc.,
the Company does not believe it is generally dependent upon any one supplier
for its products.
MANAGEMENT INFORMATION SYSTEM
The Company's management information system ("MIS") is operational in
certain of the Company's higher volume locations and is expected to be
implemented in all of the Company's new stores and certain of its other current
stores. This information system provides management with sales, inventory and
other information and is important to the Company's ability to achieve cost
efficiencies, control shrinkage and evaluate customer purchasing patterns.
The MIS features retail point-of-sale tracking functions that are
polled daily and generate sales reports and supporting documentation. These
reports are available to the Company's corporate headquarters for auditing and
input into the Company's automated accounting program. The point-of-sale
system provides daily accounting of sales and gross profit as well as other
control items such as discounts, price overrides and refunds. Financial
statements, including income statements and balance sheets, are produced
monthly for each such location. Complete inventories are taken at least once a
year. Each item in the Company's stores has its own distinct item number which
is used by the point-of- sales system to record sale and cost information.
Reports are also tracked for reorder information and generation of historical
sales information used to make purchasing and reorder decisions.
MARKETING
The Company advertises primarily through newspapers, television and
radio, stressing its wide selection, customer service and product mix. In
addition to conventional paid advertising, the Company actively works to
achieve media attention with new products and promotions such as appearances by
authors, lectures and special community programs. Authors who have appeared at
the Company's stores over the last three years include former President Jimmy
Carter, John Updike, Gloria Steinem, Amy Tan, Robin Quivers, Fred Smerlas, Jim
Kelly, Lynn Scherr, Robert McFarlaine and Captain Kangaroo.
The Company emphasizes customer service in its stores through its
well-trained, knowledgeable salespeople and strives to provide its customers
with an enjoyable shopping experience. The Company adheres to a number of
customer service policies and practices to reinforce customer confidence in the
Company.
The Company's Bookstores typically are open 15 to 18 hours a day, 365
days a year. The Company experiences its heaviest sales during the fourth
quarter of the year, which
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includes the traditional holiday season. Although the Company has historically
discounted books only during special sales periods, recognizing the need to
remain competitive, Village Green now offers everyday discounts on New York
Times best sellers and hardcover books. The Company also sells gift
certificates.
TRADEMARKS
The Company uses The Village Green Bookstore name and logo in its
business operations and intends to seek federal trademark registration of its
name and logo, as well as state registrations in New York, Pennsylvania,
Connecticut and, if applicable, in other states where the Company will do
business. Applications for the KIDEOLOGY(TM) trade and service marks have been
submitted for registration. No assurance can be given that the Company will be
entitled to or receive federal or state trademark registration of its name and
logo.
COMPETITION
RETAIL BOOKSTORES. The retail book business is highly competitive.
The Company competes with a diverse group of regional and local independent
book retailers, as well as with large national bookstore chains, including
WaldenBooks, Borders Bookshop, Barnes & Noble, Inc., Media Play, B. Dalton
Bookseller, Inc., Encore Books, Books-A-Million, Inc. and Crown Books
Corporation. In recent years, many competing national chains have been
expanding in size and number of outlets, and have developed and opened
superstores. Most of these competitors have significantly greater financial
resources than the Company, have been in existence for a substantially greater
period of time and have more extensive facilities, personnel and other
resources than those which are now, or in the foreseeable future will become,
available to the Company.
The Company also experiences indirect competition from retail
specialty stores, such as computer and "new age" stores, and religious
bookstores, that offer books in a particular discipline or specialty. To the
extent that bookstores or specialty retail stores located within a Village
Green market expand their title selections or offer prices that are lower than
the Company's prices, the Company's results of operations could be adversely
affected.
The sale of new books also is affected by competition for the
consumer's dollar with alternative forms of entertainment and information, such
as computers, interactive software, books and games in electronic form,
television, movies and video tapes. Although the Company believes that book
sales have remained relatively stable in recent periods, unfavorable economic
conditions affecting retailers generally, a decline in consumer spending or
increased demand for alternative forms of entertainment or information could
adversely affect the Company's results of operations in future periods.
EDUCATIONAL RETAIL. The retail toy business is highly competitive.
The Company competes on the basis of its stores' interactive environment, broad
merchandise selection, superior customer service and competitive pricing. The
Company competes with a variety of mass merchandisers, superstores and
specialty retailers selling portions of its product lines,
-11-
<PAGE> 14
including books, software, video and audio products, and arts and crafts. It
also completes with toy superstores and other toy retailers, including Toys R
Us and Kay Bee Toy Stores and other store formats selling educational
children's products, such as discount stores and smaller specialty toy stores.
Retailing of children's educational products is a relatively new concept.
Included among the Company's direct competitors are Zany Brainy, Learningsmith,
Noodle Kidoodle and Imaginarium.
Some of the Company's competitor's are much larger in terms of sales
volume and have more capital and greater management resources than the Company.
If any of the Company's larger competitors were to increase their focus on the
educational market or if any regional competitors were to expand their
activities in the markets primarily served by the Company, the Company could be
adversely affected. If any of the Company's major competitors seek to gain or
retain market share by reducing prices, the Company may be required to reduce
its prices on key items in order to remain competitive, which would have the
effect of reducing its profitability.
EMPLOYEES
As of May 5, 1996, the Company employed 60 full-time and 111 part-time
employees. The Company believes its success will depend upon its ability to
identify, hire and retain capable management. There can be no assurance that
the Company will succeed in recruiting or retaining suitable staff. The
Company considers its relations with its employees, none of whom are covered by
collective bargaining agreements, to be generally good.
SUBSIDIARIES
The Company was organized under the name Monroe Book Corporation in
1982 to acquire the business of the Village Green Bookstore, a Rochester based
proprietorship which had been engaged in the bookstore business since 1973.
The Company's corporate name was changed in February 1986 to The Village Green
Bookstore, Inc. Except for the Rochester store, which is operated directly by
the Company, all of the Company's stores are operated through wholly owned
subsidiaries. The Company's current stores are located in Rochester (acquired
by the Company in 1982), Greece (opened 1987 and operated by Rochester Books,
Inc.), Buffalo (opened 1989 and operated by Buffalo Books, Inc.), and Perinton
(opened 1992 and operated by Rutgers Books, Inc.), all of which are located in
Western New York State; Edwardsville, Pennsylvania (opened in 1993 and operated
by Wilkes-Barre Books, Inc.); Doylestown, Pennsylvania (opened in 1993 and
operated by Doylestown Books, Inc.) and Ridgefield, Connecticut (opened in
December 1994 and operated by The Village Green Bookstore of Connecticut,
Inc.). The Company's stores in Manaychk which opened in October 1995 is
operated by Wilkes-Barre Books, Inc. The Kideology(TM) store which opened in
Williamsville, New York is operated by Kideology(TM), Inc., a wholly-owned
subsidiary. All of the Company's subsidiaries are New York corporations except
Wilkes-Barre Books, Inc. and Doylestown Books, Inc. which are Pennsylvania
corporations and The Village Green Bookstore of Connecticut, Inc. which is a
Connecticut corporation.
-12-
<PAGE> 15
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own any real property but rather leases all of
its locations pursuant to written leases. The Company's bookstores are
presently located either in strip shopping centers or as free standing
buildings. Generally, the Company's leases have terms ranging from five years
to ten years and require the Company to pay a fixed minimum rental fee plus a
rental fee based on a percentage of net sales above a minimum threshold
together with certain executory costs such as pro rata share of property taxes,
common area maintenance and insurance. Such properties in the opinion of the
management are adequately covered by insurance.
On October 1, 1993 the Company relocated its corporate offices from
its Monroe Avenue store to 1357 Monroe Avenue, Rochester, New York 14618. The
new corporate offices comprise approximately 3,400 square feet at an annual
rent of $17,940 for a term which expires on May 31, 1997.
Set forth below are the principal terms for all significant leases for
bookstores of the Company (or its subsidiaries).
<TABLE>
<CAPTION>
APPROX. TERM
SQUARE AND/OR
LOCATION FOOTAGE EXPIRATION CURRENT RENT LESSOR
----------------------------------- ------- ---------------- --------------------- -------------------
<S> <C> <C> <C> <C>
CORPORATE OFFICE: 3,400 Expires May $17,940 per year U.S. Realty
The Village Green Bookstore, Inc. 31, 1997 Corporation
1357 Monroe Avenue
Rochester, NY 14618
LOCATION 1: 10,000 10 years $126,000 per year plus Mr. Paul Adams
766 Monroe Avenue Ending 1/31/06 4.5% of annual gross
Rochester, NY 14607 sales over $2.8
million
LOCATION 2: 7,300 5 years with $69,708 per year plus Ridgecrest
1954 West Ridge Road 1-5 year 6% of annual gross Associates
Rochester, NY 14626 (Greece) option sales over $1.2
Ending 9/20/97 million
LOCATION 3: 6,150 5 years $73,800 per year plus 765 Elmwood
765 Elmwood Avenue ending 4% of annual gross Associates
Buffalo, NY 14222 6/30/99 sales over $1.845
million
LOCATION 4: 18,039 10 years $154,858 per year plus Wegmans
6600 Pittsford-Palmyra Road Ending 9/30/05 4.5% of annual gross Enterprises
Fairport, NY 14450 (Perinton) sales over $4.1
million
LOCATION 5: 7,450 5 years with 5 $65,187.50 per year Five Star Realty
West Side Mall year option plus 3% of annual Corporation
Edwardsville, PA (Wilkes-Barre) Ending gross sales over
10/31/03 $1.448 million
</TABLE>
-13-
<PAGE> 16
<TABLE>
<CAPTION>
APPROX. TERM
SQUARE AND/OR
LOCATION FOOTAGE EXPIRATION CURRENT RENT LESSOR
- ------------------------------------ ------- -------------- -------------------- -------------------
<S> <C> <C> <C> <C>
LOCATION 6: 8,300 5 years with 5 $92,000 per year plus Ms. Marcia M.
16 South Main Street year option 3% of annual gross Chapman
Doylestown, PA 18901 Ending sales over $1.533
10/31/03 million
LOCATION 7: 7,142 10 years $140,000 per year base Willett
440 Main Street ending rent Properties, L.P
Ridgefield, CT 1/31/05
LOCATION 8: 9,086 10 years, with $140,833 plus 5% of Mr. Daniel
Main Street 10 year option the annual gross Neducsin
Philadelphia, PA ending revenue in excess of
10/31/05 $3,000,000
LOCATION 9: 3,600 10 year with $46,800 per year Stephen S. Obletz
5455 Main Street 10 year option years 4 thru 7 $54,400
Williamsville, NY ending per year
12/14/05 years 8 thru 10
$57,600 per year
</TABLE>
-14-
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS.
The Company has been named a defendant in an action commenced on
August 24, 1994 in the Supreme Court of the State of New York for Erie County
involving a dispute on a lease in the amount of $42,392.07. The plaintiff,
Benderson 85-1 Trust, is the landlord of the Company's former Tonawanda, New
York store, which the Company closed in January 1994. The Tonawanda store was
operated by the Company's subsidiary, Niagara Books, Inc., which was the party
named on the lease. The Company believes it has meritorious defenses and
intends to vigorously defend this action.
The Company has been named a defendant in an action commenced on
August 3, 1994 in the Supreme Court of the State of New York for Monroe County
by William W. Shuster, Jr., as plaintiff, involving a "slip and fall" on the
Company's property for damages in the amount of $2 million. The Company
carries $1 million worth of liability insurance which the Company believes
should be sufficient to cover any possible award of damages to the plaintiff.
Further, the Company believes it has meritorious defenses and intends to
vigorously defend this action.
The Company has been named in an Article 78 proceeding commenced on
January 10, 1995 in the Supreme Court of the State of New York for Monroe
County by G.L. Wilson Building Company ("Wilson"), as plaintiff, involving the
replacement of a lost certificate representing 186,500 shares formerly held in
the name of Penfield Realty Holding Co., Inc. Wilson has agreed to withdraw
this matter and the Company has agreed to cause a certificate evidencing
186,500 shares to be issued in the name of Wilson upon Wilson posting a bond to
indemnify the Company from any claim that may be made against the Company on
account of the lost certificate. Furthermore, the Company paid $2,000 towards
the cost of such bond and Mr. Wilson has agreed to forbear from instituting any
action against the Company with respect to the 186,500 shares acquired by the
Company upon its exercise of its option with Mr. Adams.
-15-
<PAGE> 18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the market price for the Company's
Common Stock and Redeemable Warrants on the NASDAQ Small-Cap Market. The table
reflects the high and low bid prices for the Common Stock as reported by the
National Association of Securities Dealers, Inc., for each full quarter for the
last two full fiscal years and the current fiscal year, and the high and low
bid prices for the Redeemable Warrants for the first quarter of the current
fiscal year.
Common Stock
------------
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
Fiscal Year Ended January 29, 1995
- ----------------------------------
First Quarter $3.50 $6.50
Second Quarter $4.00 $5.25
Third Quarter $3.13 $4.88
Fourth Quarter $3.25 $4.00
Fiscal Year Ended January 28, 1996
- ----------------------------------
First Quarter $2.50 $3.75
Second Quarter $1.88 $3.25
Third Quarter $2.00 $3.13
Fourth Quarter $1.63 $2.39
Redeemable Warrants
-------------------
Low High
--- ----
Fiscal Year Ended January 28, 1996
- ----------------------------------
First Quarter $0.438 $0.75
Second Quarter $0.25 $0.81
Third Quarter $0.38 $0.81
Fourth Quarter $0.38 $0.69
</TABLE>
The quotations set forth above reflect market prices between dealers,
without retail mark-up, mark-down, or commission and may not represent actual
transactions.
On February 21, 1995, the Boston Stock Exchange approved the listing of
the Company's Common Stock and Redeemable Warrants upon official notice of
issuance of the Company's Public Offering, which notice was given on March 15,
1995. On March 16, 1995,
-16-
<PAGE> 19
the NASDAQ Small-Cap Market approved and commenced trading on the Redeemable
Warrants.
As of April 30, 1996 there were approximately 836 holders of record of
the Common Stock. Such number of record holders was determined from the
Company's shareholder records and does not include beneficial owners of the
Common Stock whose shares were held in the names of various security holders,
dealers and clearing agencies.
On May 3, 1996, the closing bid and asked prices for the Common Stock as
reported by NASDAQ Small-Cap Market were $1.0625 and $1.00, per share,
respectively, and the closing bid and asked prices for the Redeemable Warrants
were $.25 and $.275, per share, respectively.
-17-
<PAGE> 20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION.
OVERVIEW
The Company currently operates eight retail bookstores and two
Kideology(TM) stores in New York, Pennsylvania and Connecticut. The Company's
strategy is focused primarily on opening additional Kideology(TM) stores in new
and existing market areas, particularly in the Northeast corridor. The Company
believes that in order to achieve sales growth and profitability it will need
to create efficiencies in its distribution capabilities and store operations
and achieve greater knowledge of its market areas and its customers. In
addition to opening new Kideology(TM) stores, management intends to continue
its practice of reviewing the profitability trends and prospects of existing
bookstores and aggressively redeploying capital by closing or relocating
underperforming stores.
The fiscal year ending January 28, 1996 ("Fiscal 1996") was a period of
consolidation and re-evaluation. The events which led to the Company's
position in calendar 1996 were the following:
The Public Offering, consisting of 2,000,000 Units, each Unit consisting
of one share of Common Stock and one Redeemable Common Stock Purchase
Warrant at a public offering price of $3.00 per Unit, was consummated on
March 23, 1995.
The anticipated maturity of an aggregate of $1.2 million Principal
Amount 7% Convertible Senior Subordinated Debentures (the "1994 Private
Placement"). Sands Brothers & Co., Ltd. ("Sands Brothers") acted as
placement agent in the sale of the Debentures. The Company is currently
negotiating with financing sources to secure repayment of these
debentures.
The continued competitive conditions which served to adversely affect
the Company's Bookstores.
The opening of two Kideology(TM) stores and the introduction of new
strategic objectives.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of net sales, unless otherwise indicated, represented by certain items
reflected in the Company's consolidated statement of operations:
-18-
<PAGE> 21
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
JANUARY 28, 1996 JANUARY 29, 1995
---------------- ----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net Sales $11,040,366 $10,002,901
As a percentage of Net Sales: 100% 100%
Same Stores 87.0 98.6
New Stores 13.0 44.1
Closed Stores 0.0 0.3
Total Net Sales 100.0 100.0
Cost of Sales 64.7 63.7
Gross Profit 35.3 36.3
Selling, General and
Administrative Expenses 45.6 37.8
Other Expenses --
Loss from Operations (2.7) (1.5)
Net Loss (13.0) (5.9)
</TABLE>
YEAR ENDED JANUARY 29, 1996 COMPARED TO YEAR ENDED JANUARY 29, 1995
The Company is facing increased competition in the Buffalo, New York
market with the addition of Borders Books and Music superstore as well as
Barnes & Noble and Media Play superstores. In addition, Barnes & Noble, Media
Play and FYE have opened superstores in the Rochester, New York area.
Net Sales for the fiscal year ended January 28, 1996 ("Fiscal 1996") and
fiscal year ended January 29, 1995 ("Fiscal 1995") were $11,040,366 and
$10,002,901 respectively, an increase of 10.4% in Fiscal 1996 versus Fiscal
1995. Comparable store sales decreased 2.7% in Fiscal 1996, versus an increase
of 1.0% during Fiscal 1995. The primary reason for this decline is due to the
sales decline at the McKinley Mall store in Blasdell, New York. This store was
closed in March 1996.
The Company's gross profit margin for Fiscal 1996 was 35.3%, as compared
to 36.3% for the Fiscal 1995. This nominal improvement of $273,285 in absolute
gross profit dollars resulted from increased sales volumes. The improvement in
absolute dollars represents a 1.0% decline in gross profit percentage. In
absolute dollars, gross profit has increased from
-19-
<PAGE> 22
$3,628,973 to $3,902,258 for Fiscal 1995 and 1996, respectively. The
additional competition in the bookstore industry resulted in the Company
competing more aggressively with discounts doubling from 2.5% of sales to 5.0%
of sales. Notwithstanding this increase in discounts of 2.5%, gross profit
declined by 1.0% as a result of ongoing efforts to maximize margins through
improved buying and better inventory management.
Selling, general and administrative expenses for Fiscal 1996 increased
33.1%, due to the initial start up costs related to costs associated with the
addition of four (4) new stores (two (2) bookstores and two (2) Kideology(TM)
stores); the introduction of the Company's new Kideology(TM) retail format; and
the slower than anticipated growth in the new stores. The new bookstores were
sited closer to major metropolitan areas resulting in higher selling, general
and administrative costs.
The Company incurred other expenses of 305,637. These expenses were
recorded as a result of the closing of two (2) of the Company's underperforming
bookstores. As a percentage of net sales, selling, general and administrative
expenses increased from 37.8% of net sales for Fiscal 1995 to 45.6% of net
sales for Fiscal 1996.
YEAR ENDED JANUARY 29, 1995 COMPARED TO YEAR ENDED JANUARY 30, 1994
Net Sales for Fiscal 1995 and fiscal year ended January 30, 1994
("Fiscal 1994") were $10,002,901 and $9,103,943 respectively, an increase of
9.9% in Fiscal 1995 versus Fiscal 1994. Comparable store sales increased 1.0%
in Fiscal 1995 versus an increase of 1.5% during Fiscal 1994.
The Company's gross profit margin for Fiscal 1995 was 36.3%, as compared
to 33.7% for the Fiscal 1994. This represents an improvement of $562,910 in
absolute gross profit dollars and a 7.7% improvement in gross profit
percentage. In absolute dollars, gross profit has increased from $3,066,063 to
$3,628,973 for Fiscal 1994 and 1995, respectively. The improved gross margin
can be attributed to better management of product and better purchase terms
received from vendors.
Selling, general and administrative expenses for Fiscal 1995 increased
2.3%, due to increased professional fees related to the Company's expansion.
As a percentage of net sales, selling, general and administrative expenses
decreased from 40.6% of net sales for Fiscal 1994 to 37.8% of net sales for
Fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents amounted to $383,918 at January 28, 1996, as
compared to $519,470 at January 29, 1995. Inventories increased by $1,574,604
to $6,306,808 at January 28, 1996 from $4,734,204 at January 29, 1995. This is
the result of additional retail locations. Property and Equipment increased
significantly due to the opening of the new locations.
-20-
<PAGE> 23
Working capital at January 28, 1996 was $1,923,897 as compared to
$281,325 at January 29, 1996. During the first quarter of Fiscal 1996, the
Company completed the Public Offering, netting the Company approximately
$4,629,041 after offering expenses, which provided substantial working capital
to the Company. Part of the proceeds from the Public Offering were used to
repay the $1.8 million debt and accrued interest incurred in the 1993 Private
Placement and the exercise of an option to acquire 186,500 shares of Common
Stock held by a former officer of the Company. See Item 13. "Certain
Relationships and Related Transactions."
The Company's independent auditors have stated that as a result of the
Company's current financial condition there is substantial doubt as to the
Company's ability to continue as a going concern. The Company recently entered
into a letter of intent with GBFC, Inc., a finance company ("GBFC"). GBFC is
discussing, subject to further due diligence investigation, the possibility of
lending up to $2 million to the Company pursuant to a Secured Revolving Credit
Facility (the "Revolving Credit Facility") for which amount the Company will be
required to provide a security interest in all of its inventory. The Company
intends to use a portion of the proceeds to pay off a portion or all of its
$1.2 million subordinated debentures. Additional proceeds from the Revolving
Credit Facility will be used to implement the Company's new strategic
objectives described above. The Company is also considering raising additional
working capital through alternative means, such as a private placement of debt
or equity. Currently, the Company has received no commitment from GBFC or any
other financing sources. No assurances can be given that the Company will be
successful in obtaining financing from GBFC or other sources or that the
Company will be successful in implementing its new Kideology(TM) retail
concept.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The specialty industry, which include the Company's bookstore and
Kideology stores is subject to certain seasonal customer buying patterns.
Typically, within the Company's fiscal year, net sales and income from
operations are significantly higher during the fourth fiscal quarter, which
includes the traditional holiday season, and are lowest in the first and second
fiscal quarters. Working capital requirements are generally greatest during
the third and fourth fiscal quarters due to the seasonality of the Company's
business. This seasonal pattern is primarily due to the increased customer
demand for books during the year-end holiday selling season. As a result, the
Company is heavily dependent on the results of its fourth fiscal quarter.
In addition to seasonality, the Company's results of operations may
fluctuate from quarter to quarter as a result of the amount and timing of sales
contributed by new stores, costs associated with the construction and opening
of new stores and their integration into the operations of the Company, as well
as other factors. These stores generally have lower initial sales volumes and
require the Company to incur pre-opening expenses. Accordingly, the
acquisition of a significant number of stores, particularly during the second
and third calendar
-21-
<PAGE> 24
quarters, could adversely affect operating results on a quarter to quarter
comparative basis. Furthermore, there can be no assurance that new stores will
operate on a profitable basis.
INFLATION
There was no significant impact on the Company's operations as a result
of inflation during the last two fiscal years.
ITEM 7. Financial Statements.
See Pages F-1 through F-12 at the end of this Form 10-KSB.
-22-
<PAGE> 25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The names, ages and principal occupations of the Directors and Executive
Officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE POSITION
- ---------------------------------------- ----- --------------------------------------------------
<S> <C> <C>
Raymond C. Sparks 45 Chairman of the board of Directors, President,
Chief Executive Officer, Treasurer, Chief
Financial Officer and Chief Operating Officer
John W. Borek 46 Director, Vice President of Marketing and
Merchandise and Secretary
Steven B. Sands 37 Director
John P. Holmes 58 Director
Michael S. Smith 42 Director
</TABLE>
The term of office of each person elected as a Director will continue
until the Company's next Annual Meeting of Shareholders or until his successor
has been elected.
RAYMOND C. SPARKS became the Company's President, Chairman and Chief
Executive Officer on June 28, 1993. Mr. Sparks has eight years of public
accounting experience in South Africa with Ernst & Young and later, with Webb &
Company. Since 1979, Mr. Sparks has concentrated in the retail industry,
primarily in supermarket and specialty stores, in both operational and
financial capacities. Mr. Sparks was Financial Director for Burlington
Industries in Cape Town until 1983. From 1983 to 1987, Mr. Sparks was
Divisional Financial Manager for Checkers Supermarkets Ltd. in Cape Town. Mr.
Sparks moved to the United States in 1987, and became Chief Financial Officer
of Checkers Restaurants, Brooklyn, New York. In 1989, he was named Vice
President of Finance at Tie Rack (U.S.) Inc. Mr. Sparks was the Chief
Operating/Financial Officer of Burke & Burke (New York) in 1991. Mr. Sparks
was Vice President and Chief Financial Officer of Conston Corporation, an
apparel retailer located in Philadelphia before he joined the Company in June
1993. Mr. Sparks holds the professional qualification of Chartered Accountant
(C.A.(S.A.)), and was awarded a Bachelor of Commerce (with honors) degree in
Financial Accounting by the University of Cape Town, South Africa.
JOHN W. BOREK has been a Director of the Company since 1986. Mr. Borek
has been Vice-President of Marketing and Merchandise since 1986. He has been
employed by the Company since 1982.
-23-
<PAGE> 26
STEVEN B. SANDS became a Director of the Company on June 28, 1993. Mr.
Sands has been engaged in the investment banking business since 1980. Since
1990, Mr. Sands has been Co-Chairman and Chief Executive Officer of Sands
Brothers & Co., Ltd., an investment banking firm. Mr. Sands is a director of
Semi-Conductor Packaging Materials Co. (semiconductor components manufacturer),
Digital Solutions, Inc. (payroll and related services), Command Security Corp.
(security guard services), Wholesale Cellular USA, Inc. (cellular telephone
distributor) and Financing for Science International, Inc. (high technology and
scientific equipment leasing), each a publicly traded company.
JOHN P. HOLMES has been a Director of the Company since October 29,
1993. Mr. Holmes has been a Managing Director of Sands Brothers & Co., Ltd.
since January 1993. Mr. Holmes has been engaged in the investment banking
business since 1962 and also is a private investor.
MICHAEL S. SMITH is the Managing Director of Corporate Finance at H.J.
Meyers & Co., Inc. (f/k/a Thomas James Associates, Inc.) ("H.J. Meyers"), an
investment banking firm which acted as the managing underwriter of the
Company's 1995 public offering. Mr. Smith serves on the Board of Directors of
The Bhirud MidCap Growth Fund, a publicly traded mutual fund. Mr. Smith has
been with H.J. Meyers since May 1991, and from 1987 until 1991 was an attorney
with the law firm of Harter, Secrest & Emery. Mr. Smith received a B.A. from
Cornell University and a J.D. from Cornell University of Law.
Each Director is elected for a period of one year at the Company's
Annual Meeting of shareholders and serves until his successor is duly elected
by the shareholders. Officers are elected by and serve at the discretion of
the Board of Directors. Directors of the Company currently receive no
compensation for their service as a Director.
The Board of Directors does not have a standing audit, nominating or
compensation committee.
-24-
<PAGE> 27
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table discloses the compensation for the persons who
served as the Company's Chief Executive Officer during Fiscal Years 1995, 1994
and 1993. No other executive officer of the Company had total compensation in
excess of $100,000 for the Fiscal Years 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- -------------------------------------------------
FISCAL OTHER SECURITIES
YEAR ANNUAL UNDERLYING ALL OTHER
NAME AND ENDING SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION 1/29-30-31 ($) ($) ($) (#) ($)
--------------------- ---------- -------- ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Raymond C. Sparks 1996 119,065 0 (1)
Raymond C. Sparks 1995 100,096 0 (1) 30,000 20,400
Raymond C. Sparks,
CEO since June 28,
1993 1994 72,596 0 (1) 150,000 0
Paul Adams, CEO
until June 28, 1993 1994 70,192 0 (2) 0 0
<FN>
(1) Other annual compensation for Mr. Sparks, including the use of a
Company car and health insurance benefits is not reported because the aggregate
of such amounts does not exceed the lesser of $50,000 or 10% of Mr. Sparks'
annual salary and bonus for the periods indicated. Also includes $17,522 which
Mr. Sparks received as reimbursement for relocation expenses.
(2) Other annual compensation for Mr. Adams, which included the use
of a Company car, health insurance benefits, and a store charge account, is not
reported because the aggregate of such amounts does not exceed the lesser of
$50,000 or 10% of Mr. Adams' annual salary and bonus for the years indicated.
Mr. Adams also receives rent from the Company as landlord of the Company's
flagship store located at 766 Monroe Avenue, Rochester, New York.
</TABLE>
The foregoing table does not give effect to compensation which may be
deemed to have been made to Steven B. Sands, a director of the Company, in his
capacity as a control person of Sands Brothers & Co., Ltd. in connection with
the June 1993 and April 1994 private placements. See Item 12. "Certain
Relationships and Related Transactions."
-25-
<PAGE> 28
The following table sets forth information concerning the value of
unexercised stock options held by the Named Executives as of January 28, 1996.
No stock options were exercised by the Named Executives in Fiscal 1996.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS
END AT FISCAL YEAR END(1)
---------------------- ---------------------
SHARES ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCIABLE
- -------------------------- ------------------ -------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Raymond Sparks - N/A 150,000/30,000 $0/$0
John Borek - N/A 20,000/30,000 $0/$0
</TABLE>
The Company does not have a stock appreciation rights plan, any long-term
compensation plan, or any pension plan requiring funding.
EMPLOYMENT AGREEMENTS
On June 28, 1993, the Company entered into an employment agreement with
Mr. Raymond Sparks, who became the Company's President, Chairman and Chief
Executive Officer on that date. This agreement, which has a term of three
years, provides for a base annual salary of $125,000, with salary increases and
bonuses to be determined by the Board of Directors in its discretion. In
addition, pursuant to Mr. Sparks' employment agreement, the Company has
reimbursed $17,522 to Mr. Sparks during the current fiscal year for expenses
related to the relocation of Mr. Sparks and his family to the Rochester, New
York area.
On June 28, 1993 the Company entered into a one year employment
agreement with John W. Borek, the Company's Vice President for Marketing and
Merchandise, Secretary and a Director of the Company. This agreement provided
for an annual salary of $60,000. Mr. Borek currently has an oral employment
arrangement with the Company at an annual salary of $66,000.
1993 STOCK OPTION PLAN
In September 1993, the Company adopted the 1993 Stock Option Plan (the
"1993 Plan") which provided for the grant by the Company of options ("Options")
to purchase up to an aggregate of 200,000 shares of the Company's authorized
but unissued Common Stock
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<PAGE> 29
(subject to adjustment in certain cases, including stock splits,
recapitalizations and reorganizations) to officers, directors, employees and
consultants of the Company. The 1993 Plan is intended as an incentive and to
encourage stock ownership by officers and certain other employees of the
Company in order to increase their proprietary interest in the Company's
continued growth and success and to encourage such employees to remain in the
employ of the Company.
It is intended that certain options granted under the 1993 Plan will
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") (hereinafter referred to as "Incentive
Stock Options"). The Company makes no warranty as to the qualification of any
options as Incentive Stock Options. Those options granted under the 1993 Plan
which do not qualify as Incentive Stock Options are hereinafter referred to as
"Non-Qualified Stock Options."
The 1993 Plan is administered by a committee (the "Committee") of two
Directors, currently consisting of Steven B. Sands and John P. Holmes, who are
"disinterested persons" within the meaning of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Committee has the
authority to select the recipients of options and determine the terms of
options granted under the 1993 Plan. The Board of Directors may, in its
discretion, reserve to itself any or all of the authority and responsibility of
the Committee with respect to awards of options to employees who are not
subject to liability under the Exchange Act at the time any such responsibility
is exercised.
The Committee is authorized under the 1993 Plan to grant to eligible
employees options to purchase shares of Common Stock. Such options may be
Incentive Stock Options and Non-Qualified Stock Options. The exercise price
per share of Common Stock under an Option will be established by the Committee
in its sole discretion at the time of grant; provided, however, that with
respect to Incentive Stock Options, the Option Price will not be less than the
fair market value of the Common Stock at the time the Option is granted, and
with respect to Non-Qualified Stock Options, the Option Price will not be less
than eighty-five (85%) percent of the fair market value of the Common Stock at
the time the Option is granted. Options may be exercised in whole or in part
at such time or times as will be determined by the Committee and set forth in
the applicable option agreement, except that the term of any Option will not be
longer than ten years from the date of its grant. Options will be exercised in
accordance with procedures established by the Committee. Options are
nontransferable other than by will or the laws of descent and distribution, or
pursuant to a qualified domestic relations order, as defined in the Code and
the Employee Retirement Income Security Act of 1974, as amended.
Except as otherwise permitted by the Code, the aggregate fair market
value (determined as of the time the Option is granted) of the Common Stock
with respect to which any Incentive Stock Option may be exercisable for the
first time by the grantee in any calendar year (under the 1993 Plan or any
other stock option plan of the Company or any or subsidiary thereof) will not
exceed $100,000.
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<PAGE> 30
No Incentive Stock Option may be granted to an individual who, at the
time the Option is granted, owns, directly or indirectly, stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
Common Stock of the Company or of any subsidiary thereof, unless such Option
(i) has an Option price of at least 110 percent of the fair market value of the
Common Stock on the date of the grant of such Option and (ii) cannot be
exercised more than five years after the date it is granted. The Committee may
grant options under the 1993 Plan to any officer, Director, employee or
consultant of the Company or its subsidiaries, who is not a member of the
Committee. Directors of the Company who are not also officers or employees are
not eligible for awards under the 1993 Plan. There currently are two executive
officers of the Company who are eligible for the grant of options under the
1993 Plan.
The aggregate number of shares of Common Stock which may be purchased
pursuant to options granted under the 1993 Plan, the number of shares of Common
Stock covered by each outstanding Option, and the price per share thereof of
each such Option will be appropriately adjusted, if necessary, for any increase
or decrease in the number of outstanding shares of Common Stock resulting from
a stock split or other subdivision or consolidation of shares of Common Stock
or for other capital adjustments or payments of stock dividends or
distributions or other increases or decreases in the outstanding shares of
Common Stock effected without receipt of consideration by the Company. Subject
to any required action by the shareholders, if the Company will be the
surviving corporation in any merger or consolidation, any Option granted will
cover the securities to which a holder of the number of shares of Common Stock
covered by the unexercised or invested portion of the Option would have been
entitled pursuant to the terms of the merger or consolidation.
Options to purchase up to an aggregate of 113,250 shares of the
Company's authorized but unissued Common Stock (subject to adjustment in
certain cases, including stock splits, recapitalizations and reorganizations)
are outstanding under the 1993 Plan. The Company has an effective registration
statement on Form S-8 under the Securities Act covering up to an aggregate of
200,000 shares under 1993 Stock Option Plans permitting the resale of shares
issued under such Plans by affiliates and nonaffiliates in the public market
without restriction under the Securities Act. However, the Company has agreed
with H.J. Meyers not to issue any options under the 1993 Stock Option Plan that
will either vest, or whose underlying shares of Common Stock may be resold
under the S-8, prior to September 15, 1996.
1987 STOCK OPTION PLAN
Prior to the adoption of the 1993 Plan, the Company had in place the
1987 Incentive Stock Option Plan, as amended (the "1987 Plan"). The purpose of
the 1987 Plan was to advance the interests of the Company by encouraging
qualified personnel to become affiliated with the Company and its subsidiaries,
to provide an incentive for directors, officers, key employees and consultants
to remain with the Company and its subsidiaries, and to stimulate the maximum
efforts of those employees and consultants on which the success and future
growth of the Company and its subsidiaries are dependent through the granting
of stock options. All options granted under the 1987 Plan are non-qualified
stock options ("1987
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<PAGE> 31
Options"). The term of the 1987 Plan originally was five years but was extended
by amendment to eight years. The 1987 Plan expired on May 18, 1995.
Options to purchase up to an aggregate of 76,500 shares of the Company's
authorized but unissued Common Stock (subject to adjustment in certain cases,
including stock splits, recapitalizations and reorganizations) are outstanding
under the 1987 Plan as of the date hereof. No additional options may be
granted under the 1987 Plan.
The 1987 Plan is administered by a committee of three Directors,
currently consisting of Raymond C. Sparks, Steven B. Sands and John P. Holmes
(the "1987 Plan Committee"). The 1987 Plan Committee is appointed from time to
time by a majority of the whole Board of Directors. Any member of the 1987
Plan Committee may be removed by a majority of the whole Board of Directors at
any time with or without cause.
The 1987 Plan Committee has the responsibility, subject to Board
approval to: (a) determine (i) the Participants to whom options under the 1987
Plan will be granted; and (ii) the number of 1987 Options to be awarded to each
Participant and the number of shares subject to each such 1987 Option; (b)
interpret, construe, and implement the provisions of the 1987 Plan; and (c)
establish, amend, and rescind appropriate rules and regulations consistent with
and relating to the 1987 Plan.
Options granted under the 1987 Plan will be evidenced by minutes of a
meeting or the written consent of the 1987 Plan Committee, ratified by a
resolution of the Board of Directors, and by written stock option agreements
consistent with the terms of the 1987 Plan, each of which will be executed by
the Company and the Participant.
1987 Options will be exercisable at such time following the date of
grant, as will be established and fixed by the 1987 Plan Committee. The date
on which any 1987 Option becomes exercisable will be the "Date Exercisable." On
or after the Date Exercisable, a Participant may exercise a 1987 Option at such
time or times as determined by the 1987 Plan Committee at the time of the
grant, provided, however, all rights to exercise a 1987 Option will expire
eight (8) years after the date such option granted by the 1987 Plan Committee
is approved by the Board of Directors.
The 1987 Plan Committee will determine, subject to approval of the Board
of Directors, the directors, officers, employees and consultants of the Company
and its subsidiaries to whom 1987 Options will be granted.
The purchase price per share of Common Stock deliverable upon the
exercise of a 1987 Option will be no less than Fair Market Value of the Common
Stock on the date of grant, or in the event the Participant owns more than ten
(10%) percent of the outstanding Common Stock, the option price will be no less
than 110% of the Fair Market Value on the date of grant. The date of grant
will be the date on which the Board of Directors approves of each option
authorized by the 1987 Plan Committee. "Fair Market Value" will mean the
closing market value on NASDAQ, or such other exchange on which the Common
Stock may then be listed.
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<PAGE> 32
The aggregate number of shares of Common Stock which may be purchased
pursuant to options granted under the 1987 Plan, the number of shares of Common
Stock covered by each outstanding Option, and the price per share thereof of
each such Option will be appropriately adjusted, if necessary, for changes in
capital structure, reorganization, merger or consolidation of the Company with
one or more corporations in which the Company is not the surviving corporation,
or of a transfer of substantially all of the property or more than eighty (80%)
percent of the then outstanding shares of the Company to another corporation,
reclassifications and stock dividends.
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<PAGE> 33
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock
as of May 4, 1996 of (a) each Director and nominee for election as a Director,
(b) each executive officer, and (c) each person known by the Company to own
beneficially more than five percent of the Company's outstanding Common Stock.
The Company believes that, except as otherwise stated, the beneficial holders
listed below have sole voting and investment power regarding the shares of
Common Stock reflected as being beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES(1) SHARES
------------------------------------ --------- ----------
<S> <C> <C>
Raymond C. Sparks 150,000(2) 4.08%
Steven B. Sands 379,000(3) 10.07%
John P. Holmes 130,000(4) 3.47%
John W. Borek 20,100(5) 1.16%
Martin S. Sands 379,000(6) 10.07%
Sands Brothers & Co., Ltd. 260,000 6.95%
All Directors and Executive
Officers as a Group (4 persons) 640,100(7) 17.33%
- ------------
<FN>
(1) Shares of Common Stock that an individual or group has a right to
acquire within 60 days pursuant to the exercise of options, warrants or
other rights are deemed to be outstanding for the purpose of computing
the percentage ownership of such individual or group, but are not deemed
to be outstanding for computing the percentage ownership of any other
person shown in the table.
(2) Includes 103,500 shares of Common Stock subject to exercise by Mr.
Sparks in connection with non-qualified stock options. Does not include
30,000 shares of Common Stock underlying options which Mr. Sparks does
not have the right to acquire within 60 days from the date of this Form
10-KSB.
(3) Includes (i) 260,000 shares of Common Stock held by Sands Brothers &
Co., Ltd. ("Sands Brothers"); and (ii) an aggregate of 99,500 shares of
Common Stock and 19,500 Redeemable Warrants owned by four private
limited partnerships which Mr. Steven B. Sands may be deemed to control.
Mr. Steven B. Sands is the brother of Mr. Martin S. Sands.
(4) Includes 80,000 shares of Common Stock beneficially owned by Mr. Holmes'
wife. Mr. Holmes disclaims beneficial ownership of all shares owned by
his wife.
(5) Does not include 30,000 shares of Common Stock underlying options which
Mr. Borek does not have the right to acquire within 60 days from the
date of this Form 10-KSB.
(6) Includes (i) 260,000 shares of Common Stock held by Sands Brothers; and
(ii) an aggregate of 99,500 shares of Common Stock and 19,500
immediately exercisable Redeemable Warrants owned by four private
limited partnerships which Mr. Martin S. Sands may be deemed to control.
Mr. Martin S. Sands is the brother of Mr. Steven B. Sands.
(7) Consists of Raymond C. Sparks, John W. Borek, Steven B. Sands, John P.
Holmes and Michael S. Smith.
</TABLE>
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<PAGE> 34
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On June 28, 1993 (the "1993 Closing Date"), the Company consummated a
private placement (the "1993 Private Placement") of 20 units with 34 investors,
including four investors affiliated with Mr. Steven B. Sands, a Director of the
Company, in the aggregate amount of $2 million, each unit consisting of (i) a
7.5% senior secured subordinated note in the principal amount of $90,000
(collectively, the "1993 Notes") and (ii) 20,000 shares of Common Stock at a
purchase price of $0.50 per share. To secure the obligations under the 1993
Notes, the Company granted a security interest in substantially all the assets
of the Company and pledged the capital stock in each of the Company's
subsidiaries in favor of the investors of the 1993 Private Placement. The 1993
Notes were retired from a portion of the net proceeds of the Company's Public
Offering and such security interests and pledges were released at such time.
Sands Brothers & Co., Ltd. ("Sands Brothers") acted as placement agent
for the 1993 Private Placement. Mr. Sands is a principal of Sands Brothers.
Mr. John P. Holmes, a Director of the Company, is a Managing Director of Sands
Brothers. In addition to receiving a ten (10%) percent sales commission
($200,000) and a three (3%) percent expense allowance ($60,000), on the 1993
Closing Date, Sands Brothers received, directly and as nominee for certain of
its employees, warrants to purchase 500,000 shares of Common Stock, at an
exercise price of $0.50 per share. On the 1993 Closing Date, the closing bid
and asked prices for the Common Stock as reported by NASDAQ were $1 13/16 and
$2 1/8 per share, respectively. These warrants were exercisable for five years
commencing September 27, 1993. On July 28, 1993, Sands Brothers divided
215,000 Placement Agent Warrants among certain of its employees. On the 1993
Closing Date, the Company also agreed to pay Sands Brothers a graduated
finder's fee consisting of 5% of the first $1 million of consideration; 4% on
the second $1 million; 3% on the third $1 million; 2% on the fourth $1 million;
and 1% on the fifth $1 million and above, in the event that Sands Brothers
originates a merger, acquisition, joint venture or other transaction to which
the Company is a party, which transaction is consummated by June 28, 1996. As
of the date of this Annual Report, Sands Brothers has not identified any
acquisition candidate for the Company. On the 1993 Closing Date, the Company
also granted to Sands Brothers the right of first refusal to underwrite or
place any public or private sale of debt or equity securities (excluding sales
to employees) of the Company, any subsidiary or successor of the Company or any
of the principal shareholders of the Company through June 28, 1996. Sands
Brothers waived its right of first refusal with respect to the Public Offering.
In connection with the 1993 Private Placement, Paul Adams resigned his
positions as the Company's President, Chief Executive Officer, Chief Operating
Officer, Chief Financial Officer, Treasurer and Chairman of the Board of
Directors, and as an officer and Director of each of the Company's
subsidiaries. He was replaced in such capacities by Raymond C. Sparks. The
Company and Mr. Adams entered into a one-year employment agreement pursuant to
which Mr. Adams served as Manager of Real Estate Operations and received a
salary of $50,000 per annum. Such agreement expired on June 28, 1994.
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<PAGE> 35
In order to induce Sands Brothers to proceed with the 1993 Private
Placement, on the 1993 Closing Date, the Company and Mr. Paul Adams entered
into an affiliate agreement (the "Affiliate Agreement") pertaining to certain
transactions and relationships between the Company and Mr. Adams. The Company
believes that the transactions contemplated by the Affiliate Agreement were as
favorable to the Company as could have been obtained in arms-length negotiated
transactions with unaffiliated third parties. Under the Affiliate Agreement,
Mr. Adams, among other things, (a) paid to the Company the sum of $129,000,
representing full payment for the leasehold improvements for a canceled lease
between a subsidiary of the Company and Mr. Adams, (b) granted to the Company a
three year option to repurchase 186,500 shares of Common Stock owned by Mr.
Adams at an exercise price of $1.00 per share (the "Adams Option"); (c) agreed,
under certain circumstances, to repay $83,000 in loans owed to the Company from
William Yager, a former officer of the Company, and Penfield Realty Holding
Co., Inc., a corporation wholly-owned by Mr. Yager (the "Yager Loans"), which
obligation was secured by the delivery by Mr. Adams to the Company of a
collateral assignment of mortgage pertaining to certain real property of which
Mr. Adams is the mortgagee, up to the sum of $83,000 (the "Collateral
Assignment").
On October 27, 1993, the Company obtained a judgment with respect to the
Yager Loans in the amount of $88,597.62 (the "Yager Judgment").
Notwithstanding reasonable legal and collection efforts undertaken by the
Company, the judgment remained unsatisfied and the Company accordingly sent
notice to Mr. Adams on March 25, 1994. In a series of letters from Mr. Adams
and/or his counsel, Mr. Adams claimed that the Company improperly pursued its
remedies against Yager and Penfield Realty, and as such, denied his obligation
to assume liability for the Yager Loans under the Affiliate Agreement.
On March 31, 1995, the Company entered into an agreement with Mr. Adams
(the "Adams Agreement"), in order to resolve certain disputes with respect to
(i) the Affiliate Agreement (including, without limitation, the payment of the
Yager Loans) and (ii) their relationship as landlord and tenant with respect to
the premises located at 746-766 Monroe Avenue, Rochester, New York (the "Monroe
Avenue Premises"), under a lease dated January 20, 1986, as amended (the
"Monroe Avenue Lease").
Under the terms and conditions provided for in the Adams Agreement, (i)
the parties terminated the Affiliate Agreement; (ii) the Company exercised its
option with Adams and acquired 186,500 shares of the Company's Common Stock
held by Adams at an exercise price of $186,500, which exercise price was offset
by the repayment by Adams of $83,000, representing full payment of the Yager
Loans, resulting in the net payment from the Company to Adams in the amount of
$103,500; (iii) the Collateral Assignment of Mortgage Agreement between the
parties dated June 28, 1993, which secured Adams' obligation to repay the Yager
Loans was terminated; (iv) the Option to Purchase Real Property Agreement dated
June 28, 1993 between the parties, which secured certain of Adams' obligations
under the Affiliate Agreement, was terminated; (v) the parties executed a
Further Modification Agreement to the Monroe Avenue Lease; (vi) the parties and
Lyndon Guaranty Bank of New York, the new mortgagee of the Monroe Avenue
Premises, executed a Subordination, Non-Disturbance and Attornment Agreement;
(vii) Adams executed and delivered general releases in favor of the
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<PAGE> 36
Company, its board of directors and executive officers and its subsidiaries;
and (viii) the Company, its board of directors and executive officers and its
subsidiaries executed and delivered general releases in favor of Adams. In
addition, the Company assigned the Yager Judgment in favor of Adams.
In connection with the 1993 Private Placement, Ms. Jessie Lazeroff
tendered her resignation as a Director of the Company and its subsidiaries.
Mr. Steven B. Sands was elected to the Board of Directors to fill the vacancy
created by Ms. Lazeroff's resignation. Pursuant to an agreement between the
Company and Sands Brothers, the Board of Directors of the Company nominated
John P. Holmes as the Company's fourth Director. Mr. Holmes was elected to the
Board of Directors of the Company at the Company's Annual Meeting of
Shareholders on October 29, 1993.
On March 31, 1994, Sands Brothers exercised all of the Placement Agent
Warrants which it held on such date and was issued 285,000 shares of Common
Stock. Mr. Holmes held 130,000 Placement Agent Warrants, which he exercised on
March 31, 1994 and was issued 130,000 shares of Common Stock. An aggregate of
488,500 Placement Agent Warrants have been exercised since March 31, 1994 by
Sands Brothers and certain of its employees. A Registration Statement on Form
S-3 covering the 400,000 shares of Common Stock comprising a portion of the
1993 Private Placement units and the 500,000 shares of Common Stock underlying
the Placement Agent Warrants was declared effective by the Commission on March
17, 1994.
On April 28, 1994, the Company consummated a private placement (the
"1994 Private Placement") with 37 investors with respect to an aggregate of
$1.2 million Principal Amount 7% Convertible Senior Subordinated Debentures of
the Company (the "Debentures") due two years from the date of issuance,
convertible into shares of the Common Stock at any time prior to maturity,
unless previously redeemed, at an initial conversion price of $5.00 per share.
Sands Brothers acted as placement agent in the sale of the Debentures and
received a placement fee of 8% ($96,000) for placing the Debentures plus a 2%
non-accountable expense allowance ($24,000).
The Debentures are expressly senior in right of payment to all Company
obligations (but subordinated to the payment of any future bank or
institutional indebtedness up to $1 million). The Debentures are redeemable,
in whole only, from time to time at the option of the Company at a redemption
price equal to 100% of the principal amount thereof plus accrued interest,
provided that the Debentures may not be redeemed prior to maturity unless,
during any period of 20 consecutive trading days ending within 30 days prior to
the giving of the notice of redemption, the market price for the Common Stock
is at least 125% of the conversion price, or $6.00 per share. The shares of
Common Stock issuable upon conversion of the Debentures have been registered
pursuant to a registration statement on Form S-3 which was declared effective
by the SEC on March 15, 1995 (the "Resale Prospectus").
In September 1994, the Company issued 100,000 shares of Common Stock and
a warrant exercisable for 100,000 shares of Common Stock to Mr. Mark Kalimian.
Such 100,000
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<PAGE> 37
shares and the shares underlying Mr. Kalimian's warrant are registered under
the Resale Prospectus. The Company has entered into an agreement with Mr.
Kalimian, a principal shareholder of the Company, whereby in consideration of
Mr. Kalimian waiving his registration rights, and agreeing to certain "lock up"
provisions requested by H.J. Meyers, the Company reserved a portion of the net
proceeds of the Public Offering towards the payment to Mr. Kalimian of any
amount by which the net proceeds of the entire 100,000 shares of Common Stock
that are actually sold by Mr. Kalimian under the Resale Prospectus are less
than $300,000. In January 1996 Mr. Kalimian sold his share and the Company was
required to deliver $125,000 to Mr. Kalimian.
John Borek, an officer and Director of the Company, owed $22,787 to the
Company as of January 30, 1994. This advance was non-interest bearing through
the year ended January 30, 1994, and during the current fiscal year is bearing
interest at the rate of nine (9%) percent per annum. Mr. Borek has agreed to
reimburse the Company for such amounts not later than June 30, 1995. Pursuant
to Mr. Sparks' June 28, 1993 employment agreement, the Company has advanced
$17,522 to Mr. Sparks during the current fiscal year for expenses related to
the relocation of Mr. Sparks and his family to the Rochester, New York area.
On April 21, 1995, Mr. Sparks reimbursed the Company for this advance. On
March 3, 1994, the Board of Directors of the Company, by unanimous consent,
resolved that it would be the policy of the Company not to extend further loans
to any officers or Directors of the Company.
During Fiscal 1996, the Company maintained an oral license arrangement
with Canandaigua Books, Inc., a New York corporation whereby Canandaigua Books,
Inc. operates under the name "The Village Green Bookstore." Mr. Adams owns a
50% interest in Canandaigua Books, Inc. The Company and Canandaigua Books,
Inc. terminated this license in June 1995.
On March 23, 1995, the Company consummated the Public Offering through
H.J. Meyers. Sands Brothers acted as a selected dealer in connection with the
Public Offering and received aggregate selling concessions of $52,500.
On March 21, 1995, the SEC declared effective a Registration Statement
on Form S-3 containing a "market making" prospectus. This prospectus may be
used by Sands Brothers in connection with offers and sales in market-making
transactions in the Common Stock and Redeemable Warrants of the Company. Sands
Brothers may act as a principal or agent in such transactions. Sands Brothers
has no obligation to make a market in the Common Stock and Redeemable Warrants
and may discontinue its market-making activities at any time without notice, in
its sole discretion.
Officers, Directors and holders of five percent or more of the Company's
outstanding capital stock have agreed that they will not sell any shares owned
by them (or subsequently acquired under any option, warrant or convertible
security owned prior to the Public Offering) for periods ranging from 45 days
to eighteen months from March 15, 1995, without H.J. Meyers' prior written
consent, PROVIDED, HOWEVER, that certain limited partnerships affiliated with
Steven B. Sands, a Director of the Company, are not subject to any such
restrictions.
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<PAGE> 38
All future transactions and/or loans between the Company and its
officers, Directors and 5% shareholders will be on terms no less favorable than
could be obtained from independent third parties and will be approved by a
majority of the independent, disinterested directors of the Company.
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<PAGE> 39
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Attached hereto are the Company's Financial Statements including
Consolidated Balance Sheets as of January 28, 1996 and January 29, 1995
and the related Statements of Operations, stockholders equity and cash
flows for the twelve (12) months ended January 28, 1996 and January 29,
1995, respectively. The Financial Statements are deemed a part of this
10-KSB.
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation. [Incorporated by reference to
Exhibit 2(a) to the Company's Registration Statement on Form S-18
(File No. 33-4560-NY) (the "S-18 Registration Statement")].
3.2 Certificate of Amendment as filed by the Secretary of the State
of New York on February 20, 1986. [Incorporated by reference to
Exhibit 2(b) to the Company's S-18 Registration Statement].
3.3 Revised Certificate of Amendment as filed by the Secretary of the
State of New York on March 31, 1986. [Incorporated by reference
to Exhibit 2(c) to the Company's S-18 Registration Statement].
3.4 Certificate of Amendment to the Certificate of Incorporation.
[Incorporated by reference to Exhibit 3 to the Company's Annual
Report on Form 10-K for the year ended January 31, 1993].
3.5 Certificate of Amendment to the Certificate of Incorporation
filed with the Secretary of State of the State of New York on
November 12, 1993. [Incorporated by reference to Exhibit 3.3 to
the Company's Annual Report on Form 10-KSB for the year ended
January 30, 1994 ("1994 10KSB")].
3.6 Certificate of Amendment to the Certificate of Incorporation
filed by the Secretary of State of the State of New York on
January 3, 1995. [Incorporated by reference to Exhibit 3.3 of the
Company's Registration Statement on Form SB-2 (File No.
33-88376) (the "SB-2 Registration Statement")].
3.7 By-Laws of Registrant. [Incorporated by reference to Exhibit 2(d)
to the Company's S-18 Registration Statement].
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<PAGE> 40
3.8 Amendment to Article II, Section 4 of the By-Laws of Registrant.
[Incorporated by reference to Exhibit 3.5 of the SB-2
Registration Statement].
4.1 Form of Common Stock certificate of the Company. [Incorporated by
reference to Exhibit 3(a) to the Company's S-18 Registration
Statement].
4.2 Form of Note issued to investors in the Company's 1993 Private
Placement [Incorporated by reference to Exhibit 4.2 to the
Company's 1994 10KSB].
4.3 Form of Debenture issued to investors in the Company's 1994
Private Placement. [Incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated April 28, 1994].
4.4 Form of Redeemable Warrant. [Incorporated by reference to
Exhibit 4.4 of the SB-2 Registration Statement].
4.5 Form of Thomas James Associates, Inc. Warrant. [Incorporated by
reference to Exhibit 4.5 of the SB-2 Registration Statement].
10.1 Lease dated January 24, 1986 between Paul Adams, as Landlord, and
the Company as Tenant, together with modifications dated January
10, 1986 and May 7, 1986 (Buffalo). [Incorporated by reference
to Exhibit 10(a) to the Company's S-18 Registration Statement].
10.2 Lease dated September 16, 1985 between Paul Adams as Landlord and
Buffalo Books, Inc. as Tenant, together with modifications dated
January 10, 1986 and May 7, 1986 (Buffalo). [Incorporated by
reference to Exhibit 10(b) to the Company's S-18 Registration
Statement].
10.3 Buy-Out Agreement for Buffalo Books, Inc. between Paul Adams and
the Company. [Incorporated by reference to Exhibit 10(e) to the
Company's S-18 Registration Statement].
10.4 Documents evidencing loan arrangement between Buffalo Books, Inc.
and Marine Midland Bank, N.A., including the following:
Marine Midland letter dated May 8, 1986 verifying existence and
basic terms of credit arrangement, as well as status as of
January 31, 1986 and April 30, 1986;
Security Agreements dated February 12, 1986 covering the
Inventory, Equipment and Accounts of Buffalo Books, Inc.;
Unlimited Continuing Guaranties of the indebtedness of Buffalo
Books, Inc. to Marine Midland, given by the Company and Paul
Adams on February 1, 1986;
-38-
<PAGE> 41
Collateral Security Mortgage covering Rochester property, granted
January 24, 1986 by Paul Adams to Marine Midland Bank, N.A.
[Incorporated by reference to Exhibit 10(f) to the Company's S-18
Registration Statement].
10.5 Note Receivable due to The Village Green Bookstore, Inc. from
Paul Adams, dated April 30, 1993. [Incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
year ended January 31, 1993].
10.6 Agreement between The Village Green Bookstore, Inc. and Paul
Adams, relating to the note referenced in Exhibit 10.4, dated
April 30, 1993. [Incorporated by reference to Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the year ended
January 31, 1993].
10.7 Employment Agreement between The Village Green Bookstore, Inc.
and Raymond Sparks dated June 28, 1993. [Incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form
8-K dated July 7, 1993].
10.8 Employment Agreement between The Village Green Bookstore, Inc.
and Paul Adams dated June 28, 1993. [Incorporated by reference
to Exhibit 10.4 to the Company's Current Report on Form 8-K dated
July 7, 1993].
10.9 Employment Agreement between The Village Green Bookstore, Inc.
and John Borek dated June 28, 1993. [Incorporated by reference
to Exhibit 10.5 to the Company's Current Report on Form 8-K dated
July 7, 1993].
10.10 Affiliate Agreement between The Village Green Bookstore, Inc.
and Paul Adams dated June 28, 1993. [Incorporated by reference
to Exhibit 10.6 to the Company's Current Report on Form 8-K dated
July 7, 1993].
10.11 Lease Agreement dated September 25, 1993, between the Company and
Marcia M. Chapman, concerning premises of Doylestown,
Pennsylvania store. [Incorporated by reference to Exhibit 10.8
to the Company's Registration Statement on Form S-3 (File No.
33-73318), filed with the SEC on March 9, 1994].
10.12 Lease Agreement dated August 25, 1993, between Wilkes-Barre
Books, Inc., d/b/a Village Green Bookstore and Five Star Realty
Corporation, concerning premises of Edwardsville, Pennsylvania
store. [Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-3 (File No.
33-73318)].
10.13 1987 Incentive Stock Option Plan. [Incorporated by reference to
the Company's Definitive Proxy Statement, dated April, 1987].
-39-
<PAGE> 42
10.14 1993 Stock Option Plan. [Incorporated by reference to the
Company's Definitive Proxy Statement, dated September 28, 1993].
10.15 Lease Agreement dated September 23, 1993, between the Company and
U.S. Realty Company, concerning premises of new corporate offices
at 1357 Monroe Avenue, Rochester, New York. [Incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form
10-KSB for the year ended January 30, 1994].
10.16 Lease Agreement dated March 1994, between the Company and Park
Plaza Limited Partnership, concerning premises of Scranton,
Pennsylvania store. [Incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-KSB for the year ended
January 30, 1994].
10.17 Modification and Extension of Lease Agreement with Paul Adams
dated June 17, 1994. [Incorporated by reference to Exhibit 10.15
to the Company's Current Report on Form 8-K for the event
reported on June 17, 1994].
10.18 Form of Lease Agreement with Glen Eagle Center Limited
Partnership. [Incorporated by reference to Exhibit 10.15 to the
Company's Current Report on Form 8-K for the event reported on
August 17, 1994].
10.19 Form of Lease Agreement with Willett Properties, L.P.
[Incorporated by reference to Exhibit 10.16 to the Company's
Current Report on Form 8-K for the event reported on October 12,
1994].
10.20 Lease Agreement dated December 1994, between the Company and
Daniel R. Neducsin, concerning premises of Philadelphia,
Pennsylvania store. [Incorporated by reference to Exhibit 10.19
of the SB-2 Registration Statement].
10.21 Letter Agreement with Mark Kalimian, dated January 10, 1995.
[Incorporated by reference to Exhibit 10.20 of the SB-2
Registration Statement].
10.22 Form of Merger and Acquisition Agreement with Thomas James
Associates, Inc. [Incorporated by reference to Exhibit 10.21 of
the SB-2 Registration Statement].
10.23 Form of Financial Consulting Agreement with Thomas James
Associates, Inc. [Incorporated by reference to Exhibit 10.22 of
the SB-2 Registration Statement].
10.24 Amendment to Article V of 1993 Stock Option Plan. [Incorporated
by reference to Exhibit 10.23 of the SB-2 Registration
Statement].
-40-
<PAGE> 43
10.25 Agreement between the Company and Paul Adams dated March 31,
1995. [Incorporated by reference to Exhibit 10.24 of the
Company's Current Report on Form 8-K, dated March 31, 1995].
10.26 Termination of Collateral Assignment Agreement between the
Company and Paul Adams dated March 31, 1995. [Incorporated by
reference to Exhibit 10.25 of the Company's Current Report on
Form 8-K, dated March 31, 1995].
10.27 Further Lease Modification Agreement between the Company and Paul
Adams dated March 31, 1995. [Incorporated by reference to
Exhibit 10.26 of the Company's Current Report on Form 8-K, dated
March 31, 1995].
10.28 Termination of Option to Purchase Real Property between the
Company and Paul Adams dated March 31, 1995. [Incorporated by
reference to Exhibit 10.27 of the Company's Current Report on
Form 8-K, dated March 31, 1995].
10.29 Subordination, Non-Disturbance and Attornment Agreement among the
Company, Paul Adams and Lyndon Guaranty Bank of New York, dated
March 31, 1995. [Incorporated by reference to Exhibit 10.28 of
the Company's Current Report on Form 8-K, dated March 31, 1995].
10.30 General Releases of Adams in favor of the Company, its board of
directors and executive officers and its subsidiaries and General
Releases of the Company, its board of directors and executive
officers and its subsidiaries executed and delivered general
releases in favor of Adams, each dated March 31, 1995.
[Incorporated by reference to Exhibit 10.29 of the Company's
Current Report on Form 8-K, dated March 31, 1995].
10.31 Amendment to 1987 Incentive Stock Option Plan. [Incorporated by
reference to the Company's Definitive Proxy Statement, dated June
25, 1990].
11 Statement re: Computation of Per Share Earnings
16.1 Letter from Michael F. Cronin, C.P.A., change in certifying
accountant. [Incorporated by reference to Exhibit 16.1 to the
Company's Current Report on Form 8-K, dated September 8, 1993].
22 List of Subsidiaries of the Company. [Incorporated by reference
to Exhibit 22 of SB-2 Registration Statement].
-41-
<PAGE> 44
(b) REPORTS ON FORM 8-K
During the last quarter of Fiscal 1996, the Company did not file any
Reports on Form 8-K.
-42-
<PAGE> 45
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE VILLAGE GREEN BOOKSTORE, INC.
Dated: May 13, 1996 By: /s/ Raymond C. Sparks
-------------------------------
Raymond C. Sparks, President
In accordance with 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 and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Raymond C. Sparks Chairman of the Board, President, Chief May 13, 1996
--------------------------- Executive Officer, Chief Financial Officer,
Raymond C. Sparks Chief Operating Officer, Principal
Accounting Officer and Treasurer
/s/John W. Borek Vice President of Marketing and Merchandise, May 13, 1996
--------------------------- Secretary and Director
John W. Borek
/s/Steven B. Sands Director May 13, 1996
---------------------------
Steven B. Sands
/s/John P. Holmes Director May 13, 1996
---------------------------
John P. Holmes
/s/Michael S. Smith Director May 13, 1996
---------------------------
Michael S. Smith
</TABLE>
-43-
<PAGE> 1
(May 10, 1996)
EXHIBIT 1.1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Village Green Bookstore, Inc.
Rochester, New York
We have audited the accompanying consolidated balance sheets of The Village
Green Bookstore, Inc. as of January 28, 1996 and January 29, 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the two years in the period ended January 28, 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 audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of January 28, 1996 and
January 29, 1995, and the results of its operations and its cash flows for each
of the two years in the period ended January 28, 1996 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company is experiencing difficulty
in generating cash flows from operations and has recurring losses from
operations which raises substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Rochester, New York
May 9, 1996
F-1
<PAGE> 3
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 28, 1996 AND JANUARY 29, 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 383,918 $ 519,470
Receivables 130,974 286,261
Merchandise inventories 6,306,808 4,732,204
Prepaid expenses and other current assets 290,141 221,572
----------- -----------
Total current assets 7,111,841 5,759,507
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation (Note 2) 1,933,838 1,237,400
OTHER ASSETS 161,585 497,864
----------- -----------
TOTAL ASSETS $ 9,207,264 $ 7,494,771
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,332,642 $ 3,348,472
Current portion of long-term debt (Note 3) 1,231,227 1,825,197
Accrued payroll expense 77,565 55,430
Accrued sales taxes payable 81,442 65,990
Other current liabilities (Note 5) 468,115 183,093
----------- -----------
Total current liabilities 5,190,991 5,478,182
----------- -----------
LONG-TERM DEBT (Note 3) 13,965 1,246,163
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 3 and 4):
Common stock, $.001 par; authorized 10,000,000 shares;
issued and outstanding 3,741,255 shares and 1,710,880, respectively 3,741 1,711
Additional paid-in capital 8,117,154 3,232,573
Retained deficit (4,118,587) (2,463,858)
----------- -----------
Total stockholders' equity 4,002,308 770,426
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,207,264 $ 7,494,771
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 4
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 28, 1996 AND JANUARY 29, 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
NET SALES $ 11,040,366 $ 10,002,901
COST OF GOODS SOLD 7,138,108 6,373,928
------------ ------------
GROSS PROFIT 3,902,258 3,628,973
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,030,044 3,779,889
OTHER EXPENSES (Note 5) 305,637 --
------------ ------------
LOSS FROM OPERATIONS (1,433,423) (150,916)
OTHER INCOME (EXPENSE):
Interest expense (111,869) (207,775)
Amortization of debt offering costs (171,500) (254,642)
Other income 65,654 44,893
Loss on disposal of property and equipment -- (21,525)
------------ ------------
Total other expense (217,715) (439,049)
------------ ------------
LOSS BEFORE INCOME TAXES (1,651,138) (589,965)
INCOME TAXES (Note 6) 3,591 4,166
------------ ------------
NET LOSS $ (1,654,729) $ (594,131)
============ ============
NET LOSS PER SHARE $ (0.48) $ (0.38)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 3,428,294 1,563,503
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 5
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 28, 1996 AND JANUARY 29, 1995
<TABLE>
<CAPTION>
ADDITIONAL
PAR PAID-IN RETAINED
SHARES VALUE CAPITAL DEFICIT
----------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, January 31, 1994 $ 1,100,000 $ 1,100 $ 2,648,434 $(1,869,727)
Issuance of common stock 610,880 611 584,139 --
Net loss -- -- -- (594,131)
----------- ------- ----------- -----------
Balance, January 29, 1995 1,710,880 1,711 3,232,573 (2,463,858)
Exercise of warrants 100 -- 50 --
Issuance of common stock (Note 4) 2,216,775 2,216 5,195,845 --
Purchase and retirement of common shares
(Note 8) (186,500) (186) (186,314) --
Payment to shareholder (Note 4) -- -- (125,000) --
Net loss -- -- -- (1,654,729)
----------- ------- ----------- -----------
Balance, January 28, 1996 $ 3,741,255 $ 3,741 $ 8,117,154 $(4,118,587)
=========== ======= =========== ===========
</TABLE>
F-4
<PAGE> 6
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 28, 1996 AND JANUARY 29, 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,654,729) $ (594,131)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 480,274 438,727
Other expenses 305,637 21,525
Changes in assets and liabilities:
Receivables 72,287 (58,507)
Inventories (1,574,604) (789,196)
Prepaid expenses and other current assets (96,946) 27,494
Accounts payable and accrued expenses 141,779 387,417
----------- -----------
Net cash used in operating activities (2,326,302) (566,671)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,117,472) (735,753)
Security deposits 1,216 (78,631)
----------- -----------
Net cash used in investing activities (1,116,256) (814,384)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of expenses 5,361,674 584,750
Advances to officers and former officers -- (11,016)
Payments on long-term debt (1,826,168) (37,081)
Purchase and retirement of common shares, net (103,500) --
Payment to shareholder (125,000) --
Proceeds from borrowings -- 1,200,000
Debt financing -- (353,813)
----------- -----------
Net cash provided by financing activities 3,307,006 1,382,840
----------- -----------
NET (DECREASE) INCREASE IN CASH (135,552) 1,785
BALANCE AT BEGINNING OF YEAR 519,470 517,685
----------- -----------
CASH BALANCE AT END OF YEAR $ 383,918 $ 519,470
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 111,869 $ 207,775
=========== ===========
Income taxes $ 850 $ 11,881
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 7
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 28, 1996 AND JANUARY 29, 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY - The Company was organized in January, 1982 to sell books,
magazines, newspapers, greeting cards, and gifts at retail to the general
public. The Company's business includes the sale of CD's, CD-ROM's, Video
Rental and operating Coffee Cafes. Due to the increased competition of
national book retailers in the Company's markets, the Company recently
altered its strategic objectives by introducing the Kideology(TM)
retail concept. Kideology(TM) is an educational retail system which the
Company has developed to sell educational toys and products to children
ages 14 and under. As a result, the Company's strategic objective is to
continue to operate retail bookstores in the markets in which it
currently competes while adding additional Kideology(TM) stores in new
and existing locations.
As of January 28, 1996, the Company carries on business at four locations
in Rochester, New York, three locations in Buffalo, New York, four
locations in Pennsylvania and one location in Connecticut. Subsequent to
January 28, 1996, the Company closed a store in Buffalo and a store in
Pennsylvania (See Note 5).
BASIS OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated
in consolidation.
BASIS OF PRESENTATION - The accompanying consolidated financial
statements have been prepared on a going concern basis which contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business. The Company incurred significant operating
losses in each of the last three fiscal years and incurred a net loss in
fiscal 1996 of $1,651,682. Additionally, the Company was unable to
generate sufficient cash flows from operations to meet a debt obligation
in April 1996 of $1,200,000 (See Note 3). These factors among others may
indicate that the Company will be unable to continue as a going concern
for a reasonable period of time. The consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
In an effort to improve operating performance, the Company has been and
will be implementing certain programs and strategies in fiscal 1997.
These strategies include:
- Raising of additional capital; a private placement and bank
financing are currently being contemplated;
- Expanding the Kideology(TM) retail concept; and
- Reviewing existing store locations with a view toward maintaining
profitable operations and closing underperforming stores.
FISCAL YEAR - The Company has a 52 / 53 week fiscal year which ends on
the last Sunday in January.
F-6
<PAGE> 8
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.
CASH AND EQUIVALENTS - Cash and equivalents include all highly liquid
investments with original maturities of three months or less.
MERCHANDISE INVENTORIES - Inventories are stated at the lower of cost
(first-in, first-out) or market. Certain merchandise, such as books,
magazines and calendars are returnable to vendors. Books and calendars
represent approximately $4,479,000, or 71%, of the Company's inventory at
January 28, 1996, a portion of which is returnable if held less than one
year. Unsold magazines must generally be returned within six months.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost, or
in the case of equipment under capital leases, the present value of
minimum lease payments or fair value, whichever is lower. Depreciation is
recorded on a straight-line basis over the estimated useful lives of the
assets. In the case of leasehold improvements, depreciation is recorded
on the straight-line basis over the lesser of the estimated useful lives
of the assets or the lease period. The estimated useful lives of the
Company's fixed assets range from three to ten years. Expenditures for
renewals and improvements are capitalized. Repairs and maintenance are
charged to operations as incurred.
PRE-OPENING EXPENSES - Incremental expenses related to the opening of new
stores are capitalized as incurred up to the point that retail sales are
commenced. Once a store opens and retail sales commence, the capitalized
pre-opening expenses are amortized over a twelve month period.
Commissions paid upon signing of leases are amortized over the life of
the lease.
DEFERRED DEBT ISSUANCE COSTS - Deferred debt issuance costs are being
amortized over the term of the related debt instruments.
LOSS PER SHARE - Loss per share is based on the weighted average
number of shares outstanding during the year.
INCOME TAXES - Income taxes are provided for all items included in the
statements of operations regardless of the period when such items are
reported for income tax purposes. Deferred income taxes are provided for
the differences between reporting of transactions for financial reporting
purposes and income tax purposes.
CERTAIN RECLASSIFICATIONS have been made to the 1995 consolidated
financial statements to conform to the classifications used in 1996.
NEW ACCOUNTING STANDARDS - Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," must be adopted in fiscal 1997.
The standard requires that impairment losses be recognized when the
carrying value of an asset exceeds its fair value. The Company regularly
assesses all of its long-lived assets for impairment and, therefore, does
not believe the adoption of the standard will have a material effect on
its financial position or results of operations.
SFAS No. 123 "Accounting for Stock-Based Compensation," must be
adopted in fiscal 1997. This standard encourages, but does not
require, recognition of compensation expense based on the fair value
of equity instruments granted to employees. The Company does not plan to
record compensation for equity
F-7
<PAGE> 9
instruments granted to employees and therefore the adoption of this
standard will have no impact on its financial position or results of
operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at January 28, 1996 and
January 29, 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Equipment under capital lease $ 100,366 $ 100,366
Equipment and vehicles 563,267 377,645
Furniture and fixtures 933,782 451,804
Rental videos 65,271 40,538
Leasehold improvements 1,170,974 893,871
---------- ----------
Total property and equipment 2,833,660 1,864,224
Less: accumulated depreciation 899,822 626,824
---------- ----------
Net property and equipment $1,933,838 $1,237,400
========== ==========
</TABLE>
Depreciation expense for the fiscal years ended January 28, 1996 and
January 29, 1995 was $308,774 and $184,085, respectively.
3. LONG-TERM DEBT
Long-term debt consists of the following at January 28, 1996 and January
29, 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
7% convertible debentures, due April 1996 $1,200,000 $1,200,000
7.5% notes payable, due and paid during fiscal 1996 1,800,000
Other 45,192 71,360
---------- ----------
Total debt 1,245,192 3,071,360
Less current portion 1,231,227 1,825,197
---------- ----------
Total long-term debt, due in fiscal 1998 $ 13,965 $1,246,163
========== ==========
</TABLE>
On April 28, 1994, the Company consummated a private placement with
respect to an aggregate of $1.2 million Principal Amount 7% Convertible
Senior Subordinated Debentures of the Company due two years from the date
of issuance, convertible into 240,000 shares of the Company's Common
Stock at any time prior to maturity, unless previously redeemed, at an
initial conversion price of $5.00 per share. The Debentures are expressly
senior in right of payment to all other Company obligations (but
subordinated to the payment of any future bank or institutional
indebtedness up to $1 million). During fiscal 1996 and 1995, the
debentures were not converted or redeemed, in whole or in part. The
Company was unable to pay its obligation for the 7% convertible
debentures which were due in April 1996. Currently, additional sources
of financing are being sought in order for the Company to satisfy its
obligation.
F-8
<PAGE> 10
4. STOCKHOLDERS' EQUITY
On March 23, 1995, the Company consummated a public offering (the
"Offering") of 2,216,775 Units, each Unit consisting of one share of the
Company's Common Stock, par value $.001 per share and one Redeemable
Common Stock Purchase Warrant at a public offering price of $3.00 per
Unit. The gross proceeds to the Company, net of expenses relating to the
Offering totalling $1,452,264, were $5,198,061.
The Company entered into an agreement with an investor in September 1994,
in which the investor purchased for $300,000, 100,000 shares of the
Company's common stock and a warrant to purchase an additional 100,000
shares of the Company's common stock. The Company had agreed to pay the
investor any amount by which the net proceeds of the entire 100,000
shares of common stock that are subsequently sold by the investor are
less than $300,000. During fiscal 1996, the investor sold the 100,000
shares of common stock for $175,000 resulting in a payment by the Company
to the investor of $125,000 which was charged to additional paid-in
capital.
OPTION PLANS - Under the Village Green Bookstore, Inc. 1987 Stock Option
Plan an aggregate of 100,000 shares of common stock were authorized for
issuance. Options issued under this Plan, which is non-compensatory and
involves only common stock, expire eight years from the date of grant.
Future grants for this Plan are not expected.
The Company's 1993 Stock Option Plan provides for the issuance of up to
an aggregate of 400,000 shares of common stock. The Committee
administering the Plan is authorized under the Plan to grant incentive
stock options and non-qualified options. The exercise price per share of
common stock under an option will be established by the Committee at the
time of the grant, provided that with respect to incentive stock options,
the option price will not be less than the fair market value of the
common stock at the time the option is granted, and with respect to
non-qualified stock options, the option price will not be less than 85%
of the fair market value of the common stock at the time the option is
granted. Options may be exercised in whole or in part at such date or
dates as determined by the Committee. No options shall be exercisable
after the date 10 years from the date of the grant of such option. At
January 28, 1996, 211,750 shares were reserved for future grant. A
summary of option transactions is presented below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 28, 1996 JANUARY 29, 1995
-------------------------------- --------------------------------
1987 PLAN 1993 PLAN 1987 PLAN 1993 PLAN
<S> <C> <C> <C> <C>
Shares under option,
Beginning of year 76,500 138,250 100,000 --
Option Granted -- 75,000 -- 138,250
Options Expiring (12,000) (25,000) (500) --
Options Exercised -- -- (23,000) --
------- ------- ------- -------
Shares Under Option,
End of period 64,500 188,250 76,500 138,250
======= ======= ======= =======
Shares Exercisable,
End of period 64,500 188,250 76,500 138,250
======= ======= ======= =======
Exercise price of shares exercisable $1.10 to $2.00 to $1.10 to $ 3.875
=======
$ 2.188 $ 3.875 $ 2.656
======= ======= =======
</TABLE>
In addition to the above options, under an agreement dated June 28, 1993,
Raymond Sparks, President, was granted a non-qualified, three year
non-plan option to purchase 103,500 shares of the Company's common stock
with an exercise price of $1.97 per share. These options are exercisable
through June 28, 1996.
F-9
<PAGE> 11
At January 28, 1996, 12,000 warrants are outstanding, exercisable at $.50
per share and 100,000 warrants to purchase 100,000 shares of common
stock, issued in conjunction with a September 1994 private placement,
were outstanding at January 28, 1996. These warrants are exercisable at
$2.25 per share. In addition, 200,000 warrants to purchase 200,000 shares
of common stocks are outstanding as of January 28, 1996, issued in
connection with the Company's March 1995 offering, which are exercisable
at $4.20 per share.
5. OTHER EXPENSES
In January 1996, the Company decided to close two underperforming stores
which were subsequently closed by the end of March 1996. Consequently, a
pre-tax charge of $305,637 was recorded in the fourth quarter of fiscal
1996 for costs associated with the store closing process, consisting of a
reserve for lease settlements ($165,000) and for the write-off of
intangible and fixed assets ($140,637).
6. INCOME TAXES
The provisions for income taxes at January 28, 1996 and January 29, 1995
consist of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Federal $ -- $ --
State 3,591 4,166
------ ------
$3,591 $4,166
====== ======
</TABLE>
The approximate tax effect of each type of temporary difference and
carryforward that gave rise to the Company's deferred tax assets and
liabilities at January 28, 1996 are as follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES TOTAL
<S> <C> <C> <C>
Nondeductible accruals for uncollected receivables $ 4,837 $ -- $ 4,837
Less valuation allowance 4,837 -- 4,837
---------- ------------ ----------
Current -- -- --
---------- ------------ ----------
Net operating loss carryforward 1,165,466 -- 1,165,466
Less valuation allowance 1,165,466 -- 1,165,466
---------- ------------ ----------
Noncurrent -- -- --
---------- ------------ ----------
Total $ -- $ -- $ --
========== ============ ==========
</TABLE>
The valuation allowance at January 28, 1996 is $1,170,303, of which
$470,778 arose during the fiscal year ended January 28, 1996.
F-10
<PAGE> 12
Income taxes were computed at rates other than the statutory federal
income tax rates due to the following items:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
AMOUNT % AMOUNT %
<S> <C> <C> <C> <C>
Tax benefit at federal statutory rate $(562,607) (34.0) $(202,005) (34.0)
State taxes, net of federal benefit 3,591 .2 4,166 .7
Net operating loss carryforward not utilized 562,607 34.0 202,005 34.0
--------- ---- --------- ----
$ 3,591 .2 4,166 .7
========= ==== ========= ====
</TABLE>
At January 28, 1996, the amount of net operating loss available to be
carried forward to offset future taxable income was approximately
$3,428,000. These losses expire in years through January, 2011.
Utilization of the net operating losses is subject to certain change of
ownership requirements of the Internal Revenue Code which may limit the
amount of net operating losses which could be utilized in a year. If the
full amount of the net operating loss allowable with the change of
ownership limitation is not used in any year, the amount not used
increases the allowable limit in the subsequent year.
7. PROFIT-SHARING PLAN
In December, 1986, the Board of Directors adopted a defined contribution
profit-sharing plan covering employees who meet eligibility requirements.
The plan was approved at the annual stockholders' meeting on May 18,
1987, and provided for discretionary annual contributions up to 15% of
the participants' compensation. No contributions were made in the fiscal
years ended January 28, 1996 and January 29, 1995. As of January 28,
1996, there were no unfunded pension benefits.
8. COMMITMENTS AND CONTINGENCIES
The Company conducts all retail operations on leased premises. Leases are
for varying periods and are generally renewable at the option of the
Company. Usually the leases provide that the Company pay a portion of the
taxes, insurance and maintenance costs associated with the leased
premises. Most leases provide for additional rentals based upon a
percentage of sales.
Lease expenses for the Company's retail and administrative locations for
the fiscal years ended January 28, 1996, and January 29, 1995 were
approximately $864,000 and $626,000, respectively.
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
1997 $ 1,166,000
1998 1,050,000
1999 1,081,000
2000 1,069,000
2001 1,060,000
Thereafter 4,245,000
</TABLE>
The Company has an employment agreement dated June 28, 1993 with its
President, Raymond Sparks, which has a term of three years. This
agreement provides for a base annual salary of $125,000, with salary
increases and bonuses to be determined by the Board of Directors in its
discretion.
F-11
<PAGE> 13
The Company has been named a defendant in an action commenced on August
24, 1994 in the Supreme Court of the State of New York for Erie County
involving payment on a lease. The plaintiff is the landlord of the
premises of the Company's former Tonawanda, New York store, which the
Company closed in January 1994. The Tonawanda store was operated by the
Company's subsidiary, Niagara Books, Inc., which was the party named on
the lease. The plaintiff is demanding it be paid approximately $42,400,
representing past due base rent, ancillary rent and late charges from
default through August 1, 1994, the last due date prior to the date this
suit was brought. The lease calls for a base rent of $5,250 per month.
The term of the lease extends to June 30, 1998. The Company believes it
has meritorious defenses and intends to vigorously defend this action.
The Company has been named a defendant in a personal injury litigation
involving a "slip and fall" on the Company's property. The plaintiff is
claiming damages in the amount of $2,000,000. The Company carries $1
million worth of liability insurance which the Company believes should be
sufficient to cover any possible award of damages to the plaintiff. This
proceeding is in the early investigatory stages. The possibility of
liability and its amount cannot be quantified at this time, as a result,
no liability has been reflected in the consolidated financial statements.
On March 31, 1995, the Company entered into an agreement (the
"Agreement") with Mr. Paul Adams ("Adams"), a former principal
shareholder and officer of the Company, in order to resolve certain
disputes with respect to (i) the Affiliate Agreement between the Company
and Adams dated June 28, 1993 (the "Affiliate Agreement") and (ii) their
relationship as landlord and tenant with respect to the premises located
at 746-766 Monroe Avenue, Rochester, New York (the "Monroe Avenue
Lease").
Under the terms and conditions provided for in the Adams Agreement, (i)
the parties terminated the Affiliate Agreement; (ii) the Company
exercised its option with Adams and acquired 186,500 shares of the
company's Common Stock held by Adams at an exercise price of $186,500,
which exercise price was offset by the repayment by Adams of $83,000 in
loans previously made by the Company to Penfield Realty Holding Co., Inc.
and William Yager (the "Yager Loans"), resulting in the net payment from
the Company to Adams in the amount of $103,500; (iii) the Collateral
Assignment of Mortgage Agreement between the parties dated June 28, 1993,
which secured Adams' obligation to repay the Yager Loans was terminated;
(iv) the Option to Purchase Real Property Agreement dated June 28, 1993
between the parties, which secured certain of Adams' obligations under
the Affiliate Agreement, was terminated; (v) the parties executed a
Further Modification Agreement to the Monroe Avenue Lease; (vi) the
parties and Lyndon Guaranty Bank of New York, the new mortgagee of the
Monroe Avenue Premises, executed a Subordination, Non-Disturbance and
Attornment Agreement; and (vii) Adams executed and delivered general
releases in favor of the Company, its board of directors and executive
officers and its subsidiaries and the Company, its board of directors and
executive officers and its subsidiaries executed and delivered general
releases in favor of Adams.
F-12
