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 September 29, 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 October 18, 1996, the registrant had 5,903,070 outstanding shares of common
stock, $ .01 par value.
FUNCO, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations - Quarter and six
months ended September 29, 1996 and October 1, 1995........3
Consolidated Balance Sheets - September 29, 1996 and
March 31, 1996.............................................4
Consolidated Statements of Cash Flows - Six months ended
September 29, 1996 and October 1, 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...............................................10
ITEM 6. Exhibits and Reports on Form 8-K ...............................11
SIGNATURES .................................................................12
- ----------
Exhibit (11) Statement Re: Computation of Per Share Earnings...............13
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FUNCO, INC.
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Quarter Ended Six Months Ended
------------------------------ ------------------------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales .............................. $ 20,415 $ 15,335 $ 39,277 $ 27,596
Cost of sales .......................... 12,543 8,826 24,555 15,745
----------- ----------- ----------- -----------
Gross profit ........................ 7,872 6,509 14,722 11,851
Operating expenses ..................... 5,943 5,573 11,512 11,094
General and administrative expenses .... 1,897 1,855 3,694 3,621
----------- ----------- ----------- -----------
Operating income (loss) ............. 32 (919) (484) (2,864)
Interest expense ....................... (2) (5) (11) (14)
Interest income ........................ 47 26 82 53
----------- ----------- ----------- -----------
Net income (loss) before income taxes 77 (898) (413) (2,825)
Income tax provision (benefit) ......... 20 (57) (161) (770)
----------- ----------- ----------- -----------
Net income (loss) ................... $ 57 $ (841) $ (252) $ (2,055)
=========== =========== =========== ===========
Net income (loss) per share ............ $ 0.01 $ (0.14) $ (0.04) $ (0.35)
Weighted average number of common and
common equivalent shares ............... 6,219,458 5,868,354 5,893,852 5,850,710
SEE ACCOMPANYING NOTES.
</TABLE>
<TABLE>
<CAPTION>
FUNCO, INC.
Consolidated Balance Sheets
(in thousands, except share data)
September 29, March 31,
1996 1996
------------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ............................................. $ 2,298 $ 5,783
Accounts receivable ................................................... 659 621
Inventories ........................................................... 15,732 9,775
Prepaid expenses ...................................................... 1,508 1,668
-------- --------
Total current assets ............................................... 20,197 17,847
Property & equipment, net of accumulated depreciation & amortization 6,530 7,662
Other assets, net of accumulated amortization ........................... 166 159
-------- --------
Total assets ............................................................ $ 26,893 $ 25,668
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ...................................................... $ 4,823 $ 3,195
Accrued liabilities ................................................... 3,521 3,634
Current portion of long-term debt and capital lease obligations ....... 61 31
Deferred revenue ...................................................... 549 622
-------- --------
Total current liabilities .......................................... 8,954 7,482
Capital lease obligations ............................................... -- 3
Accrued rent ............................................................ 87 112
Shareholders' Equity
Common stock (issued and outstanding: 5,900,034 and 5,877,887) ........ 59 59
Additional paid-in capital ............................................ 17,836 17,803
Retained earnings (deficit) ........................................... (43) 209
-------- --------
Total shareholders' equity ......................................... 17,852 18,071
-------- --------
Total liabilities and shareholders' equity .............................. $ 26,893 $ 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.
</TABLE>
<TABLE>
<CAPTION>
FUNCO, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
--------------------------
September 29, October 1,
1996 1995
------------- ----------
<S> <C> <C>
Operating Activities
Net loss ...................................................... $ (252) $(2,055)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................... 1,671 1,904
Net loss on disposal of property and equipment .............. 40 --
Changes in operating assets and liabilities:
Accounts receivable ....................................... (38) 398
Inventories ............................................... (5,957) (2,681)
Prepaid expenses .......................................... 160 (85)
Accounts payable .......................................... 1,628 2,709
Accrued liabilities ....................................... (138) (726)
Deferred revenue .......................................... (73) (87)
------- -------
Net cash used in operating activities ................... (2,959) (623)
Investing Activities
Additions to property and equipment ........................... (466) (314)
Increase in other assets ...................................... (54) (7)
------- -------
Net cash used in investing activities ..................... (520) (321)
Financing Activities
Payments of obligations under capital leases .................. (39) (143)
Net proceeds from issuance of common stock .................... 33 55
------- -------
Net cash used in financing activities ..................... (6) (88)
------- -------
Decrease in cash and cash equivalents ............................ (3,485) (1,032)
Cash and cash equivalents at beginning of period ................. 5,783 1,471
======= =======
Cash and cash equivalents at end of period ....................... $ 2,298 $ 439
======= =======
SEE ACCOMPANYING NOTES.
</TABLE>
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 176 retail locations at September 29, 1996 compared to 178 retail
locations at October 1, 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 September 29, 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) percentage of net sales for the quarter indicated and (ii)
percentage changes from the prior year.
<TABLE>
<CAPTION>
Percent Percent
Quarter Ended Inc (Dec) Six Months Ended Inc (Dec)
--------------------------- --------- -------------------------- ---------
September 29, October 1, 1997 over September 29, October 1, 1997 over
1996 1995 1996 1996 1995 1996
------------- ---------- --------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales ...................... 100.0% 100.0% 33.1% 100.0% 100.0% 42.3%
Cost of sales .................. 61.4 57.6 42.1 62.5 57.1 56.0
----- ----- ---- ----- ----- ----
Gross profit ................... 38.6 42.4 20.9 37.5 42.9 24.2
Operating expenses ............. 29.1 36.3 6.6 29.3 40.2 3.8
General and admin. expenses .... 9.3 12.1 2.3 9.4 13.1 2.0
----- ----- ---- ----- ----- ----
Operating income (loss) ........ 0.2 (6.0) N/A (1.2) (10.4) (83.1)
Interest expense ............... -- -- (60.0) -- (0.1) (21.4)
Interest income ................ 0.2 0.2 80.8 0.2 0.2 54.7
----- ----- ---- ----- ----- ----
Net income (loss) before taxes.. 0.4 (5.9) N/A (1.1) (10.2) (85.4)
Income tax provision (benefit).. 0.1 (0.4) N/A (0.4) (2.8) (79.1)
----- ----- ---- ----- ----- ----
Net income (loss) .............. 0.3% (5.5)% N/A (0.6)% (7.4)% (87.7)%
===== ===== ==== ===== ===== ====
</TABLE>
Comparison of Second Quarter Fiscal 1997 to Second Quarter Fiscal 1996
Net sales for the quarter increased from $15,335,000 in 1996 to $20,415,000 in
1997, an increase of 33.1%. The Company operated 176 stores at the end of the
second quarter this year compared to 178 stores at the end of the same period
prior year. During the quarter, the Company opened 5 new stores and closed 2 of
its lower performing stores. Costs associated with these store closings were
reserved for in fiscal 1996.
Comparable store sales for the quarter increased 34% 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. The Company anticipates increased
market penetration of these next generation systems and of the newly introduced
Nintendo 64 throughout the year, although it does not expect to sustain the high
level of comparable store sales growth achieved in the second quarter.
Cost of sales for the quarter increased from $8,826,000 in 1996 to $12,543,000
in 1997, an increase of 42.1%. 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 57.6% in 1996 to 61.4% in 1997. This increase is primarily due to
sales mix for the quarter reflecting higher sales volume of the new next
generation systems, which are sold at lower gross margin percentages than that
of new software, accessories and previously played product.
Operating expenses for the quarter increased from $5,573,000 in 1996 to
$5,943,000 in 1997, an increase of 6.6% . This increase is primarily due to
higher store payroll expense related to the quarter's increased sales volume and
media expenditures associated with the FUNCOLAND NATIONAL VIDEO GAME
CHAMPIONSHIPS tournament held in August. Operating expenses decreased as a
percentage of net sales from 36.3% in 1996 to 29.1% in 1997, as expenses
increased only nominally while net sales increased by 33.1%.
General and administrative expenses for the quarter increased from $1,855,000 in
1996 to $1,897,000 in 1997, an increase of 2.3%. General and administrative
expenses decreased as a percentage of net sales from 12.1% in 1996 to 9.3% in
1997, as expenses increased only nominally while net sales increased by 33.1%.
The Company generated operating income for the quarter of $32,000 compared to an
operating loss of $919,000 in the same period last year.
Interest income for the quarter increased from $26,000 in 1996 to $47,000 in
1997, an increase of 80.8%, primarily as the Company maintained a higher level
of cash and cash equivalents.
The Company generated net income before income taxes for the quarter of $77,000
compared to a net loss before income taxes of $898,000 in the same period last
year.
The Company recorded an income tax expense for the quarter of $20,000 compared
to an income tax benefit of $57,000 for the same period prior year.
As a result of the above factors, the Company generated net income for the
quarter of $57,000 compared to a net loss of $841,000 for the same period prior
year.
Comparison of Six Month Period Fiscal 1997 to Six Month Period Fiscal 1996
Net sales for the six month period increased from $27,596,000 in 1996 to
$39,277,000 in 1997, an increase of 42.3%. The Company operated 176 stores at
the end of the six month period this year compared to 178 stores at the end of
the same period prior year. Through the six month period fiscal 1997 the Company
has opened 6 new stores and closed 3 of its lower performing stores.
Comparable store sales for the six month period increased 47% 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. The Company
anticipates increased market penetration of these next generation systems and of
the newly introduced Nintendo 64 throughout the year, although it does not
expect to sustain the high level of comparable store sales growth achieved in
the first half of the fiscal year.
Cost of sales for the six month period increased from $15,745,000 in 1996 to
$24,555,000 in 1997, an increase of 56.0%. 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 57.1% in 1996 to 62.5% in 1997. This increase is
primarily due to sales mix for the six month period reflecting higher sales
volume of the new next generation hardware systems, which are sold at lower
gross margin percentages than that of new software, accessories and previously
played product.
Operating expenses for the six month period increased from $11,094,000 in 1996
to $11,512,000 in 1997, an increase of 3.8%. This increase is primarily due to
higher store payroll expense related to the six month period's increased sales
volume and media expenditures associated with the FuncoLand National Video Game
Championships held in August. Operating expenses decreased as a percentage of
net sales from 40.2% in 1996 to 29.3% in 1997, as expenses increased only
nominally while net sales increased by 42.3%.
General and administrative expenses for the six month period increased from
$3,621,000 in 1996 to $3,694,000 in 1997, an increase of 2.0%. General and
administrative expenses decreased as a percentage of net sales from 13.1% in
1996 to 9.4% in 1997, as expenses increased only nominally while net sales
increased by 42.3%.
Operating loss for the six month period decreased from $2,864,000 in 1996 to
$484,000 in 1997, a decrease of 83.1% and also decreased as a percent of net
sales from 10.4% to 1.2%.
Interest income for the six month period increased from $53,000 in 1996 to
$82,000 in 1997, an increase of 54.7%, primarily as the Company maintained a
higher level of cash and cash equivalents.
The Company incurred a net loss before income taxes for the six month period of
$413,000 compared to a net loss before income taxes of $2,825,000 in the same
period last year, a decrease of 85.4%. Net loss before income taxes decreased as
a percentage of net sales from 10.2% in 1996 to 1.1% in 1997.
The Company recorded an income tax benefit for the six month period of $161,000
compared to an income tax benefit of $770,000 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 six
month period of $252,000 compared to a net loss of $2,055,000 for the same
period prior year, a decrease of 87.7%. Net loss as a percentage of net sales
decreased from 7.4% in 1996 to 0.6% 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 significantly reduced losses
for the six month period of fiscal 1997 and achievement of second quarter
profitability for the first time in Company history may not be indicative of
results attainable in those periods in future years due primarily to sales
seasonality and timing of new product introductions. The following table sets
forth net sales by quarter and the number of stores operating at each quarter
end for the past ten fiscal quarters:
<TABLE>
<CAPTION>
Net Sales (in thousands) Number of Stores Open at Quarter End
- ------------------------------------------- -------------------------------------
Fiscal Fiscal
Quarter 1997 1996 1995 Quarter 1997 1996 1995
- ------- ------- ------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
First $18,862 $12,261 $10,072 First 173 181 125
Second 20,415 15,335 15,130 Second 176 178 154
Third -- 31,897 36,389 Third -- 182 181
Fourth -- 21,889 18,774 Fourth -- 173 182
</TABLE>
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 six months ended September 29, 1996, the Company used $2,959,000 of
cash in operating activities, primarily for increased levels of new product
inventory, partially offset by an increase in accounts payable, and used
$520,000 of cash in investing activities, including $466,000 for capital
expenditures. For the six months ended October 1, 1995, the Company used
$623,000 of cash in operating activities and $321,000 of cash in investing
activities.
The Company has a $10,000,000 credit facility available representing the
seasonally adjusted increase to its $3,000,000 revolving credit facility with a
commercial bank. The interest rate on outstanding borrowings under the facility
(8.50% at September 29, 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 had no borrowing under this
facility through the first six months of the year, and has had no borrowings in
the third quarter through the date of this report.
During fiscal 1997, the Company plans to incur capital expenditures of up to
$2,000,000 of which $466,000 has been incurred to date for new store openings
and other related store expenditures, corporate information systems and general
corporate expenditures. The Company incurred capital expenditures of $478,000 in
fiscal 1996.
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. The Company and its Chief Executive Officer filed a motion to
dismiss the Class Action Complaint in its entirety. On October 18, 1996, the
court dismissed the state common law claims with prejudice and dismissed the
federal securities claims without prejudice, giving the plaintiff leave to file
an amended complaint within twenty days.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
(11) Statements Re: Computation of Per Share Earnings
(b) No report on Form 8-K was filed by the registrant during the
quarter ended September 29, 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: October 25, 1996 By: /s/ David R. Pomije
------------------------------------
David R. Pomije
Chief Executive Officer
By: /s/ Robert M. Hiben
------------------------------------
Robert M. Hiben
Chief Financial Officer
Exhibit (11)
FUNCO, INC.
Statements Re: Computation of Per Share Earnings
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------------- ----------------------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding .... 5,898 5,868 5,894 5,851
Weighted average number of common stock
equivalents:
Stock options ............................ 291 -- -- --
Warrants ................................. 30 -- -- --
------- ------- ------- -------
Adjusted common equivalent shares outstanding.. 6,219 5,868 5,894 5,851
======= ======= ======= =======
Net income (loss) ............................. $ 57 $ (841) $ (252) $(2,055)
======= ======= ======= =======
Net income (loss) per common share ............ $ 0.01 $ (0.14) $ (0.04) $ (0.35)
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 2,298
<SECURITIES> 0
<RECEIVABLES> 679
<ALLOWANCES> (20)
<INVENTORY> 15,732
<CURRENT-ASSETS> 20,197
<PP&E> 15,785
<DEPRECIATION> (9,255)
<TOTAL-ASSETS> 26,893
<CURRENT-LIABILITIES> 8,954
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 17,793
<TOTAL-LIABILITY-AND-EQUITY> 17,852
<SALES> 20,415
<TOTAL-REVENUES> 20,415
<CGS> 12,543
<TOTAL-COSTS> 12,543
<OTHER-EXPENSES> 7,840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 77
<INCOME-TAX> 20
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
