-----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, KuyqT+v5AKtWCaBSe6TdEzjrwkOWgF9RVI8H7cBjJcR6chFoWuVojIJokgS/4o7R eMT+7pvA7IQ3+7uSru8Xaw== 0000897101-98-000746.txt : 19980803 0000897101-98-000746.hdr.sgml : 19980803 ACCESSION NUMBER: 0000897101-98-000746 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980628 FILED AS OF DATE: 19980730 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: 98674320 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 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. 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 - ---------- 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 ------------------------------ June 28, June 29, 1998 1997 ------------ ------------ 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
SEE ACCOMPANYING NOTES. FUNCO, INC. Consolidated Balance Sheets (in thousands, except share data)
June 28, March 29, 1998 1998 ----------- ----------- (Unaudited) (Note) 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 =========== ===========
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. FUNCO, INC. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended ----------------------------- June 28, June 29, 1998 1997 ----------- ----------- 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 =========== ===========
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 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. Note 4. Net Income per Share The following table sets forth the computation of basic and diluted net income per share:
Quarter Ended ---------------------------- June 28, June 28, 1998 1997 ----------- ----------- 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 =========== ===========
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.
Percent Quarter Ended Inc (Dec) ----------------------- --------- June 28, June 29, 1999 over 1998 1997 1998 -------- -------- --------- 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)% ======== ========
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 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:
Net Sales (in thousands) Number of Stores Open at Quarter End - --------------------------------------------- -------------------------------------------- Fiscal Fiscal Quarter 1999 1998 1997 Quarter 1999 1998 1997 - -------- -------- -------- -------- -------- -------- -------- -------- 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
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 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. 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000889664 FUNCO INC 1,000 3-MOS MAR-28-1999 MAR-30-1998 JUN-28-1998 3,270 0 1,073 29 27,289 38,354 21,651 13,887 47,368 13,113 0 0 0 62 34,037 47,368 32,894 32,894 21,264 21,264 10,916 0 0 834 334 0 0 0 0 500 .08 .08
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