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
For the fiscal year ended February 2, 1997
[ ] 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
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The Village Green Bookstore, Inc.
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(Name of Small Business Issuer in Its Charter)
New York 16-1181167
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1357 Monroe Avenue
Rochester, New York 14618
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(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code (716) 442-1151
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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 value $.001 per share
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Redeemable Common Stock Purchase Warrants
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
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(Title of Class)
Redeemable Common Stock Purchase Warrants
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(Title of Class)
<PAGE>
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 No X
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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: $ 8,069,316 .
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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 15, 1997 was
$278,500. The number of shares outstanding of the registrant's common stock on
May 15, 1997, was 3,741,255 shares.
Transitional Small Business Disclosure Format (check one): Yes No X
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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
-ii-
<PAGE>
PART I
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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. In 1996, the
Company introduced Kideology(TM), with the opening of two stores. Kideology(TM)
is an educational retail system which the Company developed to sell educational
toys and products to children from ages 14 and under.
The Company competes with a diverse group of national book retailers,
including WaldenBooks, Borders Bookshop, Barnes & Noble, B. Dalton Booksellers,
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 opened superstores within the Company's existing markets. The Company's
strategic objective is to attempt to continue to operate retail bookstores in
the areas in which it currently competes.
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. The Company's basic store
format includes (i) an inventory of several thousand book titles and magazines,
periodicals and newspapers; (ii) a stationery department which carries a number
of 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 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.
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").
On April 18, 1997, the Company announced that it had reached an
agreement in principle with CD Titles, Inc. and an underwriter, whereby the
Company will be merged into a subsidiary of CD Titles, Inc. The new corporation
created as a result of the merger plans to issue and sell $5,000,000 of its
Common Stock to the public. The agreement in principle is subject to the
customary contingencies, including due diligence by the parties, shareholder
approval and market factors. Upon execution of a definitive agreement, the
Company plans to submit the proposed merger to its shareholders for approval.
<PAGE>
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:
Fiscal Year Stores at New Stores Stores Closed Stores at
Beginning of Opened During Year End of Year
Year During Year
- -------------- ------------- ------------ -------------- ------------
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
1997 12 -- 6 6
In February, March, May, May, August, 1996 and January, 1997 the Company
closed six of its underperforming bookstores, in Philadelphia, Pennsylvania,
Blasdell, New York, Greece, New York, Ridgefield, Connecticut, Philadelphia,
Pennsylvania and Wilkes Barre, Pennsylvania, respectively.
INDUSTRY OVERVIEW
RETAIL BOOKSTORES. The retail book industry is comprised of two
principal segments, including independent bookstores and chain stores.
The independent bookstores generally have been established as free
standing stores or in strip shopping centers catering to well-educated, affluent
customers. Such stores generally are well stocked, and staffed by attentive,
service-oriented salespersons. The books generally are sold at publishers'
prices with 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 by discounting best selling books and other
books in regional malls (such as B. Dalton and WaldenBooks), and more recently,
through the development of discount "superstores" such as Barnes & Noble and
Borders Bookshop. 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 competition within the bookstore industry is significant
and the Company's market niche has been severely adversely affected,
particularly during the most recent fiscal year.
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<PAGE>
BUSINESS STRATEGY
GENERAL. As a result of recent increased and substantial openings of
retail book superstores within the Company's markets, the Company has determined
to maintain as many bookstore sites as market conditions will allow. No
assurance can be given that the Company will be able to maintain its current
bookstore sales.
RETAIL BOOKSTORES. The Company's retail bookstore strategy is to own and
continue to operate retail bookstores in the areas in which it currently
competes. However, the Company is not certain if it can continue to operate all
of its retail bookstores or even continue to operate as a going concern. The
following are the key elements to the Company's strategy.
OPTIMIZATION OF RETAIL PRODUCT MIX. The Company seeks to
differentiate itself from its competition by, among other things, offering a
retail mix that is focused and optimized to address the tastes and demands of an
affluent clientele.
EMPHASIS ON SOCIAL AND CULTURAL MEETING PLACES; ESTABLISHMENT OF
STRONG COMMUNITY TIES. The Company has introduced coffee cafes at certain of its
stores. By incorporating this concept, the Company hopes 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.
THE VILLAGE GREEN MODEL
The Company hopes to limit store closings in response to competitive
market conditions while attempting to build its customer base for existing
stores.
PRODUCT LINE
o BOOKS. The Village Green carries up to several thousand 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 an academic nature.
The Company also special orders books from a database comprising approximately
100,000 titles. For the year ended February 2, 1997, approximately 50.7% of the
Company's net sales were derived from the sale of books.
o MAGAZINES AND NEWSPAPERS. Each store carries up to several hundred
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 several dozen different newspapers, ranging from local dailies and
weeklies to major market and foreign newspapers. For the year ended February 2,
1997, approximately 16.7% of the Company's net sales were derived from the sale
of magazines and newspapers.
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<PAGE>
o STATIONERY. Each store typically carries several 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 February 2, 1997,
approximately 13.0% of the Company's net sales were derived from the sale of
stationery.
o 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 baked goods, cheesecakes, bagels
and gourmet ice creams. For the year ended February 2, 1997, approximately 6.3%
of the Company's net sales were derived from the sale of food.
o 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 February 2, 1997, approximately
3.9% of the Company's net sales were derived from the sale of gifts.
o COFFEE CAFES. The Company hopes that coffee cafes will allow the
Company to increase customer traffic in its stores. Coffee cafes accounted for
approximately 3.0% of net sales in the year ended February 2, 1997.
o KIDEOLOGY (TM). Kideology (TM) accounted for approximately 5.1% of
net sales for the year ended February 2, 1997.
o MULTIMEDIA. The Company has multimedia categories in addition to its
retail mix at several of its locations. These categories include: (i) video
cassette rentals; (ii) books-on-tape for sale; (iii) music departments; and (iv)
select computer software and CD-ROMS. 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 these categories have
been so included and only at certain of the Company's stores. The Company's
financial position may, in the future, further limit the services and product
lines the Company's stores provide. Sales of multimedia products accounted for
approximately 1.3% of net sales in the year ended February 2, 1997.
STORE LAYOUT
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 stationery throughout the
stores are near the stores' cash registers. Magazines are located towards the
back of the store to attract customers through the store's other departments.
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<PAGE>
STORE CLOSINGS
As the retail bookstore market becomes more competitive, it is likely
that the Company will have to close additional bookstores. If competitive
conditions worsen, the Company may not be able to continue to operate as a going
concern.
PURCHASING AND MERCHANDISING
The Company purchases merchandise from many different vendors. The
Company's purchasing decisions are centralized and are made at the Company's
headquarters in Rochester, New York. The Company negotiates terms, discounts,
and cooperative advertising allowances for all of the Company's stores and
decides which products to purchase, in what quantity and for which stores. New
book titles are purchased from publishers and distributors 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 Company has experienced financial difficulties due to the
competitive retail bookstore environment and as such its relationships with
certain of its suppliers have become strained. Should suppliers refuse to
negotiate supply contracts with the Company, bookstore operations will
significantly worsen.
MANAGEMENT INFORMATION SYSTEM
A management information system ("MIS") is operational in most of the
Company's 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 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 historical sales information is used to make purchasing and
reorder decisions.
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<PAGE>
MARKETING
The Company emphasizes customer service in its stores through its
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 up to 15 to 17 hours a day,
365 days a year. The Company experiences its heaviest sales during the fourth
quarter of the year, which includes the traditional holiday season. Although the
Company has historically discounted books only during special sales periods,
recognizing the need to remain competitive, the Company 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 and Kideology(TM) names and
logos in its business operations.
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
Booksellers, 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.
The expansion of chain and "superstore" bookstores have severely
impacted the Company's market and the Company's auditors have, on numerous
occasions expressed doubt as to the Company's ability to continue as a going
concern.
The sale of new books also is affected by competition for the consumer's
dollar with alternative forms of entertainment and information, such as
computer, 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 further
adversely affect the Company's results of operations in future periods.
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<PAGE>
EDUCATIONAL RETAIL. The retail toy business is highly competitive. The
Company competes on the basis of its stores' interactive environment, broad
merchandise selection, customer service and competitive pricing. The Company
competes with a variety of mass merchandisers, superstores and specialty
retailers selling portions of its product lines, including books, software,
video and audio products, and arts and crafts. It also competes 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. Included among the Company's
direct competitors are Zany Brainy, Learningsmith, Noodle Kidoodle and
Imaginarium.
Many of the Company's competitors 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's
Kideology(TM) operation will be further 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 15, 1997, the Company employed 40 full-time and 59 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), 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; Doylestown, Pennsylvania (opened in 1993 and
operated by Doylestown 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 operating subsidiaries are New York
corporations except Doylestown Books, Inc. which is a Pennsylvania corporation.
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<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own any real property but rather leases all of its
locations pursuant to written leases. It is not the policy of the Company to own
or invest in real property. 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 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
corporate offices comprise approximately 3,400 square feet at an annual rent of
$17,940 for a term which expires on May 31, 1997. This lease has not been
renewed.
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 $17,940 per year U.S. Realty
The Village Green May 31, Corporation
Bookstore, Inc. 1997
1357 Monroe Avenue
Rochester, NY 14618
LOCATION 1: 10,000 10 years $126,000 per Paul Adams
766 Monroe Avenue Ending year plus 4.5%
Rochester, NY 14607 1/31/06 of annual gross
sales over $2.8
million
LOCATION 2: 6,150 5 years $73,800 per year 765 Elmwood
765 Elmwood Avenue ending plus 4% of Associates
Buffalo, NY 14222 6/30/99 annual gross
sales over
$1.845 million
LOCATION 3: 18,039 10 years $154,858 per Wegmans
6600 Pittsford-Palmyra Ending year plus 4.5% Enterprises
Road 9/30/05 of annual gross
Fairport, NY 14450 sales over $4.1
(Perinton) million
LOCATION 4: 8,300 5 years $92,000 per year B.C.
16 South Main Street with 5 plus 3% of Associates
Doylestown, PA 18901 year option annual gross
Ending sales over
10/31/03 $1.533 million
LOCATION 5: 3,600 10 years $46,800 per year Stephen S.
5455 Main Street with 10 years 4 thru 7 Obletz
Williamsville, NY year $50,400 per year
option years 8 thru 10
ending $57,600 per year
12/14/05
</TABLE>
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Tomorrow's Toys, Inc. d/b/a ABCO Distributors v. The Village Green. The
Company was named a defendant in an adversary proceeding commenced on November
27, 1996 by Tomorrow's Toys, Inc. d/b/a ABCO Distributors, a supplier of
children's videos, as part of plaintiff's bankruptcy case in the United States
Bankruptcy Court for the Southern District of New York. Plaintiff sought
judgment based upon unpaid invoices in the amount of $11,136.10 plus interest,
litigation costs and attorney's fees. The case has been settled and payment by
the Company to the plaintiff in the amount of $8,908.88 is expected to be made
on or before June 1, 1997. In the event of a default, a judgment by confession
will be entered for $11,136.10 plus interest from July 26, 1996.
Star Video Entertainment LP v. The Village Green Bookstore, Inc. The
Company has been named a defendant in an action commenced in Rochester City
Court on January 3, 1997 by Star Video Entertainment LP. The complaint seeks
judgment based upon unpaid invoices in the amount of $2,885.04 plus interest,
litigation costs and attorney's fees. Plaintiff recently filed a motion for
summary judgment seeking $1,073.71 plus interest, costs and attorney's fees. The
Company contends that no amount is owed to plaintiff and intends to vigorously
defend this action. At this time, the outcome of this matter cannot be assessed
with certainty.
Shurman Fine Papers, Inc. v. The Village Green Bookstore, Inc. The
Company has been named a defendant in an action commenced in Supreme Court of
the State of New York for Monroe County on January 24, 1997 by Shurman Fine
Papers, Inc., a supplier of greeting cards. Plaintiff seeks judgment for unpaid
invoices in the total amount of $59,143.42 plus interest and costs, which amount
the Company contends is greatly overstated. In addition, the Company intends to
return seasonal cards, which will further reduce the total amount owed to
approximately $35,000. Settlement negotiations have begun in an attempt first to
agree upon the amount of the liability, and then to agree upon a payment plan.
At this time, the outcome of this matter cannot be assessed with certainty.
Sunrise Publications, Inc. v. The Village Green Bookstore, Inc. The
Company has been named a defendant in an action commenced in Supreme Court of
the State of New York for Monroe County on February 4, 1997 by Sunrise
Publications, Inc., a greeting card supplier. Plaintiff seeks judgment for
unpaid invoices in the total amount of $28,468.88 plus interest and litigation
costs. The Company contends that the amount owed has been overstated by
plaintiff. The Company also intends to return seasonal cards, which will further
reduce the total amount owed to approximately $18,000. Settlement negotiations
have begun in an attempt first to agree upon the amount of the liability, and
then to agree upon a payment plan. At this time, the outcome of this matter
cannot be assessed with certainty.
Empire State News Corp. v. The Village Green Bookstore, Inc. A default
judgment in the amount of $14,343.84 recently was obtained in an action
commenced in Buffalo City Court on or about March 6, 1997 by Empire State News
Corp. Plaintiff has indicated a willingness to settle this matter, and the
Company has prepared a payment proposal to be made to plaintiff.
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<PAGE>
Andrews & McMeel v. The Village Green Bookstore, Inc. The Company has
been named a defendant in a suit commenced on or about April 3, 1997 in
Rochester City Court. Plaintiff seeks judgment based upon unpaid invoices in the
amount of $14,187.76 plus interest and costs. The Company contends that the
amount owed is $8,194.19. At this time, the outcome of this matter cannot be
assessed with certainty.
International Playthings, Inc. v. The Village Green Bookstore, Inc. The
Company has been named a defendant in a suit commenced in Rochester City Court
on or about March 21, 1997. Plaintiff seeks judgment based upon unpaid invoices
in the total amount of $3,656.47. The amount owed in this case is not in
dispute, and counsel have spoken concerning payment terms. At this time, the
outcome of this matter cannot be assessed with certainty.
International Periodical Distributors, Inc. v. The Village Green
Bookstore, Inc. The Company has been named a defendant in an action commenced in
Supreme Court for the State of New York in Erie County by a magazine
distributor. Plaintiff seeks judgment based upon unpaid invoices in the total
amount of $51,972.24 plus interest and costs. The Company contends that the
amount owed is $45,679.18. At this time, the outcome of this matter cannot be
assessed with certainty.
The Company has been named a defendant in an action commenced during the
first quarter of fiscal 1997 in Delaware County, PA. The plaintiff, Glen Eagle,
is the landlord of the Company's former Glen Eagle, PA store, which the Company
closed during fiscal 1997. Glen Eagle has brought a suit for lease termination
damages in excess of $1 million for unpaid rent scheduled to be paid over the
remaining term of the ten year lease agreement. Discovery proceedings in the
case are just getting underway. At this time, the outcome of this matter cannot
be assessed with certainty, especially with respect to open issues such as
potential mitigation of damages by reletting of the premises.
Benderson 85-1 Trust v. The Village Green Bookstore, Inc. 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.
William W. Shuster, Jr. v. The Village Green Bookstore, Inc. 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.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not have an Annual Meeting of Shareholders during fiscal
1997.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares of Common Stock were traded on the NASDAQ SmallCap
Market until January 24, 1997 under the symbol Book, when the Company's stock
and Redeemable Warrants were delisted for failing to meet the minimum bid prices
required for continued listing. Subsequent to January 24, 1997, the Company's
Common Stock has traded on the National Association of Securities Dealers, Inc.
("NASD") Over-the-Counter Market ("OTC"). The table reflects the high and low
bid prices for the Common Stock as reported by the NASD for each full quarter
for the last two fiscal years and the current fiscal year. There is no longer a
market for the Company's Redeemable Warrants. The prices set forth below
represent quotes between dealers and do not include commissions, mark-ups or
mark-downs and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Period Common Stock Warrants
- ------------------------------------ ----------------------- ----------------------------
Low High Low High
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended January 28, 1996
First Quarter $2.50 $3.75 $.44 $.75
Second Quarter $1.88 $3.25 $.25 $.81
Third Quarter $2.00 $3.13 $.38 $.81
Fourth Quarter $1.63 $2.39 $.38 $.69
Fiscal Year Ended February 2, 1997
First Quarter $ .88 $1.25 $.25 $.41
Second Quarter $.19 $.35 $.38 $.75
Third Quarter $.09 $.31 $.03 $.06
Fourth Quarter $.03 $.13 $.03 $.03
</TABLE>
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, the NASDAQ Small Cap Market approved and commenced
trading on the Redeemable Warrants. On January 24, 1997, the Company was
delisted from the NASDAQ Small Cap Market for failing to meet the minimum bid
prices required for continued listing.
As of May 16, 1997 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 15, 1997, the closing bid and asked prices for the Common Stock
as reported by the OTC Market were $.06 and $.08, per share, respectively. There
is no active market for the Company's Redeemable Warrants.
-12-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company currently operates four retail bookstores and two
Kideology(TM) stores in New York and Pennsylvania. The Company's strategy is
focused primarily on continuing to own and operate retail bookstores in the
areas in which it currently competes. However, the Company is not certain if it
can continue to operate all of its existing retail bookstores or even continue
to operate as a going concern.
The fiscal year ending February 2, 1997 ("Fiscal 1997") was a period of
consolidation and re-evaluation. The events which led to the Company's position
in Fiscal 1997 were the following:
o The maturity of an aggregate of $1.2 million Principal Amount
1995 7% Convertible Senior Subordinated Debentures (the
"Debentures"). Sands Brothers & Co., Ltd. ("Sands Brothers")
acted as placement agent in the sale of the Debentures. The
Company is currently in default on the Debentures. On October
11, 1996, the Company signed a Credit Agreement dated as of
September 25, 1996 with VGBS Acquisition Corp. ("VGBS"), an
affiliate of H.J. Meyers & Co., Inc., the underwriter in the
Company's March 23, 1995 public offering, pursuant to which VGBS
is to loan the Company the amount necessary to repay the
Debentures. To date only $300,000 has been loaned to the Company
by VGBS.
o Severe competitive conditions served to continue to adversely
affect the Company's operations in both the bookstore and
educational retail environment.
o Lack of working capital as well as a lack of vendor support
resulted in the Company consolidating operations to reduce trade
payables and generate cash for daily operations. During fiscal
1997, six bookstores were closed.
-13-
<PAGE>
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 statements of operations:
Fiscal Year Ended
------------------------------------------
February 2, 1997 January 28, 1996
--------------------- -------------------
Statement of Operations Data
Net Sales $ 8,069,316 $11,040,366
As a percentage of Net Sales: 100% 100%
Same Stores 70.8 87.0
New Stores 6.1 13.0
Closed Stores 23.1 0.0
100.0 100.0
Total Net Sales
Cost of Sales 69.7 64.7
Gross Profit 30.3 35.3
Selling, General and
Administrative Expenses 50.8 45.6
Other Expenses 12.7 2.7
Loss from Operations (33.2) (13.0)
Net Loss (35.1) (15.0)
YEAR ENDED FEBRUARY 2, 1997 COMPARED TO YEAR ENDED JANUARY 28, 1996
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. Rochester, New York
has been historically the financially strongest geographic area in which the
Company's stores compete.
Net Sales for the fiscal year ended February 2, 1997 ("Fiscal 1997") and
fiscal year ended January 28, 1996 ("Fiscal 1996") were $8,069,316 and
$11,040,366 respectively, a decrease of 26.9% in Fiscal 1997 versus Fiscal 1996.
Comparable store sales decreased 16.9% in Fiscal 1997, versus a decrease of 2.7%
during Fiscal 1996. The primary reason for this decline is the continued severe
competitive conditions faced by the Company.
-14-
<PAGE>
The Company's gross profit margin for Fiscal 1997 was 30.3%, as compared
to 35.3% for Fiscal 1996. In absolute dollars, gross profit decreased from
$3,902,258 for Fiscal 1996 to $2,447,788 for Fiscal 1997. The additional
competition in the bookstore industry through the aggressive expansion of book
superstores and the Company's lack of finance and reduced trade support resulted
in the Company's closing of six of its retail bookstores and a reduction in
comparable store sales of 16.9%.
In Fiscal 1997, the Company incurred other expenses of $1,025,818. These
expenses were recorded as a result of the closing of six of the Company's
bookstores. As a percentage of net sales, selling, general and administrative
expenses increased from 45.6% of net sales for Fiscal 1996 to 50.6% of net sales
for Fiscal 1997, as a result of decreased economies of scale resulting from the
closing of six stores and reduced sales volumes from comparable stores.
YEAR ENDED JANUARY 28, 1996 COMPARED TO YEAR ENDED JANUARY 29, 1995
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 was 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 Fiscal 1995. This nominal improvement of $273,285 in absolute gross
profit dollars was a result of increased sales volumes. The improvement in
absolute dollars represented a 1.0% decline in gross profit percentage. In
absolute dollars, gross profit increased from $3,628,973 for Fiscal 1995 to
$3,902,258 for Fiscal 1996. Increased 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%.
Selling, general and administrative expenses for Fiscal 1996 increased
33.1%, due to the initial start up costs related to 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.
In fiscal 1996, 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.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash amounted to $140,417 at February 2, 1997, as compared to $383,918
at January 28, 1996. Inventories decreased by $3,522,277 to $2,784,531 at
February 2, 1997 from $6,306,808 at January 28, 1996. This is the result of the
closing of six retail locations. Working capital at February 2, 1997 was $59,243
as compared to $1,920,850 at January 28, 1996. 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.
On October 11, 1996, the Company and VGBS Acquisition Corporation
("VGBS") consummated a Credit Agreement dated as of September 25, 1996, whereby
VGBS agreed to loan up to $1,200,000 to the Company pursuant to a Senior Secured
Promissory Grid Note dated September 25, 1996 (the "Grid Note"). The Grid Note
bears interest at the rate of 9% per annum with principal and interest due in
arrears in quarterly installments commencing June 30, 1997. Pursuant to the
Credit Agreement, the Company has agreed that the $1,200,000 loan amount to be
provided by VGBS pursuant to the Grid Note will be used by the Company solely to
repay the entire principal amount owed by the Company to the holders of the
Company's 1995 7% Convertible Senior Subordinated Debentures (the "Debentures").
To date, VGBS has made one installment loan on the Grid Note and the Company has
reduced the amount due to its Debentureholders to approximately $900,000. The
Company owes approximately $300,000 to VGBS pursuant to the Grid Note.
Concurrent with the consummation of the Credit Agreement, the Company
executed a Warrant to purchase up to 2,400,000 shares of the Company's Common
Stock at the purchase price of $.50 per share in favor of VGBS (the "Warrant").
The Company has also entered into a Security Agreement with VGBS
pursuant to which the Company has granted VGBS a security interest on the
indebtedness incurred by the Company pursuant to the Credit Agreement and Note.
The Security Agreement is senior in right of payment and in collateral except
for up to $500,000 of inventory financing for working capital. VGBS has agreed
to subordinate its security interest under the Security agreement to the holders
of the Debentures in the event VGBS breaches its obligation to fund any
installment due to the Company under the Credit Agreement and Note.
Additionally, to induce VGBS to enter into the Credit Agreement, certain
of the Company's shareholders granted an irrevocably proxy to VGBS pursuant to a
Shareholders' Agreement and Irrevocable Proxy to vote such shareholders' shares
of Common Stock (the "Shareholders' Agreement"). Subsequent to the execution of
the Credit Agreement, however, certain of such shareholders sold their shares in
violation of the Shareholders Agreement.
-16-
<PAGE>
Furthermore, under the terms of the Credit Agreement, VGBS has the right
to reconstitute the entire Board of Directors of the Company, and, as such,
three of the four current directors of the Company have tendered their
resignations from the Board of Directors to the Company, including Raymond C.
Sparks, such resignations to be held by the Company pending acceptance by the
Company.
VGBS is an affiliate of H.J. Meyers & Co., Inc., the Placement Agreement
in this Offering. The Company believes that given the lack of available credit
terms from unaffiliated third parties, the consideration for the transactions
described above was the result of arms-length negotiations between the Company
and VGBS. No assurances can be given that the Company will be able to borrow
additional funds pursuant to the Grid Note.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The specialty retail industry, which includes the Company's bookstore
and Kideology(TM) 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'
business. This seasonal pattern is primarily due to the increased customer
demand for books during the year-end holiday selling season.
INFLATION
There was no significant impact on the Company' operations as a result
of inflation during the last two fiscal years.
-17-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The Company's Financial Statements, including Consolidated Balance
Sheets as of February 2, 1997 and January 28, 1996 and the related Consolidated
Statements of Operations, changes in stockholders' equity and cash flows for the
twelve (12) months ended February 2, 1997 and January 28, 1996, respectively.
For a list of the Consolidated Financial Statements filed as part of this
report, see Contents to Consolidated Financial Statements at F-2. The
Consolidated Financial Statements are deemed a part of this 10-KSB.
-18-
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC.
---------------------------------
AND SUBSIDIARIES
----------------
ROCHESTER, NEW YORK
-------------------
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
AND
---
INDEPENDENT AUDITORS' REPORTS
-----------------------------
FEBRUARY 2, 1997 AND JANUARY 28, 1996
-------------------------------------
F - 1
<PAGE>
CONTENTS
--------
AUDITED CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ----------------------------------------- ----
Independent Auditors' Reports F-3
Consolidated Balance Sheets F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Changes in Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
F - 2
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors and Stockholders
The Village Green Bookstore, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of The Village Green
Bookstore, Inc. and Subsidiaries as of February 2, 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. 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 audit.
We conducted our audit 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Village Green
Bookstore, Inc. and Subsidiaries as of February 2, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements for the year ended February
2, 1997 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note B to the consolidated financial statements, the
Company has experienced recurring losses from operations and liquidity
constraints that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note B. The consolidated financial statements for the year ended February 2,
1997 do not include any adjustments that might result from the outcome of this
uncertainty.
MENGEL, METZGER, BARR & CO. LLP
Rochester, New York
May 15, 1997
F - 3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Village Green Bookstore, Inc.
Rochester, New York
We have audited the accompanying consolidated balance sheet of The Village Green
Bookstore, Inc. as of January 28, 1996, and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for the year
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 audit.
We conducted our audit 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 the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying 1996 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
B 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 B. The 1996 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 - 4
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
ASSETS
------ February 2, January 28,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 140,417 $ 383,918
Receivables 80,725 130,974
Inventories 2,784,531 6,306,808
Other current assets 95,594 290,141
----------- -----------
TOTAL CURRENT ASSETS 3,101,267 7,111,841
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 1,331,313 1,933,838
OTHER ASSETS 57,802 161,585
----------- -----------
TOTAL ASSETS $ 4,490,382 $ 9,207,264
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 1,001,519 $ 1,231,227
Accounts payable 1,746,379 3,332,642
Accrued payroll expense 47,577 77,565
Accrued sales taxes payable 57,534 81,442
Other current liabilities 189,015 468,115
----------- -----------
TOTAL CURRENT LIABILITIES 3,042,024 5,190,991
LONG-TERM DEBT 277,090 13,965
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par:
Authorized 10,000,000 shares
Issued and outstanding, 3,741,255 shares 3,741 3,741
Additional paid-in capital 8,117,154 8,117,154
Accumulated deficit (6,949,627) (4,118,587)
----------- -----------
1,171,268 4,002,308
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,490,382 $ 9,207,264
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Year ended
----------------------------
February 2, January 28,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 8,069,316 $ 11,040,366
Cost of goods sold 5,621,528 7,138,108
------------ ------------
GROSS PROFIT 2,447,788 3,902,258
Selling, general and administrative expenses 4,100,893 5,030,044
Other expenses 1,025,818 305,637
------------ ------------
LOSS FROM OPERATIONS (2,678,923) (1,433,423)
Other income (expense):
Sundry 9,258 65,654
Interest expense (122,716) (111,869)
Amortization of debt issuance costs (23,781) (171,500)
Loss on disposal of property and equipment (8,378) --
------------ ------------
(145,617) (217,715)
------------ ------------
LOSS BEFORE INCOME TAXES (2,824,540) (1,651,138)
Income taxes 6,500 3,591
------------ ------------
NET LOSS $ (2,831,040) $ (1,654,729)
============ ============
Net loss per common share $ (0.76) $ (0.48)
============ ============
Weighted average number of common shares outstanding 3,741,255 3,428,294
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
YEARS ENDED FEBRUARY 2, 1997 AND JANUARY 28, 1996
-------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Par paid-in Accumulated stockholders'
Shares value capital deficit equity
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 29, 1995 1,710,880 $ 1,711 $ 3,232,573 $(2,463,858) $ 770,426
Exercise of warrants 100 -- 50 -- 50
Issuance of common
stock 2,216,775 2,216 5,195,845 -- 5,198,061
Purchase and retirement
of common stock (186,500) (186) (186,314) --
(186,500)
Payment to stockholder -- -- (125,000) --
(125,000)
Net loss for the year -- -- -- (1,654,729)
(1,654,729)
----------- ----------- ----------- ----------- -----------
BALANCE AT
JANUARY 28, 1996 3,741,255 3,741 8,117,154 (4,118,587) 4,002,308
Net loss for the year -- -- -- (2,831,040) (2,831,040)
----------- ----------- ----------- ----------- -----------
BALANCE AT
FEBRUARY 2, 1997 3,741,255 $ 3,741 $ 8,117,154 $(6,949,627) $ 1,171,268
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 7
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended
---------------------------
February 2, January 28,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net loss $(2,831,040) $(1,654,729)
Adjustments to reconcile net loss to net cash (used for)
operating activities:
Depreciation and amortization 437,788 480,274
Other expenses 293,141 305,637
Security deposits forfeited 80,002 --
Loss on disposal of property and equipment 8,378 --
Changes in operating assets and liabilities:
Receivables 74,249 72,287
Inventories 3,522,277 (1,574,604)
Other current assets 194,547 (96,946)
Accounts payable (1,586,263) (15,830)
Accrued payroll expense (29,988) 22,135
Accrued sales taxes payable (23,908) 15,452
Other current liabilities (279,100) 120,022
----------- -----------
NET CASH (USED FOR)
OPERATING ACTIVITIES (139,917) (2,326,302)
CASH FLOWS - INVESTING ACTIVITIES
Purchases of property and equipment (58,347) (1,117,472)
Other -- 1,216
----------- -----------
NET CASH (USED FOR)
INVESTING ACTIVITIES (58,347) (1,116,256)
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from borrowings of long-term debt 300,000 --
Payments on long-term debt (345,237) (1,826,168)
Proceeds from issuance of common stock, net of expenses -- 5,361,674
Purchase and retirement of common stock, net -- (103,500)
Payment to stockholder -- (125,000)
----------- -----------
NET CASH (USED FOR) PROVIDED FROM
FINANCING ACTIVITIES (45,237) 3,307,006
----------- -----------
NET (DECREASE) IN CASH (243,501) (135,552)
Cash at beginning of year 383,918 519,470
----------- -----------
CASH AT END OF YEAR $ 140,417 $ 383,918
=========== ===========
</TABLE>
F - 8
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
---------------------------------------------
<TABLE>
<CAPTION>
Year ended
-------------------------
February 2, January 28,
1997 1996
-------- --------
<S> <C> <C>
NON-CASH OPERATING, INVESTING AND
FINANCING ACTIVITIES
Receivable acquired in connection with sale of property
and equipment $ 24,000 $ --
======== ========
Equipment acquired under capital lease obligation $ 78,654 $ --
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 66,045 $111,869
======== ========
Income taxes $ 3,133 $ 850
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 9
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------
The Company
-----------
The Company was organized 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. In 1996, the Company
introduced Kideology(TM), with the opening of two stores. Kideology(TM) is
an educational retail system which the Company developed to sell educational
toys and products to children from ages 14 and under.
The Company competes with a diverse group of national book retailers,
including WaldenBooks, Borders Bookshop, Barnes & Noble, B. Dalton
Booksellers, 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 opened superstores within the Company's existing
markets. The Company's strategic objective is to attempt to continue to
operate retail bookstores in the areas in which it currently competes.
Each Company store is situated and merchandised to specifically address the
tastes and demand characteristics of its clientele. The Company's stores
feature a diversified retail mix. The Company's basic store format includes
(i) an inventory of several thousand book titles and magazines, periodical
and newspaper titles per store per year; (ii) a stationery department which
carries a number of 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 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 currently carries on business at four locations in Rochester,
New York, two locations in Buffalo, New York, and one location in
Doylestown, Pennsylvania.
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of The Village
Green Bookstore, Inc. and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Fiscal year
-----------
The Company has a 52/53 week fiscal year which ends on the Sunday which
falls closest to January 31.
Concentration of credit risk - cash
-----------------------------------
The Company maintains its cash balances in four financial institutions.
These balances are insured by the Federal Deposit Insurance Corporation up
to $100,000 at each financial institution. Uninsured balances amounted to
approximately $133,000 at February 2, 1997.
F - 10
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
- -------------------------------------------------------------------
Inventories
-----------
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. Certain merchandise, such as books and
magazines are returnable to vendors. Books and magazines represent
approximately $1,984,000, or 71%, of the Company's inventories at February
2, 1997. The majority of books are 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, amortization 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.
Major renewals and betterments are capitalized, while maintenance and
repairs are charged to operations as incurred. Upon sale or retirement, the
related cost and accumulated depreciation or amortization are removed from
the accounts and the related gain or loss is reflected in operations.
Impairment of long-lived assets
-------------------------------
During fiscal 1997, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". SFAS No. 121 prescribes that
an impairment loss is recognized in the event that facts and circumstances
indicate that the carrying amount of an asset may not be recoverable, and an
estimate of future undiscounted cash flows is less than the carrying amount
of the assets. Impairment is recorded based on an estimate of future
discounted cash flows. The Company has determined that no impairment loss
needs to be recognized for applicable assets of continuing operations.
Pre-opening expenses
--------------------
Incremental expenses related to the opening of new stores are capitalized as
incurred up to the point that retail sales commence. 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. Such costs have been fully amortized
or written off in connection with certain store closings (see Note F).
Deferred debt issuance costs
----------------------------
Deferred debt issuance costs were being amortized over the term of the
related debt instruments. Such costs were fully amortized at February 2,
1997.
Loss per common share
---------------------
Loss per common share is based on the weighted average number of common
shares considered to be outstanding during the year.
F - 11
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
- -------------------------------------------------------------------
Income taxes
------------
Deferred income tax assets and liabilities arise from temporary differences
associated with differences between the financial statement and tax basis of
assets and liabilities, as determined by the enacted rates which are
expected to be in effect when these differences reverse. Deferred tax assets
and liabilities are classified as current or noncurrent, depending on the
classification of the assets and liabilities to which they relate. Deferred
tax assets and liabilities not related to an asset or liability are
classified as current or noncurrent depending on the periods in which the
temporary differences are expected to reverse. The principal types of
temporary differences between assets and liabilities for financial statement
and tax return purposes are detailed in Note G.
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.
NOTE B: BASIS OF PRESENTATION AND MANAGEMENT'S PLANS
- -----------------------------------------------------
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
has incurred significant operating losses in each of the last five fiscal
years, including net losses of $2,831,040 and $1,654,729 in fiscal 1997 and
1996, respectively. In addition, the Company has been unable to generate
sufficient cash flows from operations and is currently in default on a debt
obligation to its Debenture holders which was due in April 1996 (see Note
D). Further, the Company is currently experiencing difficulty obtaining
inventory as payment terms with several of its vendors have been changed
from trade credit arrangements to cash-on-delivery (C.O.D.). 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.
Management's plans
------------------
In an effort to improve operating performance and continue its operations,
the Company has been and will be implementing certain programs and
strategies in fiscal 1998. These strategies include:
o Optimization of Retail Product Mix - The Company seeks to
differentiate itself from its competition by, among other things,
offering a retail mix that is focused and optimized to address the
tastes and demands of an affluent clientele.
F - 12
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE B: BASIS OF PRESENTATION AND MANAGEMENT'S PLANS, Cont'd
- -----------------------------------------------------
o Emphasis on Social and Cultural Meeting Places; Establishment of
Strong Community Ties The Company has introduced coffee cafes at
certain of its stores. By incorporating this concept, the Company
hopes 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.
o Operate existing stores in a manner that will maximize profits and
cash flow by increasing sales and minimizing expenses to the extent
possible.
o Market aggressively to maximize sales for stores which are currently
in operation.
o Close stores which cannot be operated at a profitable level and
generate cash flow.
o Continue to negotiate terms with vendors to assure adequate
inventory levels are maintained at the Company's stores.
o Take all steps necessary to facilitate the merger of the Company
into a subsidiary of CD Titles, Inc. (see Note J). Should the common
stock offering cited in Note J be consummated, the Company believes
working capital will be available and the Company will be in a
position to negotiate repayment of the amounts due the Debenture
holders (see Note D) as well as other obligations.
NOTE C: PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consist of the following:
<TABLE>
<CAPTION>
February 2, January 28,
1997 1996
----------- -----------
<S> <C> <C>
Equipment under capital lease $ 179,020 $ 100,366
Equipment and vehicles 551,971 563,267
Furniture and fixtures 855,842 933,782
Rental videos 66,404 65,271
Leasehold improvements 836,555 1,170,974
----------- ---------
2,489,792 2,833,660
Less accumulated depreciation and amortization 1,158,479 899,822
----------- -- -------
Net property and equipment $ 1,331,313 $ 1,933,838
============ ===========
</TABLE>
F - 13
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE D: DEBT
- ------- ----
On October 11, 1996, the Company and VGBS Acquisition Corporation ("VGBS")
consummated a Credit Agreement dated as of September 25, 1996, whereby VGBS
agreed to loan up to $1.2 million to the Company pursuant to a Senior
Secured Promissory Grid Note dated September 25, 1996 (the "Note"). Advances
of $300,000 were scheduled to be made quarterly, contingent upon the Company
complying with certain representations, warranties and covenants contained
in the Credit Agreement. The first $300,000 was advanced on September 26,
1996. As of May 15, 1997, no subsequent amounts have been advanced under the
Credit Agreement. The Note bears interest at the rate of 9% per annum with
principal and interest payable in equal quarterly installments commencing
June 30, 1997 through June 2000. Pursuant to the Credit Agreement, the
Company has agreed that all amounts advanced by VGBS pursuant to the Note
will be used by the Company solely to repay principal amounts owed by the
Company to the holders of the Company's Convertible Debentures (the
"Debentures") as cited below.
The Company has also entered into a Security Agreement with VGBS pursuant to
which the Company has granted VGBS a security interest in all assets of the
Company to secure the indebtedness incurred by the Company pursuant to the
Credit Agreement and Note. The Security Agreement is senior in right of
payment and in collateral except for up to $500,000 for the financing of
merchandise inventories. VGBS has agreed to subordinate its security
interest under the Security Agreement to the holders of the Debentures in
the event VGBS breaches its obligation to fund any installment due to the
Company under the Credit Agreement and Note.
On April 28, 1994, the Company consummated a private placement of
convertible Debentures with an aggregate value of $1.2 million (which in
previous years had been referred to as 7% Convertible Senior Subordinated
Debentures). These Debentures are convertible into 240,000 shares of the
Company's common stock at a conversion price of $5.00 per share. The
Debentures had an original maturity date of April 1996. During fiscal 1997
and 1996, the debentures were not converted or redeemed, in whole or in
part. The Company was unable to pay its obligation for the Debentures which
was due in April 1996. In May 1996, the Debenture holders entered into an
agreement with the Company whereby the interest rate on the Debentures was
increased from 7% to 9%. In accordance with the Credit Agreement cited
above, a principal payment of $300,000 was made to the Debenture holders on
September 25, 1996.
Long-term debt consists of the following:
Year ended
----------------------------
February 2, January 28,
1997 1996
---------- ----------
Convertible Debentures $ 900,000 $1,200,000
Note payable to VGBS 300,000 --
Obligations under capital leases 78,609 45,192
---------- ----------
1,278,609 1,245,192
Less current portion 1,001,519 1,231,227
---------- ----------
$ 277,090 $ 13,965
========== ==========
F - 14
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE D: DEBT, Cont'd
- -------------
Maturities of long-term debt are scheduled as follows:
1998 $ 1,001,519
1999 115,629
2000 117,862
2001 43,599
-----------
$ 1,278,609
===========
NOTE E: STOCKHOLDERS' EQUITY
- -----------------------------
Concurrent with the execution of the Credit Agreement cited in Note D, the
Company executed a warrant allowing VGBS to purchase up to 2,400,000 shares
of the Company's common stock at a price of $.50 per share (the "Warrant").
The Warrant is presently exercisable and may be exercised through September
15, 2001. The Warrant is subject to anti-dilution provisions and will not be
registered under the Securities Act of 1933, as amended. To induce VGBS to
enter into the Credit Agreement, certain of the Company's stockholders
granted an irrevocable proxy to VGBS pursuant to a Shareholders' Agreement
and Irrevocable Proxy (the "Shareholders' Agreement") to vote such
stockholders' shares of common stock. There are currently 156,000 shares of
common stock subject to the Shareholders' Agreement.
In May 1996, the Debenture holders cited in Note D were given warrants to
purchase up to 60,000 shares of the Company's common stock at a price of
$1.25 per share. These warrants are presently exercisable and may be
exercised through August 7, 2001.
On March 23, 1995, the Company consummated a public offering (the
"Offering") of 2,216,755 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
warrants attached to the Offering may be exercised to purchase common stock
of the Company at a price of $3.60 per share, through their expiration in
March 2000. The Company received proceeds of $5,198,061 from the offering,
which were net of related expenses totaling $1,452,204.
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 were subsequently sold by the investor were less than $300,000.
During fiscal 1996, the investor sold the 100,000 shares of common stock for
$175,000. Accordingly, the Company made a payment of $125,000 to the
investor, which was charged to additional paid-in capital.
F - 15
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE E: STOCKHOLDERS' EQUITY, Cont'd
- -----------------------------
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 involve 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 200,000 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 later than ten years from the date of the grant
of such options. At February 2, 1997, 68,250 shares were reserved for future
grant. A summary of option transactions is presented below:
<TABLE>
<CAPTION>
Year ended Year ended
February 2, 1997 January 28, 1996
----------------------- ----------------------
1987 Plan 1993 Plan 1987 Plan 1993 Plan
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Shares under option,
beginning of year 64,500 188,250 76,500 138,250
Options granted -- -- -- 75,000
Options expiring (16,000) (56,500) (12,000) (25,000)
-------- -------- -------- --------
Shares under option,
end of year 48,500 131,750 64,500 188,250
======== ======== ======== ========
Shares exercisable,
end of year 48,500 131,750 64,500 188,250
======== ======== ======== ========
Exercise price of shares $1.97 to $2.00 to $1.10 to $2.00 to
exercisable $ 2.188 $ 3.875 $ 2.188 $ 3.875
======== ======== ======== ========
</TABLE>
In addition to the above options, under an agreement dated June 28, 1993,
the Company's President was granted a non-qualified, three year non-plan
option to purchase 103,500 shares of the Company's common stock at an
exercise price of $1.97 per share. These options were not exercised and
expired on June 28, 1996.
F - 16
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE F: OTHER EXPENSES
- -----------------------
During fiscal 1997, the Company closed four stores (located in Ridgefield,
CT, Philadelphia, PA, Wilkes-Barre, PA, and Greece, NY), primarily as a
result of the need to generate working capital to sustain the operations of
its other locations. These stores were closed between May 1996 and January
1997. Accordingly, a pre-tax charge of $1,025,818 was recorded during the
year ended February 2, 1997 for costs associated with the store closings,
consisting of lease settlement payments and obligations ($84,592) the
write-off of fixed assets ($293,141), restocking and other charges related
to the return of inventories ($419,045) and other costs related to moving
inventories and fixed assets from the closed stores to other operating
locations of the Company ($229,040).
In January 1996, the Company decided to close two underperforming stores
(located in Blasdell, NY and Philadelphia, PA) which were subsequently
closed by the end of March 1996. Accordingly, 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).
NOTE G: INCOME TAXES
- ---------------------
The provision for income taxes for the years ended February 2, 1997 and
January 28, 1996 consists of the following:
1997 1996
---------- ---------
Federal $ -- $ --
State 6,500 3,591
--------- ---------
$ 6,500 $ 3,591
========= =========
Deferred income tax assets resulting from temporary differences as of
February 2, 1997 and January 28, 1996 are as follows:
Assets
---------------------------
1997 1996
----------- -----------
Allowance for doubtful receivables $ 8,393 $ 4,837
Net operating loss carryforwards 2,047,959 1,165,466
Less valuation allowance (2,056,352) (1,170,303)
----------- -----------
$ -- $ --
=========== ===========
F - 17
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE G: INCOME TAXES, Cont'd
- ---------------------
Income taxes were computed at rates other than the statutory federal income
tax rate due to the following items:
<TABLE>
<CAPTION>
1997 1996
------------------- --------------------
Amount Percent Amount Percent
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Tax benefit at federal statutory rate $(958,891) (34.0)% $(562,607) (34.0)%
State taxes, net of federal benefit 6,500 .2 3,591 .2
Net operating loss carryforward
not utilized 958,891 34.0 562,607 34.0
--------- ------ --------- ----
$ 6,500 .2 % $ 3,591 .2 %
========= ====== ========= ====
</TABLE>
At February 2, 1997, the amount of net operating losses available to be
carried forward to offset future taxable income was approximately
$6,023,000. These losses expire in various years through January 2012.
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.
NOTE H: PROFIT-SHARING PLAN
- ----------------------------
The Company had a defined contribution profit-sharing plan covering
employees who met certain eligibility requirements. The Plan provided for
discretionary annual contributions up to 15% of a participants'
compensation. The Plan was terminated on October 31, 1995. No contributions
were made for the fiscal year ended January 28, 1996.
F - 18
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE I: 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. The leases usually provide that the Company pay a portion of the
taxes, insurance and maintenance costs associated with the leased premises.
Most leases provide for additional rents based upon a percentage of sales.
Lease expenses for the Company's retail and administrative locations were
approximately $693,000 and $864,000 for the fiscal years ended February 2,
1997 and January 28, 1996, respectively. At February 2, 1997, future annual
minimum rentals for noncancellable operating leases for the Company's
operating facilities are as follows:
Fiscal Year
-----------
1998 $ 526,356
1999 534,379
2000 493,896
2001 467,337
2002 479,067
Thereafter 1,614,006
-----------
$ 4,115,041
===========
On June 28, 1993, the Company entered into an employment agreement with its
President which expired on June 27, 1996 but was extended for an additional
year through June 30, 1997. This agreement provides for a base annual salary
of $125,000 with salary increases and bonuses to be determined by the Board
of Directors at their discretion.
In August 1994, the Company was 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 $1,000,000 worth of liability insurance which it believes should be
sufficient to cover any possible award of damages to the plaintiff. The
Company believes it has meritorious defenses and intends to vigorously
defend this action. Accordingly, no liability has been recorded in the
accompanying consolidated financial statements.
On March 31, 1995, the Company entered into an agreement (the "Agreement")
with Mr. Paul Adams ("Adams"), a former principal stockholder 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").
F - 19
<PAGE>
THE VILLAGE GREEN BOOKSTORE, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 2, 1997
------------------------------------
AND JANUARY 28, 1996
--------------------
NOTE I: COMMITMENTS AND CONTINGENCIES, Cont'd
- --------------------------------------
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 Adam's 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.
The Company has been named a defendant in an action commenced during the
first quarter of fiscal 1997 in Delaware County, PA. The plaintiff, Glen
Eagle, is the landlord of the Company's former Glen Eagle, PA store, which
the Company closed during fiscal 1997. Glen Eagle has brought a suit for
lease termination damages in excess of $1 million for unpaid rent scheduled
to be paid over the remaining term of the ten year lease agreement.
Discovery proceedings in the case are just getting underway. At this time,
the outcome of this matter cannot be assessed with certainty, especially
with respect to open issues such as potential mitigation of damages by
reletting of the premises.
NOTE J: SUBSEQUENT EVENT
- -------------------------
On April 18, 1997, the Company announced that it had reached an agreement in
principle with CD Titles, Inc. and H.J. Meyers & Co. (an underwriter, which
is also a market maker for the Company's common stock), whereby the Company
will be merged into a subsidiary of CD Titles, Inc. The new corporation
created as a result of the merger, plans to issue and sell $5,000,000 of its
common stock to the public. The agreement in principle is subject to the
customary contingencies, including due diligence by the parties, stockholder
approval and market factors. Upon execution of a definitive agreement, the
Company plans to submit the proposed merger to its stockholders for
approval.
F - 20
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
On April 22, 1997, the Company dismissed its former auditors, Deloitte &
Touche LLP and replaced such auditors with Mengel, Metzger, Barr and Co. LLP.
Deloitte & Touche LLP's report on the year ended January 28, 1996 did not
contain an adverse opinion or disclaimer of opinion, nor was it modified as to
audit scope or accounting principles, except that their report on the
consolidated financial statements for the fiscal year ended January 28, 1996
expressed substantial doubt as to the Company's ability to continue as a going
concern.
-19-
<PAGE>
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:
Name of Director Age Position
- --------------------- ------ ------------------------------------
Raymond C. Sparks 46 Chairman of the Board of Directors,
President, Chief Executive Officer,
Treasurer, Chief Financial Officer
and Chief Operating Officer
Steven B. Sands 38 Director
John P. Holmes 59 Director
Michael S. Smith 43 Director
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, South Africa until 1983. From 1983 to 1987, Mr. Sparks was Divisional
Financial Manager for Checkers Supermarkets Ltd. in Cape Town, South Africa. Mr.
Sparks moved to the United States in 1987, and became Chief Financial Officer of
Checkers Restaurants in 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.
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.
-20-
<PAGE>
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 President and Chief Executive Officer of
International Capital and Management, Inc. ("ICM"), a financial consulting and
investment banking firm. Prior to Mr. Smith's association with ICM, he was
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 was with H.J. Meyers from May 1991 to February
1997, 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.
-21-
<PAGE>
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 1997, 1996
and 1995. No other executive officer of the Company had total compensation in
excess of $100,000 for the Fiscal Years 1997, 1996 and 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------------------------- -------------------------
Name and Fiscal Salary Bonus Other Securities All Other
Principal Year ($) ($) Annual Underlying Compensation
Position Ending Compensation Options ($)
1/28, 1/30, ($) (#)
2/2
- ------------- ------------- --------- ------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Raymond C. Sparks 1997 125,500 0 (1)
Raymond C. Sparks 1996 119,065 0 (1)(2)
Raymond C. Sparks 1995 100,096 0 (1)(2) 30,000 20,400
(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.
(2) Also includes $17,522 which Mr. Sparks received as reimbursement for
relocation expenses.
</TABLE>
-22-
<PAGE>
The following table sets forth information concerning the value of
unexercised stock options held by the Named Executive as of February 2, 1997. No
stock options were exercised by the Named Executive in Fiscal 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options at
Options at Fiscal Year
Fiscal Year End End(1)
---------------- --------------
Name Shares Value Exercisable/ Exercisable
Acquired on Realized ($) Unexercisable Unexerciable
Exercise (#)
- ------------------ -------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Raymond Sparks - N/A 150,000/30,000 $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 C. Sparks, who became the Company's President, Chairman and Chief
Executive Officer on that date. This agreement, which has an initial 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 Fiscal 1997 this contract was extended by the Company through
June 30, 1997. In addition, pursuant to Mr. Sparks' employment agreement, the
Company reimbursed $17,522 to Mr. Sparks during Fiscal 1996 and 1995 for
expenses related to the relocation of Mr. Sparks and his family to the
Rochester, New York area.
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 (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.
-23-
<PAGE>
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.
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 is only one
executive officer of the Company who is eligible for the grant of options under
the 1993 Plan.
-24-
<PAGE>
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.
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 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 48,500 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.
-25-
<PAGE>
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 are 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 have been 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 provides that 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.
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.
-26-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock
as of May 15, 1997 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.
Name and Address of Beneficial Number of Percent of
Owner Shares(1) Shares
------------------------------ --------- -----------
Raymond C. Sparks 46,500(2) 1.24%
Steven B. Sands 59,500(3) 1.59%
John P. Holmes 50,000 1.34%
All Directors and Executive
Officers as a Group (4 persons) 157,600(4) 4.21%
________________
(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) 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 an aggregate of 50,000 shares of Common Stock and 9,500
Redeemable Warrants owned by three private limited partnerships which
Mr. Steven B. Sands may be deemed to control. Does not include any
shares that may be held from time to time by Sands Brothers & Co., Ltd.
in connection with market making activities.
(4) Consists of Raymond C. Sparks, Steven B. Sands, John P. Holmes and
Michael S. Smith.
-27-
<PAGE>
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 $2.0 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 percent (10%) sales commission
($200,000) and a three percent (3%) 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 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).
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<PAGE>
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").
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.
On October 11, 1996, The Company and VGBS Acquisition Corporation
("VGBS") consummated a Credit Agreement dated as of September 25, 1996, whereby
VGBS agreed to loan up to $1,200,000 to the Company pursuant to a Senior Secured
Promissory Grid Note dated September 25, 1996 (the "Grid Note"). The Grid Note
bears interest at the rate of 9% per annum with principal and interest due in
arrears in quarterly installments commencing June 30, 1997. Pursuant to the
Credit Agreement, the Company has agreed that the $1,200,000 loan amount to be
provided by VGBS pursuant to the Grid Note will be used by the Company solely to
repay the entire principal amount owed by the Company to the holders of the
Company's 1995 7% Convertible Senior Subordinated Debentures (the "Debentures").
To date, VGBS has made one installment loan on the Grid Note and the Company has
reduced the amount due to its Debentureholders to approximately $900,000. The
Company owes approximately $300,000 to VGBS pursuant to the Grid Note.
Concurrent with the consummation of the Credit Agreement, the Company
executed a Warrant to purchase up to 2,400,000 shares of the Company's Common
Stock at the purchase price of $.50 per share in favor of VGBS (the "Warrant").
-29-
<PAGE>
The Company has also entered in to a Security Agreement with VGBS
pursuant to which the Company has granted VGBS a security interest on the
indebtedness incurred by the Company pursuant to the Credit Agreement and Note.
The Security Agreement is senior in right of payment and in collateral except
for up to $500,000 of inventory financing for working capital. VGBS has agreed
to subordinate its security interest under the Security agreement to the holders
of the Debentures in the event VGBS breaches its obligation to fund any
installment due to the Registrant under the Credit Agreement and Note.
Additionally, to induce VGBS to enter into the Credit Agreement, certain
of the Company's shareholders have granted an irrevocably proxy to VGBS pursuant
to a Shareholders' Agreement and Irrevocable Proxy to vote such shareholders'
shares of Common Stock (the "Shareholders' Agreement"). The total number of
shares of Common Stock subject to the Shareholders' Agreement is 156,000.
Subsequent to the execution of the credit Agreement, however, certain of such
shareholders sold their shares in violation of the Shareholders' Agreement.
Furthermore, under the terms of the Credit Agreement, VGBS has the right
to reconstitute the entire Board of Directors of the Company, and, as such,
three of the four current directors of the Company have tendered their
resignations from the Board of Directors to the Company, including Raymond C.
Sparks, such resignations to be held by the Company pending acceptance by the
Company.
VGBS is an affiliate of H.J. Meyers & Co., Inc., the Placement Agreement
in the 1995 Public Offering. The consideration for the transactions described
above was the result of arms-length negotiations between the Company and VGBS.
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.
-30-
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
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 10-KSB")].
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].
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].
-31-
<PAGE>
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 10-KSB].
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].
4.6 Warrant to Purchase up to 2,400,000 Shares of Common Stock of the
Company, Par Value $.001 Per Share, Executed by the Company in favor of
VGBS Acquisition Corp. ("VGBS") as of September 25, 1996. [Incorporated
by reference to Exhibit 2(c) of the Company's Current Report on Form 8-K
dated October 11, 1996].
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;
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<PAGE>
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].
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<PAGE>
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].
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].
-34-
<PAGE>
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].
10.32 Credit Agreement between the Company and VGBS Acquisition Corp. ("VGBS")
dated as of September 25, 1996. [Incorporated by reference to Exhibit
2(a) of the Company's Current Report on Form 8-K dated October 11,
1996].
13.33 Senior Secured Promissory Grid Note for $1.2 million, executed by the
Company in favor of VGBS and dated September 25, 1996. [Incorporated by
reference to Exhibit 2(b) of the Company's Current Report on Form 8-K
dated October 11, 1996].
13.34 Shareholders' Agreement and Irrevocable Proxy between Certain of the
Company's Shareholders and VGBS dated as of September 25, 1996.
[Incorporated by reference to Exhibit 2(d) of the Company's Current
Report on Form 8-K dated October 11, 1996].
13.35 Security Agreement between the Company and VGBS dated September 25,
1996. [Incorporated by reference to Exhibit 2(e) of the Company's
Current Report on Form 8-K dated October 11, 1996].
-35-
<PAGE>
22 List of Subsidiaries of the Company. [Incorporated by reference to
Exhibit 22 of SB-2 Registration Statement].
27 Financial Data Schedule. The Financial Data Schedule is qualified in its
entirety by the audited financial statements attached hereto.
-36-
<PAGE>
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated June 27, 1996
relating to the resignation of John W. Borek as a Director of the Company.
The Company filed a Current Report on Form 8-K dated October 11, 1996
relating to the consummation of a Credit Agreement between the Company and VGBS
Acquisition Corp.
The Company filed a Current Report on Form 8-K dated January 24, 1997
relating to the delisting of the Company's Common Stock from the NASDAQ Small
Cap Market.
-37-
<PAGE>
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 18, 1997 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:
Signature Title Date
- ----------------------- --------------------------------------- ------------
/s/Raymond C. Sparks Chairman of the Board (Principal May 18, 1997
- --------------------
Raymond C. Sparks Executive Officer), President, Chief
Executive Officer, Chief Financial
Officer (Principal Financial Officer),
Chief Operating Officer, Principal
Accounting Officer and Treasurer
/s/Steven B. Sands Director May 18, 1997
- -----------------------
Steven B. Sands
/s/ John P. Holmes Director May 18, 1997
- -----------------------
John P. Holmes
/s/Michael S. Smith Director May 18, 1997
- -----------------------
Michael S. Smith
-38-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE VILLAGE GREEN BOOKSTORE, INC. FOR THE FISCAL YEAR
ENDED FEBRUARY 2, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-START> JAN-29-1996
<PERIOD-END> FEB-02-1997
<CASH> 140,417
<SECURITIES> 0
<RECEIVABLES> 80,725
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