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 28, 1998
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 July 27, 1998, the registrant had 6,222,107 outstanding shares of common
stock, $ .01 par value.
<PAGE>
FUNCO, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Quarter ended June 28, 1998
and June 29, 1997.............................................. 3
Consolidated Balance Sheets - June 28, 1998 and March 29, 1998... 4
Consolidated Statements of Cash Flows - Three months ended
June 28, 1998 and June 29, 1997 ............................... 5
Notes to Consolidated Financial Statements ...................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ...... 10
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings................................................ 10
ITEM 6. Exhibits and Reports on Form 8-K ................................ 10
SIGNATURES ................................................................ 11
- ----------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FUNCO, INC.
Consolidated Statements of Income
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------
June 28, June 29,
1998 1997
------------ ------------
<S> <C> <C>
Net sales ................................... $ 32,894 $ 24,001
Cost of sales ............................... 21,264 14,589
------------ ------------
Gross profit ............................ 11,630 9,412
Operating expenses .......................... 8,402 6,358
General and administrative expenses ......... 2,514 2,108
------------ ------------
Operating income ........................ 714 946
Interest income ............................. 120 79
------------ ------------
Net income before income taxes .......... 834 1,025
Income tax provision ........................ 334 390
------------ ------------
Net income .............................. $ 500 $ 635
============ ============
Basic Net Income Per Share:
- ---------------------------
Basic net income per share .................. $ 0.08 $ 0.10
Weighted average number of common shares .... 6,195,452 6,068,039
Diluted Net Income Per Share:
- -----------------------------
Diluted net income per share ................ $ 0.08 $ 0.10
Weighted average number of common
and common equivalent shares ............ 6,549,895 6,488,590
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
FUNCO, INC.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
June 28, March 29,
1998 1998
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents .................... $ 3,270 $ 9,295
Short-term investment ........................ 3,789 1,460
Accounts receivable .......................... 1,044 2,127
Inventories .................................. 27,289 21,487
Prepaid expenses ............................. 2,359 1,175
Current deferred tax asset ................... 603 603
----------- -----------
Total current assets .................. 38,354 36,147
Net property & equipment ........................ 7,764 8,201
Long-term deferred tax asset .................... 1,122 1,122
Other assets .................................... 128 156
----------- -----------
Total assets .................................... $ 47,368 $ 45,626
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable ............................. $ 8,585 $ 4,834
Accrued liabilities .......................... 3,832 6,219
Deferred revenue ............................. 696 892
----------- -----------
Total current liabilities ............. 13,113 11,945
Accrued rent .................................... 156 156
Shareholders' Equity
Common stock (issued: 6,219,250 and 6,184,477) 62 62
Additional paid-in capital ................... 19,708 19,634
Retained earnings ............................ 14,329 13,829
----------- -----------
Total shareholders' equity ............ 34,099 33,525
----------- -----------
Total liabilities and shareholders' equity ...... $ 47,368 $ 45,626
=========== ===========
</TABLE>
Note: The balance sheet at March 29, 1998 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.
<PAGE>
FUNCO, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
June 28, June 29,
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities
Net income .......................................................... $ 500 $ 635
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ..................................... 839 782
Net loss on disposal of property and equipment .................... 6 8
Changes in operating assets and liabilities:
Accounts receivable ............................................. 1,083 210
Inventories ..................................................... (5,802) (3,215)
Prepaid expenses ................................................ (1,184) 61
Accounts payable ................................................ 3,751 2,123
Accrued liabilities ............................................. (2,387) (270)
Deferred revenue ................................................ (196) (160)
----------- -----------
Net cash provided by (used in) operating activities ........... (3,390) 174
Investing Activities
Additions of property and equipment ................................. (380) (493)
Increase in other assets ............................................ -- (26)
Purchase of short-term investments .................................. (2,329) --
----------- -----------
Net cash used in investing activities ........................... (2,709) (519)
Financing Activities
Payments of obligations under capital leases ........................ -- (20)
Net proceeds from issuance of common stock .......................... 74 118
----------- -----------
Net cash provided by financing activities ....................... 74 98
Decrease in cash and cash equivalents .................................. (6,025) (247)
Cash and cash equivalents at beginning of period ....................... 9,295 8,408
----------- -----------
Cash and cash equivalents at end of period ............................. $ 3,270 $ 8,161
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company
Funco, Inc. (the Company) was incorporated in March 1988 and is a leading
national specialty retailer of 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. The store
strategy is complemented by the Company's mail order operation, the FUNCOLAND
SUPERSTORE Web site and publication of GAME INFORMER(R), a video game magazine.
The Company operated 252 retail locations at June 28, 1998 compared to 193
retail locations at June 29, 1997.
Note 2. Fiscal Year
The Company's fiscal year ends on a Sunday on or near March 31st which completes
a 52 or 53 week reporting period. All quarters for fiscal 1999 and 1998 consist
of 13 weeks with the following period ending dates:
Ending Date
-----------------------------------------
1999 1998
------------------- ------------------
First June 28, 1998 June 29, 1997
Second September 27, 1998 September 28, 1997
Third December 27, 1998 December 28, 1997
Fourth March 28, 1999 March 29, 1998
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 28, 1998, are not necessarily
indicative of the results that may be expected for the year ending March 28,
1999 due to the seasonal nature of the Company's business.
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
29, 1998.
<PAGE>
Note 4. Net Income per Share
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------
June 28, June 28,
1998 1997
----------- -----------
<S> <C> <C>
Numerator:
Net income ................................... $ 500,000 $ 635,000
=========== ===========
Denominator:
Denominator for basic net income per share -
weighted average shares ................... 6,195,452 6,068,039
Dilutive securities:
Employee stock options .................... 354,444 420,551
----------- -----------
Denominator for diluted net income per share -
adjusted weighted average shares .......... 6,549,896 6,488,590
=========== ===========
Basic net income per share ...................... $ 0.08 $ 0.10
=========== ===========
Diluted net income per share .................... $ 0.08 $ 0.10
=========== ===========
</TABLE>
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 income
expressed as (i) percentage of net sales for the quarter indicated and (ii)
percentage changes from the comparable period prior year.
<TABLE>
<CAPTION>
Percent
Quarter Ended Inc (Dec)
----------------------- ---------
June 28, June 29, 1999 over
1998 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Net sales ................. 100.0% 100.0% 37.1%
Cost of sales ............. 64.6 60.8 45.8
-------- --------
Gross profit .............. 35.4 39.2 23.6
Operating expenses ........ 25.5 26.5 32.1
General and admin. expenses 7.6 8.8 19.3
-------- --------
Operating income .......... 2.2 3.9 (24.5)
Interest income ........... 0.4 0.3 51.9
-------- --------
Net income before taxes ... 2.5 4.3 (18.6)
Income tax provision ...... 1.0 1.6 (14.4)
-------- --------
Net income ................ 1.5% 2.6% (21.3)%
======== ========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of First Quarter Fiscal 1999 to First Quarter Fiscal 1998
Net sales for the quarter increased from $24,001,000 in 1998 to $32,894,000 in
1999, an increase of 37.1%. The Company operated a total of 252 locations at the
end of the quarter this year compared to 193 locations at the end of the same
period prior year. Comparable store sales for the quarter increased 14%. Strong
sales are attributed to operating a greater number of stores compared to prior
year and the continued growth of Sony PlayStation and Nintendo 64 product
categories.
Cost of sales for the quarter increased from $14,589,000 in 1998 to $21,264,000
in 1999, an increase of 45.8%. 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 60.8% in 1998 to 64.6% in 1999. This increase is primarily due to
sales mix for the quarter reflecting an increased proportion of new product
sales, which are sold with higher cost percentages than previously played
product.
Operating expenses for the quarter increased from $6,358,000 in 1998 to
$8,402,000 in 1999, an increase of 32.1%. This increase is primarily due to
higher store payroll and occupancy expense which occurred as the Company
operated a greater number of stores than in the same period prior year.
Operating expenses decreased favorably as a percentage of net sales from 26.5%
in 1998 to 25.5% in 1999, due to leveraging as net sales increased by 37.1%.
General and administrative expenses for the quarter increased from $2,108,000 in
1998 to $2,514,000 in 1999, an increase of 19.3%. This primarily reflects
expense associated with corporate staffing necessary to support the increased
number of store locations. General and administrative expenses decreased
favorably as a percentage of net sales from 8.8% in 1998 to 7.6% in 1999, due to
leveraging as net sales increased by 37.1%.
The Company generated operating income for the quarter of $714,000 compared to
$946,000 in the same period prior year, a decrease of 24.5%.
Interest income for the quarter increased from $79,000 in 1998 to $120,000 in
1999, an increase of 51.9%, primarily as the Company maintained a higher level
of cash and cash equivalents and short-term investments.
The Company generated net income before income taxes for the quarter of $834,000
compared to net income before income taxes of $1,025,000 in the same period
prior year, a decrease of 18.6%. As a result the Company recorded an income tax
expense for the quarter of $334,000 compared to an income tax expense of
$390,000 for the same period prior year.
Due to the above factors, the Company generated net income for the quarter of
$500,000, or $0.08 per share, compared to net income of $635,000, or $0.10 per
share, for the same period prior year.
Seasonality and Quarterly Fluctuations
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 factors including new product introductions and the number and timing of new
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
store openings. Growth of the store base may obscure the impact of seasonal
influences. 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 quarters:
<TABLE>
<CAPTION>
Net Sales (in thousands) Number of Stores Open at Quarter End
- --------------------------------------------- --------------------------------------------
Fiscal Fiscal
Quarter 1999 1998 1997 Quarter 1999 1998 1997
- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
First $32,894 $24,001 $18,862 First 252 193 173
Second 26,760 20,415 Second 215 176
Third 67,036 46,461 Third 249 188
Fourth 45,519 34,817 Fourth 250 188
</TABLE>
Liquidity and Capital Resources
The Company's primary ongoing financing requirements are for new store capital
expenditures 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 28, 1998, the Company used $3,390,000 of cash
for operating activities primarily for the purchase of inventory, and used
$2,709,000 of cash in investing activities, primarily for the purchase of
short-term investments. For the three months ended June 29, 1997, the Company
generated $174,000 of cash from operating activities and used $519,000 of cash
in investing activities.
Subsequent to quarter end, the Company amended and renewed its revolving credit
facility. Effective July 1, 1998, the Company has a $3,000,000 unsecured
revolving credit facility with a commercial bank, priced at LIBOR plus 250 basis
points, seasonally increasing to $10,000,000. The interest rate on borrowings
under the facility in place on June 28, 1998, was 8.50%, equal to the bank's
prime rate. Had the new facility been in place on June 28, 1998, the interest
rate would have been 8.16%. 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 1999, the Company plans to incur capital expenditures of up to
$6,500,000, of which $380,000 has been incurred to date, for new store openings,
other store expenditures, enhancements to store and corporate information
systems and general corporate purposes. The Company incurred capital
expenditures of $5,380,000 in fiscal 1998.
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.
Forward Looking Statements
Forward looking statements contained in this document which directly or
indirectly relate to future sales prospects and expansion plans are subject to
uncertainties from factors including growth of the industry, competitive
environment, product availability, success of the Company's existing operations,
availability of
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
new store sites and the Company's ability to finance new store expansion. For
further discussion of forward looking statements and factors which can impact
the Company's operating results, please refer to the Company's report on Form
10-K for the year ended March 29, 1998, and other Company filings with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its Chief Executive Officer were originally named as defendants
in a civil lawsuit filed on August 17, 1995 in the United States District Court,
District of Minnesota, entitled Christopher Cannon v. Funco, Inc. and David R.
Pomije. This was a putative class action in which the named plaintiff in the
Class Action Complaint purported 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. 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. The
plaintiff filed an Amended Complaint on January 6, 1997.
The Amended Complaint is a similarly styled class action suit and alleges the
Company's share price was artificially inflated, asserting various claims under
the Securities Exchange Act of 1934, as amended. Plaintiff seeks damages in an
unspecified amount plus costs and attorney's fees. The Company and its Chief
Executive Officer filed a motion to dismiss the Amended Class Action Complaint
in its entirety.
The parties have reached an agreement-in-principle to settle this lawsuit,
subject to approval by the Court and members of the class. The proposed
settlement will not have a material impact on the Company including its results
of operations, financial condition and liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
27 Financial Data Schedule
(b) No report on Form 8-K was filed by the registrant during the
quarter ended June 28, 1998.
<PAGE>
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: July 28, 1998 By: /s/ David R. Pomije
----------------------------------
David R. Pomije
Chief Executive Officer
By: /s/ Robert M. Hiben
----------------------------------
Robert M. Hiben
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000889664
<NAME> FUNCO INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> JUN-28-1998
<CASH> 3,270
<SECURITIES> 0
<RECEIVABLES> 1,073
<ALLOWANCES> 29
<INVENTORY> 27,289
<CURRENT-ASSETS> 38,354
<PP&E> 21,651
<DEPRECIATION> 13,887
<TOTAL-ASSETS> 47,368
<CURRENT-LIABILITIES> 13,113
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 34,037
<TOTAL-LIABILITY-AND-EQUITY> 47,368
<SALES> 32,894
<TOTAL-REVENUES> 32,894
<CGS> 21,264
<TOTAL-COSTS> 21,264
<OTHER-EXPENSES> 10,916
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 834
<INCOME-TAX> 334
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 500
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
