UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission file number: 0-21876
FUNCO, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1609563
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10120 West 76th Street
Eden Prairie, MN 55344
(Address of principal executive offices)
(612) 946-8883
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes __X__ No _____
On August 13, 1996, the registrant had 5,900,034 outstanding shares of common
stock, $ .01 par value.
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FUNCO, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
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ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations - Quarter ended
June 30, 1996 and July 2, 1995................................. 3
Consolidated Balance Sheets - June 30, 1996 and
March 31, 1996................................................. 4
Consolidated Statements of Cash Flows - Three months ended June 30,
1996 and July 2, 1995 .......................................... 5
Notes to Consolidated Financial Statements ......................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 7
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings................................................... 9
ITEM 6. Exhibits and Reports on Form 8-K ................................... 10
SIGNATURES .................................................................... 11
- ----------
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FUNCO, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
Quarter Ended
--------------------------
June 30, July 2,
1996 1995
--------------------------
<S> <C> <C>
Net sales .......................................... $ 18,862 $ 12,261
Cost of sales ...................................... 12,012 6,919
----------- -----------
Gross profit ................................... 6,850 5,342
Operating expenses ................................. 5,569 5,521
General and administrative expenses ................ 1,797 1,766
----------- -----------
Operating income (loss) ........................ (516) (1,945)
Interest expense ................................... (9) (9)
Interest income .................................... 35 27
----------- -----------
Net income (loss) before income taxes .......... (490) (1,927)
Income tax provision (benefit) ..................... (181) (713)
----------- -----------
Net income (loss) .............................. $ (309) $ (1,214)
=========== ===========
Net income (loss) per share ........................ $ (0.05) $ (0.21)
Weighted average number of common shares outstanding 5,889,225 5,833,066
SEE ACCOMPANYING NOTES.
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FUNCO, INC.
Consolidated Balance Sheets
(in thousands, except share data)
June 30, March 31,
1996 1996
----------- ---------
(Unaudited) (Note)
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ASSETS
Current Assets
Cash and cash equivalents ........................................ $ 4,178 $ 5,783
Accounts receivable .............................................. 563 621
Inventories ...................................................... 12,223 9,775
Prepaid expenses ................................................. 1,508 1,668
-------- --------
Total current assets .......................................... 18,472 17,847
Property & equipment, net of accumulated depreciation & amortization 6,843 7,662
Other assets, net of accumulated amortization ...................... 154 159
-------- --------
Total assets ....................................................... $ 25,469 $ 25,668
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................. $ 4,104 $ 3,195
Accrued liabilities .............................................. 2,912 3,634
Current portion of long-term debt and capital lease obligations .. 16 31
Deferred revenue ................................................. 557 622
-------- --------
Total current liabilities ..................................... 7,589 7,482
Capital lease obligations .......................................... -- 3
Accrued rent ....................................................... 100 112
Shareholders' Equity
Common stock (issued and outstanding: 5,894,627 and 5,877,887) ... 59 59
Additional paid-in capital ....................................... 17,821 17,803
Retained earnings (deficit) ...................................... (100) 209
-------- --------
Total shareholders' equity .................................... 17,780 18,071
-------- --------
Total liabilities and shareholders' equity ......................... $ 25,469 $ 25,668
======== ========
Note: The balance sheet at March 31, 1996 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
SEE ACCOMPANYING NOTES.
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FUNCO, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
-----------------------
June 30, July 2,
1996 1995
--------- --------
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Operating Activities
Net loss ................................................ $ (309) $(1,214)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ......................... 853 942
Net loss on disposal of property and equipment ........ 6 --
Changes in operating assets and liabilities:
Accounts receivable ................................. 58 436
Inventories ......................................... (2,448) 1,975
Prepaid expenses .................................... 160 124
Accounts payable .................................... 909 (331)
Accrued liabilities ................................. (734) (904)
Deferred revenue .................................... (65) (70)
------- -------
Net cash provided by (used in) operating activities (1,570) 958
Investing Activities
Additions to property and equipment ..................... (17) (120)
Increase in other assets ................................ (18) (23)
------- -------
Net cash used in investing activities ............... (35) (143)
Financing Activities
Payments of obligations under capital leases ............ (18) (53)
Net proceeds from issuance of common stock .............. 18 9
------- -------
Net cash used in financing activities ............... -- (44)
------- -------
Increase (decrease) in cash and cash equivalents ........... (1,605) 771
Cash and cash equivalents at beginning of period ........... 5,783 1,471
------- -------
Cash and cash equivalents at end of period ................. $ 4,178 $ 2,242
======= =======
SEE ACCOMPANYING NOTES.
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FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company
Funco, Inc. (the Company) was incorporated in March 1988, and is engaged in the
business of providing interactive home entertainment, primarily through the
purchase and resale of new and previously played video games along with related
hardware and accessory items through its FUNCOLAND stores and mail order
operation. It also publishes a video game magazine, GAME INFORMER. The Company
operated 173 retail locations at June 30, 1996 compared to 181 retail locations
at July 2, 1995.
Note 2. Fiscal Year
The Company's fiscal year ends on a Sunday on or near March 31 which completes a
52 or 53 week reporting period. All quarters for fiscal 1997 and 1996 consist of
13 weeks with the following period ending dates:
Ending Date
-----------------------------------------
1997 1996
------------------ -----------------
First June 30, 1996 July 2, 1995
Second September 29, 1996 October 1, 1995
Third December 29, 1996 December 31, 1995
Fourth March 30, 1997 March 31, 1996
Note 3. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation have been included.
The operating results for the quarter ended June 30, 1996, are not necessarily
indicative of the results that may be expected for the year ending March 30,
1997 due to the seasonal nature of the Company's business.
Certain items in prior year's quarters have been reclassified to conform with
the 1997 presentation.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended March
31, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain items in the statements of operations
expressed as (i) percentages of net sales for the quarter indicated and (ii)
percentage changes from the prior year.
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Percent
Quarter End Inc(Dec)
---------------------- ---------
June 30, July 2, 1996 over
1996 1995 1995
--------- --------- ---------
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Net sales ..................................... 100.0% 100.0% 53.8%
Cost of sales ................................. 63.7 56.4 73.6
--------- --------- ---------
Gross profit .................................. 36.3 43.6 28.2
Operating expenses ............................ 29.5 45.0 0.9
General and admin. expenses.................... 9.5 14.4 1.8
--------- --------- ---------
Operating income (loss) ....................... (2.7) (15.9) (73.5)
Interest expense............................... - (0.1) -
Interest income ............................... 0.2 0.2 29.6
--------- --------- ---------
Net income (loss) before taxes ................ (2.6) (15.7) (74.6)
Income tax provision (benefit)................. (1.0) (5.8) (74.6)
--------- --------- ---------
Net income (loss).............................. (1.6)% (9.9)% (74.5)%
========= ========= =========
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Comparison of First Quarter Fiscal 1997 to First Quarter Fiscal 1996
Net sales for the quarter increased from $12,261,000 in 1996 to $18,862,000 in
1997, an increase of 53.8%. The Company operated 173 stores at the end of the
first quarter this year compared to 181 stores at the end of the same period
prior year.
Comparable store sales for the quarter increased 63% from the same period in the
prior year. The large sales increase is primarily due to strong consumer demand
for Sony PlayStation and Sega Saturn products spurred by manufacturers' price
reductions taken in May. The Company anticipates increased market penetration of
these next generation systems throughout the year, although it does not expect
to sustain the high level of comparable store sales growth achieved in the first
quarter.
Cost of sales for the quarter increased from $6,919,000 in 1996 to $12,012,000
in 1997, an increase of 73.6%. The dollar increase in cost of sales is primarily
due to the strong growth in sales. Cost of sales as a percentage of net sales
increased from 56.4% in 1996 to 63.7% in 1997. This increase is primarily due to
sales mix for the quarter reflecting higher sales volume of new Sony PlayStation
and Sega Saturn systems, which are sold at a lower gross margin percentage than
that of new software, accessories and previously played product.
Operating expenses for the quarter increased from $5,521,000 in 1996 to
$5,569,000 in 1997, an increase of 0.9%. Operating expenses decreased as a
percentage of net sales from 45.0% in 1996 to 29.5% in 1997, as expenses
increased only nominally while net sales increased by 53.8%.
General and administrative expenses for the quarter increased from $1,766,000 in
1996 to $1,797,000 in 1997, an increase of 1.8%. General and administrative
expenses decreased as a percentage of net sales from 14.4% in 1996 to 9.5% in
1997, as expenses increased only nominally while net sales increased by 53.8%.
Operating loss for the quarter decreased from $1,945,000 in 1996 to $516,000 in
1997, a decrease of 73.5% and also decreased as a percent of net sales from
15.9% to 2.7%.
Interest income for the quarter increased from $27,000 in 1996 to $35,000 in
1997, an increase of 29.6%, primarily as the Company maintained a higher level
of cash and marketable securities.
The Company incurred a net loss before income taxes for the quarter of $490,000
compared to a net loss before income taxes of $1,927,000 in the same period last
year, a decrease of 74.6%. Net loss before income taxes decreased as a
percentage of net sales from 15.7% in 1996 to 2.6% in 1997.
The Company recorded an income tax benefit for the quarter of $181,000 compared
to a benefit of $713,000 for the same period prior year. The Company anticipates
offsetting this tax benefit with tax expense in the second half of the year.
As a result of the above factors, the Company incurred a net loss for the
quarter of $309,000 compared to a net loss of $1,214,000 for the same period
prior year, a decrease of 74.5%. Net loss as a percentage of net sales decreased
from 9.9% in 1996 to 1.6% in 1997.
Seasonality and Quarterly Functions
The Company's business is seasonal with a majority of net sales generated in the
third and fourth fiscal quarters, which include the holiday selling season. In
addition to sales seasonality, the Company's quarterly results are also impacted
by new product introductions and by the number and timing of new store openings.
Because of the seasonality of the Company's business and the factors mentioned
above, results for any quarter are not necessarily indicative of the results
that may be achieved for a full fiscal year. The following table sets forth net
sales by quarter and the number of stores operating at each quarter end for the
past nine fiscal quarters:
Net Sales (in thousands) Number of Stores Open at Quarter End
- -------------------------------------- ------------------------------------
Fiscal Fiscal
Quarter 1997 1996 1995 Quarter 1997 1996 1995
- ------- ---- ---- ---- ------- ---- ---- ----
First $18,862 $12,261 $10,072 First 173 181 125
Second -- 15,335 15,130 Second -- 178 154
Third -- 31,897 36,389 Third -- 182 181
Fourth -- 21,889 18,774 Fourth -- 173 182
Liquidity and Capital Resources
The Company's primary ongoing financing requirements are for new store expansion
and inventory. On an interim basis, the Company's financing requirements are
also impacted by quarterly operating results and seasonal fluctuations in
inventory levels.
During the three months ended June 30, 1996, the Company used $1,570,000 of cash
in operating activities, primarily for the increase in inventory, and used
$35,000 in cash in investing activities. For the three months ended July 2,
1995, the Company generated $958,000 of cash from operating activities and used
$143,000 of cash in investing activities.
Subsequent to quarter end, the Company renewed and increased its revolving
credit facility to $3,000,000, seasonally increasing to $10,000,000. The
interest rate on outstanding borrowings under the facility (8.5% at June 30,
1996) is equal to the bank's reference rate plus one quarter of one percent.
This facility is collateralized by substantially all inventory, accounts
receivable, equipment and general intangibles of the Company. The facility
requires the Company to maintain certain financial ratios and achieve certain
operating results. The Company currently has no borrowings under this facility.
During fiscal 1997, the Company plans to incur capital expenditures of up to
$2,000,000 for new store openings and other related store expenditures,
corporate information systems and general corporate expenditures.
The Company believes that cash from operations and funds available under its
revolving credit facility will provide sufficient funds for financing planned
store openings, working capital needs and other capital expenditures for at
least 12 months.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its Chief Executive Officer have been named as defendants in a
civil lawsuit filed on August 17, 1995, pending in the United States District
Court, District of Minnesota, entitled Christopher Cannon v. Funco Inc. and
David R. Pomije. This is a putative class action in which the named plaintiff in
the Class Action Complaint purports to represent a class of all purchasers of
the Company's common stock during the putative class period of May 18, 1994
through December 15, 1994.
The Complaint alleges the Company's share price was artificially inflated and
asserts various claims under the Securities and Exchange Act of 1934, as
amended, and state common law. Plaintiff seeks damages plus costs and attorney's
fees. The Company and its Chief Executive Officer believe that the claim is
entirely without merit, deny liability and intend to defend the litigation
vigorously. On September 7, 1995, the Company and its Chief Executive Officer
filed a motion to dismiss the Class Action Complaint in its entirety. A hearing
on this motion was held on March 1, 1996. The Company is awaiting the judge's
decision on the motion.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
(10.1a) Amendment to Credit Agreement effective June 30, 1996
by and between the Registrant and Marquette Capital
Bank, including Revolving Credit Note and Security
Agreement. This exhibit is being omitted pursuant to
a confidential treatment application.
(27) Financial Data Schedule
(b) No report on Form 8-K was filed by the registrant during the
quarter ended June 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Funco, Inc.
(Registrant)
Date: August 14, 1996 By: /s/ David R. Pomije
------------------------------------
David R. Pomije
Chief Executive Officer
By: /s/ Robert M. Hiben
------------------------------------
Robert M. Hiben
Chief Financial Officer
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-30-1997
<PERIOD-END> JUN-30-1996
<CASH> 4,178
<SECURITIES> 0
<RECEIVABLES> 580
<ALLOWANCES> (17)
<INVENTORY> 12,223
<CURRENT-ASSETS> 18,472
<PP&E> 15,411
<DEPRECIATION> (8,568)
<TOTAL-ASSETS> 25,469
<CURRENT-LIABILITIES> 7,589
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 17,721
<TOTAL-LIABILITY-AND-EQUITY> 25,469
<SALES> 18,862
<TOTAL-REVENUES> 18,862
<CGS> 12,012
<TOTAL-COSTS> 12,012
<OTHER-EXPENSES> 7,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (490)
<INCOME-TAX> (181)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (309)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
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