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 29, 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 July 28, 1997, the registrant had 6,129,461 outstanding shares of common
stock, $ .01 par value.
FUNCO, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations - Quarter ended
June 29, 1997 and June 30, 1996.......................... 3
Consolidated Balance Sheets - June 29, 1997 and
March 30, 1997........................................... 4
Consolidated Statements of Cash Flows - Three months ended
June 29, 1997 and June 30, 1996........................... 5
Notes to Consolidated Financial Statements ................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 7
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings............................................. 10
ITEM 6. Exhibits and Reports on Form 8-K ............................. 10
SIGNATURES ............................................................. 11
- ----------
Exhibit (11) Statements Re: Computation of Per Share Earnings........... 12
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FUNCO, INC.
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Quarter Ended
----------------------------
June 29, June 30,
1997 1996
----------- -----------
Net sales .................................. $ 24,001 $ 18,862
Cost of sales .............................. 14,589 12,012
----------- -----------
Gross profit ........................... 9,412 6,850
Operating expenses ......................... 6,358 5,569
General and administrative expenses ........ 2,108 1,797
----------- -----------
Operating income (loss) ................ 946 (516)
Interest expense ........................... - (9)
Interest income ............................ 79 35
----------- -----------
Net income (loss) before income taxes .. 1,025 (490)
Income tax provision (benefit) ............. 390 (181)
----------- -----------
Net income (loss) ...................... $ 635 $ (309)
=========== ===========
Net income (loss) per share ................ $ 0.10 $ (0.05)
=========== ===========
Weighted average number of common
and common equivalent shares outstanding 6,488,590 5,889,225
SEE ACCOMPANYING NOTES.
FUNCO, INC.
Consolidated Balance Sheets
(in thousands, except share data)
June 29, March 30,
1997 1997
------- -------
(Unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents .................... $ 8,161 $ 8,408
Accounts receivable .......................... 884 1,094
Inventories .................................. 17,046 13,831
Prepaid expenses ............................. 721 782
Current deferred tax asset ................... 532 532
------- -------
Total current assets ...................... 27,344 24,647
Net property and equipment ..................... 5,685 5,954
Long-term deferred tax asset ................... 984 984
Other assets ................................... 158 160
------- -------
Total assets ................................... $34,171 $31,745
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ............................. $ 3,510 $ 1,387
Accrued liabilities .......................... 4,912 5,182
Current portion of capital lease obligations . - 20
Deferred revenue ............................. 587 747
------- -------
Total current liabilities ................. 9,009 7,336
Accrued rent ................................... 91 91
Shareholders' Equity
Common stock (issued: 6,101,893 and 6,056,788) 61 61
Additional paid-in capital ................... 18,816 18,698
Retained earnings ............................ 6,194 5,559
------- -------
Total shareholders' equity ................ 25,071 24,318
------- -------
Total liabilities and shareholders' equity ..... $34,171 $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.
<TABLE>
<CAPTION>
FUNCO, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
---------------------
June 29, June 30,
1997 1996
------- -------
<S> <C> <C>
Operating Activities
Net income (loss) .......................................... $ 635 $ (309)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................... 782 853
Net loss on disposal of property and equipment ......... 8 6
Changes in operating assets and liabilities:
Accounts receivable ................................. 210 58
Inventories ......................................... (3,215) (2,448)
Prepaid expenses .................................... 61 160
Accounts payable .................................... 2,123 909
Accrued liabilities ................................. (270) (734)
Deferred revenue .................................... (160) (65)
------- -------
Net cash provided by (used in) operating activities 174 (1,570)
Investing Activities
Additions to property and equipment ........................ (493) (17)
Increase in other assets ................................... (26) (18)
------- -------
Net cash used in investing activities ............ (519) (35)
Financing Activities
Payments of obligations under capital leases ............... (20) (18)
Net proceeds from issuance of common stock ................. 118 18
------- -------
Net cash provided by financing activities ........ 98 -
------- -------
Decrease in cash and cash equivalents ......................... (247) (1,605)
Cash and cash equivalents at beginning of period .............. 8,408 5,783
------- -------
Cash and cash equivalents at end of period .................... $ 8,161 $ 4,178
======= =======
SEE ACCOMPANYING NOTES.
</TABLE>
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company
Funco, Inc. (the Company) was incorporated in March 1988, and is engaged in the
business of providing interactive home entertainment, primarily through the
purchase and resale of new and previously played video games along with related
hardware and accessory items through its FUNCOLAND stores and mail order
operation. It also publishes a video game magazine, GAME INFORMER. The Company
operated 193 retail locations at June 29, 1997 compared to 173 retail locations
at June 30, 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 references in this document to years and
quarters relate to fiscal years and quarters. 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 ended June 29, 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
The Financial Accounting Standards Board has issued FASB Statement No. 128
"Earnings per Share," which will be effective for the Company beginning with the
period ending March 29, 1998. The new accounting rules will change the method of
computation of earnings per share. The Company does not believe that the
statement will materially impact earnings per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain items in the statements of operations
expressed as (i) percentage of net sales for the quarter indicated and (ii)
percentage changes from the prior year.
Percent
Quarter Ended Inc (Dec)
--------------------------- -----------
June 29, June 30, 1998 over
1997 1996 1997
------------ ----------- -----------
Net sales ....................... 100.0% 100.0% 27.2%
Cost of sales ................... 60.8 63.7 21.5
------------ ----------- -----------
Gross profit .................... 39.2 36.3 37.4
Operating expenses .............. 26.5 29.5 14.2
General and admin. expenses...... 8.8 9.5 17.3
------------ ----------- -----------
Operating income (loss) ......... 3.9 (2.7) N/A
Interest expense ................ - - N/A
Interest income ................. 0.3 0.2 125.7
------------ ----------- -----------
Net income (loss) before taxes .. 4.3 (2.6) N/A
Income tax provision (benefit)... 1.6 (1.0) N/A
------------ ----------- -----------
Net income (loss)................ 2.6% (1.6)% N/A
============ =========== ===========
Comparison of First Quarter Fiscal 1998 to First Quarter Fiscal 1997
Net sales for the quarter increased from $18,862,000 in 1997 to $24,001,000 in
1998, an increase of 27.2%. The Company operated 193 stores at the end of the
first quarter this year compared to 173 stores at the end of the same period
prior year. Comparable store sales for the quarter increased 21%. The large
sales increase for the quarter is the result of growing market penetration of
Sony PlayStation, Nintendo 64 and Sega Saturn products. The Company anticipates
continued market growth for these systems during the 1998 fiscal year.
Cost of sales for the quarter increased from $12,012,000 in 1997 to $14,589,000
in 1998, an increase of 21.5%. 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
favorably decreased from 63.7% in 1997 to 60.8% in 1998. This decrease occurred
primarily as the Company's sales mix included a greater proportion of software
products relative to prior year, with a corresponding proportionate reduction of
hardware product sales. The sales mix shift resulted in a reduction of the cost
percentage as software generally has lower cost percentages as compared to
hardware.
Operating expenses for the quarter increased from $5,569,000 in 1997 to
$6,358,000 in 1998, an increase of 14.2%. This increase is primarily due to
higher store payroll expenses related to the quarter's increased sales volume
compared to the same period prior year. Operating expenses decreased favorably
as a percentage of net sales from 29.5% in 1997 to 26.5% in 1998, due to
improved sales leveraging.
General and administrative expenses for the quarter increased from $1,797,000 in
1997 to $2,108,000 in 1998, an increase of 17.3%. This dollar increase occurred
primarily due to additional payroll costs for staffing administrative functions.
General and administrative expenses decreased favorably as a percentage of net
sales from 9.5% in 1997 to 8.8% in 1998.
The Company generated operating income for the quarter of $946,000 compared to
an operating loss of $516,000 in the same period last year.
Interest expense for the quarter decreased from $9,000 in 1997 to $0 in 1998 as
the Company had no outstanding borrowings. Interest income for the quarter
increased from $35,000 in 1997 to $79,000 in 1998, an increase of 125.7%,
primarily as the Company maintained higher levels of cash and cash equivalents
compared to prior year.
The Company generated net income before income taxes for the quarter of
$1,025,000 compared to a net loss before income taxes of $490,000 in the same
period last year. As a result, the Company recorded income tax expense for the
quarter of $390,000 compared to an income tax benefit of $181,000 for the same
period prior year.
Due to the above factors, the Company generated net income for the quarter of
$635,000, or $0.10 per share, compared to a net loss of $309,000, or $0.05 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 nine quarters:
<TABLE>
<CAPTION>
Net Sales (in thousands) Number of Stores Open at Quarter End
- ---------------------------------------------------- ----------------------------------------
Fiscal Fiscal
Quarter 1998 1997 1996 Quarter 1998 1997 1996
- ---------- ----------- ----------- ----------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
First $24,001 $18,862 $12,261 First 193 173 181
Second - 20,415 15,335 Second - 176 178
Third - 46,461 31,897 Third - 188 182
Fourth - 34,817 21,889 Fourth - 188 173
</TABLE>
Liquidity and Capital Resources
The Company's primary ongoing financing requirements are for new store expansion
and inventory. On an interim basis, the Company's financing requirements are
also impacted by quarterly operating results and seasonal fluctuations in
inventory levels.
During the 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, including $493,000 for capital expenditures. For the three months
ended June 30, 1996, the Company used $1,570,000 of cash for operating
activities and used $35,000 of cash in investing activities.
Subsequent to quarter end, the Company amended and renewed its revolving credit
facility. Effective June 30, 1997, the Company has a $3,000,000 unsecured
revolving credit facility with a commercial bank, priced at the bank's prime
rate, seasonally increasing to $10,000,000. The interest rate on outstanding
borrowings under the facility in place as of June 29, 1997, was 8 3/4%, equal to
the bank's prime rate plus one quarter of one percent. 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
approximately $5,500,000 for new store openings, other store expenditures,
enhancements to corporate information systems and general corporate purposes.
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 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 continue to believe that the claim is entirely without merit,
deny liability and intend to defend the litigation vigorously. The Company and
its Chief Executive Officer filed a motion to dismiss the Amended Class Action
Complaint in its entirety.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
10.1a Amendment to Credit Agreement effective June 30,
1997, by and between the Registrant and Marquette
Capital Bank, N.A., and the Amended and Restated
Promissory Note
11 Statements Re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) No report on Form 8-K was filed by the registrant during the
quarter ended June 29, 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: July 29, 1997 By: /s/ David R. Pomije
----------------------------------
David R. Pomije
Chief Executive Officer
By: /s/ Robert M. Hiben
----------------------------------
Robert M. Hiben
Chief Financial Officer
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT is entered into as of June 30, 1997 by and
between FUNCO, INC., a Minnesota corporation (the "Borrower"), and MARQUETTE
CAPITAL BANK, N.A., formerly known as Marquette Capital Bank (the "Bank"). In
consideration of the mutual agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties, the Borrower and the Bank agree as follows:
1. The Credit Agreement dated June 20, 1995, by and between the
Borrower and the Bank, as amended by an Amendment to Credit Agreement dated
February 5, 1996 and by an Amendment to Credit Agreement and Security Agreement
dated June 30, 1996 (the "Credit Agreement"), is amended as follows:
a. The definitions of Borrowing Base, Borrowing Base
Certificate, and Eligible Inventory in Section 1.01 of the Credit Agreement are
deleted.
b. Section 2.01 of the Credit Agreement is amended to read as
follows:
Section 2.01 Advances. Subject to the provisions of
this Agreement, the Bank shall make Advances to the Borrower
from time to time during the period from the date hereof to
June 30, 1998, or the earlier date of termination of the Line
of Credit pursuant to Section 6.02, in an aggregate amount not
exceeding at any time outstanding $10,000,000.00 during the
period from September 15, 1997 through December 15, 1997, and
in an aggregate amount not exceeding at any time outstanding
$3,000,000.00 at all other times (the "Line of Credit"). Each
Advance shall be in the amount of $10,000.00 or an integral
multiple thereof. Within the limits of the Line of Credit, the
Borrower may borrow, prepay, and reborrow under this Section
2.01. During the period from December 29, 1997 through March
29, 1998 the Borrower shall cause the aggregate outstanding
amount of Advances to be zero for 45 consecutive days.
c. Section 2.03 of the Credit Agreement is amended to read as
follows:
Section 2.03 Revolving Note. The obligation to repay
the Advances and to pay interest and other charges, fees and
expenses thereon is evidenced by the Borrower's $10,000,000.00
Amended and Restated Promissory Note dated June 30, 1997 in
favor of the Bank (together with any amendments, extensions,
renewals and replacements thereof, called the "Revolving
Note").
d. The Section number of the Section of the Credit Agreement
entitled Letters of Credit is changed to Section 2.08. All references to June
30, 1997 are changed to June 30, 1998 in such Section 2.08.
e. Section 5.01(d) of the Credit Agreement is deleted.
f. Section 5.15 of the Credit Agreement is amended to read as
follows:
Section 5.15 Capital Expenditures. The Borrower shall
not permit the aggregate amount of Capital Expenditures of the
Borrower and the Subsidiaries in the Borrower's fiscal year
ending March 30, 1997 to exceed $2,000,000.00. The Borrower
shall not permit the aggregate amount of Capital Expenditures
of the Borrower and the Subsidiaries in the Borrower's fiscal
year ending March 29, 1998 to exceed $6,000,000.00.
g. Section 5.16 of the Credit Agreement is amended to read as
follows:
Section 5.16 Consolidated Tangible Net Worth. The
Borrower shall not permit the Consolidated Tangible Net Worth
of the Borrower and the Subsidiaries to be less than (a)
$22,000,000.00 at any time during the period from June 30,
1997 through March 28, 1998; or (b) $28,000,000.00 at any time
during the period after March 28, 1998.
h. Section 5.17 of the Credit Agreement is amended to read as
follows:
Section 5.17 Consolidated Current Ratio. The Borrower
shall not permit the ratio of Consolidated Current Assets to
Consolidated Current Liabilities of the Borrower and the
Subsidiaries to be less than: (a) 2.00 to 1 at any time during
the period from June 30, 1997 through August 24, 1997; or (b)
1.75 to 1 at any time during the period from August 25, 1997
through November 23, 1997; or (c) 2.00 to 1 at any time during
the period from November 24, 1997 through March 28, 1998; or
(d) 3.00 to 1 at any time after March 28, 1998.
i. Section 5.18 of the Credit Agreement is amended to read as
follows:
Section 5.18 Consolidated EBITDA. The Borrower shall
not at any time permit the consolidated earnings before
interest, taxes, depreciation and amortization expense of the
Borrower and the Subsidiaries in any period of 12 consecutive
fiscal months of the Borrower designated below to be less than
the amount set forth below for such period:
12-Fiscal Month Period Ending: Minimum Amount
------------------------------ --------------
From 6/30/97 through 3/28/98 $ 6,000,000.00
After 3/28/98 $10,000,000.00
j. The following Section 5.19 is added to Article V of the
Credit Agreement:
Section 5.19 New Stores. In the Borrower's fiscal
year ending March 29, 1998, the Borrower shall not permit the
number of new stores opened by the Borrower minus the number
of stores closed by the Borrower to exceed 65.
k. Section 6.02 of the Credit Agreement is amended to read as
follows:
Section 6.02 Rights and Remedies. Upon the
commencement of any proceeding under any bankruptcy law by or
against the Borrower, the Line of Credit shall automatically
terminate, and all principal, interest, and other charges,
fees and expenses under the Revolving Note and this Agreement
automatically shall become immediately due and payable in
full, all without any declaration, presentment, demand,
protest or other notice of any kind, all of which are hereby
expressly waived by the Borrower. In addition, upon the
occurrence of an Event of Default or at any time thereafter
until such Event of Default is cured to the written
satisfaction of the Bank, the Bank may exercise any and all of
the following rights and remedies:
(a) The Bank may, by notice to the Borrower, declare
the Line of Credit to be terminated, whereupon the same shall
terminate.
(b) The Bank may declare all principal, interest and
other charges, fees and expenses under the Revolving Note and
this Agreement to be immediately due and payable in full,
whereupon the same shall become immediately due and payable in
full, without any presentment, demand, protest or other notice
of any kind, all of which are hereby expressly waived by the
Borrower.
(c) The Bank may, without notice to the Borrower or
any other person, apply any and all money owing by the Bank to
the Borrower to the payment of principal, interest and other
charges, fees and expenses under the Revolving Note and this
Agreement.
(d) The Bank may exercise and enforce its rights and
remedies under the Security Agreement, the other writings
contemplated hereby, the Uniform Commercial Code and any other
applicable law.
In addition, immediately upon the commencement of any
proceeding under any bankruptcy law by or against the
Borrower, and at the Bank's option upon the occurrence of an
Event of Default, the Borrower shall pay to the Bank a sum
equal to the then outstanding amount of the Letters of Credit,
without presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived by the
Borrower. The Borrower grants the Bank a first lien and
security interest in all such funds paid to the Bank,
including without limitation all instruments evidencing such
funds, and all products and proceeds of the foregoing, as
security for all now existing and hereafter arising debts,
obligations and liabilities of the Borrower to the Bank.
l. Exhibit A to the Credit Agreement is deleted.
m. Exhibit D to the Credit Agreement is amended to read as set
forth in Exhibit D attached hereto.
2. The Bank releases and terminates its security interest under the
Borrower's Security Agreement dated June 20, 1995, as amended, and such amended
Security Agreement is terminated.
3. Except as amended or terminated herein or herewith, all provisions
of the Credit Agreement and all other agreements of the parties remain in full
force and effect. All references to Marquette Capital Bank are changed to
Marquette Capital Bank, N.A. in all other agreements and certificates of the
parties. No provision of this Amendment can be amended, modified, waived or
terminated, except by a writing executed by the Borrower and the Bank. The
Borrower shall pay to the Bank on demand all of the Bank's costs and expenses,
including but not limited to reasonable attorneys' fees and legal expenses, in
connection with this Amendment, the writings executed herewith, and the
transactions described herein and therein. This Amendment shall bind and benefit
the parties and their respective successors and assigns; provided, the Borrower
shall not assign any of its rights or obligations under this Amendment without
the prior written consent of the Bank, and any assignment in violation of this
sentence shall be null and void. This Amendment and the Credit Agreement as
amended herein shall be governed by and construed in accordance with the
internal laws of the State of Minnesota (excluding conflict of law rules).
Executed as of the date first above written.
FUNCO, INC.
By /s/Robert M Hiben
--------------------------------
Title Chief Financial Officer
-----------------------------
MARQUETTE CAPITAL BANK, N.A.
By /s/Margaret Mary Yanez
--------------------------------
Title Vice President
-----------------------------
EXHIBIT D
FUNCO, INC.
COVENANT COMPLIANCE CERTIFICATE
The undersigned chief financial officer of Funco, Inc.,
pursuant to the Credit Agreement dated June 20, 1995, as amended (the
"Agreement"), hereby certifies to Marquette Capital Bank, N.A. as follows:
As of the close of business on _____________, 19__, the
following amounts and ratios were true and correct:
1. Section 5.16 Consolidated Tangible Net Worth:
a. Actual Consolidated Tangible Net Worth $____________
b. Minimum Consolidated Tangible Net Worth $____________
2. Section 5.17 Consolidated Current Ratio:
a. Consolidated Current Assets $____________
b. Consolidated Current Liabilities $____________
c. Actual Ratio of Consolidated Current
Assets to Consolidated Current Liabilities _________to 1
d. Minimum Ratio _________to 1
3. Section 5.18 Consolidated EBITDA
for 12-Fiscal Month Period Ending __________________, 19___:
a. Earnings: Net Income or (Loss) $____________
b. Interest Expense $____________
c. Taxes Expense $____________
d. Depreciation Expense $____________
e. Amortization Expense $____________
f. Actual EBITDA (a + b + c + d + e) $____________
g. Minimum EBITDA $____________
As of the date of this Certificate, no event has occurred
which constitutes an Event of Default under the Agreement or would constitute an
Event of Default under the Agreement with notice or the passage of time or both.
Date of Certificate: ______________________, 19____
_____________________________________
Signature
AMENDED AND RESTATED PROMISSORY NOTE
Date: June 30, 1997
For valuable consideration, the receipt and sufficiency of
which is hereby acknowledged by the parties, the $10,000,000.00 Amended and
Restated Promissory Note of Funco, Inc. dated June 30, 1996, payable to the
order of Marquette Capital Bank, now known as Marquette Capital Bank, N.A., is
amended and restated to read as follows:
$10,000,000.00 Minneapolis, Minnesota
FOR VALUE RECEIVED, on June 30, 1998, the undersigned, FUNCO,
INC., promises to pay to the order of MARQUETTE CAPITAL BANK, N.A. (the "Bank"),
at its office in Minneapolis, Minnesota, or at such other place as any present
or future holder of this Note may designate from time to time, the principal sum
of (i) $10,000,000.00, or (ii) the aggregate unpaid principal amount of all
advances of credit made by the Bank to the undersigned pursuant to this Note as
shown in the records of any present or future holder of this Note, whichever is
less, plus interest thereon from the date of each advance in whole or in part
included in such amount until this Note is fully paid, computed on the basis of
the actual number of days elapsed and a 360-day year, at an annual rate that
shall always be equal to the Prime Rate and that shall change when and as the
Prime Rate shall change. Interest is due and payable on the last day of each
month and at maturity. The term "Prime Rate" means the rate established by the
Bank from time to time in its sole discretion as its Prime Rate; the Bank may
lend to its customers at rates that are at, above or below the Prime Rate.
Notwithstanding the foregoing, after an Event of Default this Note shall bear
interest until paid at 2% per annum in excess of the rate otherwise then in
effect, which rate shall continue to vary based on further changes in the Prime
Rate. The undersigned shall not permit the unpaid principal balance of this Note
to exceed $3,000,000.00, except during the period from September 15, 1997
through December 15, 1997.
All or any part of the unpaid balance of this Note may be
prepaid at any time without penalty. At the option of the then holder of this
Note, any payment under this Note may be applied first to the payment of other
charges, fees and expenses under this Note and any other agreement or writing in
connection with this Note, second to the payment of interest accrued through the
date of payment, and third to the payment of principal. Also, at the option of
the holder of this Note, if there is any overpayment of interest under this
Note, the holder may hold the excess and apply it to future interest accruing
under this Note. Amounts may be advanced and readvanced under this Note,
provided the principal balance outstanding shall not exceed $10,000,000.00
during the period from September 15, 1997 through December 15, 1997, and shall
not exceed $3,000,000.00 at any other time.
The occurrence of an Event of Default under the Credit
Agreement dated June 20, 1995 by and between the undersigned and the Bank, as it
may be amended from time to time, shall constitute an Event of Default under
this Note.
Upon the commencement of any proceeding under any bankruptcy
law by or against any maker of this Note, this Note automatically shall become
immediately due and payable for the entire unpaid principal balance of this Note
plus accrued interest and other charges, fees and expenses under this Note
without any declaration, presentment, demand, protest, or other notice of any
kind. Upon the occurrence of any other Event of Default and at any time
thereafter, the then holder of this Note may, at its option, declare this Note
to be immediately due and payable and thereupon this Note shall become
immediately due and payable for the entire unpaid principal balance of this Note
plus accrued interest and other charges on this Note without any presentment,
demand, protest or other notice of any kind.
The undersigned (i) waives demand, presentment, protest,
notice of protest, notice of dishonor and notice of nonpayment of this Note; and
(ii) agrees that when or at any time after this Note becomes due the then holder
of this Note may offset or charge the full amount owing on this Note against any
account then maintained by the undersigned with such holder of this Note without
notice. Interest on any amount under this Note shall continue to accrue, at the
option of any present or future holder of this Note, until such holder receives
final payment of such amount in collected funds in form and substance acceptable
to such holder.
The extensions of credit under this Note are made under
Section 47.59 of the Minnesota Statutes. No waiver of any right or remedy under
this Note shall be valid unless in writing executed by the holder of this Note,
and any such waiver shall be effective only in the specific instance and for the
specific purpose given. All rights and remedies of all present and future
holders of this Note shall be cumulative and may be exercised singly,
concurrently or successively. This Note shall bind the undersigned and the
successors and assigns of the undersigned. This Note shall be governed by and
construed in accordance with the internal laws of the State of Minnesota
(excluding conflict of law rules).
THE UNDERSIGNED REPRESENTS, CERTIFIES, WARRANTS AND AGREES
THAT THE UNDERSIGNED HAS READ ALL OF THIS NOTE AND UNDERSTANDS ALL OF THE
PROVISIONS OF THIS NOTE.
Executed as of June 30, 1997.
FUNCO, INC.
By /s/Robert M. Hiben
--------------------------------
Title Chief Financial Officer
-----------------------------
Marquette Capital Bank, N.A. agrees to this Amended and Restated Promissory
Note.
Executed as of June 30, 1997.
MARQUETTE CAPITAL BANK, N.A.
By /s/Margaret Mary Yanez
--------------------------------
Title Vice President
-----------------------------
Exhibit (11)
FUNCO, INC.
Statements Re: Computation of Per Share Earnings
(In thousands, except per share data)
Quarter Ended
-------------------
June 29, June 30,
1997 1996
------- -------
Weighted average common shares outstanding ......... 6,068 5,889
Weighted average number of common stock equivalents:
Stock options ................................. 419 -
Warrants ...................................... 2 -
------- -------
Adjusted common equivalent shares outstanding ...... 6,489 5,889
======= =======
Net income (loss) .................................. $ 635 $ (309)
======= =======
Net income (loss) per common share ................. $ 0.10 $ (0.05)
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000889664
<NAME> FUNCO, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-29-1998
<PERIOD-START> MAR-31-1997
<PERIOD-END> JUN-29-1997
<CASH> 8,161
<SECURITIES> 0
<RECEIVABLES> 920
<ALLOWANCES> (36)
<INVENTORY> 17,046
<CURRENT-ASSETS> 27,344
<PP&E> 17,008
<DEPRECIATION> (11,323)
<TOTAL-ASSETS> 34,171
<CURRENT-LIABILITIES> 9,009
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 25,010
<TOTAL-LIABILITY-AND-EQUITY> 34,171
<SALES> 24,001
<TOTAL-REVENUES> 24,001
<CGS> 14,589
<TOTAL-COSTS> 14,589
<OTHER-EXPENSES> 8,466
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,025
<INCOME-TAX> 390
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 635
<EPS-PRIMARY> .10
<EPS-DILUTED> 0
</TABLE>
