-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VtZzuZfdJyqzXl6DAjiTUhqC0kgbKOYjL6H3xc6me+1xPwkB/y5yDd3vuVGB0YMY RDwHpsR9XLfWAy6kEihFpw== 0000897101-98-000092.txt : 19980206 0000897101-98-000092.hdr.sgml : 19980206 ACCESSION NUMBER: 0000897101-98-000092 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980205 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FUNCO INC CENTRAL INDEX KEY: 0000889664 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS RETAIL [5900] IRS NUMBER: 411609563 STATE OF INCORPORATION: MN FISCAL YEAR END: 0405 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21876 FILM NUMBER: 98522906 BUSINESS ADDRESS: STREET 1: 10120 WEST 76TH ST CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129468883 MAIL ADDRESS: STREET 1: 10120 W 76TH ST CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 10-Q 1 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 December 28, 1997 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 February 3, 1998, the registrant had 6,174,195 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 Income - Quarter and nine months ended December 28, 1997 and December 29, 1996.................. 3 Consolidated Balance Sheets - December 28, 1997 and March 30, 1997................................................. 4 Consolidated Statements of Cash Flows - Nine months ended December 28, 1997 and December 29, 1996 ....................... 5 Notes to Consolidated Financial Statements ...................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 8 PART II - OTHER INFORMATION - --------------------------- ITEM 1. Legal Proceedings................................................ 11 ITEM 6. Exhibits and Reports on Form 8-K ................................ 12 SIGNATURES ................................................................ 13 - ---------- PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS FUNCO, INC. Consolidated Statements of Income (in thousands, except share and per share data) (Unaudited)
Quarter Ended Nine Months Ended ----------------------------- ----------------------------- December 28, December 29, December 28, December 29, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Net sales .............................. $ 67,036 $ 46,461 $ 117,797 $ 85,738 Cost of sales .......................... 46,413 30,095 77,957 54,650 ------------ ------------ ------------ ------------ Gross profit ........................ 20,623 16,366 39,840 31,088 Operating expenses ..................... 11,404 9,433 24,646 20,945 General and administrative expenses .... 2,544 2,425 6,777 6,119 ------------ ------------ ------------ ------------ Operating income .................... 6,675 4,508 8,417 4,024 Interest expense ....................... (20) (18) (20) (29) Interest income ........................ 47 22 192 104 ------------ ------------ ------------ ------------ Net income before income taxes ...... 6,702 4,512 8,589 4,099 Income tax provision ................... 2,547 1,510 3,264 1,349 ------------ ------------ ------------ ------------ Net income .......................... $ 4,155 $ 3,002 $ 5,325 $ 2,750 ============ ============ ============ ============ Basic Earnings Per Share: - ------------------------- Basic net income per share ............. $ 0.67 $ 0.51 $ 0.87 $ 0.47 Weighted average number of common shares 6,166,361 5,941,195 6,123,957 5,909,633 Diluted Earnings Per Share: - ------------------------- Diluted net income per share ........... $ 0.63 $ 0.48 $ 0.81 $ 0.45 Weighted average number of common and common equivalent shares ............... 6,635,596 6,220,172 6,576,900 6,141,792
SEE ACCOMPANYING NOTES. FUNCO, INC. Consolidated Balance Sheets (in thousands, except share data) December 28, March 30, 1997 1997 ----------- ----------- (Unaudited) (Note) ASSETS - ------ Current Assets Cash and cash equivalents .................... $ 8,222 $ 8,408 Accounts receivable .......................... 2,074 1,094 Inventories .................................. 27,716 13,831 Prepaid expenses ............................. 1,215 782 Current deferred tax asset ................... 646 532 ----------- ----------- Total current assets ...................... 39,873 24,647 Net property and equipment ..................... 8,489 5,954 Long-term deferred tax asset ................... 1,154 984 Other assets ................................... 155 160 ----------- ----------- Total assets ................................... $ 49,671 $ 31,745 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current Liabilities Accounts payable ............................. $ 9,513 $ 1,387 Accrued liabilities .......................... 8,435 5,182 Capital lease obligations .................... -- 20 Deferred revenue ............................. 1,106 747 ----------- ----------- Total current liabilities ................. 19,054 7,336 Accrued rent ................................... 126 91 Shareholders' Equity Common stock (issued: 6,170,536 and 6,056,788) 62 61 Additional paid-in capital ................... 19,545 18,698 Retained earnings ............................ 10,884 5,559 ----------- ----------- Total shareholders' equity ................ 30,491 24,318 ----------- ----------- Total liabilities and shareholders' equity ..... $ 49,671 $ 31,745 =========== =========== Note: The balance sheet at March 30, 1997, 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. FUNCO, INC. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended --------------------------- December 28, December 29, 1997 1996 ----------- ----------- Operating Activities Net income ................................................ $ 5,325 $ 2,750 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................... 2,292 2,468 Deferred tax asset ...................................... (284) (398) Net loss on disposal of property and equipment .......... 36 41 Changes in operating assets and liabilities: Accounts receivable ................................... (980) (444) Inventories ........................................... (13,885) (8,389) Prepaid expenses ...................................... (433) 61 Accounts payable ...................................... 8,126 4,538 Accrued liabilities ................................... 3,288 4,806 Deferred revenue ...................................... 359 261 ----------- ----------- Net cash provided by operating activities ........... 3,844 5,694 Investing Activities Additions to property and equipment ....................... (4,778) (1,273) Increase in other assets .................................. (80) (73) ----------- ----------- Net cash used in investing activities ................. (4,858) (1,346) Financing Activities Payments of obligations under capital leases .............. (20) (59) Net proceeds from issuance of common stock ................ 848 561 ----------- ----------- Net cash provided by financing activities ............. 828 502 ----------- ----------- Increase (decrease) in cash and cash equivalents ............. (186) 4,850 Cash and cash equivalents at beginning of period ............. 8,408 5,783 ----------- ----------- Cash and cash equivalents at end of period ................... $ 8,222 $ 10,633 =========== ===========
SEE ACCOMPANYING NOTES. 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 249 retail locations at December 28, 1997 compared to 188 retail locations at December 29, 1996. 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 1998 and 1997 consist of 13 weeks with the following period ending dates: Ending Date ----------------------------------------- 1998 1997 ------------------ ------------------ First June 29, 1997 June 30, 1996 Second September 28, 1997 September 29, 1996 Third December 28, 1997 December 29, 1996 Fourth March 29, 1998 March 30, 1997 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 and nine months ended December 28, 1997, are not necessarily indicative of the results that may be expected for the year ending March 29, 1998 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 30, 1997. Note 4. Earnings per Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. Statement 128 replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
Quarter Ended Nine Months Ended ---------------------------- ---------------------------- December 28, December 28, December 28, December 28, 1997 1996 1997 1997 ------------ ------------ ------------ ------------ Numerator: Net income ................................. $ 4,155,000 $ 3,002,000 $ 5,325,000 $ 2,750,000 ============ ============ ============ ============ Denominator: Denominator for basic earnings per share - weighted average shares ................. 6,166,361 5,941,195 6,123,957 5,909,633 Dilutive securities: Employee stock options .................. 469,235 278,977 452,943 232,159 ------------ ------------ ------------ ------------ Denominator for diluted earnings per share - adjusted weighted average shares ........ 6,635,596 6,220,172 6,576,900 6,141,792 ============ ============ ============ ============ Basic earnings per share ...................... $ 0.67 $ 0.48 $ 0.87 $ 0.47 ============ ============ ============ ============ Diluted earnings per share .................... $ 0.63 $ 0.48 $ 0.81 $ 0.45 ============ ============ ============ ============
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 and nine months indicated and (ii) percentage changes from the comparable period of the prior year.
Percent Percent Quarter Ended Inc(Dec) Nine Months Ended Inc(Dec) --------------------------- ---------- --------------------------- ---------- December 28, December 29, 1998 December 28, December 29, 1998 over 1997 1996 over 1997 1997 1996 1997 ------------ ------------ ---------- ------------ ------------ ---------- Net sales ................. 100.0% 100.0% 44.3% 100.0% 100.0% 37.4% Cost of sales ............. 69.2 64.8 54.2 66.2 63.7 42.6 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit .............. 30.8 35.2 26.0 33.8 36.3 28.2 Operating expenses ........ 17.0 20.3 20.9 20.9 24.4 17.7 General and admin. expenses 3.8 5.2 4.9 5.8 7.1 10.8 ---------- ---------- ---------- ---------- ---------- ---------- Operating income .......... 10.0 9.7 48.1 7.1 4.7 109.2 Interest expense .......... -- -- 11.1 -- -- (31.0) Interest income ........... 0.1 -- 113.6 0.2 0.1 84.6 ---------- ---------- ---------- ---------- ---------- ---------- Net income before taxes ... 10.0 9.7 48.5 7.3 4.8 109.5 Income tax provision ...... 3.8 3.3 68.7 2.8 1.6 142.0 ---------- ---------- ---------- ---------- ---------- ---------- Net income ................ 6.2% 6.5% 38.4% 4.5% 3.2% 93.6% ========== ========== ========== ========== ========== ==========
Comparison of Third Quarter Fiscal 1998 to Third Quarter Fiscal 1997 Net sales for the quarter increased from $46,461,000 in 1997 to $67,036,000 in 1998, an increase of 44.3%. The Company opened 34 new stores during the quarter and operated a total of 249 locations at the end of the quarter this year compared to 188 locations at the end of the same period prior year. Comparable store sales for the quarter increased 20%. The large sales increase is primarily due to the strong growth of the video game industry led by Sony PlayStation and Nintendo 64 products. Cost of sales for the quarter increased from $30,095,000 in 1997 to $46,413,000 in 1998, an increase of 54.2%. 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 64.8% in 1997 to 69.2% in 1998. This increase is primarily due to sales mix for the quarter reflecting increased sales of new Sony PlayStation and Nintendo 64 products, which are sold at lower gross margin percentages than that of previously played product. Operating expenses for the quarter increased from $9,433,000 in 1997 to $11,404,000 in 1998, an increase of 20.9%. This increase is primarily due to higher store payroll 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 20% increase in comparable store sales. Operating expenses decreased favorably as a percentage of net sales from 20.3% in 1997 to 17.0% in 1998, due to leveraging as net sales increased by 44.3%. General and administrative expenses for the quarter increased from $2,425,000 in 1997 to $2,544,000 in 1998, an increase of 4.9%. General and administrative expenses decreased favorably as a percentage of net sales from 5.2% in 1997 to 3.8% in 1998, due to leveraging as net sales increased by 44.3%. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company generated operating income for the quarter of $6,675,000 compared to $4,508,000 in the same period prior year, an increase of 48.1%. Interest income for the quarter increased from $22,000 in 1997 to $47,000 in 1998, an increase of 113.6%, 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 $6,702,000 compared to net income before income taxes of $4,512,000 in the same period prior year, an increase of 48.5%. As a result the Company recorded an income tax expense for the quarter of $2,547,000 compared to an income tax expense of $1,510,000 for the same period prior year. Due to the above factors, the Company generated net income for the quarter of $4,155,000, or $0.63 per share, compared to net income of $3,002,000, or $0.48 per share, for the same period prior year. Comparison of Nine Month Period Fiscal 1998 to Nine Month Period Fiscal 1997 Net sales for the nine month period increased from $85,738,000 in 1997 to $117,797,000 in 1998, an increase of 37.4%. The Company opened 61 new stores during the nine month period and operated a total of 249 locations at the end of the nine month period this year compared to 188 locations at the end of the same period prior year. Comparable store sales for the nine month period increased 21%. The large sales increase is primarily due to the strong growth of the video game industry led by Sony PlayStation and Nintendo 64 products. Cost of sales for the nine month period increased from $54,650,000 in 1997 to $77,957,000 in 1998, an increase of 42.6%. 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 63.7% in 1997 to 66.2% in 1998. This increase is primarily due to sales mix for the nine month period reflecting increased sales of new Sony PlayStation and Nintendo 64 products, which are sold at lower gross margin percentages than that of previously played product. Operating expenses for the nine month period increased from $20,945,000 in 1997 to $24,646,000 in 1998, an increase of 17.7%. This increase is primarily due to higher store payroll 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 21% increase in comparable store sales. Operating expenses decreased favorably as a percentage of net sales from 24.4% in 1997 to 20.9% in 1998, due to leveraging as net sales increased by 37.4%. General and administrative expenses for the nine month period increased from $6,119,000 in 1997 to $6,777,000 in 1998, an increase of 10.8%. This increase occurred to support the store base which grew to 249 locations from 188 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 7.1% in 1997 to 5.8% in 1998, due to leveraging as net sales increased by 37.4%. The Company generated operating income for the nine month period of $8,417,000 compared to operating income of $4,024,000 in the same period prior year, an increase of 109.2%. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Interest income for the nine month period increased from $104,000 in 1997 to $192,000 in 1998, an increase of 84.6%, primarily as the Company maintained a higher level of cash and cash equivalents. The Company generated net income before income taxes for the nine month period of $8,589,000 compared to net income before income taxes of $4,099,000 in the same period prior year, an increase of 109.5%. As a result the Company recorded income tax expense for the nine month period of $3,264,000 compared to income tax expense of $1,349,000 for the same period prior year. Due to the above factors, the Company generated net income for the nine month period of $5,325,000, or $0.81 per share, compared to net income of $2,750,000, or $0.45 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 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 eleven quarters:
Net Sales (in thousands) Number of Stores Open at Quarter End - ---------------------------------------------------------- ----------------------------------------------------- Fiscal Fiscal Quarter 1998 1997 1996 Quarter 1998 1997 1996 - ---------- ----------- ----------- ----------- ---------- -------- -------- -------- First $24,001 $18,862 $12,261 First 193 173 181 Second 26,760 20,415 15,335 Second 215 176 178 Third 67,036 46,461 31,897 Third 249 188 182 Fourth -- 34,817 21,889 Fourth -- 188 173
Liquidity and Capital Resources The Company's primary ongoing financing requirements are for new store capital expenditures and new store 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 December 28, 1997, the Company generated $3,844,000 of cash from operating activities primarily due to an increase in net income and accounts payable, offset by an increase in inventory, and used $4,858,000 of cash in investing activities, primarily for new store capital expenditures. For the nine months ended December 29, 1996, the Company generated $5,694,000 of cash from operating activities and used $1,346,000 of cash in investing activities. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company has a $3,000,000 unsecured revolving credit facility with a commercial bank, which seasonally increases to $10,000,000. The interest rate on outstanding borrowings under the facility (8 1/2% at December 28, 1997) is equal to the bank's prime rate. 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 1998, the Company plans to incur capital expenditures of up to $5,500,000, of which $4,778,000 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 $1,548,000 in fiscal 1997. 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 new store sites and the Company's ability to finance new store expansion. For further discussion of 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 30, 1997, and other Company filings with the Securities and Exchange Commission 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 December 28, 1997. 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: February 5, 1998 By: /s/ David R. Pomije ------------------------------------- David R. Pomije Chief Executive Officer By: /s/ Robert M. Hiben ------------------------------------- Robert M. Hiben Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS MAR-29-1998 SEP-29-1997 DEC-28-1997 8,222 0 2,103 29 27,716 39,873 21,229 12,740 49,671 19,054 0 0 0 62 30,429 49,671 67,036 67,036 46,413 46,413 13,948 0 20 6,702 2,547 0 0 0 0 4,155 .63 .63
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