SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
FUNCO, INC
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(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
<PAGE>
FUNCO, INC.
10120 West 76th Street
Minneapolis, MN 55344
June 26, 1998
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of
Shareholders of Funco, Inc. The meeting will be held at 10:00 a.m. Central
Daylight Time on Friday, July 31, 1998, at the Minneapolis Marriott Southwest
Hotel, 5801 Opus Parkway, Minnetonka, Minnesota 55343. I encourage you to
attend. Whether or not you plan to attend the meeting, I urge you to vote your
proxy.
On behalf of our Board of Directors and employees, thank you for your
continued support and interest in Funco, Inc.
Sincerely,
David R. Pomije
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
<PAGE>
FUNCO, INC.
10120 West 76th Street
Minneapolis, Minnesota 55344
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
Please take notice that the 1998 Annual Meeting of Shareholders of
Funco, Inc., a Minnesota corporation (the "Company"), will be held at the
Minneapolis Marriott Southwest Hotel, 5801 Opus Parkway, Minnetonka, Minnesota
55343, on Friday, July 31, 1998, at 10:00 a.m. Central Daylight Time, to
consider and vote upon the following matters, as described in the accompanying
Proxy Statement:
1. Election of directors of the Company.
2. Approval of the amendment to the Company's 1993 Stock Option Plan
to increase the number of shares reserved for issuance under such
plan.
3. Ratification of appointment of Ernst & Young LLP as independent
auditors of the Company.
4. Such other business as may properly come before the Annual
Meeting or any adjournment or adjournments thereof.
The Board of Directors of the Company has fixed the close of business
on June 16, 1998, as the record date for determination of shareholders entitled
to notice of and to vote at the Annual Meeting.
Shareholders who do not expect to be personally present at the Annual
Meeting are urged to vote, sign, date and return the accompanying proxy in the
enclosed, postage paid return envelope as soon as possible. The Board of
Directors of the Company sincerely hopes, however, that all shareholders who can
attend the Annual Meeting will do so.
By Order of the Board of Directors
Robert M. Hiben
SECRETARY
June 26, 1998
<PAGE>
FUNCO, INC.
10120 WEST 76TH STREET
MINNEAPOLIS, MINNESOTA 55344
PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JULY 31, 1998
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SOLICITATION AND REVOCATION OF PROXIES
The accompanying proxy is solicited by the Board of Directors of Funco,
Inc. (the "Company") in connection with the 1998 Annual Meeting of Shareholders
of the Company, which will be held on July 31, 1998, and any adjournments
thereof.
A person giving the enclosed proxy has the power to revoke it at any
time before the convening of the Annual Meeting. Revocations of proxy will be
honored if received at the offices of the Company, addressed to the attention of
Robert M. Hiben, on or before July 30, 1998. In addition, on the day of the
meeting, prior to the convening thereof, revocations may be delivered to the
tellers who will be seated at the door of the meeting hall. Unless so revoked,
all properly executed proxies will be voted as specified.
In the event no choice is specified on the proxy, the shares
represented by such proxy will be voted FOR the nominees for directors set forth
herein and FOR Proposals 2 and 3. If any other matters properly come before the
Annual Meeting, or if any of the persons named to serve as directors should
decline or be unable to serve, the persons named in the proxy will vote the same
in accordance with their discretion.
Abstentions and broker non-votes are counted for the purpose of
determining whether a quorum is present at the Annual Meeting. For the purpose
of determining whether a proposal (but not the election of directors) has
received a majority vote, abstentions will be included in the vote totals with
the result that an abstention will have the same effect as a negative vote. In
instances where brokers are prohibited from exercising discretionary authority
for beneficial owners who have not returned a proxy (the broker non-votes),
those shares will not be deemed to be present for purposes of calculating the
vote required for approval of such matters.
Expenses in connection with the solicitation of proxies will be paid by
the Company. Proxies are being solicited primarily by mail, but officers,
directors and other employees of the Company may also solicit proxies by
telephone, telegraph or personal calls. No extra compensation will be paid by
the Company for such solicitation. The Company may reimburse brokers, banks and
other nominees holding shares for others for the cost of forwarding proxy
materials to, and obtaining proxies from, their principals. This Proxy Statement
is first being mailed to shareholders on or about June 26, 1998.
<PAGE>
VOTING RIGHTS
Only shareholders of record at the close of business on June 16, 1998,
are entitled to notice of and to vote at the meeting or any adjournment thereof.
As of that date, there were issued and outstanding 6,207,179 shares of Common
Stock of the Company, the only class of securities of the Company entitled to
vote at the Annual Meeting. Each shareholder of record is entitled to one vote
for each share registered in the shareholder's name as of the record date. The
Articles of Incorporation of the Company do not grant shareholders the right to
vote cumulatively for the election of directors. The presence in person or by
proxy of holders of a majority of the shares of Common Stock entitled to vote at
the Annual Meeting will constitute a quorum for the transaction of business.
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information as of June 16, 1998
(or as indicated below), with respect to the stock ownership of all persons
known by the Company to be beneficial owners of more than five percent of its
outstanding shares of Common Stock, each director, each nominee for director,
each of the Named Executive Officers and all directors and executive officers of
the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OR IDENTITY OF GROUP BENEFICIALLY OWNED OUTSTANDING SHARES
- ----------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
David R. Pomije......................................... 1,775,631(1) 28.4%
10120 West 76th Street
Minneapolis, MN 55344
SAFECO Asset Management Company......................... 519,400(2) 8.4%
601 Union Street
Suite 2500
Seattle, WA 98101-4074
Woodland Partners LLC................................... 377,700(3) 6.1%
60 South Sixth Street
Suite 3750
Minneapolis, MN 55402
Crestone Capital Management, Inc. ...................... 360,580 5.8%
7720 Belleview Avenue
Suite 220
Englewood, CO 80111-2614
Stanley A. Bodine....................................... 165,157(4) 2.6%
Richard T. Guidera...................................... 11,500(5) Less than 1%
George E. Mileusnic..................................... 29,500(6) Less than 1%
Patrick J. Ferrell...................................... 8,000(7) Less than 1%
Jeffrey R. Gatesmith.................................... 74,411(8) 1.2%
Robert M. Hiben......................................... 61,256(9) 1.0%
All directors and executive officers as a group
(7 persons)......................................... 2,125,455(10) 32.8%
- ------------------------
</TABLE>
(1) Includes 52,181 shares issuable upon exercise of currently exercisable
options and options exercisable within 60 days of the record date
("currently exercisable options").
(2) Based on Schedule 13G dated February 10, 1998, filed jointly by SAFECO
Common Stock Trust ("CST"), SAFECO Asset Management Company ("AMC") and
SAFECO Corporation ("SAFECO"). AMC, a subsidiary of SAFECO, is an
investment adviser and has shared voting and dispositive power over all
of such shares, including shares held by CST, an investment company.
(3) Based on Schedule 13G dated February 4, 1998, filed by Woodland Partners
LLC, which has sole voting power over 320,400 shares and shared voting
power over 57,300 shares.
(4) Includes 99,255 shares issuable upon exercise of currently exercisable
options.
(5) Includes 6,500 shares issuable upon exercise of currently exercisable
options.
(6) Includes 11,000 shares issuable upon exercise of currently exercisable
options.
(7) Includes 7,000 shares issuable upon exercise of currently exercisable
options.
(8) Includes 55,161 shares issuable upon exercise of currently exercisable
options.
(9) Includes 49,506 shares issuable upon exercise of currently exercisable
options.
(10) Includes 280,603 shares issuable upon exercise of currently exercisable
options.
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Management has nominated the individuals listed below for election as
directors, each to serve until the next Annual Meeting of Shareholders and until
his successor is elected and qualified or until his earlier resignation or
removal.
Unless instructed not to vote for the election of directors or not to
vote for any specified nominee, the proxies will vote to elect the listed
nominees. If any of the nominees are not candidates for election at the Annual
Meeting, which is not currently anticipated, the proxies may vote for such other
persons as they, in their discretion, may determine.
NAME AGE DIRECTOR SINCE
------------------------------------- --- --------------
David R. Pomije...................... 42 1988
Stanley A. Bodine.................... 48 1992
Richard T. Guidera.............. 69 1992
George E. Mileusnic.................. 43 1993
Patrick J. Ferrell................... 41 1995
DAVID R. POMIJE is the founder of the Company and has been chairman of
the board and chief executive officer of the Company since its inception in
March 1988. He also served the Company as its president and chief financial
officer until April 1995. Mr. Pomije's prior experience includes nine years
within the consumer electronics industry. Mr. Pomije currently serves on the
Board of Directors of Excelsior-Henderson Motorcycle Manufacturing Company.
STANLEY A. BODINE was named president and chief operating officer of the
Company in April 1995. He served as executive vice president from March 1992 to
April 1995, and has been a director of the Company since May 1992. From October
1991 to March 1992, he worked for Funco as a management consultant. Mr. Bodine
held various management positions with The Pillsbury Company from 1978 to 1991,
most recently as senior vice president of The Haagen-Dazs Company, with
responsibility for business development in the United States, Europe and the
Pacific Rim. He also served as general manager of Haagen-Dazs International and
director of planning and development for Pillsbury's domestic and international
divisions.
RICHARD T. GUIDERA was elected to the Board of Directors in September
1992. Since 1984, Mr. Guidera has been president of The Guidera Group, Inc., a
firm providing shopping center consulting and business brokerage services to
retailers and shopping center developers. Prior thereto he had served as
executive vice president of operations and leasing and a partner of The Center
Companies, which was formed in 1980 as the successor to Dayton-Hudson
Properties. Mr. Guidera was twice selected as state director to the
International Council of Shopping Centers (1979 to 1982 and 1987 to 1990) and
was a recipient of the ICSC Distinguished Service Award (1990).
GEORGE E. MILEUSNIC was elected to the Board of Directors in December
1993. Mr. Mileusnic is currently an independent consultant. From 1996 to 1998,
he served as executive vice president of administration of the Outdoor
Recreation division of The Coleman Company, Inc., a leading manufacturer and
marketer of brand name consumer products for the camping and related outdoor
recreational markets in the United States, Canada, Europe and Japan. From 1994
to 1996, he served as executive vice president and chief financial officer of
The Coleman
<PAGE>
Company. He joined The Coleman Company in September 1989 as senior vice
president and chief financial officer. From 1987 to 1989, he was senior vice
president and controller of Burger King Corporation, a subsidiary of The
Pillsbury Company. Mr. Mileusnic currently serves on the Board of Directors of
Intrust Funds Trust.
PATRICK J. FERRELL was elected to the Board of Directors in May 1995.
Mr. Ferrell is currently the president, chief executive officer and co-founder
of SocialNet, Inc., a company which provides business-to-business Internet
solutions in the social networking area. Prior thereto, he was president of
Strategies & Internet Consulting, providing consultant services to the
interactive entertainment industry. From 1989 to 1997, Mr. Ferrell served as
chief executive officer of Infotainment World, Inc., a subsidiary of IDG
Communications which publishes GAMEPRO, S.W.A.T. PRO and PC GAMES magazines, as
well as related tip books and strategy guides. While with Infotainment World,
Mr. Ferrell created and co-produced the Electronic Entertainment Expo, the
world's largest trade show dedicated exclusively to interactive entertainment
products and services. Mr. Ferrell, a CPA, has held a variety of financial
management positions at Visa, U.S.A., Failure Analysis Associates, Foster Farms
and KPMG Peat Marwick LLP. Mr. Ferrell currently serves on the Board of
Directors of Hypermedia Communications.
DIRECTORS' COMPENSATION
Directors who are not otherwise employees of the Company are paid a
annual retainer of $2,400, plus $200 for each committee meeting attended which
is not held on the same date as a regular board meeting. During fiscal 1998, an
aggregate of $7,200 was paid to outside directors for their services.
Nonemployee directors are eligible for stock option awards under the Company's
1992 Stock Option Plan for Nonemployee Directors. During fiscal 1998 options to
purchase an aggregate of 4,500 shares at an exercise price of $19.85 were
granted to the Company's nonemployee directors. During fiscal 1998 two directors
exercised options, which had been granted in previous years, for 3,500 shares
realizing a value of $44,238.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
The Board of Directors met two times during fiscal 1998. All directors
attended each of the meetings of the Board and the committees on which they
served. The Board of Directors has Executive, Compensation and Audit Committees,
each comprised of two members. The Board of Directors does not have a Nominating
Committee.
EXECUTIVE COMMITTEE. The Executive Committee is authorized to take
action between meetings of the Board, subject to Board ratification. The
Executive Committee did not meet during fiscal 1998. The current members of the
Executive Committee are Messrs. Pomije and Bodine.
COMPENSATION COMMITTEE. The principal function of the Compensation
Committee is to make recommendations to the Board of Directors concerning the
compensation of executive officers and other management personnel. The
Compensation Committee met two times during fiscal 1998. The current members of
the Compensation Committee are Messrs. Guidera and Mileusnic.
<PAGE>
AUDIT COMMITTEE. The Audit Committee has the principal function of
reviewing the adequacy of the Company's internal controls, conferring with the
independent auditors concerning the scope of their examination of the books and
records of the Company, recommending to the Board of Directors the appointment
of independent auditors and considering other appropriate matters regarding the
financial affairs of the Company. The Audit Committee met one time during fiscal
1998. The current members of the Audit Committee are Messrs. Mileusnic and
Ferrell.
PROPOSAL NO. 2
APPROVAL OF INCREASE IN NUMBER OF SHARES AUTHORIZED FOR
1993 STOCK OPTION PLAN
The 1993 Stock Option Plan (the "Plan") was adopted in May 1993. The
Plan initially reserved 348,750 shares for issuance upon exercise of options
granted under the Plan. Subsequently, with shareholder approval, the plan was
amended to reserve an additional 300,000 shares. The number of shares available
under the Plan increases annually on May 1st by an amount equal to one percent
(1%) of the number of shares of the Company's Common Stock outstanding at the
prior fiscal year end. As of June 16, 1998, an aggregate of 945,595 shares of
Common Stock has been reserved for issuance under the Plan, including 61,845
shares reserved as of May 1, 1998.
PROPOSED INCREASE IN NUMBER OF SHARES. As of the end of fiscal 1998,
804,551 of the shares reserved under the Plan were subject to outstanding
options and 99,941 options granted under the Plan had been exercised. The Board
anticipates that it will continue to grant options to management employees as
part of its incentive program. In order to have sufficient shares available, the
Board has recommended that the number of shares reserved for issuance under the
Plan be increased by 300,000 to 1,245,595. The Board expects that this increase
will provide sufficient shares for future option grants at least through fiscal
2002. As of June 16, 1998, 6,207,179 shares of Common Stock were issued and
outstanding. On June 16, 1998, the closing price for the Company's Common Stock
on The Nasdaq National Market was $12.3125 per share.
DESCRIPTION OF PLAN. The Plan provides for grants of both incentive
stock options, intended to qualify as such under Section 422 of the Internal
Revenue Code of 1986 (the "Code"), and nonqualified stock options. Except for
the authority to grant incentive stock options, which expires in 2003, the Plan
has no expiration date but may be terminated by the Board of Directors at any
time, subject to the rights of the holders of options previously granted under
the Plan.
SHARES SUBJECT TO THE PLAN. The shares of Common Stock that may be
issued under the Plan may be unissued shares or treasury shares. The Plan
provides for appropriate adjustment in the number of shares subject to the Plan
and to the options previously granted if there is a stock split, stock dividend,
reorganization or other relevant change affecting the Company's corporate
structure or its equity securities. If shares subject to an option are not
issued to the extent permitted prior to expiration of the option or an option is
otherwise forfeited, the shares will become available for inclusion in future
option grants.
<PAGE>
ADMINISTRATION. The Plan is administered by the Board or a committee
composed of no fewer than two directors. The Board or committee determines the
participants, grants stock options, establishes rules and regulations for the
operation of the Plan and determines the price, term, vesting schedule, number
of shares and other terms of options. The Board or committee may delegate its
powers and duties to members of the Company with respect to participants who are
not subject to Section 16 under the Securities Exchange Act of 1934 (the
"Exchange Act").
ELIGIBLE PARTICIPANTS. Employees who have received or are eligible to
receive options under the Plan are the officers and certain other key employees
of the Company, which as of June 16, 1998 totaled 295 persons. The number of
grantees could vary from year to year.
The following table sets forth as of June 16, 1998, the number of stock
options granted to the Named Executive Officers (see "Summary Compensation
Table"), all current executive officers as a group, all persons who have
received grants to purchase 5% or more of the shares available under the Plan
and all employees as a group. No nonemployee director or other nonemployee has
received grants under the Plan.
<TABLE>
<CAPTION>
TOTAL OPTIONS
GRANTED AND OUTSTANDING
UNDER THE PLAN
----------------------
<S> <C>
Named Executive Officers:
David R. Pomije............................ 112,414
Stanley A. Bodine.......................... 130,495
Jeffrey R. Gatesmith....................... 76,041
Robert M. Hiben............................ 69,320
All executive officers as a group (4 persons)... 388,270
Richard A. Crandall............................. 55,159
All employees as a group
(excluding executive officers)................. 416,281
</TABLE>
SUBSEQUENT GRANT. Subsequent to June 16, 1998, the board of directors
has granted to officers and key employees, subject to shareholder approval of
this amendment, options to purchase a total of 170,000 shares. The following
table sets forth such grant:
<TABLE>
<CAPTION>
OPTIONS
GRANTED
------------
<S> <C>
Named Executive Officers:
David R. Pomije............................. 21,000
Stanley A. Bodine........................... 21,000
Jeffrey R. Gatesmith........................ 10,000
Robert M. Hiben............................. 10,000
All executive officers as a group (4 persons).... 62,000
Richard A. Crandall.............................. 6,500
All employees as a group
(excluding executive officers).................. 108,000
</TABLE>
<PAGE>
STOCK OPTIONS. Options granted under the Plan may be in the form of
either options that qualify as "incentive stock options" under Section 422 of
the Code ("ISOs") or those that do not qualify as such ("NQSOs"). The term of an
option will be fixed by the Board or committee, but no ISO may have a term of
more than ten years from the date of grant. Options will be exercisable at such
times as determined by the Board or committee. The option exercise price will be
determined by the Board or committee at the time of grant but will not be less
than 85% of the fair market value of the Common Stock on the date of grant (100%
of the fair market value for ISOs). The grantee may pay the option price in cash
or, if permitted by the Board or committee, by promissory note or delivering to
the Company shares of Common Stock already owned by the grantee that have a fair
market value equal to the option exercise price. The Code places the following
additional restrictions on the award of ISOs. If an ISO is granted to a
participant who owns, at the date of grant, in excess of 10% of the Company's
outstanding Common Stock, the exercise price must be at least 110% of the fair
market value on the date of grant and the term of the ISO may be no more than
five years from the date of grant. The total fair market value of shares subject
to ISOs which are exercisable for the first time by any participant in any given
calendar year cannot exceed $100,000 (valued as of the date of grant).
TERMINATION OF EMPLOYMENT. Options granted under the Plan are not
transferable other than by the laws of descent and distribution or pursuant to a
Qualified Domestic Relations Order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules and regulations
thereunder. Following the death of an optionee, any option held may be
exercised, to the extent such option was exercisable at the time of death or on
such accelerated basis as the Board or committee may determine at or after
grant, by the legal representative of the optionee's estate or by any person who
acquired the option by will or the laws of descent and distribution for a period
of one year (or such other period as the Board or committee may specify at
grant) from the date of such death or until the expiration of the stated term of
the option, whichever period is shorter. If a participant's employment by the
Company is terminated by reason of disability, any option held by such
participant may thereafter be exercised, to the extent it was exercisable at the
time of termination or on such accelerated basis as the Board or committee may
determine at or after grant for a period of one year from the date of
termination (or such other period specified by the Board or committee at the
time of grant) or until the expiration of the stated term of the option,
whichever period is shorter. If the optionee dies prior to the expiration of any
unexercised option, the option may thereafter be exercised to the extent it was
exercisable at the time of death for a period of one year from the date of death
or until the expiration of the stated term of the option, whichever period is
shorter. If any optionee's employment by the Company is terminated for any other
reason, the option may be exercised, to the extent otherwise then exercisable,
for the lesser of three months from the date of termination of employment or the
balance of the term of the option.
CHANGE IN CONTROL. In the event of a "Change in Control" or "Potential
Change in Control" (each as defined in the Plan), any option granted under the
Plan will become fully exercisable and vested and the value of all outstanding
options shall, unless otherwise determined by the Board or the committee in its
sole discretion prior to any Change in Control, be cashed out on the basis of
the "Change in Control Price" (as defined in the Plan) as of the date such
Change in Control or Potential Change in Control is determined to have occurred
or such other date as the Board or committee may determine prior to the Change
in Control.
For purposes of the Plan, a "Change in Control" occurs when (i) any
person or group of persons (as defined in the Exchange Act and the rules
thereunder, subject to certain exceptions,
<PAGE>
acquires 20% or more of the outstanding voting stock of the Company then
outstanding, or (ii) during any period of 24 consecutive months, the individuals
who at the beginning of such period constituted the Board ("incumbent
directors") cease for any reason other than death to constitute at least a
majority thereof (except that any director who is not a director at the
beginning of such 24-month period shall be deemed to have satisfied such
requirement if such director was elected by or on the recommendation or with the
approval of at least 60% of the directors who then qualified as incumbent
directors); or (iii) the approval by the shareholders of an acquisition of the
Company by an entity other than the Company or a subsidiary or parent through
the purchase of assets, or by merger, or otherwise. A "Potential Change in
Control" occurs upon (i) the approval by the Board of an agreement by the
Company which would result in a Change in Control of the Company (as defined) or
(ii) the acquisition of beneficial ownership directly or indirectly by any
person or group of shares of the Company representing 5% or more of the combined
voting power of the Company's outstanding securities and the adoption by the
Board of a resolution to the effect that a Potential Change in Control of the
Company has occurred for purposes of this Plan. The "Change in Control Price" is
the highest price per share paid in any transaction reported on The Nasdaq
National Market or on any securities exchange on which the Company's shares may
be traded or paid or offered in any bona fide transaction relating to a
potential or actual Change in Control at any time during the 60-day period
immediately preceding the occurrence of the Change in Control or Potential
Change in Control.
TAX RULES. The following is a brief summary of the federal income tax
rules currently applicable to stock options that may be granted under the Plan.
The grant of a NQSO will have no immediate tax consequences to the
grantee or to the Company. Upon the exercise of a NQSO, the grantee will
recognize ordinary income (and the Company will generally be entitled to a
compensation deduction) in an amount equal to the excess of the fair market
value of the shares of Common Stock on the date of the exercise of the option
over the option exercise price. The grantee's tax basis in the shares will be
the exercise price plus the amount of ordinary income recognized by the grantee,
and the grantee's holding period will commence on the date the shares are
transferred. Special rules apply in the event all or a portion of the exercise
price is paid in the form of stock.
Upon a subsequent sale of shares of Common Stock acquired pursuant to
the exercise of a NQSO, any difference between the grantee's tax basis in the
shares and the amount realized on the sale is treated as long-term or short-term
capital gain or loss, depending on the holding period of the shares.
The grant of an ISO will have no immediate tax consequences to the
grantee or to the Company. The exercise of an ISO by the payment of cash to the
Company will generally have no immediate tax consequences to the grantee (except
to the extent it is an adjustment in computing alternative minimum taxable
income) or to the Company. If a grantee holds the shares acquired pursuant to
the exercise of an ISO for the required holding period, the grantee generally
will realize long-term capital gain or long-term capital loss upon a subsequent
sale of the shares in the amount of the difference between the amount realized
upon the sale and the purchase price of the shares (i.e., the exercise price).
In such a case, no compensation deduction will be allowable to the Company in
connection with the grant or exercise of the ISO or the sale of shares of Common
Stock acquired pursuant to such exercise.
<PAGE>
If, however, a grantee disposes of the shares prior to the expiration of
the required holding period (a "disqualifying disposition"), the grantee will
recognize ordinary income (and the Company will generally be entitled to a
compensation deduction) equal to the excess of the fair market value of the
shares of Common Stock on the date of exercise (or the proceeds of the
disposition, if less) over the exercise price. Special rules apply in the event
all or a portion of the exercise price is paid in the form of stock.
Certain limitations apply to the Company's deduction of compensation
payable to the person serving as its chief executive officer or to any of its
three other most highly compensated executives in office as of the end of the
year in which such compensation would otherwise be deductible. In general, the
Company may not deduct compensation, other than "performance-based"
compensation, payable to such an executive in excess of $1 million for any year.
PROPOSED AMENDMENT. The text of the proposed amendment is set forth
below. If approved by the shareholders, the amendment will become effective as
of the date of such approval, July 31, 1998. A copy of the full text of the Plan
is available upon request.
The Funco, Inc. 1993 Stock Option Plan dated May 28, 1993, as amended
(the "Plan"), is hereby amended, subject to shareholder approval, effective July
31, 1998, by the revision of paragraph 1 of Section 3 of the Plan in its
entirety to read as follows:
"SECTION 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for
distribution under the Plan shall, effective July 31, 1998, be
increased by 300,000 shares to 1,245,595 shares of Stock,
which number shall be increased annually, on May 1st, by an
amount equal to 1% of the number of shares of Stock
outstanding as of the end of the most recently ended fiscal
year. Such shares may consist, in whole or in part, of
authorized and unissued shares or treasury shares. The number
of shares of Stock available for Incentive Stock Options shall
be limited to 948,750."
Except as stated above, the Plan remains in full force and effect.
The affirmative vote of a majority of the shares of Common Stock present
and voting on such matter is necessary for the approval of the increase in the
number of shares of Common Stock subject to the Plan.
The Board of Directors recommends that you vote FOR the proposal to
increase the number of shares authorized to be issued under the 1993 Stock
Option Plan by 300,000 shares of Common Stock. Your Proxy will be so voted
unless you specify otherwise.
<PAGE>
PROPOSAL NO. 3
RATIFICATION OF INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, have been the auditors of the
accounts of the Company for the past eight fiscal years. They have been
appointed by the Board of Directors of the Company for the purpose of auditing
the Company's accounts for the 1999 fiscal year and shareholder ratification of
such appointment is requested.
Representatives of the firm of Ernst & Young LLP will be in attendance
at the Annual Meeting of Shareholders and will have the opportunity to make a
statement if they desire to do so. In addition, they will be available to
respond to appropriate questions.
The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy and entitled to vote at the Annual Meeting is
required to approve the appointment of Ernst & Young LLP. In the event that the
appointment of Ernst & Young LLP should not be approved by shareholders, the
Board of Directors will make another appointment to be effective at the earliest
feasible time, either this fiscal year or the next.
The Board of Directors recommends that you vote FOR the ratification of
the appointment of Ernst & Young LLP as the Company's independent auditor for
fiscal 1999. Your proxy will be so voted unless you specify otherwise.
OTHER EXECUTIVE OFFICERS
The Company's executive officers, other than Messrs. Pomije and Bodine,
are identified below.
JEFFREY R. GATESMITH, 46, has served as vice president of retail
operations and human resources of the Company since January 1992. From 1988 to
1991, he served as vice president of human resources for the sixty-store retail
jewelry operations of Henry Birks and Sons, Ltd., Montreal, Quebec, Canada, and
as vice president of operations for Amerpro, Inc., a California firm offering
residential painting services from 1987 to 1988.
ROBERT M. HIBEN, 40, has served as chief financial officer and secretary
of the Company since April 1995. Mr. Hiben joined the Company as controller in
February 1992. He was chief financial officer of Bretts Department Store
Company, a nineteen-store chain, from 1990 to 1992, and served in various
financial capacities, most recently as director of financial planning, for
Wilsons The Leather Experts, a national retailer of leather apparel, from 1982
to 1990.
REPORT OF THE COMPENSATION COMMITTEE
With respect to executive compensation, the objectives of the Committee
are to establish and maintain programs and practices that will align executive
compensation with the Company's performance and profitability as well as
motivate and retain executive officers. In meeting these objectives, the
Compensation Committee has determined that executive compensation plans are to
include competitive base salaries, performance based cash bonuses and
appropriate long-term stock based incentive awards.
<PAGE>
ELEMENTS OF THE COMPANY'S EXECUTIVE COMPENSATION PLANS
BASE SALARY. The Board of Directors establishes the base salary level
for each executive officer, including the chief executive officer, based upon
recommendation of the Compensation Committee. In developing specific salary
recommendations, the Compensation Committee considers the scope of
responsibility for each executive officer, the individual's experience, the
competitive marketplace for the position and input from a consultant hired by
the Company. Base salaries of the Company's Named Executive Officers increased
an average of approximately 21% during fiscal 1998.
PERFORMANCE-BASED CASH BONUS. The Board of Directors establishes an
annual cash bonus plan based upon recommendation of the Compensation Committee,
which correlates incentive payments to factors including overall Company
financial performance, specific individual objectives and the individual
executive officer's base salary. The Company awarded performance based cash
bonuses to its Named Executive Officers during fiscal 1998 with bonus amounts
averaging approximately 48% of base salary.
STOCK-BASED INCENTIVE AWARDS. The Compensation Committee and the Board
of Directors believe that stock-based incentive awards encourage and reward
effective management actions that bring about long-term corporate financial
success, primarily as measured by increases in shareholder value. During fiscal
1998 the Board of Directors, upon recommendation of the Compensation Committee,
granted options to purchase an aggregate of 114,400 shares at prices ranging
from $14.25 to $16.80 to the Named Executive Officers.
COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
The following criteria were applied by the Compensation Committee to
determine compensation for the Chief Executive Officer, Mr. Pomije, for the last
fiscal year.
The Committee established Mr. Pomije's annual base salary for fiscal
1998 to be $255,000, based upon the criteria described above regarding base
salary. The Committee established Mr. Pomije's annual incentive bonus
opportunity at a level at which achievement of bonus, together with base salary,
would have been marketplace competitive. The Company awarded an incentive bonus
to Mr. Pomije in the amount of $127,500 for achieving fiscal 1998 results. The
Committee recommended to the Board of Directors that pursuant to the 1993 Stock
Option Plan, Mr. Pomije should be granted 26,500 and 15,900 shares of Common
Stock at exercise prices of $16.80 and $15.67 per share, respectively.
OTHER INFORMATION
In 1993, Section 162(m) of the Internal Revenue Code was adopted which,
beginning in 1994, imposes an annual deduction limitation of $1.0 million on the
compensation of certain executive officers of publicly held companies. The
Compensation Committee does not believe that the Section 162(m) limitation will
materially affect the Company in the near future given the current level of
compensation of the executive officers.
The Compensation Committee: Richard T. Guidera and George E. Mileusnic
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's chief
executive officer and the three other executive officers whose total cash
compensation in fiscal 1998 (based on salary and bonus) exceeded $100,000 (the
"Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
FISCAL ------------------- COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS/OPTIONS
- ------------------------------------- ------ -------- -------- ----------------
<S> <C> <C> <C> <C>
David R. Pomije...................... 1998 $255,000 $127,500 42,400 shares
Chief Executive Officer 1997 200,000 120,000 37,300 shares
1996 180,000 -- 18,500 shares
Stanley A. Bodine.................... 1998 200,000 100,000 36,640 shares
President and Chief Operating Officer 1997 168,000 100,800 34,500 shares
1996 153,750 -- 33,500 shares
Jeffrey R. Gatesmith................. 1998 115,000 50,300 18,080 shares
Vice President of Retail Operations 1997 102,000 47,500 20,900 shares
and Human Resources 1996 88,200 11,730 22,400 shares
Robert M. Hiben...................... 1998 110,000 47,200 17,280 shares
Chief Financial Officer 1997 92,000 46,000 18,900 shares
1996 78,750 11,125 20,000 shares
</TABLE>
<PAGE>
OPTIONS GRANTED DURING FISCAL 1998
The following table provides information relating to options granted to
the Named Executive Officers during fiscal 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANT VALUE AT ASSUMED
------------------------------------------------------------- ANNUAL RATE OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION
OPTIONS GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED (1) FISCAL YEAR PRICE DATE 5%(2) 10%(2)
- ---------------------- ----------- ------------------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
David R. Pomije....... 26,500 9.2% $16.80 6/15/2002 $123,001 $271,799
15,900 5.5 15.67 12/23/2002 68,836 152,110
Stanley A. Bodine..... 22,900 8.0 15.27 6/15/2007 219,914 557,305
13,740 4.8 14.25 12/23/2007 123,134 312,047
Jeffrey R. Gatesmith.. 11,300 3.9 15.27 6/15/2007 108,516 275,002
6,780 2.4 14.25 12/23/2007 60,761 153,979
Robert M. Hiben....... 10,800 3.8 15.27 6/15/2007 103,715 262,834
6,480 2.3 14.25 12/23/2007 58,072 147,166
</TABLE>
- ------------------
(1) The number indicated is the number of shares of Common Stock that can be
acquired upon exercise of the related option. The Company has not granted
any SARs. All options granted in fiscal 1998 were nontransferable, vest
over a period of three years, become exercisable in three equal annual
installments commencing either June 16, 1998 or December 24, 1998, and
provide for forfeiture of unvested options upon termination of
employment.
(2) The assumed rates of 5% and 10% are hypothetical rates of stock price
appreciation selected by the Securities and Exchange Commission and are
not intended to, and do not, forecast or assume actual future stock
prices. The Company believes that future stock appreciation, if any, is
unpredictable and is not aware of any formula that will determine with
any reasonable accuracy the present value of stock options based on
future factors which are unknowable and volatile. No gain to optionees is
possible without an appreciation in stock prices, and any such increase
would benefit all shareholders. There can be no assurance that the
amounts reflected in this table will be achieved.
AGGREGATE OPTION EXERCISES DURING FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to options exercised
by the Named Executive Officers during fiscal 1998 and the number and value of
options held at fiscal year-end. The Company does not have any outstanding stock
appreciation rights.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS A OPTIONS AT
ACQUIRED FISCAL YEAR-END FISCAL YEAR-END(1)
ON VALUE --------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David R. Pomije....... - - 38,980 73,434 $255,703 $325,972
Stanley A. Bodine..... - - 86,588 70,807 879,058 451,941
Jeffrey R. Gatesmith.. 5,175 $68,155 46,560 39,481 440,543 271,959
Robert M. Hiben....... 5,050 88,327 41,773 36,547 395,155 247,208
</TABLE>
-------------------
(1) Value is determined by the difference between the closing price of the
Company's Common Stock on March 29, 1998, which was $17.50, and the
option exercise price (if less than $17.50) multiplied by the number of
shares subject to the option.
<PAGE>
CERTAIN TRANSACTIONS
2nd Swing, Inc. ("2nd Swing"), a corporation in which David R. Pomije,
the Company's Chief Executive Officer, director and major shareholder, holds a
majority interest, received certain management services from the Company during
fiscal 1998, the value of which was approximately $46,000 (2nd Swing has
reimbursed Funco for such services). During fiscal 1999, the Company anticipates
providing additional services to 2nd Swing, the value of which is not expected
to exceed $100,000. The Company is to be reimbursed for the full value of these
services plus interest at the Company's current borrowing rate plus 0.50%. This
management services agreement is expected to be terminated by the end of fiscal
1999. Payment is personally guaranteed by Mr. Pomije. The charge for such
services is substantially equivalent to the amount that 2nd Swing would have
been required to pay to third-party providers.
<PAGE>
STOCK PERFORMANCE CHART
The following table compares the cumulative total shareholder return on
Common Stock for the period commencing April 4, 1993 through March 29, 1998,
with the cumulative total return on the NASDAQ United States Stock Market Index
and the NASDAQ Retail Trade Index over the same period. This comparison assumes
$100 was invested on April 4, 1993, in the Company's Common Stock and in each of
the foregoing indices, and assumes reinvestment of all dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG FUNCO, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ RETAIL TRADE INDEX
[PLOT POINTS GRAPH]
4/04/93 4/03/94 4/02/95 3/31/96 3/30/97 3/29/98
------- ------- ------- ------- ------- -------
Funco, Inc. $100 $106 $ 36 $ 32 $109 $130
Nasdaq Stock Market (U.S. $100 $111 $124 $168 $191 $281
Nasdaq Retail Trade $100 $108 $104 $130 $132 $193
*$100 INVESTED ON 4/04/93 IN STOCK OR INDEX-
INCLUDING REINVESTMENT OF DIVIDENDS.
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of the Company's
Common Stock, to file with the Securities and Exchange Commission ("SEC")
initial reports of ownership and changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) reports they file. To the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company during
fiscal 1998, all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent beneficial owners were complied with.
OTHER MATTERS
The Board of Directors is not aware that any matter, other than those
described in the Notice, will be presented for action at the Annual Meeting. If,
however, other matters do properly come before the Annual Meeting, it is the
intention of the persons named in the proxy to vote the proxied shares in
accordance with their best judgment on such matters.
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
All shareholder proposals intended to be presented at the 1999 Annual
Meeting of Shareholders must be received by the Company at its offices on or
before February 26, 1999.
ADDITIONAL INFORMATION
A copy of the Company's Annual Report to Shareholders for the fiscal
year ended March 29, 1998, accompanies this Notice of Annual Meeting of
Shareholders and Proxy Statement.
By Order of the Board of Directors
Robert M. Hiben
SECRETARY
June 26, 1998
<PAGE>
FUNCO, INC.
PROXY
ANNUAL MEETING OF SHAREHOLDERS -- JULY 31, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints David R. Pomije and Stanley A. Bodine,
or either of them, proxies or proxy, with full power of substitution, to vote
all shares of Common Stock of Funco, Inc. (the "Company") which the undersigned
is entitled to vote at the 1998 Annual Meeting of Shareholders to be held at the
Minneapolis Marriott Southwest Hotel, 5801 Opus Parkway, Minnetonka, Minnesota
55343, July 31, 1998, at 10:00 a.m. Central Daylight Time, and at any
adjournment thereof, as directed below with respect to the proposals set forth
below, all as more fully described in the Proxy Statement, and upon any other
matter that may properly come before the meeting or any adjournment thereof.
1. ELECTION OF DIRECTORS.
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for
(except as marked to the all nominees listed below
contrary below)
DAVID R. POMIJE STANLEY A. BODINE RICHARD T. GUIDERA GEORGE E. MILEUSNIC
PATRICK J. FERRELL
(INSTRUCTION: To withhold authority for any individual nominee, write that
nominee's name in the space provided below.)
---------------------------------------------------------------------------
2. APPROVAL OF AMENDMENT TO THE 1993 STOCK OPTION PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED AND TO BE SIGNED AND DATED ON THE OTHER SIDE)
<PAGE>
(CONTINUED FROM OTHER SIDE)
4. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting.
The power to vote granted by this Proxy may be exercised by David R.
Pomije and Stanley A. Bodine, jointly or singly, or their substitute(s), who are
present and acting at said Annual Meeting or any adjournment of said Annual
Meeting. The undersigned hereby revokes any and all prior proxies given by the
undersigned to vote at this Annual Meeting.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SHAREHOLDERS'
INSTRUCTIONS. IF THE SHAREHOLDER(S) WHO EXECUTE THIS PROXY DO NOT WITHHOLD
THEIR VOTES FOR THE ELECTION OF DIRECTORS AND DO NOT VOTE AGAINST OR ABSTAIN
FROM VOTING ON PROPOSAL NO. 2 OR NO. 3, THIS PROXY WILL BE VOTED FOR THE
ELECTION OF THE PROPOSED DIRECTORS AND FOR PROPOSALS NO. 2 AND NO. 3.
It is urgent that each shareholder complete,
date, sign and mail this Proxy as soon as
possible. Your vote is important!
Dated --------------------------- ,1998
----------------------------------------
Signature of Shareholder(s)
----------------------------------------
Signature of Shareholder(s)
Please date and sign exactly as your name or
names appear hereon. When signing as
attorney, executor, administrator, trustee,
guardian, authorized officer of a corporation
or partner of a partnership, please give your
title as such.
PLEASE DO NOT FORGET TO DATE THIS PROXY.
