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 January 2, 2000
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 January 28, 2000, the registrant had 6,014,069 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 and nine
months ended January 2, 2000 and December 27,
1998...................................................... 3
Consolidated Balance Sheets - January 2, 2000 and
March 28, 1999............................................ 4
Consolidated Statements of Cash Flows - Nine months
ended January 2, 2000 and December 27, 1998............... 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..... 11
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................... 11
SIGNATURES ............................................................... 12
2 of 12
<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 Nine Months Ended
--------------------------- ---------------------------
January 2, December 27, January 2, December 27,
2000 1998 2000 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales .............................. $ 102,701 $ 82,889 $ 197,872 $ 151,082
Cost of sales .......................... 73,212 58,049 138,212 102,350
----------- ----------- ----------- -----------
Gross profit ....................... 29,489 24,840 59,660 48,732
Operating expenses ..................... 18,502 13,020 40,710 30,341
General and administrative expenses .... 3,721 2,977 10,027 7,992
----------- ----------- ----------- -----------
Operating income ................... 7,266 8,843 8,923 10,399
Interest expense ....................... (40) (12) (40) (12)
Interest income ........................ 40 36 142 247
----------- ----------- ----------- -----------
Net income before income taxes ..... 7,266 8,867 9,025 10,634
Income tax provision ................... 2,856 3,472 3,545 4,179
----------- ----------- ----------- -----------
Net income ......................... $ 4,410 $ 5,395 $ 5,480 $ 6,455
=========== =========== =========== ===========
Basic Earnings Per Share:
- -------------------------
Basic net income per share ............. $ 0.74 $ 0.90 $ 0.92 $ 1.05
Weighted average number of common shares 5,982,410 5,980,275 5,958,118 6,126,635
Diluted Earnings Per Share:
- ---------------------------
Diluted net income per share ........... $ 0.70 $ 0.87 $ 0.87 $ 1.01
Weighted average number of common
and common equivalent shares ........ 6,308,005 6,232,506 6,308,548 6,420,311
</TABLE>
SEE ACCOMPANYING NOTES.
3 of 12
<PAGE>
FUNCO, INC.
Consolidated Balance Sheets
(in thousands, except share data)
January 2, March 28,
2000 1999
------- -------
(Unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents .................... $20,549 $ 8,550
Accounts receivable .......................... 1,615 2,020
Inventories .................................. 29,344 28,485
Prepaid expenses ............................. 3,184 2,948
Current deferred tax asset ................... 640 640
------- -------
Total current assets ...................... 55,332 42,643
Net property and equipment ..................... 16,396 11,334
Long-term deferred tax asset ................... 1,064 1,064
Other assets ................................... 62 99
------- -------
Total assets ................................... $72,854 $55,140
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ............................. $16,939 $ 9,831
Accrued liabilities .......................... 9,146 5,266
Deferred revenue ............................. 1,408 994
------- -------
Total current liabilities ................. 27,493 16,091
Accrued rent .................................... 303 213
Shareholders' Equity
Common stock (issued: 5,989,719 and 5,894,760) 60 59
Additional paid-in capital ................... 15,979 15,238
Retained earnings ............................ 29,019 23,539
------- -------
Total shareholders' equity ................ 45,058 38,836
------- -------
Total liabilities and shareholders' equity ...... $72,854 $55,140
======= =======
Note: The balance sheet at March 28, 1999 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.
4 of 12
<PAGE>
FUNCO, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
January 2, December 27,
2000 1998
---------- ------------
<S> <C> <C>
Operating Activities
Net income ................................................ $ 5,480 $ 6,455
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 3,542 2,589
Deferred tax asset ..................................... -- 44
Net loss on disposal of property and equipment ......... 60 72
Changes in operating assets and liabilities:
Accounts receivable ................................. 405 (2,663)
Inventories ......................................... (859) (8,380)
Prepaid expenses .................................... (236) (519)
Accounts payable .................................... 7,108 14,597
Accrued liabilities ................................. 4,198 5,535
Deferred revenue .................................... 186 134
-------- --------
Net cash provided by operating activities ........ 19,884 17,864
Investing Activities
Additions of property and equipment ....................... (8,657) (6,062)
Increase in other assets .................................. 30 (10)
Purchase of short-term investments ........................ -- (4,288)
Sales of short-term investments ........................... -- 5,748
-------- --------
Net cash used in investing activities ............... (8,627) (4,612)
Financing Activities
Payments for repurchase of common stock ................... -- (3,693)
Net proceeds from issuance of common stock ................ 742 721
-------- --------
Net cash provided by (used in) financing activities . 742 (2,972)
Increase in cash and cash equivalents ........................ 11,999 10,280
Cash and cash equivalents at beginning of period ............. 8,550 9,295
-------- --------
Cash and cash equivalents at end of period ................... $ 20,549 $ 19,575
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
5 of 12
<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(R) 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 401 retail locations at January 2, 2000, compared to 310
retail locations at December 27, 1998.
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. Fiscal 2000 is a 53-week reporting period with
the first quarter consisting of 14 weeks and all other quarters consisting of 13
weeks. Fiscal 1999 was a 52-week reporting period with each quarter consisting
of 13 weeks.
Ending Date
-----------------------------------------
2000 1999
----------------- -------------------
First July 4, 1999 June 28, 1998
Second October 3, 1999 September 27, 1998
Third January 2, 2000 December 27, 1998
Fourth April 2, 2000 March 28, 1999
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.
Due to the seasonal nature of the Company's business, the operating results for
the quarter ended January 2, 2000 are not necessarily indicative of the results
that may be expected for the fiscal year ending April 2, 2000.
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
28, 1999.
6 of 12
<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 Nine Months Ended
------------------------ ------------------------
January 2, December 27, January 2, December 27,
2000 1998 2000 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income ................................. $4,410,000 $5,395,000 $5,480,000 $6,455,000
========== ========== ========== ==========
Denominator:
Denominator for basic net income
per share - weighted average shares ...... 5,982,410 5,980,275 5,958,118 6,126,635
Dilutive securities:
Employee and nonemployee director stock
options .................................. 325,595 252,231 350,430 293,676
---------- ---------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares ......... 6,308,005 6,232,506 6,308,548 6,420,311
========== ========== ========== ==========
Basic earnings per share ...................... $ 0.74 $ 0.90 $ 0.92 $ 1.05
========== ========== ========== ==========
Diluted earnings per share .................... $ 0.70 $ 0.87 $ 0.87 $ 1.01
========== ========== ========== ==========
</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 periods indicated and (ii)
percentage changes from the comparable period prior year.
<TABLE>
<CAPTION>
Percent Percent
Quarter Ended Inc (Dec) Nine Months Ended Inc (Dec)
--------------------------- ------------ -------------------------- ------------
January 2, December 27, 2000 over January 2, December 27, 2000 over
2000 1998 1999 2000 1998 1999
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................. 100.0% 100.0% 23.9% 100.0% 100.0% 31.0%
Cost of sales ............. 71.3 70.0 26.1 69.8 67.7 35.0
------------- ------------ ------------ ------------
Gross profit .............. 28.7 30.0 18.7 30.2 32.3 22.4
Operating expenses ........ 18.0 15.7 42.1 20.6 20.1 34.2
General and admin. expenses 3.6 3.6 25.0 5.1 5.3 25.5
------------- ------------ ------------ ------------
Operating income .......... 7.1 10.7 (17.8) 4.5 6.9 (14.2)
Interest expense .......... -- -- 233.3 -- -- 233.3
Interest income ........... -- -- 11.1 0.1 0.2 (42.5)
------------- ------------ ------------ ------------
Net income before taxes ... 7.1 10.7 (18.1) 4.6 7.0 (15.1)
Income tax provision ...... 2.8 4.2 (17.7) 1.8 2.8 (15.2)
------------- ------------ ------------ ------------
Net income ................ 4.3% 6.5% (18.3)% 2.8% 4.3% (15.1)%
============= ============ ============ ============
</TABLE>
7 of 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Third Quarter Fiscal 2000 to Third Quarter Fiscal 1999
Net sales for the quarter increased from $82,889,000 in 1999 to $102,701,000 in
2000, an increase of 23.9%. The Company opened 48 new stores during the quarter
and operated a total of 401 locations at the end of the quarter this year
compared to 310 locations at the end of the same period prior year. Comparable
store sales for the quarter decreased 4%. The decline in comparable store sales
for the quarter occurred due to industry wide shortages of high demand products
such as Nintendo Game Boy Color systems and Pokemon Yellow games, as well as an
overall lack of "big hit" title releases for Nintendo 64 and Playstation game
consoles compared to last year. Price reductions on Playstation and Nintendo 64
hardware also adversely impacted sales comparisons. Sales were favorably
impacted by the strong performance of Sega Dreamcast.
Cost of sales for the quarter increased from $58,049,000 in 1999 to $73,212,000
in 2000, an increase of 26.1%. The dollar increase in cost of sales is primarily
due to the growth in sales. Cost of sales as a percentage of net sales for the
quarter increased from 70.0% in 1999 to 71.3% in 2000. New product comprised 66%
of sales for the quarter, consistent with prior year, however, sales mix within
new products reflected a shift from higher margin new games to lower margin new
systems.
Operating expenses for the quarter increased from $13,020,000 in 1999 to
$18,502,000 in 2000, an increase of 42.1%. 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 as a percentage of net sales increased from 15.7% in 1999 to
18.0% in 2000.
General and administrative expenses for the quarter increased from $2,977,000 in
1999 to $3,721,000 in 2000, an increase of 25.0%. This increase occurred to
support the store base which grew to 401 locations from 310 locations at the end
of the same period in the prior year. General and administrative expenses as a
percentage of net sales in 2000 remained constant with the prior year.
The Company generated operating income for the quarter of $7,266,000 compared to
operating income of $8,843,000 for the same period prior year, a decrease of
17.8%.
Interest income for the quarter increased from $36,000 in 1999 to $40,000 in
2000, an increase of 11.1%.
The Company generated net income before income taxes for the quarter of
$7,266,000 compared to net income before income taxes of $8,867,000 in the same
period prior year, a decrease of 18.1%. As a result, the Company recorded income
tax expense for the quarter of $2,856,000 compared to income tax expense of
$3,472,000 for the same period prior year.
Due to the above factors, the Company generated net income for the quarter of
$4,410,000, or $0.70 per share, compared to net income of $5,395,000, or $0.87
per share, for the same period prior year.
Comparison of Nine Month Period Fiscal 2000 to Nine Month Period Fiscal 1999
Net sales for the nine month period increased from $151,082,000 in 1999 to
$197,872,000 in 2000, an increase of 31.0%. The Company opened 90 new stores and
closed one store during the nine month period and operated a total of 401
locations at the end of the nine month period this year compared to 310
locations at the end of the same period prior year. Comparable store sales for
the nine month period
8 of 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
increased 5%. The 31.0% sales increase is primarily due to operating a greater
number of stores compared to prior year and due to strong sales of Sega
Dreamcast product since its September introduction.
Cost of sales for the nine month period increased from $102,350,000 in 1999 to
$138,212,000 in 2000, an increase of 35.0%. The dollar increase in cost of sales
is primarily due to growth in net sales. Cost of sales as a percentage of net
sales increased from 67.7% in 1999 to 69.8% in 2000. This increase is primarily
due to a shift in sales mix from previously played product to lower margin new
product which accounted for 65% of sales in the nine month period compared to
61% one year ago.
Operating expenses for the nine month period increased from $30,341,000 in 1999
to $40,710,000 in 2000, an increase of 34.2%. This increase is primarily due to
higher store payroll and occupancy expense which occurred both as the Company
operated a greater number of stores than in the same period prior year and also
to support the 5% increase in comparable store sales. Operating expenses as a
percentage of net sales increased from 20.1% in 1999 to 20.6% in 2000.
General and administrative expenses for the nine month period increased from
$7,992,000 in 1999 to $10,027,000 in 2000, an increase of 25.5%. This increase
occurred to support the store base which grew to 401 locations from 310
locations at the end of the same period in the prior year. General and
administrative expenses decreased favorably as a percentage of net sales from
5.3% in 1999 to 5.1% in 2000, due to leveraging as net sales increased by 31.0%.
The Company generated operating income for the nine month period of $8,923,000
compared to operating income of $10,399,000 in the same period prior year, a
decrease of 14.2%
Interest income for the nine month period decreased from $247,000 in 1999 to
$142,000 in 2000, a decrease of 42.5%, as the Company maintained lower average
levels of cash and cash equivalents and short-term investments.
The Company generated net income before income taxes for the nine month period
of $9,025,000 compared to net income before income taxes of $10,634,000 in the
same period prior year, a decrease of 15.1%. As a result, the Company recorded
income tax expense for the nine month period of $3,545,000 compared to income
tax expense of $4,179,000 for the same period prior year.
Due to the above factors, the Company generated net income for the nine month
period of $5,480,000, or $0.87 per share, compared to net income of $6,455,000,
or $1.01 per share, for the same period prior year.
9 of 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
store openings. As an example, the introduction of Sega Dreamcast led to
seasonally high net sales in the second quarter of fiscal 2000. 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
eleven quarters:
Net Sales (in thousands) Number of Stores Open at Quarter End
- --------------------------------------- ---------------------------------------
Fiscal Fiscal
Quarter 2000 1999 1998 Quarter 2000 1999 1998
- ------- -------- -------- -------- ------- -------- -------- --------
First $ 42,505 $ 32,894 $ 24,001 First 315 252 193
Second 52,666 35,299 26,760 Second 353 270 215
Third 102,701 82,889 67,036 Third 401 310 249
Fourth 55,591 45,519 Fourth 312 250
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 nine months ended January 2, 2000, the Company generated $19,884,000
of cash from operating activities primarily due to net income, depreciation and
increases in accounts payable and accrued liabilities. The Company used
$8,627,000 of cash for investing activities, primarily for capital expenditures
related to new stores, store remodels, information systems and the Company's
websites. For the nine months ended December 27, 1998, the Company generated
$17,864,000 of cash from operating activities and used $4,612,000 of cash for
investing activities, primarily for capital expenditures, and $2,972,000 for
financing activities, primarily for stock repurchases.
The Company has a $5,000,000 unsecured revolving credit facility with a
commercial bank, seasonally increasing to $20,000,000. The interest rate on
outstanding borrowings under the facility (8.47% for the month ended January 2,
2000) is based upon LIBOR plus 200 basis points. The facility requires the
Company to maintain certain financial ratios and achieve certain operating
results. The Company had no borrowings under the facility at January 2, 2000.
During fiscal 2000, the Company plans to incur capital expenditures of
approximately $9,300,000, of which $8,657,000 has been incurred to date,
primarily for new stores, store remodels, information systems and the Company's
websites. The Company incurred capital expenditures of $6,838,000 in fiscal
1999.
10 of 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
YEAR 2000 MATTERS
Prior to January 2000, the Y2K project team had evaluated the Company's business
and operational systems to ensure Y2K readiness. As a result, we believe that
all mission critical software and hardware was assessed, and if necessary,
remedied to be Y2K ready. All mission critical software and hardware has
continued to function beyond January 1, 2000 without any business interruption.
As the year 2000 progresses, however, we may experience problems associated with
the year 2000 that have not yet been discovered. Our Y2K project team will
continue to monitor and test systems as necessary and will remain in place
through the end of the fiscal year, April 2, 2000.
As of January 2, 2000, the Company had incurred external costs of less than
$100,000 related to year 2000 readiness, including testing, analysis and
purchase of hardware and software upgrades. The Company believes this to be the
overall cost of the project, however, there can be no assurance that final costs
will not exceed this level.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not currently subject to market risks relating to
interest rates, foreign currency exchange rates, commodity prices or other
market price risks of a material nature.
PART II - OTHER INFORMATION
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 January 2, 2000.
11 of 12
<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: January 31, 2000 By: /s/ David R. Pomije
---------------------------------
David R. Pomije
Chief Executive Officer
By: /s/ Robert M. Hiben
---------------------------------
Robert M. Hiben
Chief Financial Officer
12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-02-2000
<PERIOD-START> OCT-04-1999
<PERIOD-END> JAN-02-2000
<CASH> 20,549
<SECURITIES> 0
<RECEIVABLES> 1,644
<ALLOWANCES> 29
<INVENTORY> 29,344
<CURRENT-ASSETS> 55,332
<PP&E> 35,735
<DEPRECIATION> 19,339
<TOTAL-ASSETS> 72,854
<CURRENT-LIABILITIES> 27,493
<BONDS> 0
0
0
<COMMON> 60
<OTHER-SE> 44,998
<TOTAL-LIABILITY-AND-EQUITY> 72,854
<SALES> 102,701
<TOTAL-REVENUES> 102,701
<CGS> 73,212
<TOTAL-COSTS> 73,212
<OTHER-EXPENSES> 22,223
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 7,266
<INCOME-TAX> 2,856
<INCOME-CONTINUING> 4,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,410
<EPS-BASIC> .74
<EPS-DILUTED> .70
</TABLE>
